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24–895 PDF 2005

S. HRG. 109–206

U.S.-E.U. REGULATORY COOPERATION ON

EMERGING TECHNOLOGIES

HEARING

BEFORE THE

SUBCOMMITTEE ON EUROPEAN AFFAIRS

OF THE

COMMITTEE ON FOREIGN RELATIONS

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 11, 2005

Printed for the use of the Committee on Foreign Relations

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/senate

COMMITTEE ON FOREIGN RELATIONS

RICHARD G. LUGAR, Indiana, Chairman

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

GEORGE ALLEN, Virginia

NORM COLEMAN, Minnesota

GEORGE V. VOINOVICH, Ohio

LAMAR ALEXANDER, Tennessee

JOHN E. SUNUNU, New Hampshire

LISA MURKOWSKI, Alaska

MEL MARTINEZ, Florida

JOSEPH R. BIDEN, Jr., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

JOHN F. KERRY, Massachusetts

RUSSELL D. FEINGOLD, Wisconsin

BARBARA BOXER, California

BILL NELSON, Florida

BARACK OBAMA, Illinois

KENNETH A. MYERS, JR., Staff Director

ANTONY J. BLINKEN, Democratic Staff Director

SUBCOMMITTEE ON EUROPEAN AFFAIRS

GEORGE ALLEN, Virginia, Chairman

GEORGE V. VOINOVICH, Ohio

LISA MURKOWSKI, Alaska

CHUCK HAGEL, Nebraska

LINCOLN CHAFEE, Rhode Island

JOSEPH R. BIDEN, JR., Delaware

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

RUSSELL D. FEINGOLD, Wisconsin

(II)

CONTENTS

Page

Allen, Hon. George, U.S. Senator from Virginia ................................................... 1

Duffy, Joseph E., vice president, SAP Public Services, Inc., Washington, D.C. . 51

Prepared statement .......................................................................................... 53

Harper, Stephen F., director, environmental, health and safety policy, Intel

Corporation, Washington, D.C. ........................................................................... 34

Prepared statement .......................................................................................... 37

Hassell, John D., director, federal and state government affairs, HewlettPackard Company, Washington, D.C. ................................................................ 28

Prepared statement .......................................................................................... 30

Klaessig, Dr. Frederick C., technology director, Aerosil and Silanes Business

Unit, Degussa Corporation, Piscataway, New Jersey ....................................... 41

Prepared statement .......................................................................................... 42

Miller, Harris, president, Information Technology Association of America ........ 4

Prepared statement .......................................................................................... 7

Patton, Thomas B., vice president, government relations, Philips Electronics

North America, Washington, D.C. ...................................................................... 21

Prepared statement .......................................................................................... 24

West, Frances W., worldwide director of Accessibility Center, IBM Corporation, Cambridge, Massachusetts ......................................................................... 45

Prepared statement .......................................................................................... 47

(III)

(1)

U.S.-E.U. REGULATORY COOPERATION ON

EMERGING TECHNOLOGIES

Wednesday, May 11, 2005

UNITED STATES SENATE, SUBCOMMITTEE ON EUROPEAN AFFAIRS, COMMITTEE ON FOREIGN RELATIONS, Washington, D.C.

The subcommittee met at 2:43 p.m., in room SD–419, Dirksen

Senate Office Building, Hon. George Allen, chairman of the subcommittee, presiding.

Present: Senator Allen.

OPENING STATEMENT OF HON. GEORGE ALLEN, U.S. SENATOR

FROM VIRGINIA

Senator ALLEN. Good afternoon to everyone. Welcome. I am sorry

we are a bit late. We had a vote on the Senate floor. It is actually

fortuitous it was at the beginning of the hearing as opposed to in

the middle of it. I thank all of our witnesses for appearing this

afternoon.

I am calling this hearing of the Foreign Relations Subcommittee

on European Affairs to order.

We will be examining this afternoon how the United States and

the European Union are regulating emerging technologies. Today

we will be examining how the United States and the European

Union can work together—where we are, and where we may not

be working together. We need to cooperate to ensure that future

advancements and innovations and technology are not stifled by

overzealous or unnecessary government regulations, whether European or American.

The United States and the European Union have the largest bilateral trade relationship in the world, accounting for about 37 percent of the value of global trade in goods and about 45 percent of

the world trade in services. It is unique not only because of its size

and complexity, but also because it is one of the very few where

both sides benefit immensely from this trade relationship. Making

the effort to consult with each other prior to any new regulations

becoming law, I believe, is a key element in keeping this trade and

investment relationship beneficial and productive. Both the U.S.

and European economies are so dynamic, so fast-moving, that

changes enacted to either’s regulatory system without prior consultation could hinder future commerce, investment, and job creation.

I will give you another example, not in commerce but in law enforcement. We had a hearing this morning in the Commerce ComVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 EUREG.TXT SFRELA2 PsN: SFRELA2
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mittee on the issue of spyware and combating illegal spyware applications, which hinder and impede the enjoyment of the Internet

and computers, whether at home or in businesses. To the extent

that we are going to be able to combat this illegal burden of

spyware, it cannot just be the United States. We need our friends

in Europe to be close partners in this effort, as much as we are

close partners in combating international terrorism.

Now, nowhere is this close and consistent cooperation more important than when we are advancing, addressing, and actually embracing new technologies that emerge seemingly every month. Innovation and technology development have been a large part of

both the United States’ and the European Union’s economic success. In fact, a 2003 U.S. Department of Commerce digital economy

study found that frequent users of information technology and the

Internet are growing the gross domestic product at almost double

the rate of less frequent users. Without a supportive climate or conditions that foster breakthrough research and technologies, neither

the European Union nor the United States would be able to compete so effectively in the global economy.

To ensure that U.S. and European companies are at the forefront

of innovation and cutting-edge technologies, both the U.S. Government and the European Commission must work together to create

a fair and free regulatory environment in which the technology

community can continue to compete, succeed, and innovate.

For example, nanotechnology is one of the areas where I believe

government must tread carefully. I have made, along with a partner of mine, Ron Wyden, nanotechnology one of our priorities, and

I want to make sure the United States is in the lead in

nanotechnology. I recognize also that the Europeans are making a

concerted effort in nanotechnology, as are Asian countries as well.

Ron Wyden and I held the first hearing on nanotechnology, on this

emerging science, which I think is going to forever change the way

we approach scientific and engineering challenges. We created the

first bipartisan, bicameral Congressional Nanotechnology Caucus.

We authored the 21st Century Nanotechnology Research and Development Act, which authorized appropriations for long-term investment in the multifaceted fields of nanotechnology. I know we

have a witness from Hewlett-Packard who is very strong in

nanotechnology, as are other companies, as well as colleges and

universities.

Now, this field of science, nanotechnology, is quickly transforming almost every aspect of our world and is already significantly improving our quality of life. That is why it is important

that we have cooperation with our international partners in this

field as it continues to develop. It is my hope that United States

and European regulators can work cooperatively to provide the

needed safeguards and parameters of nanotechnology research

without burdening scientists with needless bureaucratic constraints

nor limiting innovation.

In copyright areas, we need to be working with our European

friends to make sure traditional safeguards are still relevant to

new products and technologies. The emergence of multi-media

products has brought into question the role of Europe’s so-called

collection societies. These powerful groups are authorized by law in

3

most European countries to assign a tax or levy to equipment that

can be used to copy commercial products like compact disks or

movies. The revenue raised by collecting these taxes or levies is

used to compensate copyright holders for the unauthorized copy of

their work. The development of levies on digital media and equipment has resulted in a significant increase in the levies collected

by European countries. The Business Software Alliance has found

that increases in levies, coupled with a wider range of products

subject to these charges, will result in a three-fold increase by

2006, compared to the levies collected in 2002.

The fact is there are more choices available to consumers in

terms of how they access media content and information than any

other time in our history. The ability to get media products directly

from rights holders make collection of levies unnecessary and

amount to double taxation. The United States needs to engage our

European partners and question the legitimacy of these levies,

given the uniqueness of today’s media products.

Finally, the U.S. and the Europeans must begin to harmonize the

regulation of IT (Information Technology) accessibility for the disabled. I know one of our witnesses will testify on this matter. Suffice it to say that we do need to reach a consensus with Europe,

and that will go a long way to establishing a global IT accessibility

standard and would allow companies to focus on developing their

products rather than retrofitting to a multitude of accessibility

standards.

Let me close by saying this, I want this country to lead in innovation, and I think the Europeans want to lead in innovation as

well. Advancements in technology have beneficially changed our

lives and the way we live our lives. We have more access to information, entertainment, commerce, and the sharing of ideas than

ever before. It is vital that our Government work with the governments of Europe to make sure that regulatory demands do not stifle future innovation. We can be free in this country, keeping what

I like to call Jeffersonian principles, which may not necessarily be

shared by our European friends. But at least for commerce and

jobs, it ought to be understood by our friends in Europe that having

less regulation is actually beneficial for more creativity, more innovation, and ultimately, of course, better for the people whether they

are in France, Germany, the Netherlands, or anywhere else in Europe. We do need to keep in close contact with our trade and investment partners to keep these regulatory guidelines reasonable

and consistent.

I thank all of our witnesses for being here with us today. I look

forward to hearing your testimony.

We have two panels, Harris Miller gets a panel of his own. So

we will first hear from Harris. I will introduce the second panel

after Mr. Miller’s testimony.

Mr. Harris Miller is the president of the Information Technology

Association of America. In addition to his work at ITAA, Mr. Miller

serves as the president of the World Technology and Services Alliance. He is perfect to be testifying here today. He created the first

international conference on global IT public policy held in Buenos

Aires, and he also conceived the global information security summit, one of the leaders from that, to bring together the private secVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 EUREG.TXT SFRELA2 PsN: SFRELA2
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tor of industry and government from around the world to discuss

information sharing in the global security arena.

Last month, Mr. Miller represented ITAA at the Transatlantic

High Tech Business Initiative meeting in London where many IT

policy issues of major concern to both the U.S. and the E.U. comprised the agenda.

He has served up here. He worked for former Senator John

Durkin from New Hampshire and certainly is well qualified and

conversant on the issues that we are facing and will share with us

his views.

Mr. Miller, welcome, and we look forward to hearing your insight

and commentary for our policies on this very important issue.

STATEMENT OF HARRIS MILLER, PRESIDENT, INFORMATION

TECHNOLOGY ASSOCIATION OF AMERICA

Mr. MILLER. Well, thank you very much, Mr. Chairman. We in

the IT community are very fortunate to have you holding this hearing today. Certainly your knowledge of IT issues is unrivaled in the

U.S. Senate, both from your tenure as Governor of my home State

of Virginia, which is one of the leading IT States in this country,

and of course, your service here in the Senate where you have been

a constant leader on all these IT issues. So I commend you for

holding this hearing on this important topic.

Also, there is such a thing as personal privilege. I would like to

take one minute to recognize one of the staff of the committee, my

friend, Dr. Mike Haltzel. I understand this is his last hearing after

11 years on the committee. Our wives went to college together.

They were sorority sisters many, many years ago. And I understand Mike, after many years of service on the committee, is moving to the private sector, and I want to note that we have really

appreciated working with him all these many years and look forward to working with him when he joins the private sector. So I

would like to mention that.

Senator ALLEN. Well, I am sorry to hear that bad news. He is

Democratic counsel, but we work very well together. He has always

been a gentleman, straight shooter, and we work well together on

the many issues that we actually all agree on, although no one focuses on those.

They are just not as interesting.

Mr. MILLER. Tech Daily will.

Today’s hearing, Mr. Chairman, comes at a particularly opportune time because, as you know, President Bush will host European Council President Juncker and European Commission President Barroso at the annual U.S.-E.U. summit here in Washington,

D.C. on June 20th. It is very much the hope of the high tech community that during the summit, they will make these topics of ICT

(Information Communication Technology) one of the areas they will

focus on.

Mr. Chairman, in my perspective, there are a lot of these issues

of conflict which you identified between the U.S. and E.U. that

make us almost like children on a beach fighting over small castles

in the sand, utterly focused on issues which seem very important

at the time, but what we cannot see is that the economic tide is

rising. In the 21st century, the rising tide represents the develVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 EUREG.TXT SFRELA2 PsN: SFRELA2
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oping markets, particularly China, India, Brazil. So here they are

coming in, joining the global information technology community,

and really posing a major challenge to the leadership that the U.S.

and Europe and Japan have had during the first 60 years of the

computer revolution, and we are not focusing on that challenge but

instead fighting a lot of old battles.

What is at stake? Total ICT spending is expected to grow to more than $3.2 trillion just 2 years from now, from just $2.4 trillion 2

years ago. In other words, it is going to grow by over 30 percent

in a 4-year period according to our annual study, Digital Planet.

Asia, and China in particular, are the fastest growing portions of

that span. In fact, China is growing faster than any other nation

among the top 10 spenders on ICT.

With this bigger challenge in mind, we were very pleased and

privileged to work with our sister association in the UK called Intellect and the European-American Business Council to host a conference in London last month, including high level officials from

the U.S. Government led by Ambassador David Gross, senior officials from the European Union and high tech companies from both

sides of the Atlantic, to focus on how we resolve some of these common issues and barriers that are hindering both the U.S. and Europe to be more successful in this new age of global competition.

What I want to emphasize, however, is that while the meeting

went very well, I was very troubled by how long the list is of continued disagreements that exists between the sides of the Atlantic.

Let me just focus on some of them.

Technology trade—we are in the midst of a very difficult and

contentious global round of negotiations generally referred to as

Doha. There are major differences of opinion between the so-called

developed economies and developing economies. Yet, even here the

U.S. and Europe continue to disagree on some important technical,

but yet very, very substantive issues such as classification of software, the status of downloadable products, how to best define telecommunications services. If we are going to really move ahead in

the Doha round to break down some of the global barriers to global

ICT trade, the U.S. and Europe need to get on the same page and

they need to get on the same page quickly.

Another topic, Internet governance. As you know, Mr. Chairman,

this November in Tunis we are going to have the second meeting

of the World Summit on Information Society, sponsored by the

United Nations. We in the U.S., ITAA, and many of our members

both in the U.S. and global operations, are somewhat concerned

about the tenor of the discussions leading up to those. There clearly

are people in the world who believe that the best way to run the

Internet and to forward information technology is to have bureaucrats in Geneva making decisions about how to govern the Internet. I think that given that I believe about 45 percent of all Internet traffic passes through our home State of Virginia, you and I

probably do not think that is a really great idea. Unfortunately,

there have been some musings by some European Union officials

which seem to indicate that they have at least sympathy for that

argument, and we very much are encouraging our European colleagues and the European government officials with whom they

deal to understand that the global growth of ICT is the fastest

6

growth of any technology in the history of humankind. Most of that

growth is already occurring in developing countries, and we do not

need governments to tell us how to do it better.

A third topic, which you mentioned in your opening comments,

is this issue of device accessibility. The U.S. got a little bit out in

front of the European Union on these issues. The disabilities community, the U.S. Government, people from the House and the Senate, and people from industry worked very hard to come up with

an approach which focuses on outcomes to make sure that people

with disabilities have access to information technology. We have

come up with an approach that we think makes sense. We agreed

not to focus on trying to dictate technologies. That is the wrong

way to go.

Right now, however, the European Union has come to look at

these issues, and frankly, as you will hear in more detail from

some of the other witnesses, we are concerned about some of the

directions the Europeans seem to be headed. The most important

outcome, however, is that we cannot end up with two sets of standards. We cannot do this again, particularly in the context of this

global competition.

The next area you also mentioned where you and Senator Wyden

have played such a great leadership role is nanotechnology. We

have a chance for incredible collaboration in this area. Also, we

have a chance to avoid getting involved in making bad regulatory

decisions that are not necessary or appropriate. But again, European and U.S. leaders must work together to avoid those kind of

restrictions that could occur through overregulation and come up

with useful ways of collaborating.

The next area is information security. The U.S. and Europe have

more at stake than any other region in the world in terms of information security simply because we are the largest users of information security. But we need to collaborate even more in this area.

Information security, cyber security, is the sine qua non of the information technology revolution. So we look forward to more close

collaboration between the European Union and the U.S. to make

this a higher priority.

Math and science education. Again, Senator Allen, you are one

of the leaders on this issue. I am also very pleased to see that your

colleague, Congressman Frank Wolf, has taken some very dramatic

steps in the last few weeks in this area. But you know very well

that our performance here in the U.S. unfortunately, as is the performance of many European countries, is quickly falling behind

what is going on in China, India, and other developing countries.

In 2001, for example, 39 percent of all undergraduate degrees in

China went to engineers. In the U.S., 5 percent of undergraduates

got engineering degrees.

So the U.S. and Europe again need to think about working together on collaborative efforts to increase student interest in the

basic so-called STEM field, science, technology, engineering, and

mathematics. We need to take advantage of our great educational

systems and make sure that we turn out enough people to fuel the

basic information technology revolution. People are the iron ore of

this revolution. If we do not have skilled people, we cannot last on

the battlefield.

7

The next topic is telecommunications reform. Next year the E.U.

will consider its telecommunications framework and the implementation of some of its 2001 directives. Similarly you here in the Congress have begun to assess possible reforms of the 1996 Telecommunications Act. We hope that you and your colleagues in the

Congress will keep in touch with your colleagues in the European

Parliament and the regulators here in the U.S. will work with the

European Regulators Group. We must figure out ways to collaborate on moving forward to next generation networks, getting beyond where we are now and make sure that all steps are taken to

promote next generation networks, rather than getting involved in

a heavy regulatory model, which unfortunately has held back telecommunications for, lo, these many years.

In conclusion, Mr. Chairman, we often hear China referred to as

a waking giant. I would argue that we in the West perhaps are the

slumbering giants. Perhaps we have been lulled into complacency

by 60 years of unprecedented scientific and technological success.

My simple message is we must stop arguing about how to build a

better sand castle and focus on the economic tsunami headed our

way from Asia, from Brazil, and other parts of the world which are

now part of this information technology revolution.

While the challenges I outlined today are important, we dwell on

them at a price. The leaders of the E.U. and the U.S. must lead

the way over these obstacles and assure that all western firms

have access to the world’s fastest growing technology markets.

Thank you very much, and I would be glad to answer any questions you might have.

[The prepared statement of Mr. Miller follows:]

PREPARED STATEMENT OF HARRIS MILLER

INTRODUCTION

Chairman Allen, Senator Biden and other esteemed Subcommittee Members, I appreciate your taking time from your very busy schedules to hold this hearing today

on the challenges facing the critical relationship between the United States and the

European Union as it impacts emerging technologies, the global information economy, technology trade, and the overall regulatory environment for information technology.

I am Harris N. Miller, president of the Information Technology Association of

America (ITAA), representing over 380 member companies in the information technology (IT) industry—the enablers of the information economy. Our members are located in every state in the United States, and range from the smallest IT start-ups

to industry leaders in the software, services, systems integration, telecommunications, Internet, and computer consulting fields. These firms are listed on the ITAA

website at www.itaa.org. Many of them operate on a truly global basis with offices,

operations, and clients throughout the world, including Europe.

ITAA is also the secretariat for the world Information Technology and Services

Alliance (WITSA), a consortium of information technology (IT) industry associations

from 67 economies around the world, representing over 90 percent of the world’s IT

market. As the global voice of the IT industry, WITSA is dedicated to advocating

policies that advance industry growth and development; facilitating international

trade and investment in IT products and services; strengthening WITSA’s national

industry associations; providing members with a broad network of contacts; and

overseeing the world Congress on Information Technology, the premier industrysponsored global IT policy event, that will be held in May, 2006, in Austin, Texas.

Before I address the specific issues at hand, it is important to put them into context. The E.U. and the U.S. have become like children on a beach fighting over castles in the sand. We are so utterly focused on control over our own little sand castles

that we cannot see that the tide is rising. Unless we can refocus on our common

8

1Statement of Charles W. Freeman III Assistant U.S. Trade Representative of China Affairs,

Office of the U.S. Trade Representative, Committee on House Ways and Means, April 14, 2005.

interests and flee to higher ground, our sand castles, along with our future economic

prospects in high technology, will be washed away in the surf.

In the 21st century, the rising tide represents the developing economies, primarily

in Asia and Eastern Europe, and especially China and India. While the U.S. and

Europe, along with Japan, represent the leading nations in today’s global Information and Communications Technology (ICT) market, China and India are gaining

market share rapidly. These nations represent two of the fastest growing information economies in the world today.

