U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

23–160 PDF 2006

S. Hrg. 109–474

SECURING AMERICAN SOVEREIGNTY: A REVIEW

OF THE UNITED STATES’ RELATIONSHIP WITH

THE WTO

HEARING

BEFORE THE

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT 

INFORMATION, AND INTERNATIONAL 

SECURITY SUBCOMMITTEE

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JULY 15, 2005

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs

(

(II)

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

SUSAN M. COLLINS, Maine, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

NORM COLEMAN, Minnesota 

TOM COBURN, Oklahoma 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

JOSEPH I. LIEBERMAN, Connecticut 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

MICHAEL D. BOPP, Staff Director and Chief Counsel 

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Chief Counsel 

TRINA D. TYRER, Chief Clerk 

FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND 

INTERNATIONAL SECURITY SUBCOMMITTEE 

TOM COBURN, Oklahoma, Chairman 

TED STEVENS, Alaska 

GEORGE V. VOINOVICH, Ohio 

LINCOLN D. CHAFEE, Rhode Island 

ROBERT F. BENNETT, Utah 

PETE V. DOMENICI, New Mexico 

JOHN W. WARNER, Virginia 

THOMAS CARPER, Delaware 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

MARK DAYTON, Minnesota 

FRANK LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas

KATY FRENCH, Staff Director 

SHEILA MURPHY, Minority Staff Director 

JOHN KILVINGTON, Minority Deputy Staff Director 

LIZ SCRANTON, Chief Clerk 

(III)

C O N T E N T S 

Opening statements: Page 

Senator Coburn ................................................................................................. 1

Senator Levin .................................................................................................... 15

Prepared statement: 

Senator Carper ................................................................................................. 41

WITNESSES 

FRIDAY, JULY 15, 2005

James E. Mendenhall, Acting General Counsel, Office of the United States 

Trade Representative ........................................................................................... 3

Claude Barfield, Ph.D., Resident Scholar, and Director, Science and Technology Policy Studies, American Enterprise Institute ...................................... 23

Robert Stumberg, Professor of Law, Harrison Institute for Public Law, 

Georgetown University Law School .................................................................... 26

Robert Vastine, President, Coalition of Service Industries .................................. 28

ALPHABETICAL LIST OF WITNESSES

Barfield, Claude, Ph.D.: 

Testimony .......................................................................................................... 23

Prepared statement .......................................................................................... 54

Mendenhall, James E.: 

Testimony .......................................................................................................... 3

Prepared statement with attachments ........................................................... 42

Stumberg, Robert: 

Testimony .......................................................................................................... 26

Prepared statement .......................................................................................... 59

Vastine, Robert: 

Testimony .......................................................................................................... 28

Prepared statement with attachments ........................................................... 63

APPENDIX 

Questions and responses for the Record from: 

Mr. Mendenhall ................................................................................................ 52

(1)

SECURING AMERICAN SOVEREIGNTY: A REVIEW OF THE UNITED STATES’ RELATIONSHIP WITH THE WTO 

FRIDAY, JULY 15, 2005

U.S. SENATE,

SUBCOMMITTEE ON FEDERAL FINANCIAL MANAGEMENT,

GOVERNMENT INFORMATION, AND INTERNATIONAL SECURITY, 

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:31 a.m., in room 

SD–562, Dirksen Senate Office Building, Hon. Tom Coburn, Chairman of the Subcommittee, presiding. 

Present: Senators Coburn and Levin. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Good morning. Thank you all for being here 

today. Today’s hearing will focus on the direction of the World 

Trade Organization and examine the relationship between WTO 

rulings and American sovereignty. 

Unlike other international institutions in which the United 

States participates, the WTO links its adjudication process to an 

enforcement mechanism. Using this mechanism, international diplomats determine if U.S. laws and regulations are acceptable or unacceptable, according to the political trade standards of the international community. That is probably as it should be. If nations 

don’t change laws that WTO rules against, WTO can and does impose punitive damages on that nation’s taxpayers, and trade sanctions. 

Since WTO inception 10 years ago, the United States has lost 

half the cases brought against it by other WTO members—25 out 

of at least 50 cases. Already, Congress has repealed two laws by 

WTO dictate. These include the foreign sales corporation provisions 

that were provided a tax benefit for U.S. exporters—the modification to that law is presently being challenged as well; and the Antidumping Act of 1916. Both laws were created to protect U.S. financial interests and were modified to accommodate the interests of 

foreign countries and their trade positions. 

I would say that I believe in free trade. I believe in fair free 

trade. Americans run and work for the most innovative, efficient, 

and competitive businesses in the world. On balance, free and fair 

trade with every nation benefits every American. It is an onerous 

process to negotiate bilateral trade agreements with every other 

2

Nation in the world. This process could result in confusing and conflicting standards or create burdensome consequences on American 

industry. That is why we are in the WTO, and that is why there 

is marked value to our participation. 

When the United States has brought complaints against other 

countries through the WTO, the United States has, for the most 

part, prevailed. But when other countries have brought complaints 

against us, we do far less well. So we need to be careful. With adverse rulings from the WTO on the rise, Congress must exercise its 

appropriate oversight authority and make sure that the WTO does 

not cross the line into threatening U.S. national interests. 

We need to ensure that the WTO does not misinterpret U.S. 

membership as a license to dictate to democratically elected Federal and State legislatures how to govern the affairs of the American people. Americans rely on our trade representatives, who serve 

as watchdogs of the WTO, to ensure that the WTO’s adjudication 

process does not overstep its mission and impose unwelcome and 

un-voted-on changes in our national affairs. 

Unfortunately, as with other international organizations, some of 

the WTO leadership seem to have higher ambitions for this trade 

body beyond its purpose as a forum for resolving trade disputes. 

WTO leaders pay a lot of lip service to the notion of consensus, but 

we have seen how elusive global consensus can be on fundamental 

matters of right and wrong. Let me give you an idea of what I 

mean. This is a portion of a statement given by a former WTO director general in his farewell speech entitled ‘‘Beyond the Multilateral Trading System.’’ The former WTO director general stated: 

‘‘Not too long ago, the idea of a global system of governance 

would have seemed utopia, no less utopia than the fall of the Berlin Wall without a war, the creation of a single European currency. 

Cold War rivalries, ideologic conflicts, North-South differences all 

created an international system that was defined by its divisions, 

not by its shared interests. 

‘‘The trend in today’s international system is very different. All 

around us and across many issues, we feel more and more the need 

for global cooperation, multilateral agreements, and the international rule of law. The WTO’s emergence as a leading rulemaker 

in the global economy is a powerful example of this trend, but is 

not alone. From human rights to climate change to capital flows, 

our globalizing world demands global solutions, and these solutions 

must be increasingly by shared agreements and rules.’’

What he means here is that the idea of a perfect world consists 

of a WTO paving the way for an order that is involved in everything from human rights, climate change, to capital flows. This is 

the type of agenda that I see as a problem. It suggests that WTO 

sees itself more than just trade dispute-resolution body, but an 

ideologic instrument, where it swings an economic hammer to impose a U.N.-driven, consensus-based ideology. 

Tying the economic well-being of the United States to its submission to international notions of right and wrong is the worst type 

of blackmail. We all remember when Libya was elected the chair 

of the U.N. Human Rights Commission only a couple of years after 

the United States had been kicked off the Human Rights Commission. Currently, Sudan, Zimbabwe, Cuba, and China—a literal 

3

1The prepared statement of Mr. Mendenhall with attachments appears in the Appendix on 

page 42. 

Who’s Who in human rights violators—are on that same commission. Is that the kind of consensus we want? I think not. 

WTO tentacles reach not only to Congress here in Washington, 

but to many State legislatures forced to change their laws in response to an adverse ruling. When an organization in Geneva requires a struggling entrepreneur in the middle of America to 

change how he does business or imposes new standards on entire 

industries, Congress cannot be derelict in exercising oversight. The 

balance between costs and benefits of U.S. participation in WTO 

must be constantly monitored. We need to tread carefully, because 

the WTO does carry a very big stick. 

Let me thank each of our witnesses for being here. Senator Carper was unable to attend. He will offer a statement for the record. 

We have before us today two panels. The first is James 

Mendenhall, Acting General Counsel for the Office of the United 

States Trade Representative. And we will have a second panel consisting of Claude Barfield, resident scholar, American Enterprise 

Institute; Dr. Robert Stumberg, professor of law, Harrison Institute 

for Public Law, Georgetown Law School; and Robert Vastine, president, Coalition of Service Industries. 

Mr. Mendenhall, first of all, thank you for being here. I want to 

say something and I want you to take it in the proper perspective. 

It is very difficult for me to prepare for this hearing when I get 

your testimony at 8 o’clock last night. That is when it was delivered to my office. And I know that is not necessarily your fault. But 

at every hearing, I want the message to go back through the OMB 

that we have to have more timely availability of testimonies with 

which to be prepared to conduct the hearing. So if you would do 

that. 

I thank you for your testimony. Your written testimony will be 

considered a part of the record, and I recognize you now. Thank 

you so much. 

TESTIMONY OF JAMES E. MENDENHALL,1 ACTING GENERAL 

COUNSEL, OFFICE OF THE UNITED STATES TRADE REPRESENTATIVE 

Mr. MENDENHALL. Thank you, Chairman Coburn. 

I appreciate the opportunity to speak to you today about the relationship between the United States and the WTO. It is obviously 

a critical issue for all of the reasons that you highlighted in your 

own statement. 

The specific title of today’s hearing is ‘‘Securing American Sovereignty.’’ I would suggest an equally appropriate topic would be 

‘‘Securing American Economic Strength,’’ for those two complementary objectives together form our guiding principles in negotiating 

and implementing the WTO agreements. 

U.S. participation in the WTO and the world trading system is 

absolutely critical to our continued economic growth. At the same 

time, the safeguards that are built into the system, which I will describe in my testimony, fully preserve our sovereign right to reguVerDate 0ct 09 2002 12:00 Jul 14, 2006 Jkt 023160 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 C:\DOCS\23160.TXT SAFFAIRS PsN: PAT
4

late as we—the U.S. Government, State and local governments, 

and the people of America to whom we answer—see fit. 

Since 1994, when the WTO agreements were completed, the 

United States has experienced an extraordinary period of economic 

growth. USTR’s Annual Report, issued in May of this year, details 

those benefits at great length. Highlights also appear in my written 

testimony, and I won’t go into the details of them here. But in summarize, they demonstrate dramatic increases over the past 10 

years in production, productivity, incomes, and jobs throughout the 

United States. 

In short, the benefits of U.S. participation in the WTO are large, 

tangible, and widespread, as recognized by the House of Representatives last month when it voted overwhelmingly—338 to 86—to defeat a resolution calling for U.S. withdrawal from the WTO. 

During the WTO negotiations—the Uruguay Round negotiations—and in the current round, U.S. trade negotiators have been 

ever mindful of the need to protect U.S. sovereignty. It is absolutely critical that at the same time we work to integrate the global 

economy and maximize opportunities for U.S. workers, farmers, 

and businesses, we fully preserve our sovereign prerogatives. 

To better explain how we have sought to achieve those objectives, 

I will break my testimony into three parts: First, a discussion of 

the substantive rules; second, a discussion of the administrative 

structure of the WTO; and third, a discussion of the landmark dispute settlement mechanism negotiated during the Uruguay Round, 

including a summary of how we have fared under that system. 

The predecessor to the WTO, the GATT, or General Agreement 

on Tariffs and Trade, lasted for about 50 years and covered only 

trade in goods. Since the negotiation of that agreement, though, the 

global economy has evolved and it now looks much different than 

it did 50 or 60 years ago. The services sector now accounts for 60 

to 80 percent of the U.S. economy. It is the one area where the 

United States actually has a trade surplus. Protection of intellectual property has come to play a central role in U.S. economic 

growth. The value of innovation, creativity, and branding, covering 

everything from movies and music to software to pharmaceuticals 

to basic trademarks, is a key driver of U.S. competitiveness. 

As a result, we negotiated new rules in the Uruguay Round to 

cover services and intellectual property and break down trade barriers. We also modernized and elaborated on the old GATT disciplines, so that they now cover in greater detail issues such as 

standards, sanitary and phytosanitary measures, and trade remedies. Yet, all these rules share the same hallmarks as the previous 

GATT system. They set general parameters to eliminate protectionist measures and liberalize trade, while at the same time they 

allow ample flexibility to regulate in the public interest. 

Outside general guidelines prohibiting discrimination on the 

basis of nationality, promoting transparency and the like, the 

GATT and the GATS—the services agreement—impose few constraints on a country’s ability to regulate as it sees fit. In the context of the GATS, a country may agree to open, for example, its 

markets to foreign firms seeking to provide legal and architectural 

services, but governments will retain their right to regulate admission, licensing, and disciplinary standards and the like. 

5

As another example, WTO rules require that governments base 

their food safety standards on science. At the same time, though, 

governments are free to adopt as high a standard of protection as 

they want, provided those standards are in fact science-based. The 

GATT and GATS also contain explicit exceptions for measures 

taken to protect health and safety, national security, and the like. 

When it comes to intellectual property, the rules we negotiated 

in the Uruguay Round codified, elaborated on, and made consistent 

100 years of international practice and rulemaking, and at the end 

of the day, the agreement that we negotiated, the TRIPS agreement, effectively obligated other countries to meet standards that 

the United States by and large already met. 

But perhaps the most important safeguard with respect to the 

substantive rules is the way the United States, in accordance with 

our constitutional procedures, has chosen to implement them. The 

rules negotiated in the WTO, in and of themselves, have absolutely 

no domestic legal effect. Instead, the United States implemented 

the WTO agreements by statute, through the Uruguay Round 

Agreements Act. Any and all changes to U.S. law necessary to implement the WTO agreements are contained in that act and in subsequent amendments to U.S. law that the Congress may choose to 

adopt. If the Congress chooses not to amend a law that conflicts 

with a WTO rule, the domestic law prevails. 

Other protections are built into the statute as well. For example, 

there is no private cause of action that may be brought in U.S. Federal courts on the basis that a particular measure—State, local, 

Federal—is inconsistent with the WTO agreements. And State laws 

are given similar protection. The WTO agreements don’t automatically preempt State laws, and the statute contains provisions establishing procedures for consultation between the Federal and 

State governments regarding implementation of the WTO rules, including when it comes to dispute settlement. 

Turning to the administration of the WTO, it is important to recognize that the WTO is a member-driven organization. There is a 

secretariat that administers the organization, which is based in Geneva, but it has virtually no independent decisionmaking ability. 

Decisions are generally taken by consensus, that is, by unanimous 

consent, which means that any member may, in theory, exercise a 

veto, including, of course, the United States. Now, countries with 

stronger economic and political clout—which of course includes the 

United States—can effectively use this threat to motivate other 

members to reach compromises that are acceptable to all. 

Special rules are spelled out in the WTO Agreement for taking 

particularly important decisions, such as amendments or binding 

interpretations. For example, core provisions on most favored nation treatment, the amendment process, the decisionmaking process—those rules may only be amended by consensus. No substantive amendment to the WTO agreements can apply to any 

member that doesn’t agree to its application. 

Turning to dispute settlement: The dispute settlement system 

that existed under the GATT was overhauled during the Uruguay 

Round, and the new rules for dispute settlement are set forth in 

the Dispute Settlement Understanding, or DSU. The DSU is in 

6

turn administered by something called the Dispute Settlement 

Body, which is a subsidiary body to the WTO General Counsel. 

The Dispute Settlement Understanding, and the process that is 

set forth therein, provides a forum for resolving disputes over a 

member’s compliance with the rules. But dispute settlement is only 

available to governments, not to private parties. Private parties 

can’t go to the WTO and bring a claim against any other member, 

including the United States. 

The dispute settlement process begins with consultations, and if 

that fails to produce a resolution, the complaining member may 

submit the dispute to a formal panel for resolution. The panel is 

composed of three members chosen by the disputing parties, so 

there is party control over the process. And if no agreement is 

reached, the WTO director general will choose the members of the 

panel. The panel will then issue findings as to whether the responding member has acted inconsistently with its obligations. If 

such a finding is rendered, the panel may recommend that the 

member bring its measure into compliance. 

Either member may appeal the panel’s decision to the appellate 

body, which is a standing body of seven members, one of which is 

from the United States. The appellate body will then issue its findings and correct errors in the report. 

The DSB will then automatically adopt the panel or appellate 

body report, unless it agrees by consensus not to do so—which effectively means that all reports are adopted. It is important, in fact 

critical, to recognize, however, that regardless of any decision that 

may be rendered by a panel or the appellate body, the WTO has 

absolutely no authority to require any member to change a law, 

regulation, or practice. 

If a member fails to bring its measure into compliance, there are 

other options available. It can offer compensation to the complaining member, which may mean, for example, that it lowers tariffs on imports from the complaining member. It doesn’t have to do 

that. If it chooses not to offer compensation, or if no agreement on 

compensation is reached, the complaining member can retaliate, 

which means it can impose higher tariffs, for example, on imports 

from the member found to be acting inconsistently with the rules. 

But again, the WTO cannot force any member to change a law 

or regulation or practice. And if a country refuses to comply with 

a finding, it can’t be forced to do so. 

In a sense, this is no different than what would happen if the 

WTO never existed in the first place. In such a world, any country 

could impose sanctions for whatever reason it deemed appropriate. 

There are, of course, significant differences, which are important. 

The complaining member, if it goes through the process and sanctions are its only alternative at the end of the day, it receives a 

stamp of approval from the WTO, and that is important from the 

perspective of the international community. And the international 

community may bring pressure to bear on the country that was 

found to be acting inconsistently with the WTO rules and try to 

persuade, on that basis, the member to bring its measures into 

compliance. But diplomatic pressure is vastly different from a system that could compel a government to comply. And again, the 

7

WTO cannot compel the United States or any other member to 

comply with a ruling. 

The United States has fared fairly well under this system. Since 

the start of the WTO, we have initiated 75 cases, of which we have 

settled 24, we have won 24, we lost four, and the remainder are 

in litigation or being monitored for progress or otherwise inactive. 

We have been challenged 84 times. As you noted, 52 of those cases 

have been completed, and of those we have settled 15 and won 12. 

The number of cases filed by the United States and all WTO 

members combined has declined over time, as countries in the beginning of the system, back when the WTO first began, essentially 

picked the low-hanging fruit and there was a pent-up demand that 

was exhausted during the first few years of the WTO. That, combined with the fact that the WTO dispute settlement system works 

to deter new breaches, has resulted in a gradual decline in cases 

over time, but there still is a steady stream of them, as there has 

been over the past few years. 

The system isn’t perfect, and we recognize that, and part of the 

negotiations that are going on now are to improve the system. The 

United States has played a critical role, central role in that process. We have advocated, for example, increased transparency in the 

dispute settlement process by opening proceedings to the public, 

opening up the hearings, facilitating public access to documents, 

and urging members to consider establishing guidelines for accepting, for example, amicus curiae submissions so that members of 

civil society and others who wish to voice an opinion on the interpretation of the agreements may do so. 

We have also suggested that WTO members provide additional 

guidance to panels and the appellate body to help ensure that the 

process better serves its primary function of facilitating settlement 

of disputes rather than merely rendering legal decisions. And we 

have recommended the development of new mechanisms to improve 

flexibility and member control over the process. 

In conclusion, I return to where I began, that participation in the 

WTO has benefitted the United States tremendously. We recognize, 

however, that efforts to strengthen integration and open foreign 

markets for U.S. farmers, workers, and businesses must at all 

times be balanced with appropriate safeguards to protect our sovereignty. As in the past, we will continue to ensure that we preserve this balance as we continue with the current round of negotiations. Thank you. 

Senator COBURN. Thank you very much for your testimony. Let 

me ask a few questions of you, if I might. 

The people who actually make the decisions is from a list of what 

I understand is experts in the area. Is that right? 

Mr. MENDENHALL. You are talking about dispute settlement panels? 

Senator COBURN. Yes. 

Mr. MENDENHALL. That is right. 

Senator COBURN. Who are they? Where is the list? Who makes 

the list? 

Mr. MENDENHALL. Right. 

Senator COBURN. Where do they come from? Where is the transparency to know who is making the decisions? Do we know who 

8

is—when the dispute settlement body is undergoing a decision, and 

there is this list of experts that they choose from, who makes the 

choice of who the experts are that see that; and does the general 

public, are they aware of who made the decisions? 

Mr. MENDENHALL. Right. The particular panelists in a given case 

are chosen by agreement of the disputing parties—so the complaining member and the responding party. If they can’t agree, 

then the WTO director general chooses the panelists in close consultation with the parties and others that have——

Senator COBURN. Does that happen, in fact, often that they can’t 

agree? 

Mr. MENDENHALL. It does happen quite frequently that——

Senator COBURN. Let’s go behind that. Why is that? Because certain experts will rule one way and certain experts will be deemed 

to—thought to rule another way? Or we don’t believe that they are 

experts? 

Mr. MENDENHALL. Well, there may be concerns about a particular member having conflicts. There may be concerns about a 

particular panelist, or proposed panelist, who has rendered decisions that one of the disputing parties may not approve of; it 

doesn’t agree with the approach that has been taken, and so on. 

So they have the ability to take that into account in deciding 

whether or not they would agree to a particular panelist. 

Senator COBURN. Is this all transparent? In other words, anybody anywhere in the world could find out who the list of experts 

are and who is the experts on each panel? 

Mr. MENDENHALL. There is a roster that is maintained, which is 

included in our annual report. And that is available. It is available 

on our Web site—we publish it in hard copy as well. 

So, yes, the roster itself is publicly available. The particular panelists in a given case are, of course, known, as the ones who are 

presiding over the dispute are of course known as well. 

Senator COBURN. You say that WTO rules have no domestic legal 

effect. That is your testimony. Isn’t it true to say that if the United 

States chose not to comply with these rulings, there will be serious 

implications about our trade relations? 

Mr. MENDENHALL. I think it is fair to say that if any country 

doesn’t comply, they will face pressure to comply. I think that is 

true. Now, at the same time, though, that doesn’t mean that every 

country complies in every case. If there is a particular issue that 

is particularly sensitive for a member, that member may not comply. That has happened. The United States has not complied with 

several rulings that——

Senator COBURN. Can you give me some examples of those? 

Mr. MENDENHALL. We haven’t complied yet with the Byrd 

Amendment, the finding against the Byrd Amendment. We haven’t 

complied with the ruling against us on a particular intellectual 

property matter dealing with Irish music. By and large, we have 

complied, and we have sought to do so. But it is recognized that 

the Congress, if a law needs to be changed, has the final say on 

whether or not that law is changed, at the end of the day. 

Senator COBURN. I am sorry, I didn’t hear the last thing you 

said. 

9

Mr. MENDENHALL. There are times when the United States, as 

with other countries, has not complied with a given ruling. And it 

is recognized in the United States, as with all members, that the 

final say, if legislation needs to be changed, the final say on whether to do that lies with the legislature. So it lies with the Senate 

and the House of Representatives whether to implement or not, if 

a law needs to be changed. 

Senator COBURN. So the WTO allows countries to impose punitive damages and sanctions if a country does not come into compliance with a WTO ruling. 

Mr. MENDENHALL. Right. They are not punitive. They are capped 

at the level of economic harm that the inconsistent measure has 

caused to the complaining member. 

Senator COBURN. Well, let’s talk about France and beef, then. 

How did we get to the dollar amount that we got on hormone beef 

going into France? 

Mr. MENDENHALL. We calculated—I don’t know if we did France 

specifically, but we calculated the value of what our trade would 

have been absent the EC measure that was found to be inconsistent, and that was the level of retaliation that we were allowed 

to impose. 

Senator COBURN. OK. And so we collect that? 

Mr. MENDENHALL. Yes. 

Senator COBURN. We collect a payment from them because they 

don’t allow us——

Mr. MENDENHALL. We collect a payment by virtue of increasing 

our tariffs on certain imports from the European Community. 

Senator COBURN. Do you happen to know specifically what we responded to in terms of—we had a favorable ruling with the WTO 

on beef, and where did we increase tariffs? 

Mr. MENDENHALL. That is a public list. I would be happy to provide it to you. I don’t have the list in my head. 

Senator COBURN. Have we complied—other than the two you 

mentioned, all the other WTO rulings we have complied with? 

Mr. MENDENHALL. We have complied with the vast majority. I 

would be happy to get you more information on the specifics of 

that. But we have complied with the vast majority. 

Senator COBURN. In your testimony you state WTO decisions are 

taken by consensus, which means that any member may, in theory, 

exercise a veto. Later in your record, you go on to state that any 

interpretation of the rules—that is, a type of WTO decision that involves binding trade rule interpretation—requires the agreement 

by three-quarters of all members. 

Mr. MENDENHALL. Right. 

Senator COBURN. Can you explain the difference to me there? In 

other words, we can exercise a veto, but it can still be binding. How 

can it be binding? 

Mr. MENDENHALL. Right. Interpretations, that is right. The interpretation rules are slightly different from the general rule. 

There is a general rule in the WTO that consensus is needed for 

decisionmaking. That is made explicit or reinforced elsewhere in 

the WTO agreements when it comes to particularly important procedures, such as the amendment procedure, such as particularly 

10

important substantive rules like nondiscrimination, MFN treatment, and the like. 

The interpretation procedures are a bit different. You are right, 

they require three-quarters, which I believe, although I would have 

to double-check it, was increased from—I believe it was increased 

from a majority in the GATT, although I would have to doublecheck that. So that is not consensus. 

Now, I can tell you as a matter of practice that there has never 

been a vote in the WTO. Members try extremely hard to only take 

decisions by consensus, regardless of what the rule written on 

paper may be. If we ever did go to a vote, it would be a landmark 

event, and we have never done that. In fact, on the interpretation 

procedure that you cite specifically, I don’t believe it has ever been 

invoked since the beginning of the WTO. I don’t think it has ever 

been invoked even in the GATT, although, again, I would have to 

double-check that history. 

So it is theoretically possibly to have a three-quarter vote on an 

interpretation—but practice is consensus. Interpretation, though, is 

vastly different than amendment. And the rules make clear that an 

interpretation cannot go beyond, cannot amend the rules and 

should not be used as such. And I think members are cognizant of 

that cautionary rule. 