The primary reason for this rapid accession into IT global leadership is that unlike traditional industries, there is a relatively low cost of entry into the global ICT

market. Along with the implicit efficiency and productivity afforded by technologies

such as IP networking and high volume data storage, a commitment to leadership

in ICT is nearly all that it takes for an emerging economy to rival established powers, as long as they prepare their workforce, the ‘‘iron ore’’ of the IT revolution.

Despite our differences, the U.S. and E.U. are bound by a common heritage and

common values. We believe in the democratic process, in freedom of expression, and

in free market economies. We also share common interests. We represent much of

the developed world. We both currently spend more on ICT than any other global

region. We depend more on information technology to ‘‘grease the gears’’ of every

day life. We are first to enjoy the productivity benefits of automation and the value

this productivity creates for customers and shareholders.

Similarly, the U.S. and the E.U. face many of the same challenges to our global

leadership in information and communication technology. Our ICT markets are developed, and while they will continue to grow steadily, our companies must look to

other geographies for rapid growth opportunities. Our comparative advantage in

terms of technical know-how and quality performance is challenged by the developing economies cited above, which are anxious to use their rapidly expanding expertise in computers, software and networks to build larger and more sustainable

middle class societies.

Our common trans-Atlantic dilemma is determining how to build these distant

markets without tearing down our own. And our shared commitment to democracy

and a civil society constantly pushes us to seek public policy solutions that balance

the need to protect profits and privacy, national security and commercial practice,

including, most often, keeping government out of the way.

Meanwhile some countries—and China, unfortunately, continues to be a prime example—seek to protect their domestic markets from potential trading partners and

focus primarily on gaining access to other people’s markets with little reciprocation.

With that in mind the U.S. and the E.U. must resolve our minor differences—quickly.What’s at stake? Total ICT spending is expected to grow to more than $3.2 trillion by 2007, from $2.4 trillion in 2003, according to the latest study on global ICT

spending published by WITSA, Digital Planet 2004. Asia, and China, in particular,

represent a growing portion of that spend. Among the top ten nations in ICT spending, China is projected to be the fastest growing, with a compound annual growth

rate of 13.9 percent during the years 2003 through 2007. They will be 6th fastest

among all nations, including many in the developing world that are starting from

near zero. India, meanwhile, ranks tenth in growth overall at 13.44 percent.

For the U.S., overall exports to China have increased dramatically since China

joined the WTO in 2001.1 U.S. exports to China totaled $35 billion in 2004, close

to double the total for 2001. In fact, from 2001 to 2004, U.S. exports to China increased nearly 8 times faster than U.S. exports to the rest of the world. As a result,

China rose from our ninth largest export market in 2001 to our fifth largest export

market in 2004.

While the opportunity within Chinese borders is clear, it is hardly free to all corners. To put it succinctly, China is not playing by the rules of global trade, and in

fact, may be trying to change the game entirely. For example, China’s implementation of its WTO commitments has lagged in areas in which the U.S. and Europe

have competitive advantage, particularly where innovation or technology plays a key

role. Their recent proposal to have a ‘‘buy China’’ policy for software purchased by

the Chinese government is one extremely unfortunate example.

With so much in common, the U.S. and must work together through our respective governments and industries to address what are—in the greater context—small

problems. To that end ITAA, and its sister association in the United Kingdom, Intellect, along with the European American Business Council, recently hosted a conference in London between high-level industry and government officials. AmbasVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6621 EUREG.TXT SFRELA2 PsN: SFRELA2
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sador David Gross led the U.S. government delegation and did an excellent job explaining the challenges and opportunities from the U.S. government perspective. Officials from the European Union and from the U.K. government joined us.

Our objective was to discuss ways to advance our common interests and further

what must be our common purpose: the delivery of information technology to solve

the world’s most pressing problems in security, healthcare, education, environmental protection, law enforcement, and economic development. At the end of those

talks, we committed to continued cooperation in a public declaration, which I have

attached to my statement. We will continue to work together and with our respective governments to contribute to resolving these issues. However, I would like to

emphasize that, from industry’s perspective, the list of troubling issues was much

too long for comfort. Too many obstacles exist between the E.U. and U.S. to permit

the full achievements possible.

Today’s hearing comes at a particularly opportune time. President Bush will host

European Council President Jean-Claude Juncker and European Commission President Jose Manuel Barroso at the annual U.S.-E.U. summit in Washington on June

20th. Among the many other important issues that they discussed that day, it is

my hope that these challenges related to ICT will be discussed with timely resolutions in mind.

Now I would like to discuss several of the issues over which we can either continue to fuss and feud or form a more perfect foundation for global trade in information and communication technology.

TRADE

Technology trade is one area where the U.S. and the E.U. have much at stake.

Though fundamentally allies, there are a number of vexing issues where we are at

odds with one another to the detriment of advancing what should be our common

interests. Various bilateral trade differences continue to hinder trade between the

two economic powers and the liberalization of ICT services in other countries.

Aggressive efforts to resolve these differences in a timely manner would spur economic activity in both the U.S. and E.U., and in the rest of the world for E.U. and

U.S. companies, Yet instead of joining forces and securing improved commitments

from more countries, we are engaged in bilateral squabbling over a number of specifics.

For example, the Doha round of World Trade Organization negotiations appear

to be poised to move forward, particularly in services. However, we disagree on the

classification of software, the status of downloadable products, and how best to define telecommunication services. Movement of highly skilled people between the

U.S. and E.U. remains difficult. And various labor laws frequently found in European countries—though not all member countries—continue to be major inhibitors

to U.S. services companies expanding their operations in Europe.

INTERNET GOVERNANCE

Internet governance is an area of particular frustration, as the E.U. seems to support the hasty installation of an international governing body for the Internet, an

ill-conceived idea, if ever I have heard one. The issues potentially in play represent

international regulation of the Internet in areas that extend far beyond the technical coordination currently exerted by the Internet Corporation for Assigned Names

and Numbers (ICANN). Mr. Chairman, given that so much Internet traffic travels

through your home state, you know better than most what a truly bad idea it would

be for regulators in Geneva or any other location to decide the future of one of the

greatest inventions of humankind.

The Working Group on Internet Governance is currently considering recommendations for the second phase of the World Summit on the Information Society to be

held in Tunis this November. In the Summit, the U.S. and the E.U. have adopted

a common agenda to promote freedom of information internationally. But they

should also jointly oppose efforts to move control of the Internet to government regulation from the global, collaborative, private sector-led approach that currently

works so well.

However, the E.U. appears focused on the internationalization of Internet governance, calling it one of the core topics besides the ‘‘organization and administration

of naming and numbering, including the operation of the root server system’’ and

‘‘the stability, dependability and robustness of the Internet, including the impact of

spam.’’

Through this process, we should also agree to take steps to encourage the widespread deployment of broadband, RFID (radio frequency identification), and other

innovative technologies to extend the economic and security benefits of ICT, again,

10

2OECD Science, Technology and Industry Scoreboard 2003—Towards a knowledge-based

economy. 3 J.S.A. Bhat, ‘‘Concerns of New Technology Based Industries—the Case of Nanotechnology,’’

Technovation, 2005.

without heavy handed and unnecessary government interference. Instead, the E.U.

has initiated a privacy review of RFID that, by its very nature, creates uncertainty

and dampens the widespread adoption of this critical technology. Finally, we should

redouble our efforts to promote telecommunications liberalization, which continues

to produce positive results in countries that adopt it.

NANOTECHNOLOGY

Common technology policy interests and objectives are difficult enough to establish between global regions when technologies are well understood and their applications accepted. In many technical areas, however, we stand at the threshold. The

possibilities are vast and the outcomes unknowable. Nanotechnology is one such

area. Even as we struggle to understand the broad outlines of what this field entails, countries are rushing to claim leadership in nanotechnology expertise.

The Organization for Economic Cooperation and Development (OECD) estimates

that over 30 nations have funded nanotechnology research programs. The OECD

goes on to report that between 1997 and 2000, nanotech research and development

(R&D) funding jumped from approximately $114 million to over $210 million in the

E.U., $102 million to $293 million in this country, and from $93.5 million to $189

million in Japan.2

If we compare the relative positions of the U.S. and E.U. in nanotechnology with

other regions of the world, the advantages of the West are enormous. We are the

first movers in the marketplace. We are performing the bulk of the research. We

have the history of productive collaboration between government agencies and research universities. We have the culture of risk capital and entrepreneur-driven innovation. We have the twin traditions of public domain knowledge and intellectual

property protection. Nanotechnology is an interdisciplinary science, most prominently affecting industries like aerospace, biotechnology, defense, electronics, energy

and other high tech fields. As home to many of the world-class corporations in these

industries, the U.S. and E.U. have the critical mass of private sector firms with the

ability and incentive to support both nanotechnology research and to provide investment capital.3

What is critical, again, is collaboration, particularly among leading researchers in

academic institutions and laboratories, without unjustified interference from wellintentioned but ultimately interfering public officials.

INFORMATION SECURITY

The U.S. and E.U. share common concerns about information security. If we look

across the globe, we quickly see that our respective regions represent the most mature ICT markets. We are, therefore, the most reliant on their unimpeded performance. Given this reliance, information security means national economic security.

And in an era of global terrorism and the possibility of cyber warfare, information

security may mean national security itself.

As a result, we share a common goal of protecting our information infrastructures

from attack. This commonality of purpose entails best practice approaches to vulnerability assessment and intrusion detection, attack prevention and cyber hygiene, incident investigation and computer forensics and cybercrime prosecution. We advocate additional collaboration by U.S. and E.U. government agencies to achieve these

goals, a process that should at a minimum incorporate law enforcement, intelligence, harmonized regulatory approaches, education, investment and appropriate

statutory frameworks.

Encouraging people to keep their cyber doors locked remains one of our largest

common challenges, whether at home or on the job. If it is impractical to export

cyber security awareness campaigns, certainly we can share the good ideas, lessons

learned and insights into what works can be pooled and exploited for the benefit

of both societies.

Because the nature of the cyber threat is constantly changing, additional information security R&D by experts in both the U.S. and E.U. should be encouraged, funded and, where appropriate, shared.

And I must not miss this occasion to once again encourage this committee and

the Senate to take favorable action at the earliest possible moment to ratify the

Council of Europe Convention on Cybercrime that sets a solid framework for all

countries around the world to fight cybercrime.

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4 John A. Douglass, R&D and the U.S. Economy: A Sputnik Reflection, University of California, Berkeley. 5 American Association for the Advancement of Science, AAAS Analysis of R&D in the FY

2006 Budget, March 9, 2005. 6 Ibid, page 16.

7President’s Council of Advisers on Science and Technology, ‘‘Maintaining the Strength of Our

Science & Engineering Capabilities,’’ June 2004. 8Lachlan Carmichael, ‘‘Blair pledges to boost Britons’ skills to compete with China, India,’’

Agence France Presse, April 28, 2005.

RESEARCH & DEVELOPMENT

Information security is not the only arena for enhanced cooperation in research

and development. In the U.S., federal government support for research and development has slipped substantially. In the aftermath of the Soviet Union’s Sputnik

launch, federal R&D funding of basic research swelled to 75 percent of all such

spending. Seventy cents of every R&D dollar now comes from the private sector.4

Federal R&D spending creates jobs for scientists and engineers directly and for professionals in business, law, accounting and many other fields indirectly. This support also underwrites the development of valuable intellectual property that,

through a process of technology transfer from the public domain to the private sector, forms the basis of still more capital investment, job creation and wealth creation.

Federal funding for leading science and technology government agencies has also

slipped. Increases in the federal R&D budget will fail to keep pace with inflation

for the first time in ten years, up in FY 2006 a barely perceptible 0.1 percent. Most

non-defense agencies performing R&D will see their budgets decline. National

Science Foundation research grants will be reduced for the second consecutive year.5

To turn a blind eye to R&D is to turn a blind eye to the future. Less government

R&D means less basic research; less basic research means a society with less potential for innovation, inspiration and commercial success. Less potential translates to

fewer career opportunities for individuals to make a difference in science and technology. And fewer individuals striving for breakthroughs in fields like aerospace, energy, the environment, healthcare, nanotechnology, optics, robotics and more means

fewer such breakthroughs are likely. We will not know what we do not know—and

we will not even be asking the questions.

MATH AND SCIENCE EDUCATION

Cutbacks in R&D may already be having an impact on the science, technology,

engineering and math education pipeline. While the number of undergraduate degrees awarded in the U.S. is rising, the number of degrees awarded to science and

engineering students is falling. Between 1985 and 2000, bachelor’s degrees awarded

in engineering, math, computer sciences, physical sciences and geological sciences

fell 18.6 percent.6 Comparing the graduate enrollments of U.S. citizens and permanent residents in 1983 and 2001, totals have dropped in physical sciences; earth,

atmospheric and ocean sciences; agricultural sciences; mathematics and engineering.

In China, the situation is just the reverse. In 2001, 39 percent of all undergraduate degrees awarded in China went to engineers; in the U.S., that percentage

was five percent. Almost 220,000 Chinese students received engineering degrees in

2001, compared to just under 60,000 in the U.S.7 India and China produce 125,000

computer science graduates annually, twice the number of the European Union.8

Collaborative efforts to increase student interest in the basic STEM fields—

science, technology, engineering, and mathematics—is certainly a worthy topic of

discussion between the U.S. and the E.U.

TELECOMMUNICATIONS REFORM

Both the U.S. and the E.U. find themselves at a fork in the road in terms of their

overall telecommunications regulatory environment. Next year, the E.U. will consider its telecommunications framework and the implementation of the 2001 directives. Similarly, Congress has begun to assess the 1996 Telecommunications Act and

consider possible revisions. We call on the Federal Communications Commission

and the European Regulators Group to initiate a collaborative dialogue and work

towards ‘‘light touch’’ regulatory approaches that emphasize competition, innovation,

capital investment and market demand.

Sadly, instead of making common cause, the U.S. and E.U. appear to be at loggerheads over fine-grained aspects of telecommunications trade policy. The WTO Doha

negotiations, particularly in the area of services, appear to be poised to move forward. Yet instead of joining forces and securing improved commitments from more

12

countries, we are engaged in bilateral squabbling over a number of specifics. For example, the E.U. has proposed a new definition of telecommunications that many

companies feel will allow countries to slide on previous commitments. Rather than

introducing new, controversial mechanisms, the E.U. and the U.S. should jointly encourage new and better commitments from all countries.

DEVICE ACCESSIBILITY

If we are truly committed to building ICT markets that promote values like competition, innovation, and capital investment, the U.S. and E.U. should likewise

avoid implementing disparate standards, particularly in the area of device accessibility. Technology should be used aggressively to help seniors and those with disabilities live fuller, richer lives. Government mandated technical specifications for

device accessibility create rather than eliminate barriers to swift deployment.

ITAA is proud to have played a major role in the formation of the provisions incorporated in the ‘‘Electronic and Information Technology Accessibility Standards’’ in

the U.S. Some of ITAA’s member companies were represented on the Access Board’s

Electronic and Information Technology Accessibility Advisory Committee that formulated the standard that underlies section 508. ITAA consulted with members,

drafted and submitted industry comments on the regulation during its development,

and facilitated alignment between the positions of the government, industry, and

the stakeholder organizations in the community of people with disabilities. We consider this alignment between the parties concerned with ICT accessibility to be of

significant value. We hope that as Europe looks at the topic of ICT accessibility,

they will consider the principles underlying the approach taken in the U.S. standard.

Unfortunately, however, they seem to be heading in a different direction, a direction that will end up with companies having to face two different worlds—one in

the U.S. and one in Europe—and that will ultimately lessen the ability of companies

to improve accessibility for individuals with disabilities.

We are pleased that the U.S. Commerce Department is currently participating in

the U.S.-E.C. ICT Standards Dialogue in an effort to steer clear of mandated technical specifications. When governmental bodies adopt accessibility requirements for

government ICT purchases, these requirements should strike an appropriate balance between encouraging the design, development, and provision of products and

services that address accessibility on one hand, while ensuring that accessibility requirements do not impede the rapid advancement of information technology.

Thus, ITAA is a champion of performance-based, open standards intended to facilitate innovation and desired outcomes. We believe that the U.S. and E.U. must

work towards a single, global standard that reflects these values and gives all users

of information and communications technology the ability to enjoy its maximum

benefits.

CONCLUSION: FROM COMMON GOALS TO COLLABORATIVE ACTION

We often hear China referred to as a waking giant. The commitment of the Chinese government to a national technology policy and to leverage comparative advantage in science and technology for global competitive advantage strongly suggests

that the giant is not only awake but on the move. I would argue that we in the

west are the slumbering giants, perhaps lulled into complacency by 60 years of unprecedented scientific and technological success.

The U.S. and E.U. need to assess systematically those aspects of their public policy that have nurtured high tech innovation and investment, and those which have

lost effectiveness in light of the new competitive reality.

Instead of looking for areas to regulate, I strongly encourage governments on both

sides of the Atlantic to look to areas to deregulate, to remove barriers to ICT

growth.

With this knowledge, we must form a persistent collaboration dedicated to removing regulatory barriers, facilitating competition, promoting technology convergence

and, through this process, accentuating the comparative advantages of the world’s

most developed ICT markets.

Most of all, we must stop arguing about how to build a better sand castle and

set our collective sights on the economic tsunami headed in this direction. In recent

times, the U.S. and E.U. countries have disagreed on privacy rights, the value added

tax, the definition of telecommunications, how to classify software, the status of

downloadable products and other issues. We have done a terrific job understanding

individual trees; we have done a terrible job standing back and viewing the global

forest.

13

The Information Technology Association of America is committed to working with

counterpart organizations in the E.U. to achieve policies that foster growth, innovation and security. ITAA believes that U.S. and E.U. officials should develop a dialogue on high tech policy issues in keeping with these goals.

ATTACHMENT

CONCLUSIONS OF THE TRANSATLANTIC HIGH-TECH BUSINESS INITIATIVE—GOVERN- MENTS LISTENING TO BUSINESS HELD ON MONDAY, APRIL 11, 2005 AT INTELLECT’S OFFICES IN LONDON.

There needs to be persistent collaboration between the E.U. and the U.S. on ICT

issues. The meeting noted that the TABD (Trans Atlantic Business Dialogue) does

not currently address ICT issues in sufficient detail. It was proposed that the group

assembled by EABC, ITAA and Intellect should fulfill the function of a TABD for

ICT issues (whether informal, or formally recognized). It was agreed that future

meetings should be held alternately in Brussels and Washington. They must be held

every six months if the goal of persistent collaboration is to be achieved. ITAA, Intellect and EABC will plan the next meeting for October 2005.

We seek to have included in the forthcoming E.U.-U.S. summit a declaration on

Information and Communications Technology. A proposed draft is shown below.

Proposed Draft Declaration on ICT for the E.U./U.S. Summit.

The E.U./U.S. relationship on technology is a critical area of mutual importance

that impacts economic security, national security and the interdependency of all

critical sectors. U.S. and E.U. ICT policies must:

• stimulate investment and growth in the availability of the products and services

of the ICT sectors;

• support the innovations that advance these technologies;

• seek commonality in their regulatory regimes;

• assure a secure environment for their use, and

• assure continued private sector leadership of the technical components of the

Internet.

To achieve this ITAA and EABC will work through Ambassador David Gross and

Intellect will work through Fabio Nasarre de Letosa, EICTA and the UK Government’s DTI.

Further background on the above draft is contained in the sections below.

Telecommunications—The Infrastructure for a Knowledge Economy

There is a unique opportunity to bring together the overall regulatory climate in

the E.U. and U.S. In 2006 the E.U. will be reviewing the telecommunications framework and the implementation of the 2001 directives. Concurrently the U.S. will be

drafting new telecommunication legislation to account for new technologies. An over

riding principle must be the need to stimulate investment and innovation.

Persistent co-operation is required between the U.S. and the Commission. The

FCC and the ERG (European Regulators Group) need to link their work. There is

a need for more formal and more frequent issue based communication. We need to

decouple social and regulatory issues.

The meeting was concerned at the current state of VoIP regulation in the E.U.

Maximum possible regulatory convergence between the E.U. and U.S. should be a

goal. One specific example is the need for a common mobile handset conformance

testing regime. (This can be treated as a trade or telecoms issue).

Information Technology (IT): Enabling the Innovation Ecosystem

The information technology environment:

• needs to have policy addressed on an urgent basis;

• is global in nature, with emerging new significant policy voices (China/India);

• depends on public-private collaboration;

• must focus on the role/impact on citizens/customers/consumers of IT services;

• is characterized by rapid commoditisation of its technologies, and

• needs to enhance role of sector as an effective employer.