Senator COBURN. Is it not a fact that rulings are not supposed 

to be precedent-setting, but in fact many times precedents are used 

to justify new rulings? 

Mr. MENDENHALL. They are—you are correct that they are not 

formally precedent-setting. There is no formal rule of stare decisis 

in the WTO as there would be in a common law system, like the 

United States. At the same time, you are also right, and as I said, 

I think, in my written testimony, that panels and appellate bodies 

do look to previous decisions for guidance. 

Senator COBURN. Has that been harmful or helpful for the 

United States? 

Mr. MENDENHALL. I think it is helpful—by and large, it is helpful 

for the United States and the system as a whole. It improves the 

stability, predictability of the system and helps ensure that people 

understand, countries understand how the rules will be interpreted 

and applied. So it has been helpful. Which isn’t to say that every 

decision has been in our favor, or that we have agreed with every 

single finding that any panel and appellate body decision has rendered. But by and large, it has been helpful. 

Senator COBURN. I understand that the United States has proposed to the WTO body at least two resolutions that would modify 

the WTO’s judicial system and allow for greater transparency and 

flexibility for disputing parties to work things out through bilateral 

negotiations. Can you tell me what the outcome of these resolutions 

are and if these were resisted or accepted by the WTO, and what 

are in the impact of these outcomes? 

Mr. MENDENHALL. There is no outcome as of yet. Those negotiations are continuing. I think people are taking the proposals seriously. There is an interest by, certainly, a large number of countries in improving transparency and control. But those discussions 

are ongoing, so I can’t tell you what the outcome will be. 

11

Senator COBURN. Can you educate me as to why somebody would 

be resistant to transparency at the WTO? 

Mr. MENDENHALL. Sure. I don’t think they should be, of course, 

but there are a lot of countries in the world—some countries in the 

world, anyway, that don’t have domestic legal systems that operate 

in the same way as the United States system does, which is highly 

transparent. It is a concept that they aren’t necessarily familiar 

with. They need to get used to the idea of opening up the court proceedings and opening up the submissions and so on. 

So in many cases, it is simply an education process more than 

anything else, that it is new and different, and there are some who 

may feel that, on top of that, that international proceedings of this 

sort should be between governments and not open. 

Now, the United States obviously disagrees strongly with that, 

and so we have pushed for greater transparency. 

Senator COBURN. One of the problems CAFTA is facing is the difficulty in Congress being informed prior to decisions being made 

and, to quote the chairman of the Agriculture Committee, is ‘‘it is 

not going to happen again in terms of the lack of input. The complications over sugar could have been handled had the Congress 

been involved.’’

The other thing I spoke with Representative Portman about was 

enforcement of intellectual property rights. And it is my opinion—

it may not be a correct opinion—that we lose all the time, even 

though people are ‘‘in compliance,’’ as China supposedly is in compliance. But then they don’t carry out the effect of their own internal laws. 

How is the WTO helping us on the intellectual property? Because 

that is the only thing that we really have an advantage on today. 

And where are we going with that in terms of them enforcing? In 

fact China agrees with WTO rulings on intellectual property rights 

and yet they don’t enforce the law in their own country, what are 

our options? 

Mr. MENDENHALL. Right. Yes, I think we have an advantage in 

a lot of areas in addition to intellectual property—services, and certainly a lot of our manufacturing sector, and others. Agriculture is 

highly competitive. But obviously intellectual property is critical. It 

is a growing part of our economy. It is an area where we do have 

a very marked comparative advantage. And so we do need to do all 

we can to protect the value of our innovation and create incentives 

to continue innovation in the future. 

To determine what the benefit of the—let me break your question into two parts. One is the progress we have made so far, and 

then next steps, where we go from here. 

On the first part about where we are now and how we got there, 

I think it is important to look back where we were 10 years ago, 

when the WTO was first put in place. At that point, a large number of countries in the world didn’t have very developed laws on intellectual property, even apart from enforcement. We were in a 

sense in Phase I of the IP rulemaking world, where we just needed 

to put the rules into place so at least they had them on the books. 

We did that through the TRIPS agreement. There has been a 

dramatic improvement in the rules in the books around the world, 

including in China, but also in other countries as well. And we are 

12

continuing to ensure that happens when countries accede to the 

WTO, including Russia, for example. We are seeking to do that. 

The rules in the TRIPS agreement are by and large designed to improve the rules on the books. 

Enforcement is much harder. I call this Phase II, which is the 

challenge that is now facing us: How to develop enforcement rules 

that work. Because as you implied, you can have all the rules on 

the books that you want, but if you don’t enforce them, they are 

not worth the paper they are written on. So we do need to focus 

now on enforcement. There are rules in the WTO on enforcement. 

Unfortunately, they aren’t as precise as they could be. They say the 

enforcement procedures have to be deterrent, sufficiently severe to 

be deterrent. That standard, we all know, in some degrees is not 

met in countries like China, and we know that. 

What we are now in the process of doing on China is working 

closely with our industry to gather all the information that we can, 

and evidence that we can, and working closely with our trading 

partners and with their industries as well to gather all the information we can to demonstrate that we have tried the system, it 

has been tested, and it hasn’t worked, and here is why it hasn’t 

worked, and as a result we have 90 plus percent piracy rates in the 

country. We could then move forward and demonstrate that in fact 

there is an inconsistency. 

The WTO dispute settlement process—which a lot of folks are 

asking us to use and which we are willing to use if we are confident we can move forward successfully—it is a judicial process, or 

it is a quasi-judicial process, at least, and we need to prove our 

case. So even though we all know that it is a huge problem, we 

need to gather the evidence to do it. And that is a complicated process and that is a time-consuming process, but that is what we are 

doing. And we are working very closely with our industry to do it. 

And once we have gone down that road, if we have not seen a significant improvement in China, we have signaled quite strongly 

that we are willing to go forward and use all the options available 

to us in the WTO. 

In the meantime, we intend to use the procedures short of formal 

dispute settlement in the WTO to see what we can do to pressure 

China to move forward, including utilizing the transparency rules 

in the WTO that allow us to go to China and say give us all of your 

information on your cases so we can see exactly how your court 

system works and whether it has worked or not, whether it is effective or not. We are going to go forward with that. And we are working with our allies to see if they will join us in that effort. 

And then even outside the WTO process we are working through 

a formal bilateral dialogue with the Chinese, through the Joint 

Committee on Commerce and Trade, to improve IP enforcement in 

China, including setting benchmarks, setting standards, specific objectives that we would like them to meet. If we don’t see dramatic 

improvement, then, as I said, all options remain on the table. 

Senator COBURN. I am trying to understand how the WTO helps 

us in intellectual property. You have the software manufacturers 

who are hesitant to go forward with a sanction against China, or 

a case, because they are being blackmailed, in essence, that if you 

13

do this, you are going to have worse problems participating in 

China. 

The very advantages that you list that we have are dependent—

other than agriculture—on our intellectual properties, whether it is 

manufacturing techniques. We know things are reverse engineered 

in China, from patented items in this country, and then they are 

duplicated and the intellectual property is totally ignored. 

So how is WTO helping us at this time? Ten years from now may 

be too late for most of our software, most of our drugs, most of our 

copyrighted music and other things. Once that is gone down the 

road, then the advantages that we have in these other areas—manufacturing, service industries, and everything else. My question to 

you is why have we not filed through the WTO for an enforcement 

action on intellectual property in China? Are we afraid that we are 

not going to be able to continue the sales growth of our exports 

there through a blackmail process? 

I am having trouble understanding how the WTO is working effectively to control and protect American intellectual property. 

Even though we have the TRIPS agreement, if you have no enforcement, you have no law. 

Mr. MENDENHALL. Right, I agree with everything that you said. 

It is absolutely critical that we act and we act quickly to address 

the problem of IP piracy and counterfeiting in China. I couldn’t 

agree more. What we are doing now is trying to find the most effective way to do that. There are several tools that are available at 

our disposal, but they are not——

Senator COBURN. What are they? 

Mr. MENDENHALL. Well, I went through a number of them in my 

last statement. We have the ability to work with them bilaterally, 

which we are doing through the Joint Committee on Commerce and 

Trade, to address—to reach agreement on specific IP benchmarks 

and objectives for them to obtain. Now, we did it last year, and we 

did it just recently—last week, I believe, in China. They haven’t 

fully met all of those objectives. We recognize that. But we are 

working with them closely——

Senator LEVIN. May I just interrupt for one second? What is the 

‘‘it’’ that you did? You said you did it recently. 

Mr. MENDENHALL. The ‘‘it’’ is setting forth common objectives 

with the Chinese——

Senator LEVIN. Proposing. Excuse my interruption, but be real 

clear. The ‘‘it’’ is proposing benchmarks. Is that what you are saying? 

Mr. MENDENHALL. Proposing specific objectives, including significant reduction in piracy and counterfeiting. 

Senator LEVIN. Not achieving them, just proposing them. 

Mr. MENDENHALL. We have reached with China agreement on 

obtaining a set—or reaching a set of objectives, including significant reduction in piracy and counterfeiting. Have they met those 

objectives, all of them? No, they have not. They have not significantly reduced piracy and counterfeiting to the level that we would 

wish them to do so. It is an ongoing process. We are continuing to 

work with them. 

But getting back to the question about what the tools are that 

are available and how we are utilizing them, this is one but not 

14

the only tool that we are utilizing. So we are using the Joint Committee on Commerce and Trade to enter into a serious bilateral 

dialogue with the Chinese to try to set forth a set of common 

agreed objectives that the Chinese should meet with respect to reducing piracy and counterfeiting. 

There is a general objective of significantly reducing piracy and 

counterfeiting in China as well as a series of specific objectives 

dealing with, for example, accession and implementation of the 

WIPO Internet treaties to bring their IP laws—to modernize them, 

allow them to address digital piracy online. We are also working 

on software procurement issues, working on a variety of other 

issues. We can provide more information on the specifics, if you 

would like. 

That is one tool. It is not the only tool. And it hasn’t yet produced the dramatic and necessary results that we would like to see. 

So that is one tool. Another tool that we have is working through 

the WTO, and there are a number of procedures that are available 

to us on that front. One is working together with our allies through 

the TRIPS Council in the WTO, which is an IP forum, to bring 

pressure on the Chinese to—international pressure to bear on the 

Chinese to try to get them to comply. We have done that. Again, 

and I am not saying we have achieved all the goals we would like 

to achieve, but these are the tools available to us. 

Third, we are using the transparency procedures in the WTO to 

demand that China provide us information on why they believe, if 

they can put their money where their mouth is and prove to the 

world that in fact their system is effective in enforcing intellectual 

property. 

The last option available to us is dispute settlement, and that is 

an option that is certainly on the table. We have said to the Chinese that is a very serious possibility, and we are working closely 

with our industries, all segments of our industry who are interested in having us move forward on a case, to gather all the appropriate information, test the system, have a comprehensive program 

to make sure the system works in China. If it doesn’t work, to provide the evidence to us so that we have a very compelling dossier 

of evidence that we can go to the WTO and say they failed in the 

following ways, their court system doesn’t work, we have 90 percent piracy rates, or whatever rate it is that we are able to glean 

from the information that we are collecting, and prove our case in 

court, essentially, through the dispute settlement mechanism, that 

in fact the enforcement procedures are not deterrent. 

Those are all the options that we have available to us, and we 

are working hard. We are working to utilize all of them to maximize their potential and to ensure that they will actually succeed 

at the end of the day. 

Senator COBURN. I am going to defer to Senator Levin here in 

just a minute. Can you give us a time frame? In other words, the 

risk to U.S. intellectual property over a period of time not being enforced creates more and more damage to us as a Nation in terms 

of our future economic model. Because we really don’t have a tool, 

or we refuse to use a tool to enforce this in China. How long can 

we wait until we bring them into compliance? 

15

Mr. MENDENHALL. How long can we wait? Well, obviously we 

need to get them into compliance as soon as we can. That almost 

goes without saying. But we do need to be able to have all the evidence before us. Now, we have been working very hard over the 

past several years to gather what we can to demonstrate the case. 

And just to give you an example of what we have done, last year 

we submitted, or issued, a survey to all—an open survey to anyone 

who wanted to respond. We sent it to every Member of Congress, 

we put it up on the Web site, we sent it directly to companies, 

every company and trade association that came to us and said they 

have a problem with IP in China. We sent it to all of them, asking 

for information on the particular problems they have, how they 

have sought to enforce their rights, whether it worked, whether it 

didn’t work, and so on. And we have done that. We conducted a 

special out-of-cycle review under our special 301 process—which is 

a tool I forgot to mention—to continue that process, gather additional information. We put China in a special category this year. 

We indicated that they are back on the priority watch list in addition to being under what we call Section 306 monitoring, which I 

can explain if you want. But they are in a category of their own, 

indicating that this is a matter of critical importance to us. We set 

out a work plan in that OCR and we are continuing to work with 

our industries now to gather any remaining information that we 

can. 