Trade in ICT Goods and Services

The ICT Trade environment needs to:

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• Resolve bilateral differences on telecommunications definition, software classification, inclusion of internet services, and status of downloadable products;

• Promote ICT services WTO commitments aggressively, and

• Address China and India trade issues uniformly as a single entity.

Further Background

Growth:

• Government must become educated on technology;

• Regulators should commence a deregulatory review and impact analysis, forbear

from regulation unless clear need emerges, assure multilateral consistency in

any regulatory measures;

• Non-tariff trade barriers (NTTBs) must be dismantled, and

• Government’s role in affirmatively fostering technology innovation and investment must be expressed through tax policy, intellectual property protection, h/

r policies that promote skilled worker mobility, role of government as customer,

and adherence to industry led oversight of the technical co-ordination of the

Internet.

Technology

• Emergence of Next Generation Networks (NGNs) as primary artifact (includes

edge/access/mobile networks);

• Intellectual property (IP) protections must be maintained and consistent, and

• Research (R&D) is the source of innovation; investment in research must grow.

Security

• The sine qua non of the networked ecosystem;

• Law enforcement’s role in maintaining security must be supported with education, investment and statutory frameworks that empower effective prosecution;

• Multilateral cooperation;

• Research investment for security must be encouraged, collaborative and supported by government investment (7th Framework Programme/U.S. R&D institutions), and

• Security education and awareness of all stakeholders must expand.

Senator ALLEN. Mr. Miller, thank you so much for your testimony. I am going to put your entire statement in the record. I

know you summarized it. I would say this to all the witnesses.

Your entire statement will be put in the record, if you so desire.

I suspect you would not have spent time composing it if you did

not want it as part of the record.

Thank you for this. There are so many things that you brought

up, and I am, as you might guess, in complete agreement with you.

The education issue. Today there has been a strand of continuity,

but just earlier today, sometime in the morning, we received a petition from 6,000 women concerned about the lack of women involved

in science, engineering, and technology. It is just in the single digits really, maybe a little bit over 10 percent. And then you add to

the concern as to African Americans and Latino citizens, one of the

fastest growing part of our work force and will be 35 percent of the

workforce in the next 15 to 20 years. You think, well, if we are not

recruiting or encouraging women to get involved, that is half of our

population. If Latinos and African Americans, for whatever reason—and a lot of it has to do with the Hispanic-serving institutions

and historically black colleges and universities not having the technology infrastructure to get the faculty to impart the knowledge

and skills to those students. Then they are not able to apply for

and get the 60 percent of the jobs out there which require technological proficiency.

15

Meanwhile, our engineering schools—and thank you for these figures here—I understand in this country we are behind one-fourth

to one-sixth of what India or China, respectively, are matriculating.

And then about 40 percent of those students in our universities in

these graduate studies in technology and science and engineering

are from overseas, which is fine. I want this country—I have said

this many times—to be a magnet for the best minds in the future.

You are exactly correct. This is what is going to help us compete

and lead in innovation in the future.

I want to work with you. Please, if there are any specific ideas

that you have that you can share with us in this committee here

this afternoon. Ideas on encouraging all Americans, regardless of

their gender, their race, or their ethnicity, to get more involved, to

get encouraged, to get into science and technology and engineering,

please share them with us here or please stay in contact with me.

I think this is one of the most absolutely essential challenges facing

this country and our ability to compete and succeed in the future.

I forgot what you called it. The gold mine?

Mr. MILLER. The iron ore.

Senator ALLEN. The iron ore. Well, I do not care to call humans

anything but gold and diamonds. Regardless, the strength of our

country is our people and their capability. They are the best asset

of this country and we need to make sure they have that ability.

Do you have any specific ideas of what we can do to encourage

young people in this country to engage in these key sciences of the

future?

Mr. MILLER. Well, I certainly agree with the analysis of the current situation, Senator Allen. In fact, we did a study in 1997, before the Internet boom really took off, of women and minorities in

the computer science field. We repeated that study in 2003, hoping

that perhaps we would see some improvement, at least among

women and minorities, in terms of percentages in the computer

science field and in the profession of computer science. Unfortunately, there had been almost no change between 1997 and 2003.

We are expecting to do that survey again either late this year or

early next year. But the numbers are not good.

Since you opened the door, let me make a modest proposal, and

I will tell you where the modest proposal came from. When I was

in India last October for a cyber security conference, I was invited

by the chief minister of Andhra Pradesh, the equivalent of a governor as you were, to meet with him. I thought it was a typical

kind of meet and greet. Here is the U.S. IT guy coming to meet the

chief minister. He was just newly elected. This is a gentleman

named Dr. Reddi. He is a medical doctor. Well, it was more than

just a meet and greet. He actually wanted to talk for over half an

hour about this issue of how he increased his work force.

Now, in Andhra Pradesh is the City of Hyderabad, which is probably the second IT center in India after Bangalore. It is not quite

as well known, but believe me, it is a huge and growing center.

All he wanted to talk about was the shortage. So the half hour

was up, and I figured, well, now he is going to get rid of me. That

is enough. He said, come with me to my next meeting. I said,

where are we going, Chief Minister? He was going to meet with all

the vice chancellors of all the universities in Andhra Pradesh,

16

which are like the presidents of our universities, the equivalent

under the British or Indian system. I said, well, why do you want

me to come along. He said, well, I am going to tell them that they

have got to turn out more engineers and mathematicians and scientists, and I will fund every one of them. I said, why do you want

me to come along? He said, because I want you to say the same

thing, and they will believe you. They will not believe me.

He sees his competition in Shanghai and Beijing and Brasilia

and places that have not taken off yet, Karachi and Manila and

other places. So even though we may sit here saying how far the

Indians are ahead of us, he is sitting there as a political leader saying, I am afraid of the future and falling behind. So I am going to

invest even more. He said to the vice chancellors of the universities, for every student you enroll in the sciences and math, I will

pay for it.

So I began to think. I said, now, we used to have a time like that

in this country. It was called Sputnik in 1957. When the Soviets

sent that little missile up into outer space, the country went into

a full-fledged panic. It was part of the big Cold War attack, very

unsettling to the American people, and we passed the National

Higher Education Defense Act and basically said if you want to

study science or math, the U.S. Government will pay for it. Many

would argue that that really helped to grow the United States dramatically as we entered the engineering age, followed by the information technology age. But we have had nothing like that since.

We had that one brief burst where the government stepped in and

basically said we will educate everybody in science and math.

Well, my modest proposal, to be somewhat ironic about it, is we

should do it again. We really need to think about something that

dramatic. Now, your colleague, Congressman Wolf, has gone part

of the way with his ideas of a loan forgiveness program, but I

would be even more radical. I would say that we should have a goal

of doubling the number of STEM graduates in this country within

a 5-year period, and we as a government—I know this is tough in

tough budget times, and I know you face these issues every day as

a Senator making allocations—we should say we will fund anybody

who will go into science and math in undergraduate education.

If my kids wanted to go school and one is studying English and

one is studying music right now, it is on my nickel or they have

to go get student loans or find some other way to pay for school.

But if that student, no matter what socioeconomic income, no matter what race, whichever gender, wants to study science and math,

the U.S. Government will pay for it.

We estimate the cost at probably a couple billion dollars a year,

so it is not chicken feed. On the other hand, think about the return

on the investment in terms of new products, new revenue, because

these people will become higher wage earners. We have all the research that shows that. More research in universities.

The other thing I think that would happen, Senator—I know you

come from a sports background, your father is a famous coach—is

maybe the parent who is now spending all their time coaching their

kids to play football or soccer or something else, because they hope

they get a college scholarship in that area, will say, maybe I ought

to coach Johnnie and Susie in math or science, and maybe instead

17

of sending them to summer basketball camp, I ought to send them

to summer science camp. The secondary effects would be remarkable.

So that is my modest proposal. We are still working on trying to

put it into more concrete terms, but I think we have to do something dramatic. There is no Sputnik right now, Mr. Chairman.

There is no dramatic thing. Instead, we are kind of like the frog

sitting in the boiling water. It is getting hotter and hotter, and before we know it, we are going to be dinner because these other

countries, like the chief minister of Andhra Pradesh, are making

those investments today. On a per capita basis, China is turning

out two and a half times more engineers, not in absolute numbers,

on a per capita basis. Within 3 years, they will be turning out three

and a half times more engineers than we are in this country. We

cannot compete with that kind of disadvantage in the global marketplace.

Senator ALLEN. Understood. The innovations of the future, the

intellectual property, the inventions will come from many of those

engineers. It makes it very difficult.

I do think kids like to be outside in the summer, though. Kids

are kids.

There is a measure I am working with some of my colleagues on

the Senate side on providing scholarship approaches in technology

and science. I do think it is important that we give scholarships.

Of course, they are funded in athletics, which is fine, and the universities make a ton of money off all the TV contracts.

Unfortunately, this country is reducing our R&D funding in aeronautics. The Europeans, our friends, whom we are talking about

here, have a strategic plan to dominate the world by 2020 in aeronautics. They are on the way to doing it because last year they sold

more aircraft than the United States. The funding proposals are to

keep cutting on the next generation or new vehicle systems,

hypersonic flight, and all the rest.

We do need to invest, and we do have to find ways to encourage

students. Scholarships may very well be, the sort of incentive

grants we need. It’s the best way to go, and I appreciate your comments.

Let me ask you one other question here. The Europeans generally seem to have a more active regulatory instinct than the U.S.

I know you are generally in the other party than I am, but we both

seem to have this libertarian streak to leave free people and free

enterprise minimally limited. I hate restrictions and limits unless

they are harming someone else.

The Europeans seem to be more restrictive. Even the concept of

the Internet is being somehow governed by the United Nations. To

me this is just an abhorrent idea. This is not something for the

United Nations or folks in Geneva need to be worrying about. Let

individuals make those decisions. I think the Internet is the greatest invention since the Gutenberg press for the dissemination of information and ideas, and the last thing we need is regulatory reform.

You can take the example of Martin Luther in Germany, the

Church at Wittenberg, where he nailed his 95 theses. People would

not have read those but for the Gutenberg press getting it dissemiVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
18

nated. So that is another reason, just historically, you do not want

government regulations.

Some have viewed the European Commission position—and it

ends up depending on the industry to thinking that the government is the best capable of setting parameters and standards. My

general view is that I would like to have the industry, the people

in the private sector, saying here is our standard. This applies not

just to the U.S. and E.U. It ends up with China as well because

if China comes up a different standard, that fouls all of us up.

How does the industry look at this approach, or the propensity

of the Europeans to be looking at government setting standards, as

opposed to those in private industry? Is that a legitimate concern?

Mr. MILLER. It is. While I think there are many people in the

European Union who do understand the value of having the marketplace make these decisions, there are others in the European

Union and some of the European Union member states which still

do have a very regulatory approach. The implications for Europe

are fairly clear.

When I was in London recently, for the meeting I mentioned,

there was also a meeting hosted by my good friend, Mike Maibach,

the head of the European-American Business Council. He brought

in a research firm who had been studying the impact of the European approach versus the U.S. approach in terms of ICT, a firm

called Indepen. They gave a report to the group at an event that

he hosted. It showed that the European Union—this is counting

the original 15 member states, before the accession of the additional 10—that ICT was only 5.8 percent of GDP, whereas in the

U.S. it is 6.3 percent of GDP.

Senator ALLEN. Say that again. What are you measuring here?

Mr. MILLER. Gross domestic product. In the U.S., IT is 6.3 percent of GDP. It is 5.8 percent in Europe, half of a full percentage

point, which is a huge amount.

In another metric, the ICT investment in terms of all investment

in Europe is only 18 percent; whereas, in the U.S., it was 29 percent. So there is a lot more investment by customers of IT in the

U.S. as opposed to what is going on in Europe.

And in terms of perhaps the most important economic factor that

economists look at over time, which is labor productivity growth,

because at the end of the day, you cannot grow an economy unless

you get productivity growth, ICT contributed 42 percent of labor

productivity growth in Europe during the last half of the last decade, while it contributed 80 percent of labor productivity growth in

the U.S.

So, the short answer to your question is the European Union attitude is not just sometimes creating difficulties between Europe

and the U.S.; it is actually, I would argue, even hurting Europe

itself.

I will tell you, this is not a European policy, but some nation

states in the European Union, as you know, have very, very restrictive labor mobility laws. It is very difficult to dismiss someone, to

use the nice terminology, to downsize, to right size, whatever the

terminology is. Well, the implication of that is if you are an IT

services firm—and you have many of them headquartered with

very, very significant operations in northern Virginia, and you

19

know them all very well, and some will be testifying on the next

panel—you basically have to be out of your mind to open a facility

in some of those countries in Europe because your whole business

model is that when things are going well, you hire more people,

and when things are not going quite so well, you have to have the

flexibility to lay some people off. That is your whole business

model. Your assets are those people. Sometimes business is good,

sometimes business is not so good.

Another event I attended while I was in London, at an event

hosted by our sister association, Intellect—I was very busy in London—was a presentation by a research group called Ovum. One of

the speakers noted that he had clients in one particular country,

France, where they were having to accept clients paying only 30

percent of their normal labor fee because they had to get some cash

in the door because they could not fire these people. They could not

lay them off. They could not do normal kind of business activity.

Those clients, of course, were very seriously looking at pulling out

of that country.

Now, that does not help the workers in that country. It does not

help the users of IT in the country. It does not help the French

economy to have leading IT companies, whether they are European

or U.S., saying I do not want to do business here because of bad,

restrictive, unnecessary labor mobility laws. We understand the

need to protect the rights of workers. That is not the issue, but the

issue is in a services economy, the IT economy, you have to have

flexibility.

So having said all that, I would still say the European Union officials here in the U.S. and Europe are always willing to meet with

us. We do have a lot of dialogue going on, Senator. So I do not want

to claim that there is no dialogue going on, but I think we still

have a long way to go to get on the same page.

Senator ALLEN. Let me finish with this question. We have to finish with something positive. Can you give me an example of where

this cooperation has actually been beneficial? Every once in a

while, if you find those sort of approaches, that can be the model

for future discussions and cooperation.

Mr. MILLER. I think there are a lot of very positive conversations

going on in the research and development area in various areas of

IT between the U.S. and Europe, and more and more joint research

projects are being set up. I think that has been an area that has

been very, very positive and is moving forward.

Senator ALLEN. How about on standards?

Mr. MILLER. On standards we are making some progress, but

again, the Europeans still tend to bend a little bit toward government knows best or locking in technologies as opposed to locking

in outcomes and letting the industry come up with them.

Yes, there is some good dialogue going on. After all, the telecommunications system does work between here and Europe. Europe has, to a large extent, deregulated its telecommunications

market, in some ways better than we have in some areas. They

have moved ahead with some technology even faster than we have

in some areas, but I still think there is a long way for us to go in

partnership to do a lot more.

20

Senator ALLEN. Well, Mr. Miller, I very much appreciate you appearing, your insight, and I look forward to working with you in

the years to come on these shared interests and ideas for the future

of our country—working with the Europeans, but also making sure

this country is competing and succeeding as well.

Mr. MILLER. Thank you very much, Senator.

Senator ALLEN. Thank you so much.

We are having votes this afternoon, and some members may not

get here. Some may want to pose some questions in writing, and

hopefully you will be willing, as always, to answer those questions.

Mr. MILLER. Absolutely.

Senator ALLEN. Thank you, Mr. Miller.

I would like to call forward now our second panel, if you would

all approach.

Well, I want to thank our second panel for being here. We have

Mr. Patton and Mr. Hassell to talk about the European collection.

Correct?

Mr. HASSELL. Yes, Senator.

Senator ALLEN. All right, on nanotechnology we have Mr. Harper

and Mr. Klaessig, and then on IT access we have Ms. West and Mr.

Duffy.

What I would like to do is have everyone shift. We have not

hiked the ball, so everyone still can shift so we have at least a coherence of going from nanotech, to IT, to Euro, then back to

nanotech.

Let me briefly introduce our second panel. I am going to stick

with this order; it will be close enough.

First, Mr. Harper. Steve Harper is the director of Environmental,

Health and Safety Policy for Intel Corporation. Prior to being at

Intel, he directed Amoco Petroleum’s Fuel Regulatory Service

Group and was a senior policy analyst at the United States EPA.

Prior to his work at EPA, he was vice president in the consulting

firm, ICF Consulting. Mr. Harper has an MBA from the University

of Chicago and an MPA from Princeton. Welcome, Mr. Harper.

Dr. Klaessig is the technical director of Aerosil and Silanes Business Unit of Degussa Corporation, which is headquartered in Germany. Pertinent to his testimony is his work on fumed metal oxide

powders, silica, titanium oxide, alumina, and others which are high

surface area powders supplied by Degussa for more than 60 years.

Though not fitting the dominant definition of nanoparticles, these

materials have many attributes associated with nanomaterials.

Prior to working at Degussa, Dr. Klaessig led the research department at Betz Laboratories. He has a Ph.D. from Rensselaer Polytechnic Institute and a bachelors of science from the University of

California at Berkeley.

Thomas Patton is the vice president of government relations for

Philips Electronics North America Corporation, Philips a Dutch

company. He joined Philips in 1986 to open its first Washington office on federal government relations. He was elected vice president

and corporate officer in January of 1989 for government relations

for the NAFTA region and is a member of the Philips global government relations team. He had previously worked for the U.S.

electronics industry and trade organizations and was a policy analyst for the Office of the Secretary of the U.S. Department of

21

Health and Human Services. Mr. Patton received his masters in

public administration from American University in 1978 and his

B.A. in political science from Stetson University in 1976.

John Hassell is the director of federal and state government affairs for Hewlett-Packard Company based in Washington, D.C. In

the U.S., he helps lead the public policy and public sector business

development at the federal and state government agency level.

Hewlett-Packard is a wonderful international company, great technology company, and Mr. Hassell joined in January of 2000. He is

a native of Newport News, Virginia, is a graduate of the College

of William and Mary, and now reportedly lives in Washington, D.C.

Is that correct?

Mr. HASSELL. My dad still lives in Richmond.

Senator ALLEN. All right. Well, you ought to get on the other side

of the bridge.

At any rate, Ms. Frances West. Ms. West is the director of the

Worldwide Accessibility Center at IBM. She is charged with the responsibility of establishing IBM’s leadership and accessibility by

promoting IBM technology through thought leadership, products,

and solutions on a worldwide basis. Her team is based in the IBM

research area but works across all divisions of IBM. She attended

universities in Hong Kong and the United States, and earned her

bachelors degree in marketing. Welcome, Ms. West.

Finally, Joseph Duffy. Mr. Duffy is the vice president of SAP

Public Services, where he has responsibility for a number of key

strategic initiatives and customer relationships. Mr. Duffy is the

spokesperson for SAP’s efforts in accessibility and the executive

sponsor of numerous customer relationships in federal, state, and

local government and utilities as well. Prior to joining SAP, he

spent 17 years at their rival, Oracle, in a variety of executive and

sales management positions. He received his bachelors degree from

the University of Maryland and he has attended numerous business and trade education forums. He is a member of the board of

directors of Plato Learning, which is the NASDAQ symbol TUTR,

if you want to check it out. He resides with his family in Potomac,

Maryland.

Welcome to you all. I thank you all for coming. What I would

suggest we do—I assume you all have this agenda—Mr. Patton and

Mr. Hassell will talk on the European collection. Then if we could

have Mr. Harper and Mr. Klaessig talk about nanotechnology, and

then Ms. West and Mr. Duffy on IT access. If there is no objection,

I would like to proceed that way. We would like to hear first from

Mr. Patton.

STATEMENT OF THOMAS B. PATTON, VICE PRESIDENT, GOVERNMENT RELATIONS, PHILIPS ELECTRONICS NORTH

AMERICA, WASHINGTON, D.C.

Mr. PATTON. Thank you very much, Chairman Allen.

First, a couple of very quick reactions to the excellent testimony

of Mr. Miller. If being a Virginian gets you your own panel, I deserve one too. I was born in Winchester, Virginia.

Senator ALLEN. Oh, great. Did you go to Apple Blossom last

weekend?

22

Mr. PATTON. I did not get out there. Others in my family were

there, though. I do reside in the District.

Senator ALLEN. Are you related to General Patton?

Mr. PATTON. No, sir.

Senator ALLEN. He went to VMI, you know.

Mr. PATTON. Yes, and my dad did as well.

Senator ALLEN. Great.

Mr. PATTON. Secondly, my son takes off for 6 weeks for biology

camp this summer in Sanibel Island in the Keys. It is all outdoors,

and it should be a lot of fun.

Senator ALLEN. See, that is the way to do it: incent it so it is

fun.

Mr. PATTON. And thirdly, if you have to run for President to

launch a bold initiative in the math and science area, there would

be a few that would support that idea.

Senator ALLEN. All right. We have got to stay to relevant subjects here.

Mr. PATTON. Thank you for this opportunity. I appreciate being

here. My name is Tom Patton, vice president for government relations with Philips Electronics North America Corporation, a subsidiary of Royal Philips Electronics.

As a health care, lifestyle, and technology company, Philips is a

world leading manufacturer of medical devices, lighting products,

consumer electronics, semiconductors, and domestic appliances. We

employ more than 160,000 people worldwide, more than 30,000 in

the United States. It invests more than $1 billion annually in research and development and we are proud to hold more than

115,000 patents.

I am testifying on behalf of Philips, of course, as well as the European-American Business Council, which is committed to fortifying U.S.-E.U. economic integration, growth and competitiveness

by establishing an open transatlantic market that stimulates innovation, investment, economic growth, and job creation.

My testimony today addresses a matter of serious consequence

for the transatlantic relationship and, indeed, to global economic

growth and the future of technological innovation, especially innovation in digital content protection technologies, an area of great

importance in the new digital era. Specifically, I speak of the urgent need to harmonize, rationalize, and modernize Europe’s myriad national copyright levy regimes. These levies, which are administered on a country-by-country basis throughout the E.U. by national entities known as collecting societies, are remnants of a bygone era of the analog time and are, indeed, intended to provide

remuneration to authors, artists, and other intellectual property

rights holders for certain uses of copyrighted works. As these levies

are being imposed in today’s digital world, however, they threaten

to stifle otherwise robust consumer demand for new digital products and services and perversely undermine innovation in technologies that promise to provide genuine intellectual property

rights protection.

Absent swift and sweeping reform, technology companies such as

Philips face an unacceptable array of risks and potential liability,

all of which deter investment in new digital rights management

and other advanced digital content protection systems needed to

23

prevent mass, indiscriminate, unauthorized redistribution of digital

video and audio content over the Internet. The amount of levies imposed upon new high tech products, often based upon storage capacity, creates a lack of predictability and may artificially constrain

consumer functionality because the levies militate against incorporating greater storage capacity.

Today a company seeking to introduce a new digital device or

media to European consumers, including PC hard drives, MP3

players, DVD players and recorders, blank DVD’s and CD’s, faces

a gauntlet of as many as 20 different national copyright levy regimes, all of which vary considerably in terms of the rate, the

scope, complexity, structure, and payment processes.

For example, in France, levies imposed by that country’s collecting society, SACEM, on blank DVD’s now represent more than

47 percent of the final price for the consumer. In Germany, where

their levy is on PC hard drives, as disk drive sizes expand to

terabytes in notebooks and petabytes in home DVR’s, the tax will

far outweigh not just the cost of the drive, but the cost of the entire

device. In Austria, the exorbitant levy imposed upon MP3 players

has caused Philips to delay introduction of its Jukebox product in

that country.

This creates nothing less than a toxic environment for investment and stands in marked contrast to that of the United States

which has chosen, quite wisely—and thanks in large part to your

leadership, Senator Allen—to promote innovation and economic

growth in Internet-based services by shielding them from these

very types of redundant and excessive taxes.

Philips suggests that there are three areas most in need of reform. The first is harmonization. Despite the continued best efforts

of the European Commission to foster a uniform, rational European

system of copyright levies, uneven and incomplete implementation

of these objectives has, unfortunately, resulted in a patchwork quilt

of outmoded, inefficient, and excessive levies, dramatically increasing the final sales price to consumers of many products or impeding

their market introduction altogether. Potential reforms in this area

might include standardized levies on agreed-upon products

throughout Europe or eliminating the individual levies collected directly by collecting societies in favor of a payment of a fixed

amount from a VAT tax.

The second area is better governance and increased transparency. There is a need to address the severe lack of basic good

governance, transparency, and accountability in the way that national collecting societies operate. In particular, the arbitrary and

discriminatory manner in which these levies are enforced is a

major problem and has resulted in competitively disadvantaging

the larger leading manufacturing companies, the ones most engaged in innovation, while virtually ignoring smaller competitors.

Philips supports efforts being undertaken by the EC to impose

good governance rules on collecting societies and agrees that such

rules are crucial. In particular, processes should be open, transparent, and nondiscriminatory, both to the manufacturers paying

in and the rights owners being compensated.

Finally is the area of modernization. Technology companies such

as Philips and major copyright owners agree that levies-based copyVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
24

right protection systems are nothing less than archaic in light of

the digital technology alternatives. Technology-based solutions

make it easier for content owners to identify authors and articulate

terms of usage, to establish prices and collect payment, and to determine, among other things, how content is delivered, accessed,

and copied. As these technologies evolve, content providers are discovering new ways to use them, developing exciting new business

models that allow them to better satisfy a broad spectrum of user

requirements. The ultimate beneficiaries of these developments, of

course, are consumers who can enjoy greater and more user-friendly opportunities to access and interact with digitally distributed

content.

In this new digital environment, it is more important than ever

that intellectual property laws and regulations strike an appropriate balance between a consumer’s right to copy for personal and

noncommercial use and content owners’ right to protect their works

from unauthorized redistribution, especially over the Internet.

In light of this need for a modern and balanced approach, Philips

is particularly disturbed by the finding of a French court that recently ruled that DRM-based security features on DVD’s are actually illegal, as they violate that country’s private copying right. By

outlawing DRM solutions for DVD’s, the French court’s decision

does not appear to recognize or respect the need for such a balance,

and unless overturned, that decision could harm innovation and

uptake of similar technology solutions that offer much needed relief

from that and other E.U. countries’ oppressive system of levies.

In conclusion, Senator Allen, the current system of balkanized,

excessive, and secretive national copyright levies in Europe is so

flawed and so potentially harmful to global economic growth and

technological innovation that it demands immediate, high level

transatlantic cooperation. It would be most productive if this topic

and the reforms we suggest could be given high priority at the

United States-European Union summit next month.

Again, I thank you for the opportunity to appear before this subcommittee and would be pleased to answer any questions. Thank

you.

[The prepared statement of Mr. Patton follows:]

PREPARED STATEMENT OF THOMAS B. PATTON

Thank you, Chairman Allen, ranking member Biden and members of the subcommittee. My name is Tom Patton, and I am Vice President for Government Relations with Philips Electronics North America Corporation, a subsidiary of Royal

Philips Electronics headquartered in Amsterdam, The Netherlands. On behalf of the

European-American Business Council, Philips welcomes the opportunity to participate in this subcommittee’s hearing on U.S. and European regulations affecting

emerging technologies.

Philips is a diversified global technology company employing more than 160,000

employees in over 60 countries worldwide, roughly 30,000 of whom work in the

United States. Philips is a company focused on the physical and emotional wellbeing of its customers, manufacturing products as varied as defibrillators and medical diagnostic equipment, electric toothbrushes, electric shavers, and a full range

of video and audio entertainment products from digital televisions to the Jukebox

MP3 player. Philips is currently number 1 in the global markets for lighting, electric

shavers, and DVD recorders, and we’re number 2 in medical diagnostic imaging

worldwide. Philips Consumer Electronics is the third largest consumer electronics

company in the world and the largest in Europe. Together with Sony, Philips invented the technology that enabled the development of the CD and DVD industries.

25

Our company invests more than a billion dollars annually in research and development and holds more than 115,000 patents.

The transatlantic economic relationship is one of most important in the world. Bilateral trade and investment are powerful forces that have fostered prosperity and

stability between the U.S. and Europe, as well as much of the world. In 2003, total

transatlantic commercial exchanges reached $2.5 trillion, generating $77.1 billion in

earnings for U.S. affiliates in Europe and $46.4 billion for European affiliates in the

U.S. In that same period, total U.S. investment in Europe was $800 billion and total

European investment in the U.S. was more than $1 trillion. Not surprisingly, this

investment is a major engine for job growth, with 4.2 million people employed in

the U.S. by European affiliates and 3.2 million people employed in the E.U. by U.S.

affiliates. With eleven percent of the world’s population and forty percent of its

GDP, the U.S. and E.U. together are both an engine for global growth and leaders

in standards-setting for the world. The European-American Business Council is

committed to fortifying U.S.-E.U. economic integration, growth and competitiveness

through regulatory convergence and free exchange of goods, services and capital.

EABC pursues mutually beneficial solutions to U.S-E.U. trade barriers through enhanced government-to-industry dialogue across the Atlantic.

THE NATIONAL COPYRIGHT LEVY SYSTEM IN EUROPE IS BROKEN

My testimony today addresses a matter of real consequence to global economic

growth and future technological innovation, and in particular, to the development

and introduction of new and effective digital content protection technologies, exciting consumer digital entertainment devices and IT services. There is an urgent need

to harmonize, rationalize, and modernize the laws and regulations that govern how

intellectual property rights are protected and compensated in the European market.

Currently, throughout Europe, there exists a system of copyright levies, collected

and distributed on a country-by-country basis throughout the E.U. by national entities known as ‘‘collecting societies.’’ The purpose of these levies, which originated in

the analog era, is to provide remuneration to authors, artists, and other intellectual

property rights holders for certain uses of copyrighted works, some of which, such

as certain home copying, are not subject to copyright control in the U.S. As these

levies are being imposed in today’s digital world, however, they are causing serious

market distortions, threaten to stifle otherwise robust consumer demand for new

digital products and services, and perversely undermine the very intellectual property rights protection that they are intended to promote.

Absent swift and sweeping reform of the myriad national copyright levy regimes

operating in Europe, technology companies such as Philips face an unacceptable

array of risks and potential liability, all of which deter investment in new digital

rights management and other advanced digital content protection systems needed

to prevent mass, indiscriminate, unauthorized redistribution of digital video and

audio content over the Internet. The amount of levies imposed upon new high-tech

products, often based upon storage capacity, creates a lack of predictability and may

artificially constrain consumer functionality because the levies militate against incorporating greater storage capacity. The balance of trade deficit for the United

States will worsen because both the American entertainment and high-tech industries stand to lose significant revenues under the current levy system.

The negative consequences of this increasingly out-of-control system of levies on

global economic growth and technological innovation are so serious and immediate

that reform of the system should be accorded real priority in next month’s U.S.-E.U.

summit.

Of particular concern to Philips is the evolution of these copyright levies—functionally consumer taxes—on the sale of virtually anything capable of storing or recording digital data. Today, a company seeking to introduce a new digital device or

media to European consumers, including PC hard drives, MP3 players, DVD player/

recorders, blank DVDs, and CDs, faces a gauntlet of as many as 20 different national copyright levy regimes, all of which vary considerably in terms of rate (as well

as the metrics used to assess that rate), scope, complexity, structure, and payment

processes.

For example, in France, levies imposed by SACEM on blank DVDs now represent

more than 47 percent of the final price for the consumer. In Germany, where there

is a levy on PC hard drives, as disk drive sizes expands to terabytes in notebooks

and petabytes in home DVRs, the tax will far outweigh not just the cost of the drive,

but the cost of the entire device! In Spain, a multi-function copier/fax/printer costs

around ÷79 (approx. $102) (including 16% VAT). Spain’s collecting society, SGAE,

imposes a levy on that device of slightly more than ÷45, which is also subject to

a 16% VAT, thus increasing the final price to the consumer by 66 percent, to ÷131

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(approx. $170). In Austria, the exorbitant levy imposed upon MP3 players has

caused Philips to delay introduction of its ‘‘Jukebox’’ product in that country.

The trend line is clear. Ever-increasing levy rates are being exacted by national

collecting societies across Europe without any semblance of uniformity on an everincreasing number of digital consumer electronics devices and blank media. To

make matters worse, the irregular manner in which these levies are imposed and

enforced disproportionately harms the most innovative technology companies, often

ignoring entirely lesser-known ‘‘copy-cat’’ manufacturers. Indeed, in a perverse

twist, the more modern the product, the more cutting-edge the technology, and the

earlier its introduction to the market, the greater is the risk. In short, the national

levy system in Europe turns all of the fundamental laws of capitalism on their

heads.

The net effect of these disparate, unevenly enforced and unreasonably high copyright levies is nothing less than a toxic investment environment for U.S. and European companies, including Philips, that are at the forefront of digital technology innovation. How can technology companies justify the enormous initial investments

required for innovation, including innovation in the very types of technologies that

offer a better solution to protecting digital content, if they cannot even plan new

products because of the unpredictable effect of ever-increasing and redundant copyright levies? The answer is they cannot.

It’s important to point out that the current approach in many E.U. Member Countries to tax emerging technologies as much as possible stands in marked contrast

to that of the U.S., particularly this country’s decision—thanks in large part to your

leadership, Mr. Chairman—to promote innovation and economic growth in Internetbased services by shielding them from these very types of redundant and excessive

taxes. Thank you. We hope you will agree that, for the sake of preserving and promoting a vibrant and healthy transatlantic economy, and the enormous benefits

that clearly flow from that, a similar approach is desperately needed in Europe.

NEEDED REFORMS

There are three distinct areas of reform that need to be undertaken immediately:

harmonization, vastly increased transparency, and, most importantly, a fundamental re-examination leading to modernization.

1. Harmonization

Despite the continued best efforts of the European Commission (initially through

its adoption its 2001 Copyright Directive (implementing its obligations under the

WIPO Treaty) and today in its pending review of Member Countries’ implementation of that Directive) to attempt to foster a more harmonized and rational system

of laws to protect intellectual property and preserve and promote technology innovation and competition, uneven and incomplete implementation of these objectives by

E.U. Member Countries has unfortunately resulted in a patchwork quilt of outmoded, inefficient and excessive levies—either increasing the final sales price to

consumers of many products or impeding their introduction into the market altogether. This maze of disparate copyright levies distorts cross-border trade and creates massive inefficiencies and costly administrative burdens. It competitively disadvantages leading manufacturing companies which bear the brunt of the levies. Potential reforms in this area might include standardized levies on agreed upon products throughout Europe or eliminating the individual levies collected directly by collecting societies in favor of payment of a fixed amount from a VAT tax.

2. Governance and transparency

There also is a need to address the severe lack of basic ‘‘good governance,’’ transparency and accountability in the way that national collecting societies operate. Incredibly, the manner in which these quasi-governmental, quasi-private entities operate and set levies is closed to public scrutiny with little meaningful opportunity for

stakeholders to participate in the levy-setting or distribution processes or to object

to these levies once established. The arbitrary and discriminatory manner in which

these levies are enforced is contrary to every basic tenet of fairness. Moreover, even

most of the largest and most creative content owners, whose intellectual property

rights these levies are supposed to protect, strongly oppose the current system because it does not serve the core purpose of protecting their digital content; instead

it simply favors a select group of domestic rights holders or other pet parochial

projects.

Philips supports efforts being undertaken by the E.C. to impose ‘‘good governance’’

rules on collecting societies, and agrees that such rules are crucial. In particular,

processes should be open, transparent and nondiscriminatory. Stakeholders should

be able to contest tariffs through efficient, open and cost-effective procedures conVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6621 EUREG.TXT SFRELA2 PsN: SFRELA2
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ducted by an independent third party, with appeal to the E.U. as necessary and appropriate. Similarly, collection societies should be required to publish detailed information on the amounts they collect and the distributions they make.

3. Modernization that emphasizes digital content protection technology solutions

The problems with the national system of copyright levies are so acute today that

these first two major areas of reforms must be implemented right away. They are

not, however, substitutes for a fundamental re-examination of the levy system and

development of a modernized system that reflects the realities—and responds to the

imperatives—of the digital era in which we now live.

Technology companies such as Philips and major copyright owners such as U.S.

motion picture studios and record companies stand united in the belief that the advent of digital technology demands a new paradigm in which digital content protection technologies and digital rights management systems—not taxes—play a paramount role in ensuring that rights owners are appropriately and adequately compensated for their works and that those works are better protected from indiscriminate, unauthorized redistribution.

In fact, levies-based copyright protection systems are nothing less than archaic in

light of the digital technology alternatives. Technology-based solutions make it easier for content owners to identify authors and articulate terms of usage, to establish

prices and collect payment, and to determine, among other things, how content is

delivered, accessed and copied. As these technologies evolve, content providers are

discovering new ways to use them, developing exciting new business models that

allow them to better satisfy a broad spectrum of user requirements. The ultimate

beneficiaries of these developments, of course, are consumers, who can enjoy greater

and more user-friendly opportunities to access and interact with digitally-distributed content.

It is no wonder that the content industry prefers DRM-based solutions over private copy levies. As one major content industry association executive recently stated, ‘‘Private copy levies impose a cost on all consumers, whether or not they copy,

and distribute the proceeds imprecisely and with high overhead.’’

For these reasons, Philips and the EABC agree with the European Commission

that DRM solutions represent ‘‘. . . an important, if not the most important, tool

for rights management in the [European] market of the new digital services.’’ Indeed, we urge that copyright regimes must be modernized not only to reflect the

availability and effectiveness of these technologies, but to promote their development and use.

The outlook for technology alternatives in the European context, however, is not

particularly good. Just last month, a French court, reversing a lower court ruling

in the Que Choisir case, ruled that DRM-based security features on DVDs are actually illegal, as they violate that country’s private copying right. In this new digital

environment, it is more important than ever that intellectual property laws and regulations strike an appropriate balance between a consumer’s right to copy for personal and non-commercial use, and content owners’ right to protect their works from

unauthorized redistribution especially over the Internet. By outlawing DRM solutions for DVDs, the French court’s decision does not appear to recognize or respect

the need for such a balance, and, unless overturned, that decision could harm innovation and uptake of similar technologies solutions that offer much needed relief

from that and other E.U. countries’ oppressive system of levies.

CONCLUSION

The current system of balkanized, excessive and secretive national copyright levies in Europe is so flawed and so potentially harmful to global economic growth and

technological innovation that it demands immediate, high level transatlantic cooperation. It would be most productive if this topic could be given high priority at

the United States-European Union Summit next month.

Again, I thank you for the opportunity to appear before this subcommittee and

would be pleased to answer any questions.

Senator ALLEN. Thank you for your testimony, Mr. Patton.

I want to actually ask questions at the end, but there are some

that just hit me. With these balkanized approaches, what people do

in this country is they just trade over the borders. If certain things

are cheaper on one side of the border in different States, they go

over there and buy it. Does, say, a French person—or whatever

that was that cost so much there—go over to Switzerland or to GerVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
28

many or Belgium and buy it, or does somebody from Germany go

to Austria. Or does somebody from Austria where you were not

putting in the MP3, I think you were saying, just go to Hungary

or to Germany and buy them there where the levies are less?

Mr. PATTON. Yes, Senator. It is hard to know what exact numbers to attribute to that kind of reaction by the consumer in the

marketplace. Because the marketplace is so distorted by these various collecting societies and the levies that they produce, it is not

clear where one would go to avoid these. But it is definitely changing the consumers’ behavior in these markets.

The distortion leads to a variety of other problems as well. A

great market for products that are not paying the levies is a very

lucrative market for these products. It is changing the business behavior. You would think that you would come to the point where

you might ignore these arbitrary and discriminatory kinds of programs, but then you find yourself at the place such as in the

French courts where your DRM solutions, for example, are deemed

illegal. So it is a system in much need of repair.

Senator ALLEN. Thank you, Mr. Patton. And it should be made

a priority. That is one of the reasons we held this hearing at this

time before that meeting. Thank you.

Mr. Hassell.

STATEMENT OF JOHN D. HASSELL, DIRECTOR OF FEDERAL

AND STATE GOVERNMENT AFFAIRS, HEWLETT-PACKARD

COMPANY, WASHINGTON, D.C.

Mr. HASSELL. Good afternoon, Senator Allen. Thank you. My

name is John Hassell. I am director of federal and state government affairs for Hewlett-Packard Company. I thank you, Mr.

Chairman, and the committee for hosting this hearing on several

issues of importance to HP.

Senator ALLEN. By the way, let me interrupt briefly. Your entire

testimony, just for time—and I do not know when we are going to

get another vote. If you could summarize your statements and your

key points, that would be appreciated. Your whole statement will

be made a part of the record. I just do not want folks getting cut

off. So if each of you all could summarize your statement in 5 to

7 minutes, that might be helpful just in the caution of votes and

time. Excuse me, Mr. Hassell.

Mr. HASSELL. Thank you. I will be brief.

As you are well aware, the world is experiencing a digital entertainment revolution where the consumer is in charge. Using new

technologies, consumers are now able to have a digital mobile, virtual, and personal experience with content in ways never before

imagined. As the largest consumer IT company, HP stands firmly

at the center of this revolution. We are striving to build every one

of our consumer devices to ensure an exciting and rewarding experience for consumers, while at the same time respecting and supporting intellectual property.