Now, obviously we need to move as quickly as possible. But we 

can’t move unless we have all the information that we need. And 

to a large degree, it is up to our industries to work with us to do 

that. So we are in the process of doing it. I can’t give you a precise 

timeframe, but we are working with all due haste to try to get it 

all together and be prepared to move forward, if that is where we 

need to be at the end of the day. 

Senator COBURN. All right. Thank you. 

Senator Levin, you are next for an opening statement and questions. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Thank you, Mr. Chairman, most importantly for 

holding this hearing, and you are, it seems to me, performing an 

extraordinarily important function in terms of trying to weed out 

what is the wheat and what is the chaff when it comes to WTO. 

I must tell you, when it comes to trade enforcement, I have seen 

talk as a substitute for action for so many years around here that 

I am not surprised to hear more talk this morning. What does this 

mean, ‘‘all due haste’’? It sounds like ‘‘all deliberate speed’’ to me. 

Mr. MENDENHALL. What I mean by that is we are——

Senator LEVIN. The Chairman asked you for a timetable. 

Mr. MENDENHALL. Right. And I gave the best I can give. 

Senator LEVIN. ‘‘As quickly as possible.’’ That is not a timetable. 

Mr. MENDENHALL. Would you like me to respond? 

Senator LEVIN. Yes. I would love you to respond, but with a timetable. This year? Next year? This decade? I mean, China is absolutely not only continuing to close its country to our products, violating our intellectual property agreements, violating WTO, running up a huge trade surplus, manipulating currency, and what we 

16

hear is ‘‘we’re gathering evidence.’’ You have told us they have not 

even complied with agreements, and that is true. You know it. You 

have said this again here. What more will it take, and when do you 

contemplate we are going to get to the WTO if they do not shape 

up—which they are not going to do. They will enter into an agreement and break it. When are we going to the WTO? Will it be this 

year? Do we have a commitment that you will go this year to 

WTO? 

Mr. MENDENHALL. I can’t give you a commitment. I can tell you 

that we are working extremely closely with our industries, all industries that are interested in bringing a case. And it depends in 

large part on their ability to pull together all the information that 

we are going to need. Now, I can’t speak for industry and tell you 

when they are going to do that. But they are working on it. And 

I know they are working on it, so I don’t mean this as a criticism 

of them. But it is in large part dependent upon them. And we are 

working with them to try to design a program to ensure that we 

get the information that we need. And that is the rate-limiting step 

here, if you will. 

Senator LEVIN. At the rate you are going, when will we file a 

case? 

Mr. MENDENHALL. I am not sure what more I can add to what 

I have said already. 

Senator LEVIN. You talk a little too fast for me, I am sorry. Just 

a little slower on that. At the rate we are going, the current rate—

you know what the rate is—gathering information, when will we 

be in a position to file a case? 

Mr. MENDENHALL. I can’t give you an answer to that. I can’t foresee everything that is going to come up over the next few months. 

I don’t know the answer to that. I can tell you we have pulled out 

all the stops to try to move this. It is one of our highest priorities 

to try to ensure that in fact we are moving forward on this. 

Senator LEVIN. Agreements have been violated. Is that correct? 

Did you not just say that again this morning? We have entered into 

agreements; they haven’t lived up to them. 

Mr. MENDENHALL. What I said was——

Senator LEVIN. Is it true, they haven’t lived up to our agreements that we have reached with them? 

Mr. MENDENHALL. It is true that they have not significantly reduced piracy and counterfeiting to the levels we would like to see 

them to do so, that is correct. 

Senator LEVIN. Is it true that they have not lived up to agreements we have reached with them? 

Mr. MENDENHALL. It is critical for us, if we are going to move 

forward in a dispute settlement case, that we be able to demonstrate it with all of the evidence as if this were a court. Now, 

we may all know it to be true intuitively, because we have all 

heard the horror stories, whether it be—largely anecdotal, but 

widespread anecdotal evidence that in fact there is a serious problem with IP enforcement in China. We know that. We know that 

it hurts small businesses, we know that it hurts large businesses. 

It is a top priority of this Administration to deal with this problem. 

However, knowing it intuitively is different from proving it in 

dispute settlement. I think we can—we will be able to prove it in 

17

dispute settlement, but we are in the process of gathering all the 

information we need to do that. 

Senator LEVIN. And when you say ‘‘proving it,’’ are you talking 

about proving violation of WTO or proving breach of agreements 

that we have already reached with China? 

Mr. MENDENHALL. I was talking in the context of dispute settlement, but the same would be true otherwise, for any other reason. 

Senator LEVIN. You are talking about proof of both or proof of 

WTO violations? Is it agreements that have already been reached, 

or violation of WTO rules? Or both? 

Mr. MENDENHALL. Well, I suppose it is both. But what I had in 

mind was WTO dispute settlement, since that was the context of 

our discussion. 

Senator LEVIN. OK, now, we have also entered into agreements 

with China. Is that not true? 

Mr. MENDENHALL. We entered into an agreement in the mid1990s on intellectual property enforcement. We reached common 

objectives last year, not as a formal agreement, but common objectives last year in the context of the JCCT, which provided further 

elaboration. 

Senator LEVIN. And the agreement that was reached on intellectual property in the mid-1990s, have they complied with that 

agreement? 

Mr. MENDENHALL. That agreement is now 10 years old. Hard to 

say which of those commitments are now applicable and which are 

not. When the agreement was first reached, there was a significant 

reduction in export of pirated materials, which was a key objective. 

We have seen recently an increase in that. To say that they have 

definitively breached it or not, if you parse through that agreement, would be difficult to say. Clearly, though, if the overall objective of that agreement, under the TRIPS Agreement, is that they 

reduce piracy and counterfeiting to an acceptable level, they 

haven’t done that. That is true. 

Senator LEVIN. Is part of the agreement that we have reached 

with China that they will comply with the WTO standard procedural norms, respond in writing to requests for information? 

Mr. MENDENHALL. We are going to——

Senator LEVIN. No, is that part of the agreement? Is that part 

of the WTO requirement, that they respond in writing to requests 

for information from other member countries? 

Mr. MENDENHALL. They are supposed to do that, yes. 

Senator LEVIN. Have they? 

Mr. MENDENHALL. We haven’t made the request yet. We are 

doing that—well, let me—I don’t know which specific provision you 

are talking about, but there are a couple of provisions that pertain 

to transparency. There is a process called the Transitional Review 

Mechanism developed under the TRIPS Council which is a review 

mechanism which is done periodically. IP is a prominent part of 

that. We have requested information, as have other countries. They 

have provided responses to those requests. There is a separate provision in the TRIPS agreement that allows countries to ask for specific information on specific cases. We are working with our industry on this request. They are happy with the results, with the 

working relationship we have, to put together that request, and we 

18

are working now with our trading partners to see if we can work 

jointly on that. We expect that request to go in soon. And then 

China will then have a period of time to respond thereafter. 

Senator LEVIN. The transitional review mechanism, is that called 

‘‘trim’’? 

Mr. MENDENHALL. T–R–M, yes. 

Senator LEVIN. It is called T–R–M. Have they abided by accepted 

WTO procedures relative to that transitional review mechanism? 

Mr. MENDENHALL. Have they responded to questions? 

Senator LEVIN. Yes. 

Mr. MENDENHALL. Yes, they have responded to questions. 

Senator LEVIN. So we don’t have any cases where they have not 

responded to questions? 

Mr. MENDENHALL. Not that I am aware of, although I can get 

back to you if there is a specific problem there. 

Senator LEVIN. And what does USTR mean when it says it is 

going to take more forceful action aimed at enforcing China’s implementation of those WTO commitments? What do you mean 

when you say it? 

Mr. MENDENHALL. I mean what I explained earlier. There are a 

number of procedures available in the WTO that are available to 

us. 

Senator LEVIN. Are there instances where China has not carried 

out its WTO commitments, in your judgment? 

Mr. MENDENHALL. I think there is a very strong sense that there 

is a problem that they have on enforcement, that they have not 

lived up to the standard on enforcement in the WTO. Again, that 

is much different than saying we have all of the evidence that we 

need to gather to bring a case. Now, I think we can gather that 

evidence, but we are in the process of doing that now. 

Senator LEVIN. I am way over my time. Thank you, Mr. Chairman. 

Senator COBURN. I just have a couple more questions for you, if 

I might, and then we will be free. 

First of all, thank you for your candor. I understand you can’t 

say something here that puts us in a limited negotiating position 

by what you testify here, and I understand that and I am appreciative of your position and recognize that. 

The National Conference of State Legislatures wrote to U.S. 

Trade Representative Rob Portman in March of this year and expressed concerns with the implications of WTO decisions on States 

rights, which are in fact major in many instances. What is the 

USTR doing to remedy the current problem of State lawmakers 

being out of the loop even though trade negotiations will affect 

their laws? In what stage of a trade dispute does USTR typically 

reach out to the States? 

Mr. MENDENHALL. I will answer the latter question first and get 

back to the former. 

If there is a dispute that implicates State laws, we begin consultations immediately with the State, particularly the Attorney 

General’s Office and others who have an interest in that. We did 

that, for example, in the gambling case, which prompted in part, 

I think, that letter. So we fully consult with the States who are implicated with any dispute all along the way. In fact, I think we are 

19

required to by statute, and we would do it anyway because it is absolutely critical that they be involved in the process throughout the 

time if any of their interests are implicated. 

So on dispute settlement, that is what we do. On negotiations, 

we have a similar process, where we have State points of contact 

that we work with in each individual State. We work with the Governor’s Office. We of course have formal or informal dialogue with 

anybody, including State legislators, that individually or collectively want to ask us questions. We are happy to answer them at 

any time. 

But when we put forward negotiating positions, for example, as 

in the services context, that implicate State laws, we consult fully 

with the States on them. They have a chance to review the content 

of the submissions that we would make, the negotiating proposals 

we put down. They consent or not—in most cases they do. We work 

with professional associations, including State bar associations if 

we are talking about legal services, or whatever the appropriate association would be in a given case. 

So we have extensive contacts with the States at all times. And 

we will continue to do all we can to improve those lines of communication if a particular problem arises. 

Senator COBURN. Mr. Barfield is going to be on our second panel, 

and I read his testimony yesterday or the day before. And he seems 

to have some pretty good ideas or recommendations for us in terms 

of changing the WTO. I would consider it a personal favor if both 

you and Representative Portman would look at some of the recommendations in terms of—actually it is more in terms of transparency and solutions to problems that don’t take us down some of 

these other paths. So I would consider it a great favor if you all 

would look at his testimony, because I found it very insightful. 

Do you have additional question, Mr. Levin? 

Senator LEVIN. I do. Thank you, Mr. Chairman, just a few. 

First, on the currency evaluation issue, Article 15 of the GATT 

prohibits WTO members from using currency exchange action to 

frustrate the intent of GATT. Has China manipulated their currency, in your judgment? Currency exchange? 

Mr. MENDENHALL. My judgment isn’t the determinative judgment. 

Senator LEVIN. I know that. But in your judgment, have they? 

I know it is not determinative. 

Mr. MENDENHALL. I am going to have to defer to the Treasury 

Department on that. 

Senator LEVIN. Well, is it not true that the Treasury Department 

has said that current Chinese policies are highly distortionary and 

pose a risk to not just their economy but to trading partners and 

the global economic growth? Does that sound familiar? 

Mr. MENDENHALL. I am assuming you are quoting a document. 

They could very well have said that. I would defer to them. 

Senator LEVIN. Do you accept that? 

Mr. MENDENHALL. Again, on currency policy, I am going to have 

to defer to the Treasury Department. 

Senator LEVIN. Well, who challenges that policy at WTO? 

Mr. MENDENHALL. Who challenges the policy? 

Senator LEVIN. Is that the Treasury Department, or you? 

20

Mr. MENDENHALL. We would work in close consultation with the 

Treasury Department, as we do on all issues. We have an extensive 

interagency process on any matter that may implicate any agency’s 

interest. 

Senator LEVIN. But who would actually file the document? 

Mr. MENDENHALL. Yes, USTR would actually file it. 

Senator LEVIN. Are you considering filing such a case? 

Mr. MENDENHALL. Well——

Senator LEVIN. Given their finding and you work closely with 

them, are you considering filing that case? 

Mr. MENDENHALL. I don’t believe they found manipulation. 

Senator LEVIN. No, they found current policies are distortionary. 

Mr. MENDENHALL. But they didn’t find manipulation. 

Senator LEVIN. OK, so you are not prepared to file a case at this 

time? 

Mr. MENDENHALL. It is not currently under consideration. 

Senator LEVIN. Would you be willing to file a case if you found 

manipulation? 

Mr. MENDENHALL. If we found a violation of the WTO agreements, it would be something that we would always consider. 

Senator LEVIN. And if there is an artificial undervaluation of 

their currency through manipulation, would you file a case? 

Mr. MENDENHALL. I can’t commit to filing a case. 

Senator LEVIN. Even under that circumstance? 

Mr. MENDENHALL. You are asking me a hypothetical question on 

whether we would bring a case if particular findings were made. 

I can’t answer that question. It is a hypothetical question. 

Senator LEVIN. I think it is a very real question, actually. It is 

not hypothetical at all. If you can’t say you would file a case if you 

find a violation of WTO, I don’t know why you can’t answer that 

case. Why isn’t that ‘‘of course you would’’? 