HP is committed to three principles to support digital rights

management: one, to emphasize the consumer experience; two, to

build reasonable content protection solutions; and three, to respect

intellectual property and copyright.

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Unfortunately, our efforts and the efforts of others in the tech industry to give consumers these exciting opportunities are being undermined by private copyright levies. Tax-like levies were developed almost 50 years ago at a time when it was impossible to ensure that authors received fair compensation for uses of their

works. Today, however, technologies like digital rights management systems make it possible for consumers to fully enjoy works

while preventing unauthorized uses.

While DRM’s are complex in their workings, what they mean at

a practical level is that content creators, the right holders, are able

to control how their works are enjoyed and to set license fees accordingly. At the same time, DRM’s enhance the consumer experience as well by offering new and simpler ways for users to enjoy

copyrighted works.

HP is active in this space. One of our products includes the HP

DVD movie writer, the first system in the industry to respect digital rights, informing the consumer only when content cannot be legally copied.

Despite the development of tools like this one, we continue to see

the virtual unfettered expansion of tax-like levy regimes throughout Europe. HP is currently paying levies on CD and DVD burners,

as well as multi-functional devices such as copies and scanners. In

Germany, a recent court judgment now under appeal upheld the

extension of levies to PC’s. HP is engaged in separate litigation regarding the application of these levies to printers. In some instances, proposed levies have even exceeded the cost of the product

being levied. In others, competing collecting societies are seeking

levies on the same products.

We seek the subcommittee’s support to address the challenges

brought on by copyright levies. At the outset, I want to stress the

E.U.’s constructive role in this issue. It is important to note that

the expansion of levies, without regard to DRM’s, is happening in

spite of E.U. law to the contrary. Indeed, the E.U. has worked

closely with HP and other companies in an effort to ensure these

limitations are respected in practice. For this, we are grateful.

We ask you to do two things, Mr. Chairman. We respectfully

urge the subcommittee to express its support to the E.U. in these

efforts. As the E.U. currently considers broad-based legislation on

collective rights management, the IT industry has called upon it to

take this opportunity to review the functioning of national levies

regimes. We ask the E.U. to impose clear parameters to limit efforts to expand those regimes into the digital arena. Specifically,

Mr. Chairman, we request that you communicate support for this

position to Commissioner McGreevy, the commissioner for internal

market and services, and other counterparts in Europe.

At the same time, secondly, countries outside of Europe are

studying whether they should expand levies regimes to cover digital products. We believe U.S. free trade agreements should include

language opposing the establishment of new levy systems and calling for the phase-out of existing levies. We ask for your support in

this effort as well.

Thank you again for your leadership on this issue and for holding this hearing. I stand ready to answer any questions you may

have.

30

[The prepared statement of Mr. Hassell follows:]

PREPARED STATEMENT OF JOHN HASSELL

Good afternoon. My name is John Hassell. I am the Director for Federal and State

Government Affairs for the Hewlett-Packard Company. HP is a technology solutions

provider to consumers, businesses and institutions globally. The company’s offerings

span IT infrastructure, global services, business and home computing, and imaging

and printing, with annual revenue exceeding $81 billion.

I thank the committee for hosting this hearing and for giving me the opportunity

to testify today. We applaud that you have chosen for consideration three issues of

critical importance to HP. In my testimony, intend to address the increasingly important issue of European ‘‘private copy levies.’’

As my testimony will demonstrate, levies are now outdated and pose a significant

threat to the interests of authors, consumers and technology developers. They were

developed almost 50 years ago, at a time when it was impossible to ensure that authors received fair compensation for uses of their music or movies. Today, technologies like digital rights management make it possible for both the consumer to

fully enjoy the work while preventing unauthorized uses. The tax-like levy raises

costs to all, and creates the misimpression that piracy is sanctioned. This was never

the goal of levies, and it constitutes bad public policy.

We believe that circumstances have evolved to the point where the rough justice

that justified levies in the first place is no longer good policy. E.U. law recognizes

this change. But many European countries persist not only in maintaining their levies regimes, but in expanding them to new areas. The net result is increased costs

to consumers, who end up paying two or three times for the music and movies they

acquire.

We seek your support in addressing this challenge. More specifically, we ask that

the subcommittee support the E.U.’s efforts to address national levies regimes

through its upcoming directive on collective rights management. We also recommend that U.S. trade agreements include language opposing the establishment

of new levy systems and calling for the phase-out of existing levies.

ORIGIN OF COPYRIGHT-RELATED LEVIES

I would like to start my testimony by offering a brief explanation of the origins

of the levy system in Europe for those of you unfamiliar with this system.

Many European Union member states have what is known as a ‘‘private copy exception’’ in their copyright laws. This exception permits users in certain situations

to reproduce copyrighted works such as music and movies for personal use. (Notably, there is no private copy exception for software).

This exception raised a problem of remuneration for authors, however. In the days

of analog works, it was extremely difficult for authors and right holders to monitor

or administer the private copy exception. There was no effective way for right holders to control how and when private copies of their copyrighted works were made.

Similarly, there was no effective way for them to track the number of private copies

being made or to be remunerated directly for those copies.

The levies system emerged in the 1960s as a response to those challenges. In essence, a levy is similar to a tax added to the purchase price of blank media and

recording and reproduction devices. Many European states now have legislation that

allows national ‘‘collecting societies’’ (independent and quasi-governmental associations responsible for administering levies regimes) to set the amount of the levy, determine the media and devices that would be covered by the levy and handle distribution of the funds collected. As a general matter, a percentage of the levy collected is distributed to authors and right holders; a percentage is used for the cost

of administering the levy; and, in some instances, an amount is also set aside to

support national cultural funds or projects.

Although so-called ‘‘private copy’’ levies have never been able to accurately reflect

the actual value and use of any particular work, they were deemed to be the only

practical method to compensate right holders for private copy exceptions in the analog era. In short, levies reflected a compromise solution in a world where the technology did not exist to manage particular uses of works.

LEVIES TODAY: THE DIGITAL DIMENSION

In today’s digital world, the fundamental premise that underlies levy regimes—

the author’s inability to control private uses of his or her work—has been eroded

dramatically. Indeed, technology now enables right holders to exercise far greater

control over the use of their works and to be compensated accurately for such uses.

31

These technologies are commonly referred to as ‘‘digital rights management’’ technologies or ‘‘DRMs.’’ DRMs are among the most important and most exciting emerging technologies. While these technologies are complex in their workings, what they

mean at a practical level is that authors and right holders are able to control how

their works are enjoyed and to set license fees accordingly. Authors, composers, recording companies and even collecting societies are now using DRM systems to identify content and authors, to set forth acceptable uses, to establish prices and to

grant licenses directly and automatically to individual users. At the same time,

DRMs enhance the consumer experience as well, by offering new and simpler ways

for users to enjoy copyrighted works.

HP is very active in the DRM space. Our activities in this area, which are focused

on enhancing the consumer experience, building reasonable solutions for respecting

creative content, and respecting copyright, include the following:

• HP created HP DVD Movie Writer, the first system in the industry to respect

digital rights, informing the consumer only when content cannot be legally copied;

• HP allied with Apple on iTunes and iPod to deliver the best music experience

possible;

• HP developed VCPS with Philips, and licensed other industry leading DRM

technologies;

• HP collaborates with numerous standards bodies and industry consortia to further next generation technologies, such as the Advanced Access Copyright System, Open Mobile Alliance DRM, Content Management Licensing Administrator, and DVD Copy Control Association;

• HP is a founding member of the Coral Consortium, a cross-industry group to

promote interoperability between DRM technologies used in the consumer

media market.

The above are only a few examples of HP’s commitment to ensuring a simple, affordable and enjoyable entertainment experience that is supported by a fair business model for content providers.

Tools like the ones described above are enabling right holders to manage their

works directly and thus are eliminating the need for traditional levies. In light of

these developments, one would anticipate that levies would be scaled back. This has

not been the case, however. Instead, we have consistently seen the expansion of levies regimes throughout Europe—including the systematic extension of levies to digital media and equipment and an ongoing increase in the amount of levies demanded by collecting societies.

It is important to note that the expansion of levies is happening despite a 200

law adopted by the European Union that instructs Member States to the contrary.

The ‘‘Copyright Directive’’—which brings European copyright law into the digital

age—makes clear that levy regimes must be adjusted to reflect the application of

DRMs. The majority of Member States and national collecting societies have yet to

implement this obligation in practice, however.

Instead, despite the increasing usage of DRMs, national collecting societies are

applying levies to an expanded universe of products. Depending on national legislation, levies are being extended to digital equipment such as PCs, printers, mobilephones, personal video recorders and portable music players, fax machines, copiers,

scanners as well as to a wide variety of media (hard disks, memory cards, CM,

DVD-R). In some Member States, proposed levies have exceeded the cost of the

product being levied. In others, competing collecting societies are seeking levies on

the same products.

To take just one example of particular significance to HP, in Germany, a highprofile case brought by the collecting society VG Wort against Fujitsu Siemens has

extended the levies regime to PCs, notebooks and servers. After unsuccessful negotiations with industry, VG Wort chose to bring a test case against Fujitsu Siemens,

arguing that its products could be used for copying and therefore should be subject

to levies. Earlier this year, its claim was successful and in fact, the court initially

declared that the levy should be applied retroactively to include all machines sold

since 2001, when the claim was first made. (The court did rule, however, that the

levy should be 12 Euros for each new PC sold rather than 30 Euros as originally

sought by the collecting society.) Fujitsu Siemens was supported during the proceedings by other hardware manufacturers, including HP, and has filed an appeal

against the decision. The ultimate decision will apply to other manufacturers as

well.

The German levy would be in spite of the fact that PCs are used for many other

purposes than making private copies of copyrighted works. (As noted, there is no

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1http://www.bsa.org

2Presentation delivered in Maryland, USA ‘‘Impact of Content Rights Compensation Levies:

Lost Sales Revenue Worldwide.’’ April 28, 2003, Robert Damuth, Vice President Nathan Associates, www.nathaninc.com

private copy exception for software and thus no levy applicable to software reproductions). Similar litigation is under way between VG Wort and HP and Lexmark, concerning attempted levies sought on printers. Applying levies to multi-functional

products necessarily opens the door to the application of levies to all sorts of other

hardware equipped with memory chips: radio and television sets, digital cameras,

digital video units, telephones, car stereos, automobile information systems, watches—the possibilities are endless. If this path is followed, an increasingly large number of users will end up subsidizing the activities of a small group of private copiers.

THE IMPACT OF LEVIES ON DIGITAL PRODUCTS

Before reviewing the broad and often detrimental effects of digital private copy

levies, let me begin by saying that HP is committed to fair and full remuneration

for rights owners for the use of their products. What we question is whether levies

are the best way to attain this end—especially in light of digital developments

which call into question the necessity of levies. HP hopes to partner with interested

stakeholders in the transition away from a levies-based system to a world of reasonable, consumer-friendly solutions for respecting creative content.

The Impact on Consumers

Levies as a general rule are paid by IT product manufacturers and importers. Ultimately, however, the consumer shares this burden.

Where DRMs are in place, a levy on digital products means a consumer may pay

two or more times for private copies. For example, when a consumer purchases her

favorite song through a DRM-enabled on-line music store for use on her MP3 player,

the artist receives a direct payment for her use of the song and for a specified number of ‘‘private’’ copies. If collecting societies have their way, that consumer will also

pay a levy on the device. If she stores the song in her PC, she might pay a levy

on the PC, on the CD-burner embedded in the PC and on the blank CD used to

hold the song.

The increasing popularity of on-line music and movies services that employ DRM

technologies and the increasing number of digital devices covered by the levy system

can only mean that more and more consumers will be charged multiple times for

the right to make a copy. This decreases consumer enthusiasm for DRMs. It also

means right holders have little incentive to apply DRMs to their works.

At a more general level, levies are a tax on digital products. As such they raise

the cost of technology to a country’s citizens. When a collecting society establishes

a levy on a new product or raises the price of a levy on an existing product, the

increased price necessarily results in a lower demand for such products. The result

of this ‘‘tax’’ is that fewer people possess the newest technological products, slowing

the uptake of new technologies and widening the digital divide.This tax also suppresses sales by U.S. information and communication technology (ICT) companies

in Europe and reduces investment in, and the development of, DRM-enabled businesses like those that have flourished in the United States.

Impact on Industry

Two major studies have been conducted to calculate the significant costs to industry that levies impose. The first study, undertaken by Rightscom and commissioned

by the Business Software Alliance in September 2003,1 examined the impact of levies in France, Germany, Italy, the Netherlands and Spain. The study predicted. that

between 2002 and 2006 the total amounts of levies collected in these five countries

would increase by threefold—from $380 million in 2003 to over one billion U.S. dollars in 2006. This analysis was based on the fact that levies now cover more products and that levy rates are increasing. If proposed levies on additional products,

such as the German levy on PCs, continue to be enforced, the study estimated that

the total amount collected in 2006 could increase to over $1.5 billion.

A second study sought to assess lost sales (of PCs, portable music players, and

printers) as a result of increased prices brought-about by the private copy levies.

This study from Nathan Associates,2 concludes that the cost of levies to the technology industry, depending on the elasticity of the price of the product, could range

from $808 million to $8.8 billion per year.

These costs are staggering. Few but the largest technology providers can bear

them. And faced with demands that can be both arbitrary and unpredictable and

that differ from one Member State to another, levies also impair industry’s ability

33

to develop coherent, E.U.-wide business strategies. Add to this the fact that levies

on digital products suppress demand for those products and hinder the roll-out of

DRM-enabled content delivery systems and the reason for the concern of the technology industries becomes evident.

Impact on Authors and Right Holders

Even authors and right holders—the intended beneficiaries of levy systems—have

significant concerns with how these systems are operated. Many of these revolve

around the transparency of the system and the way in which levies are distributed.

At present, it can be difficult for authors (and consumers and manufacturers as

well) to understand how levy rates are assessed, on what products they apply and

how they are distributed.

In a number of countries, for example, an artist will only receive compensation

if he or she is a member of a particular collecting society—leaving non-members

with little recourse. Because a portion of the funds collected are used to pay the collecting societies’ administrative expenses, right holders often receive distributions

that represent only a fraction of what they would receive if they were compensated

directly.

Contribution to Piracy

As this Committee knows well, right holders suffer significant harm as a result

of copyright piracy. Users of digital audio and audio-visual works can and do mistake private copy levies—which are intended to compensate right holders for lawful

private copying only—for an ‘‘open-license’’ to copy content freely. Levies quickly become a ‘‘license to pirate.’’ At the same time, the presence of levies in a market can

also hamper or undermine investment in DRM-enabled products and services that

would seem to offer the best avenue for curtailing rampant illegal file-sharing.

Recommendations to the Subcommittee

Before making any recommendations, I want to stress the E.U.’s constructive role

on this issue. As I noted above, European law includes many important safeguards

to avoid the unfettered expansion of levies regimes. The ELI has worked closely

with HP and other companies in an effort to ensure these limitations are respected

in practice. For this, we are grateful.

I also want to reiterate HP’s commitment to DRM technologies and to ensuring

regulatory systems that enable, rather than obstruct, these technologies. It is part

of HP’s core mission to ensure and advance the consumer’s ability to easily enjoy

entertainment on any device, in any format, while making new business models possible. Levies, improperly considered, can and do stand in the way of this mission.

This is why HP and other technology providers have been extremely active on the

levies issue in Europe both independently and through trade associations including

the Business Software Alliance and EICTA, the European ICT industry association.

We respectfully request the committee’s support in our efforts:

• First, we urge the committee to express its support for E.U. efforts to rationalize national levies regimes. Led by its Directorate on the Internal Market, the

E.U. is currently considering broad-based legislation on collective rights management. The ICT industry in Europe has called upon the E.U. to take this opportunity to review the functioning of national levies regimes and impose clear

parameters on national efforts to expand those regimes into the digital arena.

We ask that you communicate support for our request to your counterparts in

Europe. We understand that there is an E.U.-U.S. Ministerial Summit scheduled for June 2005. This might be an appropriate opportunity to express the

U.S. Government’s interest and concerns surrounding this issue.

• At the same time, countries outside of Europe are studying whether they should

expand levies regimes to cover digital products. We believe U.S. trade agreements should include language opposing the establishment of new levy systems

and calling for the phase-out of existing levies. We ask for your support in this

effort.

I thank you for your time today and stand ready to answer any questions you may

have.

Senator ALLEN. Thank you, Mr. Hassell. As I stated to all of you

all here, one of the reasons we are having this hearing is the timeliness of it. To the extent we get your information, it is actually

great to get it from a U.S. company, as well as a Dutch company,

34

that does business not just in Europe and the U.S. but throughout

the world. We thank you for your testimony. We will act on that.

Now I would like to shift to our two panelists concerning

nanotechnology. We will first hear from Mr. Harper.

STATEMENT OF STEPHEN F. HARPER, DIRECTOR, ENVIRONMENTAL, HEALTH AND SAFETY POLICY, INTEL CORPORATION, WASHINGTON, D.C.

Mr. HARPER. Thank you, Senator. I direct Intel’s global environmental, health, and safety policy activity and nanotechnology, in

part, falls underneath that umbrella.

I want to express our appreciation, as was mentioned earlier, for

your leadership in establishing the congressional Nanotechnology

Caucus, which we think is a great development.

I am here representing Intel and EABC. Tom Patton already introduced EABC. Hopefully you are familiar with Intel.

I think the critical data point here is that we are a global company with operations throughout the world. We have very significant manufacturing and other operations in Europe, as well as the

United States and Asia. I am going to really basically focus on one

key issue with several different dimensions of it. That issue is the

need for cooperation in addition to competition between the United

States and Europe with respect both to the science of

nanotechnology but also with respect to the environmental, health,

and safety regulation of nanotechnology moving forward.

Intel’s interest in nanotechnology is multifaceted. In the immediate term, we are today creating devices that feature transistors

that are smaller than 100 nanometers in width. That is the classic

definition of nanotechnology. These nano features are the reason

why our current Pentium IV processors have more than 100 million

transistors on them and why we just prototyped a new Itanium II

processor that has 17 billion transistors in it. We cannot do that

without the small feature of the nanotechnology.

In terms of dollar value of product, advanced semiconductors currently represent by far the biggest slice of the current

nanotechnology marketplace.

The size of our current transistors and circuits are so small that

they are difficult to fathom, at least for this political scientist, as

opposed to a physical scientist. The best way to appreciate their

size is in relation to more familiar objects. Later this year, we are

going to introduce chips that have transistor gates that measure

less than 35 nanometers across. At that size, approximately 100 of

these transistor gates—and that is the switch that flips the transistor on and off—can fit within the diameter of a human red blood

cell.

For the foreseeable future, semiconductors will continue to rely

on traditional silicon-based technology, what we have used for

many years. But perhaps approaching around 2020, we anticipate

running up against physical limitations that will hamper the ability to continue to use silicon-based approaches. At that point chip

manufacturing may rely on new nanomaterials such as carbon

nanotubes and nanowires to continue along the progress of Moore’s

Law.

35

The year 2020 sounds like a long time away, but because of the

complexity of the technical work that must be done to invent and

implement the nanotechnology future, Intel and the semiconductor

industry have begun investing in a major way in the research and

development to bridge to that future. Much of this work takes place

in the context of what is called the International Technology Roadmap for Semiconductors, or ITRS. The ITRS lays out the priority

scientific and environmental challenges that must be met in order

to continue progress along the trajectory of Moore’s Law. It is important to emphasize that the ITRS and much of the current

nanotechnology research and development work being done in our

industry is viewed as pre-competitive. Companies from across the

industry from around the world are pursuing a common basic research agenda, working through cooperative institutions like

Sematech and the Semiconductor Research Corporation to solve

some of the important physical issues associated with continuing

along Moore’s Law.

I have referred now several times to Moore’s Law. It is the 40th

anniversary of Moore’s Law last month and hopefully most people

have at least heard of it. But why care? Why does Moore’s Law

matter?

Forty years ago Gordon Moore, one of the founders of Intel, predicted that the number of transistors and integrated circuits would

double every year. That was later extended to every 2 years.

Moore’s observation—it really is an observation rather than a

law—really focuses on two phenomena: increasing density of transistors on semiconductors and a radical decrease in the cost per

transistor. Although it is not a law—it is an observation—it has

functioned as a law in our industry because it has driven the pace

of innovation, research, and development.

So who cares about Moore’s Law? Maybe that is something interesting to semiconductor geeks or IT technologists only, but progress

along the trajectory of Moore’s Law has translated into cost decreases for a wide range of products that depend on semiconductors: computers, telecommunications equipment, automobiles, scientific equipment, and the like. Falling prices for information technology products have driven the rapid proliferation of IT throughout the world’s economy, and the diffusion of IT has been the biggest single reason for the recent historic acceleration of U.S. economic productivity growth which, as Harris Miller pointed out at

the beginning of the hearing, is key to the advancement and improvement of our standard of living.

Pre-competitive research and development in our industry has

been essential to continuing along Moore’s Law. We believe it will

be even more important as we continue further into the realm of

nanomaterials. This cooperation needs to be international in scope,

combining the best research minds in the industry and government, as well as university labs, no matter where those best minds

are. This is somewhat at odds with the spirit of numerous government reports and communications on nanotechnology from the U.S.

Government, from Europe and Japan that portray nanotechnology

as the next space race, as the proverbial goose that may lay the

golden economic egg down the road.

36

My message today is we need a balance, a balance of competition

and cooperation, when it comes to the applications of

nanotechnology. International cooperation is also critical in the

realm of the implications of nanotechnology, especially the environmental, health, and safety implications of this new magic. Research

initiatives launched pursuant to the National Nanotechnology Initiative need to be undertaken in cognizance of and, where appropriate, in cooperation with parallel activities in Europe and elsewhere.

At this point I want to stress the value we place in the NNI, and

your nanotechnology bill of 2003 was critical in helping to establish

a statutory basis for that program, and we appreciate that. In a

very short period of time, the NNI staff, with support from the

agencies that participate in the NNI and support from Congress,

have developed a very robust program of activities. In the semiconductor industry, we are active in a series of NNI/Semiconductor Research Corporation, or SRC, joint work groups focusing on a variety

of nanotechnology technical issues, including environmental,

health, and safety.

The NNI/SRC focus on the EHS dimensions of nanotechnology is

part of a broader trend of NNI focusing on the implications of this

technology. We support these activities. Indeed, we believe more attention and resources need to be devoted to this important task of

identifying and reducing the EHS risks of nanotechnology.

Intel’s own EHS management activities in the nanotechnology

realm have two primary focal points. In the immediate term, we

are committed to ensuring the safety of our own workers in the research and development operations where we work with

nanomaterials. Longer-term we have an interest in the responsible

development and deployment of nanotechnology, ensuring that attention is paid to the implications, as well as the applications.

What we want to avoid is for the trajectory of nanotechnology to

follow that of genetically-modified organisms, or GMO’s. In the case

of GMO’s, which has been a hot button issue between the U.S. and

the E.U., in our view the deployment of the applications outpaced

attention to the environmental, health, and safety implications of

the technology. Public concerns that arose because of this phenomenon have significantly retarded the realization of GMO’s great

commercial potential.

Finally, I want to focus on the issue of government regulation of

the EHS aspects of nanotechnology. Drawing lessons once again

from the precedent of GMO’s, government regulation of

nanotechnology may be essential to long-term public acceptance of

new technologies like nano. This probably is especially true in the

European Union where the precautionary approach underlies their

basic approach to these issues. But I want to caution—and this is

the difficult aspect of the issue—that while we think governmental

oversight of this new technology is important to public acceptance,

we very much want to avoid overregulation that does have the potential, as you alluded to in the previous context, of killing this

golden goose.

While the two governments, U.S. and E.U., are beginning to sort

out how they want to regulate nano, there is need for cooperation

across the Atlantic. Because progress on the scientific aspects of

37

nanotechnology will depend in part on international cooperation,

there is a parallel need for cooperation in assessing and addressing

the environmental implications. The emergence of significant differences in the regulatory approaches across the Atlantic does have

the potential in the future to undercut the cooperation on the

science. So the two are interrelated.

Specifically what is called for is open cooperation and sharing in

the generation of data concerning the risks, as well as the benefits,

of nanotechnology. Sensible regulations need to be based on good

science and accumulating data from credible scientific studies. We

need an international research strategy focused on the potential

environmental, health, and safety risks of nanotechnology, as well

as the benefits, with a very broad sharing of research results and

coordination of research efforts.

With that I will end and be glad to answer any questions. Thank

you.

[The prepared statement of Mr. Harper follows:]

PREPARED STATEMENT OF STEPHEN HARPER

Thank you, Senator Allen and committee members, for this opportunity to discuss

an important topic—nanotechnology in the context of U.S.-European relations. I am

Stephen Harper, director of environmental, health and safety policy at Intel Corporation. I am here representing Intel as well as the European-American Business

Council (EABC).

EABC is a trans-Atlantic, trans-sectoral alliance network of 43 U.S.- and European-based global companies. EABC’s mission is to enhance U.S. and European economic competitiveness through government-to-government and government-to-industry policy collaboration. The EABC believes that smart trans-Atlantic regulatory

alignment can truly add to productivity gains. Today I want to emphasize several

key themes:

• First, innovation in the semiconductor industry has been a principal driver of

recent U.S. gains in economic productivity and significant improvements in

health care and other fields benefiting humanity.

• Second, looking into the not-too-distant future, continued progress in the semiconductor industry will depend on progress in the development of

nanotechnology. Just as semiconductor technology is the competitive edge of the

Information Age, so nanotechnology will be the competitive edge of semiconductor technology in the future.

• Third, continued progress in the development of nanotechnology depends in significant measure on international cooperation in key areas of research and development. The opportunities and challenges simply are too great for one nation, or a national industry, to try to tackle them in isolation.

• Fourth, the evolution of an appropriate environmental, health, and safety (EHS)

regulatory framework for addressing potential nanotechnology risks will be critical to the ultimate public acceptance of this new technology. International cooperation, especially between the U.S. and Europe, will be key here as well.

• The U.S. government, focused through the National Nanotechnology Initiative,

can help ensure international cooperation regarding EHS regulation of

nanotechnology.

Before I delve into each of these themes, let me first focus on Intel—who we are

and why we care about nanotechnology.

Intel, as you know, is the largest and leading semiconductor company in the

world. Founded in 1968, Intel today employs 87,000 employees worldwide, with 2004

revenue of approximately $34 billion. Although known primarily for our Pentium

and Centrino products, Intel markets over 450 products and services.

Intel also is a global company, with 294 offices and facilities in 48 countries. Intel

has a major manufacturing presence in the United States, with 49,000 U.S.-based

employees and major production facilities in Oregon, Arizona, New Mexico, Colorado, Washington, and Massachusetts. We continue to have major research, design,

and other facilities in California, in addition to our corporate headquarters.

38

Importantly in the context of today’s hearing, Intel also has a major investment

in Europe. Leixlip, Ireland, in the suburbs of Dublin, is home to two Intel factories

or ‘‘fabs,’’ employing 3,300. In addition to Ireland, we have significant design and

research facilities in the UK, Denmark, and Germany. Specifically focused on

nanotechnology, we participate in the Irish Nanotechnology Research Center as well

as a research center in Belgium. Reflecting our production, design, and research investments in the European Union, we also participate in a number of industry trade

associations and coalitions, including the European-American Business Council. The

important thing to stress is that our facilities in the U.S. and Europe, and in Asia

for that matter, are all part of an integrated enterprise. The success of each is important to the success of the overall company.

Intel’s interest in nanotechnology is multi-faceted. In the immediate term, Intel

today is creating devices that feature transistors that are smaller than 100

nanometers wide. These nano-sized features are why Intel’s current Pentium 4

processors are packed with more than 100 million transistors and our Itanium 2

server processor family includes a recently-prototyped chip that includes more than

17 billion transistors, a product we expect to launch commercially early next year.

In terms of dollar value of product, advanced semiconductors represent the biggest

slice of the current nanotechnology marketplace. We refer to our current

nanotechnology as ‘‘nano-electronics.’’

The width of our current transistors and circuits is so small they are difficult to

fathom. The best way to appreciate their size is in relation to more familiar objects.

Later this year, Intel will introduce chips that have 65 nanometer-sized transistors.

The gates of the transistors—the switch that turns them on and off—measure only

35 nanometers across. At this size, approximately 100 of these transistor gates could

fit inside the diameter of a human red blood cell. Another comparison: approximately 10 million of these transistors could fit in the area of the tip of a ball-point

pen.

Looking ahead we believe that we can continue to evolve and improve current materials and technologies to drive transistor sizes down to approximately the 10

nanometer size range. For the foreseeable future, semiconductors will continue to

rely on traditional silicon-based technology. But perhaps approaching 2020, we anticipate running up against the physical limitations of silicon-based approaches. At

that point, chip manufacturing may rely on new nanomaterials such as carbon

nanotubes and nanowires to continue progress in accordance with Moore’s Law.

The year 2020 sounds like a long time away. But because of the complexity of the

technical work that must be done to invent and implement the nanomaterial future,

Intel and the semiconductor industry have begun investing in significant research

and development to bridge to the nanomaterial future. Much of this work takes

place within the context of the International Technology Roadmap for Semiconductors (ITRS). The ITRS lays out the key scientific and environmental challenges that

must be met in order to continue progress along the path predicted by Moore’s Law.

It is important to emphasize that the ITRS, and much of the current nanotechnology

R&D being undertaken in the semiconductor industry, is viewed as ‘‘pre-competitive’’—companies from across the industry, from around the world, are pursuing a

common basic research agenda, working through cooperative institutions like

Sematech and the Semiconductor Research Corporation. The economic promise and

technical challenges of nanotechnology require effective international collaboration.

Within Europe, Intel has been active in the Belgium-based Interuniversity MicroElectronics Center (IMEC), the European Nanoelectronics Initiative Advisory Council (ENIAC), and other industry-government cooperative ventures. We will also play

a major role in the upcoming First International Nanotechnology Conference on

Communication and Cooperation, scheduled for early June in San Francisco.

I have referred several times to ‘‘Moore’s Law.’’ What is Moore’s Law and why

does it matter? Forty years ago, Gordon Moore, one of the founders of Intel, predicted in an industry magazine that the number of transistors in integrated circuits

would double every year. Moore later updated his projection to a doubling every two

years, accounting for the increased complexity of semiconductors. Moore’s observation really focuses on two phenomena—increasing density of transistors on semiconductors and radically decreasing cost per transistor. It describes the phenomenon

in our industry whereby we etch ever smaller-sized features in silicon. Moore’s Law

was a prediction based on an observation, not a true ‘‘law.’’ But it has functioned

as a law in the sense that it has driven the pace of change and innovation in our

industry, as we seek to continue the trend of past advances.

So who cares? As described, Moore’s Law perhaps is something interesting to

semiconductor industry technologists only. But progress along the trajectory of

Moore’s Law has translated into cost decreases for a wide range of products that

depend on semiconductors—computers, telecommunications equipment, automobiles,

39

scientific equipment, and many other devices. Falling prices for information technology products have driven the rapid proliferation of information technology. The

diffusion of information technology has been the biggest reason for the recent, historic acceleration of U.S. economic productivity growth. And productivity growth is

the secret to improving our standard of living. In the words of Harvard Economics

Professor Dale W. Jorgenson, ‘‘A consensus has emerged that the development and

deployment of information technology (IT) is the foundation of the American growth

resurgence. The mantra of the ‘new economy’—faster, better, cheaper—characterizes

the speed of technological change and product improvement in semiconductors, the

key enabling technology,’’ (2005 Semiconductor Industry Association Annual Report).

Pre-competitive R&D cooperation has been central to keeping up with Moore’s

Law in the past. We believe it will continue to be critical as we move further into

the realm of nanomaterials. And this cooperation needs to be international in scope,

combining the best research minds in the industry, and in government and university labs, wherever they are located. This is somewhat at odds with the spirit of numerous governmental reports and communications—from the U.S., Europe, and

Japan—that portray nanotechnology as the next ‘‘space race,’’ as the proverbial

‘‘goose’’ that will lay the future economic ‘‘golden egg.’’ Clearly, governments in

many geographies view nanotechnology as a foundation of future economic growth.

My message today is that what we need is a balance of competition and cooperation. And international cooperation is critical in areas such as semiconductors,

where the challenges are great and the cost of meeting those challenges is excessive.

International cooperation is also critical in the realm of the implications of

nanotechnology—especially the environmental, health, and safety (EHS) implications of this new ‘‘magic.’’ Research initiatives launched pursuant to the National

Nanotechnology Initiative (NM) need to be undertaken in cognizance of and, where

appropriate, in cooperation with parallel activities in Europe and elsewhere.

At this point I want to stress the value we place on the activities of the NNI. In

a very short period of time, the NNI, with support from participating agencies and

funding from the Congress, has developed a very robust program of activities. And

we are confident that the ongoing National Academy of Sciences review, mandated

by Congress, will confirm this and make suggestions for the continued success of

the NNI. In the semiconductor industry, we are participating in a series of joint

NNI/Semiconductor Research Cooperation (SRC) workgroups under the auspices of

the NNI’s Consultative Board on Advancing Nanotechnology (CBAN). These issues

range from meeting priority technology challenges to identifying and addressing environmental, health, and safety (EHS) research needs related to semiconductor applications of nanotechnology. NNI funding related to semiconductor nanotechnology

research goes to many universities in numerous states across the U.S.

The NNI/SRC focus on the EHS dimensions of nanotechnology is part of a broader

NNI trend of focusing on the ‘‘implications’’ of nanotechnology, not just ‘‘applications.’’ We support those activities; indeed, we believe that more attention and resources need to be devoted to identifying and reducing the EHS risks of

nanotechnology.

Intel has proud record of accomplishment in our own EHS programs and activities. Our guiding EHS management principles commit us to preventing all injuries

in the workplace, being an EHS leader in our industry and our communities, and

reducing the environmental ‘‘footprint’’ of our products, processes, and operations.

But ‘‘talk is cheap’’; we have translated these principles into a world-class record

of performance. Our worker safety record is among the best of any company in any

industry. Across both safety and environmental realms, Intel has earned dozens of

awards for leadership in the U.S., Israel, the Philippines, and many other geographies. Within the industry, Intel has been a leader in the development of the EHS

element of the International Technology Roadmap for Semiconductors.

Intel’s EHS management activities in the nanotechnology realm have two primary

focal points. In the immediate term, we are committed to ensuring the safety of our

own employees as they work with innovative nanomaterials in our research labs.

Longer-term, we have an interest in the responsible development and deployment

of nanotechnology, ensuring that attention is paid to the ‘‘implications’’ as well as

the ‘‘applications.’’ What we want to avoid is for the trajectory of nanotechnology

to follow that of genetically-modified organisms (GMOs), the most recent ‘‘magic’’

technology. In the case of GMOs, in our view, deployment of applications outpaced

attention to the environmental, health, and safety implications of the technology.

Public concerns that arose because of this have significantly retarded the realization

of GMO’s great commercial potential.

With this concern in mind, Intel has been an active participant in the CBAN

NNUSRC Workgroup 5 activities, focused on EHS research. Intel also has assumed

40

a role in a nascent activity under the auspices of the International Standardization

Organization (ISO) focused on developing international standards related to the

EHS aspects of nanotech. We also are one of the founding supporters of the International Council on Nanotechnology (ICON), a multi-stakeholder initiative of Rice

University’s Center for Biological and Environmental Nanotechnology (CBEN).

ICON is focused on advancing and coordinating nanotechnology ENS research. In

addition, we are engaged in formal ‘‘benchmarking’’ activities with other companies

to identify ‘‘best known methods’’ in the measurement and safe handling of

nanomaterials in the research laboratory environment.

As a result of our engagement in these nanotechnology EHS initiatives, we believe

there are two broad categories of research needs. First, much more needs to be

known about the toxicity of nanomaterials. Second, there is a need for the development of standardized meterology techniques and EHS controls for application in

both the laboratory and production environments. These needs are not unique to the

semiconductor industry—they are common to a broad range of industries with an

interest in the responsible deployment of nanotechnology.

Finally, I want to focus on governmental regulation of the EHS aspects of

nanotechnology. Drawing lessons once again from the precedent of CMOs, governmental regulation of nanotechnology may be essential to the long-term public acceptance of new technologies like nano. This probably is especially true in the European Union, where the ‘‘precautionary approach’’ increasingly defines the governmental, and societal, approach to new technologies.

Here in the U.S., the Environmental Protection Agency is in the early stages of

wrestling with some difficult questions concerning the applicability to

nanotechnology of their regulatory authority under the Toxic Substances Control

Act (TSCA). We understand that the Agency intends to convene a public workshop

on this issue later this year.

In the European Union, we anticipate that regulation of nanotechnology will proceed under the broad umbrella of the REACH Directive. REACH is a fundamental

revision of the E.U.’s approach to regulating new and existing chemicals. Because

the REACH Directive is still in the legislative process, it is not entirely clear what

the new chemical regulatory regime will look like, much less how it will address

nanotechnology.

While the two governments—U.S. and E.U.—are beginning to sort out how they

want to regulate nanotechnology, there is a need for cooperation across the Atlantic.

Because progress on the scientific aspects of nanotechnology—at least in the semiconductor industry—will depend in part on international cooperation, there is a parallel need for cooperation in assessing and addressing the EHS implications of

nanotechnology. The emergence of significant differences in regulatory approaches

across the Atlantic could undercut cooperation on the science.

Specifically what is called for is open cooperation and sharing in the generation

of data concerning the risks as well as the benefits of nanotechnology. Sensible regulations need to be based on good science and accumulating data from credible scientific studies. We need an international research strategy focused on the potential

EHS risks of nanotechnology, with broad sharing of research results and the coordination of future efforts. The U.S. Government can provide a significant service in

this regard. The NNI, working with CBEN, ICON, and others, should clearly identify all past, current, and proposed nanotechnology research focused on human

health risks and safety issues. Overtures should be made to the Europeans and Japanese to encourage them to add to this database. A collective, international effort

of this kind will help to identify key research gaps and spur the development of an

international EHS research strategy for nanotechnology. Execution of this strategy

will inform responsible regulation of nanotechnology and, in our view, increase the

prospects of public acceptance and commercial realization of nanotechnology’s great

promise.

Thank you again for this opportunity to testify. I will be happy to answer any

questions.

Senator ALLEN. Thank you, Mr. Harper, for your insight. Part of

what you were saying about the concerns about GMO’s and others

is exactly one of the salient reasons why Senator Wyden and I have

created the Nanotech Caucus. I would venture to say there are not

many Senators who understand this subject. And if people are not

knowledgeable, if there are charges or frightening unknowns

brought forward, the reactions can be exaggerated and then be

harmful. But on the other hand, there should be certain standards

41

that will help that credibility whether here or in Europe, in fact,

an international standard. But I thank you for your insight on this.

Now we would like to hear from Mr. Klaessig.

STATEMENT OF DR. FREDERICK C. KLAESSIG, TECHNOLOGY

DIRECTOR, AEROSIL AND SILANES BUSINESS UNIT,

DEGUSSA CORPORATION, PISCATAWAY, NEW JERSEY

Dr. KLAESSIG. Good afternoon, Senator.

Senator ALLEN. Good afternoon.

Dr. KLAESSIG. I appreciate very much the opportunity from you

and your subcommittee to appear today on a very important topic

for Degussa.

I represent the Degussa Corporation, plus a number of chemical

firms in the United States and in Europe that have organized

under the American Chemistry Council to come together and bring

industry’s view to the regulatory agencies and also the counterparts of the American Chemistry Council over in Europe, the

CEFIC, VCI, and similar organizations.

I am the technology director for a product that comes under the

definition of nanotechnology. My responsibilities are customer support, introduce new products, and liaison between our research department in Germany, as well as with emerging American marketplace opportunities.

The material that we do manufacture, as you mentioned earlier,

is a fumed metal oxide. It does not fit the standard definition of

nanotechnology, but that is one of the issues that we do deal with,

that there is no definition of nanotechnology. Steve just referred to

the classical definition, but there are a number of definitions. Each

agency seems to have a definition that is associated with its mission statement. Therefore, we accept that our knowledge of the

chemistry of our materials, other chemistry that people are discussing in the nanotechnology area—and in some applications our

materials are found in the nano size of 100 nanometers that Steve

mentioned.

We have been manufacturing those materials for about 60 years.

In fact, our materials have been in commerce longer than the word

‘‘nano’’ has been in the English language, if you believe the Oxford

English Dictionary. So we have a rather historical perspective,

shall we say. We are bemused sometimes with the scientific facts

that others find surprising in physical chemistry, but they are

learning what we have known for a while, and there are new innovations definitely there too.

We are concerned about the different definitions that are occurring and feel that there may be shifting burdens, but as a supplier

of existing materials, we are prepared for that. That is also the reason that we are working with other firms.