Mr. MENDENHALL. The question is whether or not the facts are 

out there to support——

Senator LEVIN. No, I didn’t. I said ‘‘if you found’’. 

Mr. MENDENHALL. If we found it a violation of the WTO, it would 

be something that we would always consider. I can’t speak definitively as to whether or not we would bring a case, since this is a 

request you are making to me in a hearing. I can’t answer that. 

Senator LEVIN. OK. Just a couple of questions on auto policy. 

China’s distribution registration system does not appear to allow 

for imports to be sold in China on a nondiscriminatory basis. For 

instance, China requires to sell cars in China you have to be a registered manufacturer in China. Is that legal under WTO? 

Mr. MENDENHALL. If you are asking me specific questions about 

specific cases, we would be pleased to answer those in writing. So 

if you would like to ask me those questions, that would be fine. We 

will be happy to respond to them. The topic of the hearing was sovereignty. 

Senator LEVIN. It was—I am sorry? 

Mr. MENDENHALL. Protecting American sovereignty. I would be 

happy to answer questions you may have in that regard. If you 

have questions on specific cases, specific potential cases, we would 

be happy to answer them, but I am not prepared today to talk in 

depth about potential cases. 

21

Senator LEVIN. Well, we talked about intellectual property. Was 

that American sovereignty? 

Mr. MENDENHALL. I was trying to be as responsive as I could to 

the questions that you asked. I don’t have all the facts available 

to answer all of the questions that you have on issues that are outside the topic. 

Senator LEVIN. I will just conclude, then, by asking you will you, 

for the record, review China’s auto policy and report to the Subcommittee as to whether, in your judgment, there is violations of 

WTO involved in those policies? 

Mr. MENDENHALL. I will certainly take that back and I will discuss it with my folks, and we would be happy to get back to you 

and discuss it with you. 

Senator LEVIN. As to whether you will do that, is that what you 

will get back to us? In other words, you are not going to commit 

to review the China auto policy and tell us whether in your judgment there are violations in that policy of WTO? Is that what you 

are—you are not committing to do that. 

Mr. MENDENHALL. To tell you whether or not there is a violation? 

Senator LEVIN. In your judgment. What I am asking you to do, 

would you be willing to review China’s auto policies and to report 

to this Subcommittee as to whether, in your judgment, those policies contain violations of WTO? Are you willing to make that commitment? 

Mr. MENDENHALL. I am willing to look at it and see what is 

available, what the answer is. 

Senator LEVIN. Thank you, Mr. Chairman. 

Senator COBURN. Mr. Mendenhall, I am sorry we moved off of 

the subject. I know you did not come here prepared to answer a 

lot of questions on specific trade functions between us and China. 

So for that, thank you for being forbearing. 

One last question on our anti-gambling cases through the WTO, 

in terms of sovereignty. We won three of those, I believe, out of the 

four. The final outcome of the WTO ruling, there is a particular 

note because the first time the WTO cited a ‘‘moral exception 

clause’’ in its rules and said the United States had a moral right 

to restrict marketing access to gambling. Allowing the WTO to discern whether U.S. laws can stand on their moral basis if not their 

economic raises the WTO to a whole new level. 

Will other U.S. laws, such as child pornography bans, be subject 

to the same moral examination? What about Internet child pornography? And what if the WTO rules against us on that? 

Mr. MENDENHALL. Sure. 

Senator COBURN. Using this moral definition. And I am going 

back to sovereignty, because we do have the right to do that. 

Mr. MENDENHALL. Sure. Absolutely we do. And it is not the 

WTO’s role to second-guess whether or not our standards of morality fit with any particular panel or appellate body or any other 

country’s standards of morality. And they don’t do that. It is up to 

each country to decide what its standards of morality are. 

The question that the WTO was trying to answer in the context 

of a specific exception that allows us an ‘‘out’’ to act inconsistently 

with the WTO for seeking to protect morality is whether or not the 

measures that we have adopted in fact achieve the ends that we 

22

have sought. So we set whatever standard of morality that we 

would like, whether it be gambling or pornography or what have 

you. And the WTO doesn’t second-guess it. But what it looks to see 

is whether in fact the measures that we have sought to protect our 

moral values are truly designed to meet those goals or whether 

they are an arbitrary protectionist measure. 

They certainly would not second-guess child pornography and say 

that is something that ought to be permitted. They didn’t say gambling is something that ought to be permitted. We are perfectly 

within our rights to say it is not. 

Senator COBURN. But their actual decisionmaking process makes 

a value judgment on whether or not we as a Nation have a right 

to set a certain moral standard and whether or not we were using 

that appropriately? 

Mr. MENDENHALL. No. Sorry if I didn’t explain myself properly. 

It is entirely up to the United States to decide what moral standard it seeks to achieve, and that is across the board, whether we 

are talking about pornography or gambling or what have you. They 

do not second-guess that. 

Senator COBURN. Well, if they are making an evaluation if we 

were using that properly, is that what you are saying, too? For example, let’s talk about the gambling case. They obviously—three 

out of the four. There is some dispute whether we won all that or 

not. But three out of the four, if they could prove that our laws on 

Internet gambling were protectionist instead of we don’t want 

Internet gambling, then its moral purpose is then presumed allowed, or not allowed? In other words, if it is their judgment that 

we did it from a protectionist standpoint instead of from a moral 

standpoint, and they rule against us, and they don’t allow us to use 

the moral exception, then in fact they are making a judgment on 

our sovereign law. Is that not correct? 

Mr. MENDENHALL. Let me respond to that in a couple of parts. 

The way they would analyze it is they would say—whether it is 

pornography or gambling of what have you, they would say the 

United States has authority, ability under the WTO rules to decide 

for itself whether or not to permit gambling, whether or not to 

allow child pornography, or any other moral value we would seek 

to vindicate. What they would then say is, is there a particular reason that you—the United States or another country is, for example, 

singling out foreigners and saying—what they said in the gambling 

case is we singled out for a particular type of Internet services, we 

had different rules for domestic and foreign operators. And the 

question is why would you do that? It is not that you can’t prohibit 

gambling, or permit it, whatever you want to do, but why would 

you differentiate between the U.S. and foreign nationals? If truly 

you are trying to vindicate a moral value, why would you discriminate? 

That would be the question that they would ask. They wouldn’t 

be questioning the underlying moral judgment that the United 

States put forward. 

Senator COBURN. Thank you very much. I appreciate your testimony and I would hope somebody from your staff will hang around 

to hear our second panel. 

Mr. MENDENHALL. Thank you. 

23

1The prepared statement of Mr. Barfield appears in the Appendix on page 54. 

Senator LEVIN. Just on the gambling issue, could I follow that 

up? What you are saying, then, is they are saying they are not 

going to interfere with our moral judgment, they want to make 

sure that it is applied equally to domestic and to foreign services, 

gambling services? Is that the heart of their judgment? 

Mr. MENDENHALL. The way the exception is established is it says 

you can discriminate in certain—they realize that in some cases 

you may have to discriminate in order to vindicate whatever it is 

that you are trying to vindicate. But it can’t be arbitrary. There 

would have to be a reason why you would need to discriminate between foreign and domestic individuals——

Senator LEVIN. Does that reason have to relate to the underlying 

moral purpose? 

Mr. MENDENHALL. It would have to—yes. Well, it would have 

to—the discrimination that you would seek to be justifying, you 

would have to argue that in fact the discrimination was necessary 

to vindicate the moral value. 

Senator LEVIN. Thank you. 

Senator COBURN. Mr. Mendenhall, thank you so much for being 

here. 

Mr. MENDENHALL. Thank you. I appreciate it. 

Senator COBURN. Panel number two will please come forward. 

We have Claude Barfield, resident scholar at the American Enterprise Institute; Robert Stumberg, professor of law, Harrison Institute for Public Law, Georgetown Law School; and J. Robert 

Vastine, president, Coalition of Service Industries. 

Mr. Barfield will begin our testimony. Your written testimony 

will be made a part of the record. If you could, limit your initial 

comments to 5 minutes. 

Mr. Barfield. 

TESTIMONY OF CLAUDE BARFIELD, PH.D.,1 RESIDENT SCHOLAR, AND DIRECTOR, SCIENCE AND TECHNOLOGY POLICY 

STUDIES, AMERICAN ENTERPRISE INSTITUTE 

Mr. BARFIELD. Thank you very much for inviting me today. You 

have my written testimony, and so I am just going to hop, skip and 

jump around. I would like to make three preliminary points. 

One is that despite the criticisms that I level in my testimony 

about the dispute settlement system, I am a strong supporter of 

the World Trade Organization. 

Second—and we can come back to this—often, and I think sometimes this is true, the critics of the dispute settlement system, of 

them it is said that they are kind of sore losers, that they somehow 

represent interests that lost a case or some cases, for instance, of 

the anti-dumping case or whatever. I should say that in my own 

case I have this odd dysjunction. I am a very strong critic of the 

U.S. anti-dumping system, and yet I think the decisions that went 

against us are wrong. I think the FSC legislation was terrible, but 

I think the decision that went against us was also terrible. I think 

the Byrd amendment is a terrible piece of legislation, but it is in 

the Congress prerogative to pass bad pieces of legislation. 

24

So I do not come at this as someone who thinks just because he 

lost cases that we ought to change things. I am in favor of the outcome, I just did not like the way it——

And then finally, I would say that in my own case, what my position represents today is a change of my own views about the WTO 

and how it works, and how it works particularly with national systems, with national democracies. I would say as late as 10 years 

ago, 5 years ago, in my judgment, when you looked at trade negotiations, more is better, and that is, the deeper you went, the farther you went, the better you are. I also thought that the Congress 

really was an organization of mischief, basically often represented 

protectionist groups, and that the Executive really was the place 

one had to look for salvation, as it were, in the trade area. 

I no longer think that. That is, I still think that Congress can 

do, in my judgment, make some bad judgments, whether it is Byrd 

or whatever, but I think the problem we face is that the international rules—and I will come back to this because this is really 

the theme of what I would be saying—really have a dramatic impact on the domestic priorities and the domestic rationale for individual nation-states, and particularly they have an impact, I think, 

and we have to look more and more in terms of impact on the legislative and the representative system of governments in individual 

nation-states I am talking about. 

Let me just go more specifically to the WTO, and to take you 

back to a history here. From the beginning of the GATT and then 

the WTO, there were two traditions that kind of were juxtaposed 

against each other. On the one hand, there were those who looked 

at the GATT as an inter-governmental organization that was an 

extension of diplomacy, and that if you had disagreements among 

nations, between nations, you ought to really try to handle it diplomatically, not really worry so much about legal principles or 

international law principles, but just do what you needed to do to 

settle the issue. 

Europeans tended at that time to have that view of the international trading system. The United States was always on the 

other side, and that is, given our highly legalistic society, we always pushed for strong legal rules, legal interpretations. And the 

old GATT, I think, was much more European, the new WTO is 

much more, I think, in what had been a traditional U.S. point of 

view. I guess in my own case I would say that in terms of the 

change, be careful what you wish for. 

And let me just go back to what happened with the move to 

WTO. Two things happened, and what I think was playing out are 

the unintended consequences—and any generation would have to 

go back and look at what you had done. Two things happened in 

the Uruguay Round. One, there was the creation of the WTO with 

a new, much more at least quasi-legal if not totally international 

legal system, international legal rules of trade. At the time you 

changed the way the system operated, and that is, you went from 

a system in which when you had a complaint under the GATT, you 

could not really get—you did not get a resolution in favor of the 

complainant unless you could get consensus from everyone. That is, 

a panel could rule, but the United States could overrule that. 

25

Now, the United States and other countries were quite restive 

with that system, and let me be very clear because of where I am 

coming out. It was the United States who pushed for this change, 

that you would go in another direction. So the system was changed 

actually in the WTO so that it went from where you had to have 

a consensus to reach a ruling, to where once a panel in the appellate body in the new WTO ruled, you had to have a consensus, in 

other words, unanimous virtually against that in order for that to 

change. 

At the same time we kept a system where—as you asked Mr. 

Mendenhall—in order to have new rules you had to have consensus, or if you had to interpret old rules, three-quarters. In other 

words, what we set up was a very efficient judicial system, and it 

continued a very inefficient rulemaking, as it were, or legislative 

system. In terms of the analogy in the United States, it is as if 

when the Supreme Court ruled—forget about, I am not talking 

about things about the first 10 amendments now—when it rules on 

an issue of commercial, or the Federal courts ruled, it was as if 

that ruling could only be overturned by the Congress if you had 

virtual unanimity in the House and Senate. 

Now, one other thing happened to complicate matters. In the 

Uruguay Round, for the first time—you had seen this before in 

other rounds—but really in the Uruguay Round, you had the construction and the implementation of rules that went far beyond the 

border and deep into the national regulatory systems, or at least 

in their potential of telecommunications, of financial services, of 

health and safety, in other words, issues would have been before 

counted as domestic issues, and in some ways still were domestic 

issues. 