We have a higher concern when the issue comes to that of a finding of safety. There are many new novel materials being introduced

or being examined. All materials, to get into commerce, have to go

through the regulatory review. In this area, concerns about public

safety or public confidence in safety may arise.

The last area of our concern, but one that is less that we can influence and one of the reasons that I am here today, is the issue

that others have mentioned, harmonization, avoiding patchwork

42

quilts of regulations around the world. Here we have less immediate influence, but we are trying to be participatory and ask for

help there.

We have three essential items that we would like to bring your

attention to. One is that nanotechnology is real and here today.

You change the definitions, you just change the volumes of what

you are quoting in terms of what is in commerce.

Steve mentioned the Moore’s Law. One of the enabling technologies for semiconductor chip manufacture involves silica particles and a water slurry being used to planerize the chips. That

is an example of something that has been around and is contributing to innovation in other fields.

We also have examples in inkjet paper where the coating for

glossy inkjet paper often has nanomaterials or materials that can

become nano under processing conditions.

So it is here. It is real, and we believe that the regulatory TSCA

procedures by the EPA are robust enough to incorporate them because they have been incorporating them for some time if ongoing

science is introduced into the process.

Our second point is that I have mentioned science and we have

had a number of mentions here today about science. This topic is

a global science topic with a global opportunity, and the area of environmental, health, and safety, the level of effort, the priority in

the nano initiative has not been as prominent either here or in Europe or other locations, and it does go to public trust. That will extend itself into other areas such as customs duties and identification of materials. It will also go into other areas such as FDA. But

since every firm has to go through this process, we need the best

evaluatory tools in order to proceed.

The last item is the harmonization item. This topic is emerging.

It is becoming more prominent. There will be meetings here by the

EPA on June 23rd, a public meeting. There will be a meeting by

the OECD on June 7th on the same topic. As this rises in priority

or in visibility to the governments, the strong voice that both

groups or of all groups respond to the science in their way but to

have a harmonized version would be appreciated.

The final comment is for those who do not know. Degussa is a

multinational firm based in Germany, about 6,000 employees in

the United States with major facilities in Alabama, Virginia, New

Jersey, and other States. We appreciate very much the opportunity

to speak to you. Thank you.

[The prepared statement of Dr. Klaessig follows:]

PREPARED STATEMENT OF FREDERICK C. KLAESSIG

Thank you, Senator Allen and committee members and staff, for the opportunity

to address nanotechnology and regulatory issues from the standpoints of U.S. and

European firms. I am Dr. Frederick C. Klaessig, technology director for the Aerosil

& Silanes Business Unit of Degussa Corporation. I am here representing Degussa

plus several U.S. and European member firms of the American Chemistry Council

(ACC) that are actively involved with nanotechnology issues. Some of these firms

are also active in the ACC’s European and German counterparts, CEFIC and VCI,

respectively.

If I am effective in my testimony today, I will be leaving you with three concepts:

43

1. The existing regulatory frameworks in Europe and the U.S. are robust

enough to evaluate newer nanomaterials if on-going scientific advances are

taken into consideration;

Congressional support would be most effective in encouraging global coordination and harmonization of regulatory activities, so that newer materials do not face a patchwork of regulations; and

3. Congressional support is also crucial in encouraging federal agencies

to increase funds for environmental, health and safety (EHS) research.

Degussa Corporation is a wholly-owned subsidiary of Degussa AG, the third largest German chemical firm, based in Duesseldorf, Germany. Degussa AG’s roots go

back to the mid-nineteenth century and we are presently the world’s largest specialty chemical firm with revenues of ÷13 billion, employing 45,000 people globally.

In the United States, Degussa employs 6,000 workers at over 60 manufacturing

sites, with major facilities in Alabama, Virginia, New jersey, New York, Ohio, Georgia, and Texas.

Nanotechnology is regarded as one of the key technologies of the 21st century,

Degussa regards this new technology as an opportunity to help develop new products and efficient scientific and technological solutions, and so make essential contributions towards environmental protection, health, and product quality. The company’s responsible approach to nanotechnology is described in the policies recently

approved by Degussa’s Management Board; according to these policies, Degussa produces and markets nanomaterials only if, according to the latest available research,

they can be manufactured and applied in a safe and environmentally compatible

manner.

Degussa specializes in manufacturing fine scale powders. During these manufacturing processes, intermediates form that are nanoscale in part, which are smaller

than one ten-thousandth of a millimeter and which immediately coalesce into much

larger, micron-sized agglomerates. For special applications, formulations such as

dispersions are selectively manufactured that contain these nanomaterials. In the

research, production, and application of nanomaterials, Degussa is guided by informed prudent practices and the findings of scientific studies on hazard and risk

assessment. These findings determine the measures necessary to protect employees,

customers, and consumers when manufacturing and using nanoscale materials.

Degussa works closely with leading European and U.S. research institutes for this

purpose. Moreover, Degussa explicitly supports the establishment of new research

methods, specially tailored to the specific effects of nanoscale materials, which permit refinement of risk assessment.

Unlike other ‘‘new’’ technologies, there is a long history of nanomaterials being

safely used in commerce when following good industrial hygiene practice. As a manufacturer for more than 60 years of products that have nano-scaled features, we are

in a position to bring an historical perspective to the current R&D initiatives taking

place in the U.S., Europe, and Japan. We have actively participated in the general

trend of utilizing finer and finer materials (smaller and smaller features) and narrower and narrower particle size distributions, which taken together are termed the

top down avenue to nanotechnology. The decades long trend to smaller particles has

led to a dramatic improvement in physical properties in such applications as reinforcement of silicone rubber, paint theology control, fillers in general, glossy inkjet

paper coatings and chemical mechanical planarization of semiconductor wafers.

From the broader historical perspective, we note the following tipping points when

viewing the current nanotechnology initiative in the United States (expressed in the

traditional stasis categories):

Comment on Current Situation

Fact.—Traditional concepts of surface and bulk chemistry are being confused when physical and life science disciplines participate in the dialog.

Definition.—There are a multitude of definitions for materials that have

been in commerce safely for decades, while there is a lack of definition for

newer materials and novel functionality.

Quality.—The safety of existing materials, as well as future innovative

substances, is put into question when there are gaps in scientific knowledge

and toxicity test methodology that are being actively pursued.

Venue.—The science and uses of nanotechnology are global in nature, but

the research initiatives and regulatory schemes are potentially regional.

Overall.—The various branches of technology development are operating

at different speeds, causing confusion regarding the science, safety, and utilization of nano-scaled materials.

44

For those firms having existing nano-scaled products, like Degussa, there is a concern that new, naive definitions will undermine existing patents, trade secrets, and

TSCA registrations. The same would be true for our customers who have relied on

our technology in developing their own products. For those firms that are contemplating entering the field of nanomaterials with new ‘‘engineered’’ substances with

novel functionality, there is uncertainty regarding evolving definitions that do not

capture the essence of their innovative concepts in manufacturing, characterizing,

and evaluating these materials. For some firms, especially those that are small, innovative and inexperienced, there is the greater likelihood that they are unaware

of the regulatory issues they must address in order to achieve a finding of safety

for their product(s). All categories of firms, no matter size or resources, will encounter the same regulatory issues during the commercialization process, However, it is

not clear that regulatory agencies are viewing the development of nanotechnology

with the same priority or coordinating with each other. Placing these concerns

under the common heading of ‘‘regulatory risk,’’ all categories of firms must now add

an additional risk to the standard business risk of the marketplace.

Several member firms of the American Chemistry Council have established working groups with the purposes of coordinating a collective response to our concerns

about both existing materials and those in the R&D pipeline.

It is our firm belief that the current regulatory frameworks in the U.S. and Europe are capable of addressing the development of new nanomaterials, if scientific

results are taken into consideration as they arise. Certainly, emerging scientific results will need to be taken into consideration as they arise, but the regulatory

frameworks are in place to deal with them. The firms participating in the ACC forums are committed to Responsible Care principles and are prepared to respond

to new and on-going EHS studies. The same is true for industrial hygiene issues,

where an industry consortium is already planning efficacy evaluations of face mask,

gloves, and other materials when exposed to nanoparticles.

Governmental initiatives in both the U.S. and Europe are to be congratulated in

fostering the development of applications in nanotechnology. As society has experienced in other emerging fields, meshing science, technology, funding, and patents

does not guarantee success in the global marketplace with new products. We

(Degussa and the like-minded firms at ACC, CEFIC, etc.) are most concerned with

EHS issues, and we would ask the Senator and his colleagues to consider this issue

in their future deliberations.

All new substances require EPA review before being introduced to the commercial

market, yet to date, the global initiatives for nanotechnology have not emphasized

EHS in their priority programs. Generating the body of knowledge needed to make

findings of safety, the process inherent to being TSCA listed, are considered to be

the domain of the commercial firm and not of the academic laboratory. Yet, too, the

new nanomaterials can exhibit unique properties in both their physical performance

as well as in their toxicological, environmental attributes. The novel materials are

challenging to the field of toxicology as they are unique in their performance. A gap

is forming where we as a society are generating nanotechnology more rapidly than

we are creating the tools to measure the EHS impact of this same technology. We

understand that public confidence in both the safety of the novel products of

nanotechnology and in the methods and processes used to assess them are essential;

both must be vigorously pursued. Existing materials may point the way to both

health concerns and the product stewardship practices needed to eliminate those

concerns.

The unknown, especially the unseen material with an uncertain toxicity, can lead

to a sudden loss in public confidence about safety. Our concern, being global companies, regarding the developing gap between generating nanotechnology and evaluating its EHS attributes, is that it may lead the different regions of the world to

have separate and restrictive EHS regulations. If a competitive race between regions in generating nanotechnology should lead to a commensurate race in regulating these same materials, then our common desire for benefiting from

nanotechnology will be undermined.

It is our firm belief at Degussa that nanotechnology is a global opportunity to be

based on a global reservoir of scientific facts. We would urge the Congress to encourage the U.S. agencies to work cooperatively with their European and Japanese counterparts. For example, we commend the Environmental Protection Agency’s staff for

their active involvement with the upcoming OECD meeting on 7 June. The public

meetings the EPA plans in the U.S. will parallel the public meetings to be held by

the OECD in 2006. Efforts such as these should be encouraged.

It would help the research innovation cycle greatly if the Congress would encourage the funding agencies involved with the NNI to redirect money from the fundamental research of nanomaterials to the fundamental research for potential toxicity

45

of nanomaterials, as well as their relevant exposure scenarios. It is currently assumed that industry should be responsible for generating the database needed to

gain a TSCA listing, but the newer nanomaterials pose a challenge to existing testing methodology. However, test methodologies, structure activity relationships, and

analytical techniques are not standardized in this field, and federal funding here

would guide the regulatory agencies and responsible firms towards proper testing

and evaluation of new materials. Industry and the EPA will look for some guidance

to federally funded academic studies, which is preferable to case-by-case studies protected by trade secret status.

Many states have nanotechnology initiatives, which is true in Europe as well.

These efforts are closely tied to job creation and often use local university and college resources in these efforts. Successful, state-funded firms will encounter EHS

hurdles when commercializing their products at the point of regulatory review at

the EPA level or when exporting to Europe or Asia. In fact, there is a range of

trade-related issues, such as customs duties, that are similar to EHS concerns and

are susceptible to confusing, isolated interpretations when viewed on the global perspective. Again, global coordination of Federal agency activities and research funding of EHS-related evaluation techniques are areas where Congressional encouragement would be most helpful.

I wish to join my other colleagues from industry in expressing our appreciation

of the time you are giving to this topic.

Senator ALLEN. Thank you, Dr. Klaessig, for your testimony and

insight from a company that has been involved for a long time.

Generally you say 100 nanometers and all that. Of course, it is

so small no one understands it. I always explain it as one one-hundredth of the width of the human hair, if you would agree with

that definition. You have got to scale it to something people could

understand. Obviously, one one-hundredth of the width of the

human hair is microscopic. That is at least one way I try to explain

it.

It is profoundly changing the way that we do a lot of things.

Microelectronics is one that is fully understood. The materials engineering I think will have the earlier applications, and ultimately

some of those in the life sciences, health sciences, and energy have

great potential as well.

I appreciate your comments.

We would now like to hear from Ms. West and then Mr. Duffy.

Ms. West.

STATEMENT OF FRANCES W. WEST, WORLDWIDE DIRECTOR

OF ACCESSIBILITY CENTER, IBM CORPORATION, CAMBRIDGE, MASSACHUSETTS

Ms. WEST. Thank you. Before I start my formal testimony, I

would like to follow Mr. Patton’s example to make a Virginia connection. The first school I attended in the United States was Washington Lee University.

Senator ALLEN. Oh, great.

Ms. WEST. And my son is a sophomore at the University of Virginia. So I feel like I am half Virginian too.

Senator ALLEN. Certainly paying tuition.

Ms. WEST. That is right.

So let me start. Thank you, Senator Allen. I appreciate the opportunity to share with you the importance of furthering the development of IT accessibility. I thank you for your work on this subject and for recognizing the importance of this topic and your willingness to take a leadership position in this area.

46

You have my written testimony that I submitted for the record,

and I would like to highlight what I think are the most relevant

and important concepts in my oral remarks.

My name is Frances West, and I am the worldwide director of

IBM’s Accessibility Center. I have been with IBM for 25 years and

have been the director of the center for the past two years.

Accessibility has traditionally been viewed as a people with disabilities issue. It is not. It is really every man’s and woman’s issue

because we are all aging. According to recent AARP statistics, one

in every four people will acquire a functional disability by age 50;

one in two people by age 65. So the topic of accessibility is not really about them. It is about all of us.

Given that accessibility is an emerging technology, we do need

government policies that raise the awareness and set in motion actions that can be taken by industry. For example, IBM has always

viewed accessibility as a key part of our work force core values, and

we hired the first disabled employee in 1914, some 76 years before

the Americans with Disabilities Act.

In 1999, section 508 was passed into law which was the impetus

for corporate action. IBM set up its Accessibility Center in the year

2000 and issued internal corporate instruction 162 on this topic,

which is an example of how Government policy can be a catalyst

for institutional changes in a private enterprise.

Section 508 promoted focus and growth, but if there are too

many competing standards, it could cause corporations to spend

precious resources not on innovation but on compliance-related decisions or actions.

We see accessibility product compliance as an initial building

block on a journey towards usable access and societal access. What

do I mean by that? Let me explain.

Usable access is about not just enabling a person to have access

but to have the access in a meaningful way. For example, a web

page can be accessible to a blind person, but it may take 20 minutes for a screen reader to read through all the information on the

screen. Or you can build in navigational tools to skip around so

that the blind user can accomplish the same task in 5 minutes.

That is the difference between compliant access and usable access.

Societal access is about integrating private and governmental infrastructure to provide citizens of all capabilities with seamless

support. For example, a returning soldier from Iraq with a disability or a hard-of-hearing grandmother can have all their transportation, medical, and financial services coordinated in such a way

that it is efficient, effective, and personalized to their needs. The

benefit of such an environment is a more citizen-centric government and a much better allocation of both governmental and private resources.

To achieve this desired state, much innovation is needed. Industry resources should be focused on innovation to solve these complex issues and technical challenges instead of diverting these resources to support enforcement proposals such as third party certification or mark and labeling.

The European Union just issued a procurement directive for information technology, and this is very exciting. We see this as a potential next step in extending what section 508 has started. We

47

would like the opportunity to collaborate with the E.U. government

and other stakeholders in the development of the next generation

of accessibility policies so that we can continue to promote innovative products, best practices, and new approaches.

With strong endorsement from government leaders such as yourself and supporting policies from the E.U. and the U.S., private enterprises like IBM will embrace the challenge to deliver innovative

solutions to people at large and especially to people with disabilities.

We in IBM truly believe in a vision and environment in which

all people can fulfill their highest capacity regardless of their ability or disability. Currently all lines of the business within IBM are

involved in inventing and developing technologies, products, services, and solutions that will benefit people with diverse capabilities.

We are engaged with governments and the private sector in firstof-a-kind enterprise transformation initiatives that will result in a

more inclusive society, a society where human and societal potential can be optimized. In essence, we are striving to deliver not just

innovation, but innovation that matters to the world, a corporate

core value of IBM, and we think that enhancing human capacity

through accessible technology and solutions is an innovation that

matters.

But this vision can only be achieved through active collaboration

between industry, government, and the citizenry. We therefore appreciate opportunities, such as today’s hearing, for advancing this

dialogue.

I thank you very much for your time and your interest in this

topic.

[The prepared statement of Ms. West follows:]

PREPARED STATEMENT OF FRANCES WEST

Good afternoon. I am Frances west with the IBM Corporation. It is my pleasure

to appear today before you on behalf of the European-American Business Council

(EABC) and the Information Technology Industry Council (ITI), two organizations

with whom IBM has a longstanding relationship.

We appreciate the opportunity to speak to the Senate European Affairs Subcommittee on the topic of accessibility—a subject we believe is strongly tied to enhancing human capacity in the transatlantic region. Specifically, we will share our

views on the impact information technology (IT) accessibility policy can have on the

transatlantic market, how certification and labeling proposals can negatively impact

the current growth and development of accessibility initiatives, and our recommendations for the U.S. government to work with the European Union towards

the same goal of a global accessibility standard for technology.

INTRODUCTION

IT Accessibility, until recently seen as an emerging market and technology issue,

is going mainstream, fueled by powerful demographic and social trends.

Between 750 million and one billion of the world’s six billion people have a

speech, vision, mobility, hearing or cognitive impairment, according to the World

Health Organization. And accessible information technology is one solution to assist

all these people in connecting to the world around them.

In the U.S., more than 54 million people have disabilities. These numbers are increasing, in part, because while people are living longer and health care is continually improving, this has not fully ameliorated the incidence of acquired disabilities

as a natural part of the aging process. According to AARP, one in every four people

will acquire a functional disability by age 50, one in two people by age 65.

According to the Center for Strategic and International Studies in a 2003 report,

the rapid aging of the populations of developed countries poses major challenges for

48

global prosperity and stability during first half of the 21st century. In countries like

Italy, Spain and Japan, by year 2040, 45% of the population will be over the age

of 60. This changing demographic further elevates the importance of accessibility.

The impact of accessibility affects society as whole, As this emerging trend continues, society and industry can realize economic returns if individuals are allowed

to benefit from product, services and solution innovation and if this innovation is

enabled by governmental policies.

IBM, for example, is taking a holistic approach to accessibility. Our focus on accessibility encompasses our roles as a developer and manufacture of IT products, a

service provider in the IT industry, a buyer of components, products and services

and an employer of over 330,000 people worldwide, looking to attract and retain the

best talent in a competitive industry. To each of these roles, we bring a philosophy

that strives to enhance human capacity by enabling and easing information access

for the largest number of people—especially those whose disabilities restrict direct

access. Frequently, this involves the creation of special products or modifications of

the products that we design and manufacture. But, to achieve the greatest benefit

requires more than just products.

We believe that making technology accessible to all is a need that is best met by

technologies and solutions that are committed to interoperability based on open

standards, and have been developed via collaborative processes. Accessibility is enhanced by open standards that permit the free exchange of information, encourage

innovation and give businesses, governments, schools and social agencies more flexibility to customize solutions and meet their own individual requirements.

IBM workforce diversity is a core commitment and we have long viewed accessibility as part of this corporate belief. For example, IBM hired its first disabled employee in 1914, fully 76 years before the ADA was enacted. We accelerated accessibility related investments, however, when the U.S. government took a leadership

role in establishing section 508. We believe that section 508 is a comprehensive and

meaningful framework to support the industry’s work in this area. We, along with

ITI, EABC and our industry colleagues like SAP applaud the U.S. Government’s

foresight in this issue.

BACKGROUND

The need for accessible information technology is acute across the globe. The global number of people with disabilities is expected to grow as the population ages. In

response to this reality, the U.S. led the world in developing a policy for IT accessibility when it passed section 508 of the Rehabilitation Act in 1998, a procurement

law mandating that all IT purchased by the federal government be accessible. This

law, with technical specifications defined within it, has had an impact far beyond

the U.S. federal government and in fact, has global reach.

However, we have a concern that the positive impact of section 508 may be disrupted or side tracked. Governments in Europe are currently exploring or actually

establishing national or regional, IT accessibility policies. Some of these policies are

similar to section 508, but many of them are different. These governments are considering procurement policy now to help develop accessible e-government systems.