And so you put up a fairly rigid new legal system, which would 

be very difficult to change, juxtaposed against a rulemaking system 

that you could not change, and the authority of the WTO going 

deep into matters that had been counted as matters of the nationstate. That I think is the problem that we face. I do not think that 

there is a conspiracy in the WTO or the panel——

Senator COBURN. Let me get you to sum up, if you would, please. 

Mr. BARFIELD [continuing]. To go into or second guess national 

governments. But I think inevitably what has happened—and we 

can talk about this in individual cases and we could argue individual cases—what has happened is, is an all too human trait that 

if somebody asks you a question, there is the temptation always to 

answer it, even if, as it is widely known, that in many cases the 

rules that are negotiated by diplomats in the WTO are unclear, 

they are contradictory. They sometimes are in opposition to each 

other. And so there is the temptation when that happens to answer 

the question even though you cannot. 

I have suggested a variety of ways of fixing this. You could have 

some sort of blocking mechanism, whereas you have some minority, 

a substantial minority does not agree with the system, you block 

it until you can negotiate it out, or you could have—without getting 

technical in international legal terms, the panels in the appellate 

body invoke the doctrine of ‘‘non liquet.’’ In other words, what they 

would be—the Latin term means ‘‘it is not clear,’’ and to send it 

back to the negotiators. Or you could put in what we have flirted 

26

1The prepared statement of Mr. Stumberg appears in the Appendix on page 59. 

with in the United States, a so-called political issues doctrine, in 

which the panel would say, look—I would put the FSC to some degree in that—this is a volatile political issue that we are not comfortable in answering, and you should negotiate this yourselves, 

and not put it to a dispute settlement system. 

I will leave it there. 

Senator COBURN. Thank you. Mr. Stumberg, thank you for being 

here. 

TESTIMONY OF ROBERT STUMBERG,1 PROFESSOR OF LAW, 

HARRISON INSTITUTE FOR PUBLIC LAW, GEORGETOWN UNIVERSITY LAW CENTER 

Mr. STUMBERG. Thank you very much for inviting me. Senator 

Levin, good morning. 

I have provided a written statement with four points. Let me just 

frame those points and then spend the rest of my time responding 

to some of the questions you raised about the gambling case, Senator Coburn. 

My first point is that trade agreements have a constitutional 

character, and if, as Members of this Subcommittee, you are familiar with domestic constitutional debates about preemption or about 

privatization or about takings, you will quickly recognize these debates in the international context. You will see some of the same 

language in the actual text of trade rules, and you will see the 

same issues basically argued before the WTO and other fora. 

Trade agreements are constitutional in the sense that they are 

designed to limit governing authority, even in areas where discrimination against foreign goods or services is not an issue, and 

they are also constitutional in the sense that the rules are very 

general, even vague in the way they are formulated. 

My second point, which I will return to, is that a good case study 

to see all these things at work is the WTO’s decision on Internet 

gambling. 

But before I return to the gambling issues, let me also mention 

that there has been a developing dialogue between USTR and State 

and local governments on the so-called sovereignty issues. USTR 

has made a number of very clear statements on its web page. You 

can view them there. I have spoken to a number of State and local 

officials who feel like the responses just are not attentive to their 

concerns. In other words, you have two groups that are coming 

from very different cultures and perspectives, and the kind of consultation that is necessary to avoid problems like the gambling case 

presented has really not taken hold yet. 

There is no traction yet in terms of any meaningful, FederalState consultation, and that is really my fourth point. Congress can 

play an important role by creating a forum to encourage people to 

come together and have a public dialogue about such issues as you 

raised about the gambling case. 

So let me just spend the rest of my time making a few points 

that I think are responsive. Even when the United States wins a 

case, there is a lot you can learn from it. This is one of the very 

few cases on the services agreement, the General Agreement on 

27

Trade in Service (GATS). Mr. Vastine’s coalition has worked very 

hard to GATS put in place in order to promote American exports 

of services abroad.economy. 

What the gambling case says to me is that making a commitment in a sector like gambling services is like hugging a porcupine; 

it can be done, but you have to do it very carefully if you do not 

want to get hurt. 

Among the lessons we have learned from that case are, first of 

all, as the WTO appellate body recognized, the U.S.’s commitment 

on gambling services, which was made back in 1993 and 1994, was 

essentially a mistake. It was a mistake that could have been avoided had there been effective consultation between U.S. trade negotiators and the legions of State-level officials who regulate this industry on a day-to-day basis. 

Second, the GATS rule that the island Nation of Antigua used 

to challenge the United States was interpreted very expansively by 

the WTO appellate body. It is a rule called ‘‘market access.’’ What 

is interesting about that rule is that it has nothing to do with discrimination against foreign firms. It is a rule that has to do with 

whether or not governments at any level may impose quantitative 

limits such as licensing monopolies or a limited number of service 

providers or imposing a quota. The WTO ruled that in this case, 

a ban on Internet gambling amounted to a zero quota. 

That is a very controversial decision. You might say it is a bad 

decision. But that is the job of the Appellate Body, to interpret language that is so vague and open-ended. They did their job, and 

used the role to find the United States in violation. 

The U.S. Trade Representative (USTR) effectively defended the 

United States with respect to all but one measure, the Interstate 

Horse-Racing Act, which permits remote betting for horse races. 

What is interesting about the public morals exception, as interpreted by the WTO, is if the USTR persuaded the Appellate Body 

that there were public morals concerns that were specific to remote 

gambling. In the Internet gambling context, these include accessibility to children through the Internet or the potential for money 

laundering or other connections to organized crime through Internet financial transactions. But those rationales do not apply to the 

kind of economic regulation that State and local governments have 

in terms of creation of monopolies, tribal casino concessions, State 

lotteries, and other sorts of quantitative limits that are common in 

the United States. 

Finally, one of the most interesting things about the case is to 

anticipate the end game. If the Congress does not move expeditiously with respect to amending the Interstate Horse-Racing Act, 

the WTO dispute process provides sanctions that include alternatives even for a small country like Antigua, which I think has 

about 90,000 residents. It is a country which is obviously too small 

to have any meaningful options in terms of a trade sanction when 

it comes to imposing tariffs on imports from U.S. goods and services. We would not even notice. The academic literature suggests 

that Antigua will follow the lead from Brazil, which just this past 

week has published its blueprint for how it will apply sanctions in 

a cotton case which Brazil recently won against United States with 

28

1The prepared statement of Mr. Vastine with attachments appears in the Appendix on page 

63. 

respect to a number of commodity subsidies and export promotion 

credits for cotton exports. 

Even a tiny country like Antigua can decide to withdraw its 

trade commitments with respect to honoring U.S. intellectual property rights. And the list of property rights that Brazil used, and 

which Antigua can use as a model, include copyrights, trademarks, 

industrial designs, patents, and protection of undisclosed information. That is a significant sanction stick, and it raises important 

questions about how the United States should make its future 

GATS commitments. 

Senator COBURN. Thank you, Mr. Stumberg. Mr. Vastine, thank 

you. 

TESTIMONY OF ROBERT VASTINE,1 PRESIDENT, COALITION 

OF SERVICE INDUSTRIES 

Mr. VASTINE. Thank you very much. I am Bob Vastine, President 

of CSI. Under another hat, I am Chairman of the Inter-Agency 

International Trade Committee on Services, an official advisory 

body of the U.S. Government, created in the 1974 Trade Act. 

I appreciate the opportunity to be here today. This is the first 

time I have had the pleasure of testifying to a committee of which 

I was once the staff director. Since Senator Levin has left the room, 

I’ll confess I was a Republican staff director. 

I want to say that my testimony is mainly focused on U.S. commercial stake in the WTO, though I am going to try to ad lib about 

regulation. 

First of all I want to make the point that CSI’s member companies include virtually every aspect of U.S. services, tradeable services. We operate in more than 100 countries. Our global sales are 

over 800 billion. We employ about 2.2 million people globally. 

These companies are absolutely committed to the WTO and to the 

Doha Round as the best means of obtaining global trade liberalization to expand their foreign markets and create more jobs here. 

U.S. services trade consists of two elements, cross-border trade 

and sales by U.S. foreign affiliates to foreigners. The total of this 

trade, cross-border and affiliate trade, is $740 billion, more than 

the GDP of Canada. Cross-border trade, is like financial services 

that are traded electronically, but it also means trade conducted by 

people, people who travel, who come here to buy health services, 

who come here to buy education services. Every time a foreign student matriculates at a U.S. university, that is an export. We are 

very good at this. We are also very good at sending our experts, our 

lawyers, our accountants, our computer consultants, abroad to 

other countries to provide their services personally. All of this 

amounts to total cross-border exports, as I said, of $338 billion, 

where we have a $50 billion annual surplus. 

We are also the most competitive country in sales from foreign 

affiliates, $402 billion in sales in 2002. By the way, since you are 

the Governmental Affairs Committee, responsible for oversight of 

our statistics programs, I would love to talk to somebody on this 

Subcommittee about needed changes in the government’s programs 

29

for compiling these statistics. We are dealing with 2002 data. It is 

too old. 

As I said, we are committed to the WTO. CSI was created in 

1982 because there was at that time no mechanism, no legal framework, for conducting trade in services, for creating rules for free 

trade in services, and CSI had a great deal to do with the writing 

of the General Agreement on Trade and Services (GATS). 

We believe that GATS is essential, because, Senator, it is the 

only way we can obtain legally binding commitments as to the 

treatment of our foreign investments and our export industries. In 

order to invest millions, sometimes a billion or more dollars in a 

foreign affiliate, a U.S. company needs legal certainty. The best 

way to get that legal certainty under the WTO is commitments in 

the GATS which are legally binding and therefore subject to dispute settlement. 

So in spite of the flaws, the discussion we have had today about 

dispute settlement, it is really an essential part of the post-Uruguay Round world, and very important for our member companies. 

Achieving legally binding commitments subject to dispute settlement is very important. 

I am going to skip a lot of my text, and I wanted to tell you how 

the Doha Round is in crisis, and ask your help in dealing with that, 

but I want to talk a little bit about regulation from my standpoint 

as having observed closely, the trade negotiations process really 

since 1965. 

The U.S. Trade Regulation is acutely aware of the need to preserve the right to regulate federally, State and locally. We know 

that USTR is very aware of these State regulation issues, for example, insurance. Insurance is regulated State by State under the 

McCarron Act, there is no Federal regulator for insurance. There 

are State commissioners. There is no common standard of State 

regulation insurance. It is bad for U.S. insurance companies operating nationally. It is very bad as well for foreign insurance companies that have to operate with a 50-state regulatory system. 

Other countries have asked in the Doha Round that we change 

that system. We cannot change that system. We are not going to 

be able to change that system. We are not going to be able to override the States. The best we can do is try to urge on these commissioners the need to consult among themselves and create harmonious, sensible regulation. But for now the whole insurance industry is held back domestically and globally by this system of State 

regulation, which is not going to be changed by the WTO. 

The Federal system creates equally complex problems for the law 

profession, for the engineering profession, for the construction profession. So we are very aware that in the areas where State regulation—and it is a big piece of our services trade—prevails, we have 

problems. 

Now, in my experience, in no case has the United States obligated any State to regulatory rules that a State has not voluntarily 

accepted. We just made a new offer in the WTO. We revised our 

previous offer. That offer included some changes in regulation that 

States had voluntarily adopted in the last 2 years. Before including 

those changes in our offer, the USTR went to every single one of 

those States and got their permission to do that. Now, that does 

30

not mean that the professor is not correct. I would say the greatest 

crying need right now in this era of when some State legislators 

are rebelling against the WTO—based often on hearsay, innuendo 

and frankly, wrong-headed stories about the evils of the WTO—the 

best thing USTR could do would be to beef up its state-wide operation. They need a former governor, a former noted head of assembly or Senate or the State legislature to come be a counselor to the 

USTR, to be at Portman’s right hand, to be a main point of contact 

for the States, to call the 50 States Attorneys General, the Supreme Court Justices, etc. 

Senator COBURN. Let me get you to sum up, if you would. 

Mr. VASTINE. So I think I have made my point. I think we do 

have an issue with State regulation. In my own experience, the 

USTR is extremely sensitive to the need not to tread on the States, 

but we need to do a lot more work with the States themselves. 

Thank you. 

Senator COBURN. Thank you. 

Mr. Vastine, you just said we need the legal certainty of the 

WTO, and let me bring a case to you: Zippo lighter. Total piracy, 

there is no legal certainty for them. There is no enforcement mechanism. There is no punitive action that is going to be taken against 

the Chinese because the Chinese did not enforce it. 

So tell me what the legal certainty is when you have laws that 

are not enforceable, or we will not through our own political benefit 

enforce the sanctions that are available to protect intellectual property or piracy. I do not know if you have read the article on that. 

The Chinese make three or four times the number of Zippo lighters 

than Zippo makes, and with Zippo’s lifetime guarantee, they all 

started coming back in because they were junk. Here is an American company whose intellectual property—i.e., a quality product 

with its name brand on it—was pirated, and yet we have done 

nothing about that. 

So tell me what you mean by ‘‘legal certainty.’’

Mr. VASTINE. I will try to do that. It is difficult not to get caught 

in the China problem, which is a vast problem. But let me give you 

some background. 

We worked very closely with the USTR in writing the agreement 

with China, the bilateral agreement between China and the United 

States, which laid out most of the rules that China is now supposed 

to be implementing. And we worked very hard for PNTR passage 

in Congress because we felt that agreement was a very good agreement. 

Now, we have a large number of industries and companies that 

have been having adjustment problems working with the Chinese 

to get them to implement their agreements. I don’t know anything 

about Zippo, so I can talk to you only——

Senator COBURN. You know zippo about Zippo. [Laughter.] 

Mr. VASTINE. Thank you. But I can talk to you about our service’s experience. Some of these companies are software companies, 

and some are entertainment companies, and they are all acutely 

aware of the IPR problems. And we join them in bringing constant 

expressions of concern to bear on USTR and on the Commerce Department about these violations. 

31

Senator COBURN. Let me interrupt you for a minute. Is it not a 

fact that the software manufacturers chose not to push for enforcement of the very laws that the Chinese were violating in terms of 

intellectual property? 

Mr. VASTINE. Well, that is what I am getting to. The decision to 

go to the WTO and file a case is a complex decision. It is a difficult 

decision for a company. We have companies in, say, express delivery who, on the one hand, are doing extremely well. Their sales in 

China have vastly increased. On the other hand, they have unfair 

competition with the local Chinese postal office, which is giving 

them a hard time in a number of ways. 

What does a company do in a situation like that? You have to 

put yourselves in the shoes of the company, and you can understand that they want to protect their position. They are doing well. 

On the other hand, they need to continue to argue for fair treatment vis-a ́-vis the China post or whatever entity may be in competition with them; the same thing in the insurance sector. It has 

taken years to get the insurance regulators in China to come 

around to beginning to implement their commitments in insurance 

services. 

Senator COBURN. Let me get you to answer my question. 

Mr. VASTINE. So I am having a hard time answering your question. 

Senator COBURN. Is it true or not? 

Mr. VASTINE. Is what true? 

Senator COBURN. That the software companies felt intimidated 

for their future market to not file a complaint. 

Mr. VASTINE. I do not know that, Senator. I do not know the 

facts. I just do not know. 

Senator COBURN. Well, the problem I see with your statement, 

legal certainty, is there is no legal certainty when it comes to 

China. I am just talking about China. I am not talking about all 

of it because I know we have wonderful trading partners that do 

protect our intellectual property. But, in fact, if you have a system 

where the leverage is such that even if you have a legal remedy, 

the leverage is such by the country that is working it will not carry 

out the proper factors of that, you really have no legal certainty. 

We do not have that in terms of intellectual property. 

Mr. VASTINE. There was a case—and maybe Mr. Barfield knows 

the case. 

Senator COBURN. Mr. Barfield——

Mr. VASTINE. We brought a dispute settlement case 6 months ago 

to the Chinese. We took it to Geneva. They settled immediately. 

Senator COBURN. Which case was that? 

Mr. BARFIELD. I do not know the case. 

Senator COBURN. Mr. Barfield, would you like to comment? 

Mr. BARFIELD. My only point is that I do not—the answer to your 

question is yes. But I do not think we can limit this to China. We 

can take up an issue that is about to maybe got to the WTO, very 

much, I am sure, on Congress’ mind and the Administration’s 

mind, and that is the Boeing-Airbus. For a decade, at least, the 

United States did not bring that case because the Boeing Company 

had reservations about what it would do with its markets in Europe, a sort of open secret. So I think you are right in terms of 

32

what is happening in China, but that is part of a calculation, as 

Mr. Vastine was saying. When you bring this case, a company or 

the government has to think, well, how does it fit with—this or any 

other case, how does it fit with our overall trade relations and, in 

some cases, diplomatic relations or security relations. 

We ought to admit that all of these things work as a piece of that 

decisionmaking process. But it is not just China. It is true with our 

other trading partners, too. It would be true probably with—we 

have relations with Brazil. We are calculating what we would do 

there. 

Senator COBURN. For example, the recent negotiations with 

Merck where they told them that they would reproduce the drug 

themselves unless Merck dropped the price. 

Mr. BARFIELD. That ended up—I think the U.S. Government did 

not get involved in it, but——

Senator COBURN. No, we settled it. 

Mr. BARFIELD. Merck had to calculate what does this do about 

in this case Merck’s overall international corporate strategies, and 

Merck decided that it would be better to fold on this. In other 

cases, if you take, let’s say, the pharmaceutical companies in terms 

of Canada, for instance, and cross-border, they are holding the line. 

But these are—in each case——

Senator COBURN. My point is there is no legal certainty. 

Mr. BARFIELD. That is true—well, the legal system is embedded 

in a larger political system. 

Senator COBURN. Right. So it is not a legal certainty because if, 

in fact, I make XYZ product and I have to make a way, not on a 

legal basis but on an economic basis, an international relations 

basis, diplomacy basis. So, in fact, we are to a position——

Mr. BARFIELD. Well, legal——

Senator COBURN [continuing]. Where the purposes of the WTO 

are good and long term maybe very positive. The real fact is there 

are a lot of other players, things that play into whether or not we 

get enforced trade law as to whether it is, and we turn a blind eye 

when it is not necessarily in our total national interest. 

Mr. BARFIELD. That is right. And I would hope—and I would 

agree with this or the Clinton Administration or whichever Administration it was that did it. The President has to look at this in 

terms of not just our trade policy but our total diplomatic and security——

Senator COBURN. Let me come back to you. I asked Mr. 

Mendenhall this. How many years can we afford to continue to lose 

in the international markets the very intellectual property that Mr. 

Vastine represents through his service industry and continue to be 

able to compete? 

Mr. BARFIELD. Well, I actually think we could go for a long time, 

because I think actually what is happening is that other countries 

are kind of chasing their tail and we are—the aim that we—I 

think, as I would have said 10 years ago about Japan or others, 

I would look internally as to how we are handling our own innovation system. This is not to say that I do not think at some point 

the United States should not bring a set of cases on intellectual 

property. You were hammering Mr. Mendenhall correctly, but what 

he is dancing around is that the Administration basically thinks 

33

that if you look at our total relations with China, if you look at the 

way they are at least attempting to live up to their WTO obligations, which were far beyond the obligations that any other big 

country has ever undertake, just for membership, they figured—

and this is true with the Europeans—we do not want to inundate 

the system. We could hammer the Chinese with a number of cases, 

but their worry has been—and maybe we are coming to the end of 

that—that this would really overload the system. If you really just 

sort of—a dozen cases against Chinese and, you could second-guess 

that or say that is an incorrect judgment. But I think that—he 

could not say this, but I would say it, that, yes, they are calculating 

a number of political things beyond just intellectual property and 

beyond trade. They are probably looking at Korea. They are looking 

at other things. 

Senator COBURN. Let me get back to sovereignty for a minute, 

our sovereignty as we have patent laws, we have internationally 

negotiated both through bilateral agreements and WTO the recognition of intellectual property and patent laws. Let’s say I am 

Merck and I spend $1 billion a year researching HIV drugs. And 

then wherever I go around the world, because of our lack of trade 

sanction enforcement, all the companies say we are not going to 

allow you the return on investment to pay for the research that you 

had on this drug. 

Why is Merck in the future going to invest capital in research 

and the production of intellectual property if, in fact, they cannot 

get a return and we will not reinforce or enforce the very agreements that we have? Let me just background that for a minute. In 

this country, we pay 50 percent more than anybody else in the 

world does for pharmaceuticals. Part of the reason is because we 

have not enforced our intellectual property rights because we have 

been blackmailed to say, well, we will just allow somebody else to 

make it under your patent and we will not honor your patent. And 

they know that will be a long fight, and it will come through WTO. 

But, in fact, we are being blackmailed. 

So, consequently, the American people are paying, they are subsidizing the rest of the world’s pharmaceuticals through the prices 

they pay. We are getting ready to have Medicare D, which is going 

to, again, subsidize the rest of the world’s pharmaceuticals, because 

we do not have a cogent trade policy because we have fixed in this 

overall parameter of things that maybe it is better for us not to. 

The costs of not recognizing that are weighing a tremendous burden on this country, and it is very short-sighted for us to not look 

at that. 

So the very consequences—and this gets back to the sovereignty 

of our intellectual property, i.e., the sovereignty of a patent of 

rationalizing that it is in our best short-term interest to not enforce 

it, but it ignores our long-term interest. Who is going to invest the 

capital in our drugs in the future if, in fact, our intellectual property is not done. And there you are challenging our own sovereignty because we undermine our sovereignty because we will not 

enforce it. 

Mr. BARFIELD. Well, I would say that, in general, whether it 

was—I could be bipartisan. I think it was the Clinton Administration and it is true with the Bush Administration. We are enforcing 

34

it in the big markets, and I think we will continue to do that, and 

I think we will back our companies—I hope we will back our companies, for instance, in the whole—I mean, you may be on the 

other side of this, the whole—the way they are reacting to parallel 

imports from Canada, because you have got to maintain the price 

structure. And, indeed, I fully agree with you that the proponents 

of just giving away all these pharmaceutical products in terms of 

let’s take AIDS, the market signal you are giving to the pharmaceutical companies is do not invest in AIDS drugs because they are 

going to hammer us, we will not be able to get our return. And that 

is a terrible signal, and I think the Administration and previous 

Administrations have been cognizant of that. 

I think where it gets complicated is with—I do not know anything about Brazil, but with African countries, for instance, where 

there is no infrastructure and indeed the price is probably not the 

question. But you at least have to do something about that. The 

key to the answer—and we are off the subject, I think, of sovereignty. The key answer here is that we have got to enforce parallel import restrictions. It is perfectly good to allow our companies 

and encourage our companies to send drugs at much cheaper prices 

to lower economic developing countries in Africa, as long as those 

drugs don’t come back to Sweden, because that is what will really 

kill Merck, that it is the developed country markets, and that I 

think is the answer. 

Senator COBURN. Well, but that subsidy—that is not a real market. What you are saying is we are going to allow, through the 

international——

Mr. BARFIELD. No, we—Merck is producing at market rates. 

They are pricing for the world. If we undercut that—and the biggest way you would undercut that would be to have—we are not 

saying——

Senator COBURN. We are not——

Mr. BARFIELD [continuing]. To Merck you have got to send those 

drugs to Africa. They are not——

Senator COBURN. We are pricing——

Mr. BARFIELD [continuing]. Protecting Merck from——

Senator COBURN. We are pricing for the United States and subsidizing the world with pharmaceuticals. 

Mr. BARFIELD. We have a worldwide pricing——

Senator COBURN. Mr. Stumberg, do you agree with Mr. Vastine 

that the States are voluntarily changing laws, or are they feeling 

pressure to change laws? 

Mr. STUMBERG. Probably neither, sir. Most State legislatures and 

State officials are not in the loop whatsoever. They are continuing 

to make their decisions like they used to. Some of them wake up 

in the morning, read the newspaper and are surprised to learn that 

a kind of law they have been making for years is now the subject 

of a trade dispute or at least it is being negotiated for the first 

time. I think that is perhaps a more realistic description of what 

is really going on. 

If you look at the U.S. schedule of GATS commitments, which is 

the progeny of the Coalition of Service Industries work in partnership with USTR over more than a decade, you will see that there 

35

are a number of specific sector commitments that represent the priorities of the United States in terms of those big markets. 

Within that big schedule, you will see that there are some States 

that are—I am using jargon here—listed as limits on U.S. commitments; in other words, some specific State laws are being carved 

out because USTR talked to those States. 

I will give you one example because Oklahoma is on the list, I 

believe. There are a number of States that have explicit limits on 

who may actually own land, including ranch land. By my count, 

there are 17 such States. USTR intended to carve out those States 

with respect to a GATS commitment on access to real estate for 

purposes of commercial wholesale and retail distribution services. 

There are only seven States listed on the U.S. schedule, which does 

not reflect the 17 that actually have these kind of laws, two of 

which are actually constitutional. I think Oklahoma and Nebraska 

are the ones that actually have constitutional provisions. 

Senator COBURN. This is corporate farming prohibitions. 

Mr. STUMBERG. Right, exactly. I interviewed a number of lawyers 

who worked for Western State governors just to see whether these 

turn-of-the-century—the prior century—laws really were a priority 

of the governors, and somewhat to my surprise, the answer was 

‘‘yes.’’ These are laws they want to safeguard. 

So I cite this just as an example that there sometimes is consultation. Even when there is an attempt at consultation, it is often 

incomplete because the process is so complex and so hurried. I 

think your point, Mr. Vastine, that USTR does not have the person 

power to effectively manage its relationships with States is well 

put. But I would go farther. I would say it is not just a matter of 

perhaps making a mistake with respect to reserving State authority about regulation of land use or ownership. And it is not just 

about making a mistake with respect to a gambling sector. It is a 

much deeper question of managing that complexity but at the same 

time appreciating that the bottom-up perspective of American federalism, which champions laboratories of democracy and local experimentation, is a very different and in some ways conflicting idea 

with the essential purpose of the WTO trade rules, which is to 

make for a more uniform set of rules by which the global economy 

can operate. Both are positive values——

Mr. VASTINE. And I think we have been accommodating them, 

and I hate to hear you say that there is some sort of effort to undermine the States. 

Mr. STUMBERG. I did not say that there was an effort to undermine the States. I am saying that the system appears not to be 

working very well, and I have given you an example. The example 

is that in the context of gambling, where there appears not to have 

been effective consultation in 1993, which 10 years later led to a 

major trade dispute. That is the time frame—you have to plan your 

legal moves anticipating something that might happen in 10 or 15 

years. Now we are on the cusp of another decision. Should the 

United States withdraw its commitment to gambling or not? That 

is a big strategy question in terms of the current round of GATS 

negotiations. Are Attorneys General being consulted by USTR with 

respect to the strategic tradeoffs on that very important decision? 

36

And according to the Attorneys General, just a month ago, the answer is ‘‘no.’’

Senator COBURN. They are not being consulted. 

Mr. STUMBERG. They are not. 

Senator COBURN. So are there specific recommendations other 

than the ombudsman position that Mr. Vastine—that you would 

make to the USTR in terms of how to make this more fluid, competent, and consistent with States so that we can negotiate reservations, if that need to be the case, for State positions? 

Mr. STUMBERG. Well, let me start with something safe, and then 

venture out from there. The USTR’s own advisory committee called 

IGPAC, the Inter-Governmental Policy Advisory Committee, which 

USTR appoints (these are hand-picked State and local officials), 

wrote a report this spring which called for much deeper and broader consultation with States. Their point was that USTR needs to 

be talking not to the governor’s policy adviser for trade, who wears 

a lot of hats and is basically a political agent for the governor, but 

rather, the people in the State governments who actually make decisions about protecting State sovereignty: The lawyers in the Attorney General’s office and people such as utility regulators, whoever is the relevant agency. 

That level of consultation has only occurred in rare circumstances, for example, insurance and accounting. It has not occurred across the board, and that leads to a second obvious need, 

which is capacity. 

But I would argue that while USTR is obviously understaffed to 

take on meaningful consultation with State and local governments, 

the real step forward will come when the State and local governments themselves organize in such a way that they can bring their 

issues to USTR, just like the Coalition of Service Industries brings 

its issues to USTR. 

You cannot make USTR big enough to handle a country as complex as the United States and its Federal system; rather, I think 

the movement has to come from the bottom up. But if you think 

about the role of Congress—and this is the final point in my testimony—Congress I think could play not only a catalytic role with 

hearings like the one you called today, Congress could provide a 

friendly forum, a neutral forum, where State officials and USTR 

are encouraged to come and have a public dialogue where it has 

not happened before. And the kind of close questioning that you 

showed earlier with respect to USTR and its China policy, if applied to American federalism, would open some eyes and help 

USTR understand that federalism is a priority in trade negotiations. 

Remember, the USTR’s job description is set by the President of 

the United States and the Congress when you authorize negotiations every several years. If federalism is not spoken from either 

branch of government, then——

Senator COBURN. You are referring to the fast-track legislation. 

Mr. STUMBERG. I am. 

Senator COBURN. Thank you. 

Mr. Barfield, are you concerned that WTO may become a mechanism for political international activists, that we look at this—what 

can potentially come out of this gambling, like the Kyoto treaty or 

37

something like that? Is there a potential for it to move to a position 

where the implication of other policies outside trade implicate and 

influence trade decisions? 

Mr. BARFIELD. Yes, there is that possibility, and this is not sort 

of Henny Penny, the sky is falling, but let me walk you through 

the way another new character of the WTO beginning in 1995 was 

that in legal terms, without getting heavy into legalese, the WTO 

much more became a part of what is called public international 

law. And there are certainly legal scholars who argue that precepts 

of public international law now cover the WTO, that is, outside of 

trading rules. 

There are articles, for instance, in legal journals and some governments have commissioned pieces about, well, could we bring the 

United States to heel because they have not signed the Kyoto treaty through some Article 20——

Senator COBURN. Would you be kind enough to reference those 

to the Subcommittee? 

Mr. BARFIELD. Sure. 

Senator COBURN. Thank you. 

Mr. BARFIELD. And other, the so-called morals clauses that Mr. 

Mendenhall talked about, the escape clauses, that is, that nations 

can implement particular—and then enforce them, particular policies and then try to enforce them with trade sanctions, so that 

there are also discussions about how human rights would come into 

the WTO. 

Now, let me be very careful here. That is something that I would 

hope that the Congress of the United States and other countries 

would be very careful to watch. The United States has to decide 

what it wants to do here. But to pick up on this discussion that 

was talking about State versus Federal, I think the same thing is 

true at the congressional level. 

The truth of the matter is I am in favor of fast track, but I have 

to say that I know the reasons from the trade side that is important. You are not going to get people to come to the table. That is 

what Mr. Vastine would say. It is what I have said. On the other 

hand, the truth of the matter is Congress in the Uruguay Round 

was presented with a mass of new rules, which, again, no conspiracy here, it was just impossible, even with much larger staffs 

than you had, much larger staffs than the government had, the implication which you could not particularly fathom, particularly, as 

I say, in services and health. This is all inside the border. 

The other thing is true that, again, when you look at the way negotiations are handled, USTR is being asked to make judgments 

about telecommunications policy or financial services policy. Now, 

they often depend on the other agencies, but these are issues that 

I think should be front and center with the Congress as it goes forward. And I say this as a supporter of the system. But these rules 

do have an impact on what we have counted as domestic issues. 

And we should be very careful—I am not suggesting that we should 

stick our head in the hole and say there are no international rules. 

But we need a better system of judging where you will give up—

‘‘you’’ being the Congress—will give up authority to some international body, and you in speaking for the States will give up auVerDate 0ct 09 2002 12:00 Jul 14, 2006 Jkt 023160 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 C:\DOCS\23160.TXT SAFFAIRS PsN: PAT
38

thority to some international body. And I think that system is increasingly, it seems to me, under challenge. 

As I say, it is the way of the world today that for a lot of reasons, 

because of globalism, there are a lot of people who are arguing for 

particular rules that we need across the board. 

Industry, by the way, just as you find in the Federal system of 

the United States, will at some point sometimes be tempted to say, 

gosh, instead of going to the States, 50 States, let’s go to the national government and settle it that way. You will find that same 

translation, I think, sooner or later—in the international level. 

Why do we have to deal with the rules of the United States versus 

the rules of the Europeans versus the rules of the Brazilians if you 

are—take the name of a company, if you are a multinational. But 

from the point of view of the elected representatives of United 

States democracy or the European Union evolution or Brazil or 

whatever, I think that ought to be a very much more careful process than we have had so far. And in my judgment, the dispute settlement system kind of adds to that. 

Mr. Mendenhall was not, I think, purposely being evasive or disingenuous when he said, yes, the Congress can—correctly, yes, the 

Congress—nobody can overturn the congressional rule. A WTO 

rule, the Congress does not have to agree to it. 

The problem with that is the way the system works. Your only 

alternative would be to withdraw from the WTO, and so you get 

these—you get a FSC case or another case, and it is kind of individual cases, none of which add up, in my judgment, to a decision 

the United States should pull out of the WTO. But your alternative 

is to swallow the case and say, all right, well, and we will negotiate 

it. And then the problem there is that once you have won a case 

in the WTO today, it is very difficult then to get somebody to go 

back and—if the European Union—they won on the FSC. Do you 

honestly think the European Union will go back and then negotiate 

a rule that allows us—it is just not in the cards for that to happen? 

Senator COBURN. So, in fact, there is significant impact. 

Mr. BARFIELD. Sure there is. 

Senator COBURN. Yes. Any other comments? 

Mr. VASTINE. Senator, I cannot let you—well, you wanted to 

make the point about——

Senator COBURN. I want to make a broader point, so go ahead. 

Mr. VASTINE. I will make my broader point, too. Senator, our 

companies care deeply about obtaining legal commitments to the 

WTO. I cannot let the hearing end with you thinking that the Chinese accession and the membership in the WTO does not have legal 

value. We would not be discussing the potential for a dispute settlement process if it did not. At least China’s accession gives us the 

ability to come to the Chinese in a number of forums and try to 

enforce our rights. It gives us rights to enforce which we did not 

have previously. 

So China’s accession to the WTO and its membership there are 

very valuable. We are very lucky that the Chinese did it when they 

did and that leadership was willing to take the extraordinary bold 

step of subjecting that very rigid state-owned economy to market 

discipline. And it is a difficult process for them. It is a difficult 

process for us to adjust to globalizing the Chinese economy, but at 

39

least if they are in the WTO, at least we have these avenues to approach them. 

As to legal certainty, I hear your point. But our companies do believe——

Senator COBURN. Those were your words, not mine. 

Mr. VASTINE. I know. 

Senator COBURN. I was quoting back your words. 

Mr. VASTINE. I accept that, and I stand by them. They do want 

the legal—they want it in writing. They want to see that, for example, the Saudis in the negotiation that is going on this very minute 

do not have the right to mandate sessions, insurance sessions to internal parties. I mean, we fight these agreements down to the last 

word. 

Senator COBURN. I recognize their value. 

Mr. VASTINE. OK. 

Senator COBURN. But a right not exercised is a right not 

used——

Mr. VASTINE. And there are——

Senator COBURN [continuing]. And a right not used is a right 

lost. And when we choose in the short term, on a short-term economic model—and that is the whole question. The real thing that 

is in front of Congress that is worrying us about the Chinese, just 

to be—it is not that we are not sitting up and that we are not progressing. It is will we progress to the place where they are a legal, 

aboveboard player in time to save our own economy. 

Mr. VASTINE. Yes. 

Senator COBURN. And that is the real question in front of the 

Members of the Senate and the Members of the House. They are 

not playing by the rules now, period. Even though they are in the 

structure and on the team, they are like the bully that does not 

play by the rules. They go behind the barn and change the rules 

and then come out. And that is on intellectual property. That is on 

reverse engineering. And it is happening routinely. 

Now, maybe it is less. Maybe it is not. And the Congress is for 

them being a part of that. That is not the issue. The issue is 

whether or not you use the tools that they have agreed to to enforce the very outcome rather than make a short-term situation 

that we are better off now for our business, but we lose the business in the long term. 

So it is about a short-term view versus a long-term view. I just 

happen to think that we ought to be thinking about the long term. 

And it ought to cost them something now for stealing. And that is 

what it is. It is theft of intellectual property and future for the 

companies of the United States. 

Mr. VASTINE. It is infuriating. 

Senator COBURN. I want to thank you each for being here. We 

have gone over our time. I appreciate you waiting for the long time 

that we had Mr. Mendenhall. And I thank you for your contribution. 

We will have some questions, and, Mr. Barfield, if you would give 

us those references, I would very much appreciate it. 

Thank you all very much. The hearing is adjourned. 

[Whereupon, at 11:33 a.m., the Subcommittee was adjourned.] 

(41)

A P P E N D I X 

PREPARED STATEMENT OF SENATOR CARPER 

I would like to thank our witnesses for being here today to discuss the important 

role that the World Trade Organization plays in arbitrating and enforcing international trade rules and agreements. This work protects American businesses’ access to foreign markets and ensures that foreign producers do not engage in unfair 

trade practices in the United States, such as dumping, that can undermine our domestic goods and service providers. This is the very essence of free trade. 

We, in the Senate, recently passed the Central America Free Trade Agreement 

in an effort to liberalize trade with Central American countries and in doing so promote reform in these developing nations. In fact bilateral agreements, particularly 

with developing countries, provide us an essential tool to press for such change. But 

we often overlook the role that the World Trade Organization plays in laying the 

necessary groundwork for our bilateral trade agreements. 

One hundred and forty-eight countries currently belong to the World Trade Organization and close to thirty countries are seeking admission. To gain entry, these 

countries must negotiate bilateral agreements with other World Trade Organization 

members, leading to specific commitments—such as judicial reforms, government 

transparency, patent protections, labor and environment standards, etc. 

The United States is currently negotiating bilateral trade agreements with several 

countries seeking membership in the World Trade Organization, including Russia, 

Ukraine, and Saudi Arabia. In these bilateral agreements and through the World 

Trade Organization we hope to secure the enforcement of intellectual property 

rights, tax reforms, improving food health and safety standards, and more. 

The World Trade Organization also provides the only multilateral dispute settlement mechanism for international trade. In fact, this is an important tool that the 

Bush Administration has not used proactively. Whereas the Clinton Administration 

brought an average of 11 cases per year in World Trade Organization, the Bush Administration has filed only 12 in their first 4 years. We are not adequately using 

this important resource to protect our nation’s businesses. 

I look forward to hearing from the witnesses today and discussing ways to better 

use the World Trade Organization and the ongoing Doha Round negotiations to encourage reforms in developing nations and to even the playing field for American 

goods and services both at home and abroad.

42


23160.001
43


23160.002
44


23160.003
45


23160.004
46


23160.005
47


23160.006
48


23160.007
49


23160.008
50


23160.009
51


23160.010
52


23160.011
53


23160.012
54


23160.013
55


23160.014
56


23160.015
57


23160.016
58


23160.017
59


23160.018
60


23160.019
61


23160.020
62


23160.021
63


23160.022
64


23160.023
65


23160.024
66


23160.025
67


23160.026
68


23160.027
69


23160.028
70


23160.029
71


23160.030
72

Æ


23160.031