This is good for the technology sector, for the people who need accessibility and for

the marketplace. But without a harmonized approach to accessible IT procurement,

each government could decide to adopt a different technical standard, thereby fragmenting markets, limiting accessible choices, reducing incentive for research and innovation by companies, but most importantly, undercutting the very real contributions we need persons with disabilities to make.

Section 508 has been important not only to those requiring accessibility but to the

whole technology sector. Since the passing of section 508 into law, the technology

industry has invested significant technical and human resources in bringing products into compliance. IBM, for example, has made significant investments in our internal infrastructure as well as our design and testing processes.

• We have developed an extensive set of techniques that guide our development

teams in implementing section 508 requirements and our test teams in validating that the requirements have been properly met.

• We have integrated accessibility tasks into all phases of our mainstream development processes. Accessibility requirements are considered from the very beginning during the concept phase of product development.

• We have developed an extensive reporting and tracking system for the accessibility of all our products. Once a product is ready for announcement, a section

508 Voluntary Product Accessibility Template (VPAT) is created.

49

Fulfilling the true mandate of section 508 is not easily accomplished—it takes systematic and corporate wide effort in order to be realized. Industry has made much

progress but there is more to do. Given the broad implications accessibility has on

society and the population in general, industry is looking to move beyond compliance and bring innovative solutions to the marketplace. This is where we can use

your help.

U.S.-E.U. REGULATORY HARMONIZATION IS NEEDED

If you are blind and use a screen reader to surf the Web, it should read sites from

the U.S. government as easily as it reads ones posted by the government of Sweden.

This can only be done if there is agreement among governments on the policy for

accessibility.

Without transatlantic harmonization of global IT accessibility approaches in policy

and standards, all consumers—or more importantly the people who need the technology most—lose. If differing regional or country technical requirements are mandated, industry is forced to focus on multiple compliance developments rather than

pushing beyond and investing in new technologies and solutions.

Take just Web site accessibility and compliance as an example. IBM has approximately 5 million internal and external Web pages. If it had to bring all of its Web

pages into compliance with multiple accessibility mandates, it would be economically and practically impossible.

If different standards are enforced, as one can see in the example just cited, the

cost of implementation would be astronomical. Companies would be forced to choose

whether they have the resources to develop unique products and services to meet

varying specifications. Or, more likely, they might choose not compete in certain

markets at all. If, on the other hand, the European technical specifications for accessibility are harmonized with those globally, it would more than double the market

for conforming IT products and would create an even greater incentive for manufacturers to compete on the basis of accessibility. Ultimately, society will reap the

greatest benefits in the form of more involved citizens, more contributing workers

and more enabled individuals.

What the technology sector seeks is for the U.S. government to work with the European Commission to ensure that any new accessibility policy removes existing barriers and does not create any new barriers to the accessibility market.

THIRD PARTY TESTING OR CERTIFICATION

The European Commission will publish its Communication on e-Accessibility in

the autumn of this year; it is expected to discuss the introduction of accessibility

compliance testing or certification by a third party. Based on the technology sector’s

experience with third party testing over the years in other venues, and given the

resources involved in accessible product design, development, marketing, and support, third party certifications present significant problems and draw backs:

• Third party certification tends to freeze innovation by driving manufacturers to

focus their attention and resources on passing certification tests rather than on

new research and development that can lead to new and innovative ways to incorporate accessibility features into IT.

• Only the manufacturer has the flexibility to test and evaluate components as

they are developed in-cycle, whereas third-party testing is usually performed at

the end of the development cycle, thereby increasing the costs of product modifications or redesigns. External certification increases manufacturing costs considerably; it would lengthen the product development cycle; and can not only

delay the introduction of new products into the market, but also potentially

slow the procurement process. This benefits no one, especially the end user.

• Third-party testing across the range of accessibility products is impractical due

to the inherent subjectivity, ambiguities, and complexity of the technical accessibility standards. In some cases it is technically infeasible, like trying to measure ‘‘equivalent facilitation’’ or difficult to be objective when determining if a

web page uses simple language to convey a concept.

• This method of testing demands that a certifying organization rely on open,

transparent and recognized objective technical criteria and testing protocols, yet

these criteria and protocols do not exist. For example, there are no established

section 508 objective conformance criteria, and it is highly unlikely that they

could be developed in light of the broad range and multifaceted functionality of

IT products currently in the marketplace.

• An additional complexity is that third party testing organizations, in using any

such objective conformance criteria and testing protocols required for IT prodVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 EUREG.TXT SFRELA2 PsN: SFRELA2
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ucts, would also have to account for IT interoperability with assistive technologies. The assistive technology issue is particularly problematic, as there are

many different assistive technology products, and they are not all designed to

work on all systems.

• Another problem with this approach is the scope and depth of technical expertise that would be needed by external testing organizations.

In light of the significant technological and operational complexity in this area,

and the negative impact it would have ultimately on the user, third party testing

is not an approach that will increase IT accessibility or add value to products or

services. For whether or not a testing organization successfully evaluates a product’s

accessibility, the manufacturer in either case remains responsible and liable for the

accessibility of the product.

We do support, however, a voluntary system of self certification that strengthens

the incentive to address accessibility early in the product design phase, and enables

innovative products to be brought to the marketplace more quickly. Evaluation of

products in-house encourages interoperability and collaborative problem solving between hardware, software, and assistive technology vendors, and also reinforces a

corporate commitment to accessibility. This self-declaration approach has been implemented successfully in Europe and elsewhere on such critical matters as product

safety and environmental attributes (e.g. electrical shock, flammability standards).

In the U.S., the Voluntary Product Accessibility Template or VPAT has been a successful part of the procurement process to report compliance with the technical requirements of section 508.

PRODUCT LABELING

There is discussion in the E.U. about developing a quality mark or labeling for

accessibility on IT products and services. We have concerns regarding potential requirements for accessibility labeling or an accessibility mark and the effect it will

have on the development of IT products.

Given the enormous range of functional limitations that exist, even within a single disability or impairment type, it would be nearly impossible to create a label or

mark that could provide sufficient information to buyers regarding a product’s conformance with evolving accessibility technical and procurement standards. Indeed,

it could raise false expectations for consumers and thereby generate significant legal

and practical concerns for manufacturers. We see labeling as having the following

drawbacks:

• Consumers and users can misperceive labeling proposals as a simplistic and

complete solution to a complicated technology issue that only due diligence by

the developers can resolve. A quality mark can never replace the in-depth work

that site developers and owners should be doing in their creation of pages.

• Labeling proposals would not provide sufficient information regarding conformance with developing accessibility standards given the various differences

among disabilities and even within a single disability or impairment.

• Labeling proposals run the risk of setting false expectations for consumers. For

example, with websites, most consumers do not recognize that an accessible web

page is only part of a comprehensive solution to deliver an accessible experience

to the end-user. Support is also needed in the web browser and the assistive

technology. Labeling a web page as accessible may not give the consumer accessibility if the assistive technology does not perform as expected. False expectations from labels may give rise to significant legal and practical concerns for

manufacturers and employers.

• Labeling proposals would be difficult to organize and implement for most products, but especially for web pages that are updated frequently—some as often

as many times an hour.

Finally, product labeling is expensive. If a government entity were to embrace

unique accessibility labeling requirements for products sold in a specific marketplace, the business case for selling in that marketplace would be lessened, reducing

competition and consumer choice. And again, the people most in need of this technology would lose.

CONCLUSION

IBM, on behalf of the IT industry, requests the assistance of this committee in

ensuring that all who need accessible technology get the best our industry has to

offer. We have three specific requests:

51

First, given the broad reach of the technology and potential impact on all

citizens, IT accessibility policy demands attention from the highest levels

of government. We hope that the profile and importance of IT accessibility

can be raised whenever there are discussions between U.S. andleaders.

Second, we suggest establishing an early warning process where Congressional and Parliament members can work in tandem to examine regulatory

convergence issues such as IT accessibility. We believe that with increased

attention from the leadership and proper oversight, transatlantic agency activities with regard to accessibility standardization can be accelerated.

And third, we request that the U.S. government work with the European

Commission to continue the pursuit of a harmonized approach to accessibility.

In closing, IBM shares the belief with EABC and ITI that IT accessibility is a

topic that touches not just people with disabilities, but increasingly the population

at large, as we all will experience some type of disability the older we get and the

longer we live. We therefore need to work towards a global standard that is open,

harmonized to existing approaches, and promotes an IT environment that enables

interoperability. This would foster innovation, unite the market place, and create a

border free and barrier free information society.

Finally, at IBM, we envision an environment in which all people can fulfill their

highest capacity, regardless of ability or disability. Currently, all lines of business

within IBM are involved in inventing and developing technologies, products, services, solutions that will benefit people with diverse capabilities. We are engaged

with governments and the private sector in first-of-a-kind enterprise transformation

initiatives that will result in a more inclusive society; a society where human and

societal potential can be optimized. In essence, we are striving to deliver ‘‘innovation

that matters to the world,’’ a corporate wide value. And we think enhancing human

capacity through accessible technology and solutions is an innovation that matters.

But, this vision can only be achieved through active collaboration between industry, government and the citizenry. We therefore appreciate opportunities such as today’s hearing for advancing this dialogue.

Thank you for your attention and I look forward to answering your questions.

Senator ALLEN. Thank you, Ms. West, for your testimony and insight.

Now we would like to hear from Mr. Duffy.

STATEMENT OF JOSEPH E. DUFFY, VICE PRESIDENT, SAP

PUBLIC SERVICES, INC., WASHINGTON, D.C.

Mr. DUFFY. Thank you very much, Mr. Chairman, and thank you

for the opportunity to testify before you today.

We appreciate the role that Congress has played in creating a favorable policy environment for accessible information technologies.

We commend you today for seeking to encourage greater harmony

on this issue between the United States and Europe because only

harmonized international accessibility standards will produce the

best results for the disabled community.

For background, SAP is the world’s leading provider of business

applications software. More than 26,000 companies and government agencies run on SAP business software, and an estimated 12

million individuals who work for these organizations are SAP

users. SAP has a strong presence in the U.S., employing more than

5,500 people in 18 locations. SAP America has enjoyed substantial

growth in the last 2 years, and we anticipate growing further this

year. Our CEO, Bill McDermott, recently stated that SAP created

1,500 new jobs in the United States in the last 18 months. In addition, SAP provides more than 50,000 U.S.-based students with SAP

training at 115 universities across the Nation.

At SAP we feel strongly that barriers faced by individuals with

disabilities in the work place must be eliminated. We support poliVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
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cies that protect a person with disabilities’ right to participate in

the work force, including section 508.

Through our Accessibility Competence Center and our industryleading research and development, we are working to make sure

that our software solutions are accessible and meet the needs of

people with disabilities around the globe. Today we are implementing a very detailed program with specific goals and milestones

to meet the needs of the disabled community. Our plan is designed

to address sensory and motor-skill disabilities and to focus on the

needs of end users first, making accessible software available to the

largest number of users as rapidly as possible.

Making information technology, or IT, more accessible to people

with disabilities is not an easy task. First, there are many kinds

of physical disabilities. Each type poses unique challenges to IT

product developers. Second, the degree of IT accessibility depends

on the complex interaction of multiple technologies produced by

multiple vendors, including operating systems, keyboards, terminal

screens, mouse pointers, and business applications. On top of this,

people with disabilities usually use a combination of assistive technologies such as screen readers, Braille displays, and mouse alternatives. As you can imagine, designing and producing accessible

products is an ongoing and complex challenge for all IT providers,

while the very definition of accessibility is a moving target.

To put this into context, one of our products, mySAP ERP, contains more than 150,000 screen views. Updating each one of them

with accessibility features is really a daunting task.

As we pursue this mission, we strongly support efforts to achieve

harmonized global accessibility standards. Simply put, accessibility

standards are specifications that product manufacturers must meet

to serve the needs of the disabled user. International standards development organizations, or SDO’s, are one source of such standards, but government entities in the U.S. and Europe also provide

such specifications. If we get into a situation where there are multiple standards for a given technology, then IT developers must either choose one set of standards and forego certain markets or go

to the trouble of implementing multiple standards and hope they

do not come into conflict with each other. As you can imagine, the

difficulty of avoiding such conflicts increases as more and more

standards are created.

Before moving on to solutions, let us just take a moment to examine how fragmented accessibility standards can negatively impact people with disabilities.

To cite the most obvious effect, fragmented standards impose

extra cost and delay on technology providers which has a spill-over

effect on consumers. This extra effort delays the availability of new

technologies, and even worse, it raises the price of such products

for consumers, imposing additional burdens on the very people we

are trying to help, many of whom are financially disadvantaged.

Another impact of fragmented standards is to recreate the geographic barriers that IT otherwise does so much to remove. Imagine the frustration of a disabled consumer who cannot access a web

site because the designed lived in another country and followed a

different accessibility standard. In short, the needs of disabled consumers are essentially identical whether they live in the United

53

States or Europe and we should not impose new barriers based on

fragmented standards.

Lastly, it must be noted that fragmented information technology

accessibility standards also create trade barriers and discourage

global competition. The negative impact is particularly damaging to

small companies which can ill-afford the smaller markets and extra

development costs of complying with divergent standards.

With regard to ongoing work to establish accessibility standards

in Europe, the IT industry encourages policy makers there to consider the flexible, market-oriented approach taken in the United

States under section 508 of the Rehabilitation Act. The applicable

requirements have already been incorporated into the product development process at SAP and many other companies. As a result,

section 508 has already generated significant innovation and benefits all disabled users in the public and private sectors all over the

world.

As the U.S. Access Board is now considering an update to section

508, we see this as a great opportunity for transatlantic cooperation. Ideally we would like to see a single set of rules governing the

accessibility requirements in both regions and have them be

performance- and outcome-oriented. The specific technical requirements should be generated and managed by SDO’s.

As a company with a strong presence in Europe, we have committed to supporting and working closely with our U.S.-based

peers, including IBM, Microsoft, Oracle, HP, and others to promote

global harmonized standards within the European Commission. We

all believe that only harmonized international accessibility standards can produce the best results for the disabled community, businesses, and the economy.

We would like to thank ITI and EABC for their support to industry and thank you for the opportunity to submit these comments.

We look forward to further discussion, and I will be happy to answer any questions.

[The prepared statement of Mr. Duffy follows:]

PREPARED STATEMENT OF JOSEPH DUFFY

Mr. Chairman, Senator Allen, and members of the subcommittee, thank you for

the invitation to be with you today for this important discussion. I know I speak

for many in our industry when I say we appreciate the role that Congress has

played in creating a favorable policy environment for accessible information technologies (IT). We applaud you again today for seeking to encourage greater harmony

on this issue between the United States and Europe, because only harmonized international accessibility standards will produce the best results for consumers, businesses and the economy.

Mr. Chairman, my company, SAP, is the world’s leading provider of business application software. Our products and services are relied upon by more than 12 million users at 26,000 companies and public sector agencies to manage such crucial

functions as financials, operations, supply chains, and human resources. We are a

global company with a strong presence in the United States, employing more than

5,500 people in 18 U.S. offices and labs. We are also an active partner of many Federal and state agencies, which use our software to improve efficiency and accountability in agencies like the departments of Defense, Homeland Security, Treasury,

Interior and Energy, and GSA.

SAP also donates more than $60 million a year to help improve math, science and

engineering curriculum in U.S. secondary and post-secondary educational institutions. Over the last few years, we have provided almost half a million dollars to

schools and programs in the U.S. that serve thousands of disabled adults and children.

54

1 U.S. Census Bureau, fact sheet dated 12 July 2002 and posted at http://www.census.gov/

Press-Release/www/2002/cb02ffl.html. 2 European Commission Directorate-General for Employment and Social Affairs, report entitled ‘‘Active Labour Market Programmes for People with Disabilities,’’ dated August 2002 and

posted at http://europa.eu.int/comm/employment_social/index/active_labour_market. 3World Health Organization, fact sheet dated 3 December 2003 and posted at http://who.int/

ncd/disability/index.htm.

Mr. Chairman, our commitment to serving our customers and communities includes making our products accessible to users with physical disabilities. We are

doing this not only because it’s the right thing to do, but also because there is a

strong and growing market for it. According to the U.S. Census Bureau, the United

States is home to about 30 million working-age people with disabilities,1 while the

European Commission estimates an additional 17 to 24 million live in the European

Union.2 The World Health Organization estimates about 600 million people of all

ages live with disabilities worldwide.3 Obviously, there are large markets to be addressed and many social and economic benefits to be gained by working together

to make IT products more accessible.

Making IT more accessible to people with disabilities is not an easy task. First,

there are many kinds of physical disabilities, and each type poses unique challenges

to IT product developers. Second, the degree of IT accessibility depends on the complex interaction of multiple technologies produced by multiple vendors: operating

systems, keyboards, terminal screens, mouse pointers, business applications, and so

forth. On top of this, people with disabilities usually use a combination of assistive

technologies such as screen readers, Braille display, and mouse alternatives. As you

can imagine, designing and producing accessible products is an ongoing and complex

challenge for all IT providers, and the very definition of accessibility is a moving

target.

At SAP, through our Accessibility Competence Center and our industry-leading

research and development, we are working to make our software solutions more accessible. Accessibility requirements are incorporated into our product design, development, and quality control processes. We are taking additional steps to add accessibility features into existing products. For example, one of our products, mySAP

ERP, contains more than 150,000 screen views, and updating them is a serious undertaking. In addition, our partners and customers can also take advantage of our

technology advancement to enhance the accessibility of their software applications.

Indeed, we are implementing a very detailed program with specific goals and milestones to meet the needs of the disabled community. Our plan is designed to address

sensory and motor skill disabilities and to focus on the needs of end users first,

making accessible software available to the largest number of users as rapidly as

possible.

As we pursue this mission, we strongly support efforts to achieve harmonized

global accessibility standards.

Simply put, accessibility standards are specifications that product manufacturers

must meet to serve the needs of disabled users. International standards development organizations are one source of such standards, but government entities in the

U.S. and Europe also provide such specifications. If we get into a situation where

there are multiple standards for a given technology, then IT developers must either

choose one set of standards and forgo certain markets, or go to the trouble of implementing multiple standards and hope they do not come into conflict with each other.

As you can imagine, the difficulty of avoiding such conflicts increases as more and

more standards are created.

Before moving on to solutions, let’s take a moment to examine how fragmented

accessibility standards can negatively impact people with disabilities.

To cite the most obvious effect, fragmented standards impose extra costs and

delays on technology providers, which then have spill-over impacts on consumers.

In the best-case scenario, divergent standards do not create irreconcilable conflicts

but merely require extra time and expense to design, development, test, and deploy.

This extra effort delays the introduction of new technologies. Even worse, it raises

the prices of such products for consumers, imposing additional burdens on the very

people we are trying to help, many of whom are financially disadvantaged.

Another impact of fragmented standards is to re-create the geographic barriers

that IT otherwise does so much to remove. Overcoming such barriers is particularly

relevant to those with physical disabilities because they have greater difficulties in

traveling. Imagine the frustration of a disabled consumer who might be unable to

access an important web site because the site designer lived in another country and

followed a different standard. In short, the needs of disabled consumers are essenVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 EUREG.TXT SFRELA2 PsN: SFRELA2
55

tially identical whether they live in United States or Europe, and we shouldn’t impose new barriers based on fragmented standards.

Lastly, it must be noted that fragmented information technology accessibility

standards also creates trade barriers and discourage global competition. The negative impact is particular damaging to small companies, which can ill-afford the extra

development cost of complying with divergent standards.

For all of the forgoing reasons, SAP strongly supports efforts to achieve harmonized global IT accessibility standards. Harmonized standards offer the greatest

opportunities for consumers, business, and society by reducing costs, improving time

to market, widening the availability of accessible products, and increasing the quality of life of people with disabilities. So how can we achieve harmonized standards?

Global standards development organizations (SDOs) are in the best position to

maintain global standards and resolve conflicts among competing standards. Let’s

face it, the pace of technological innovation is so fast that even SDOs have a hard

time keeping up. But writing technical standards into law or regulation makes the

problem even worse. Typical lawmaking processes cannot keep up with the speed

of information technology advancements.

We encourage legislators and regulators in the United States and abroad to reference the work of international SDOs in domestic regulations instead of trying to

fine-tune those standards and set them in law in their own countries. If specific requirements must be written into law, we encourage the lawmakers to specify the

requirements based on outcome and performance instead of technical methods.

Methods often change due to technological advances.

With regard to ongoing work to establish accessibility standards in Europe, the

IT industry encourages policy makers there to consider the flexible, market-oriented

approach taken in the United States under section 508 of the Federal Rehabilitation

Act. Section 508 requires the U.S. Government to purchase the most accessible products on the market. Because the U.S. Government is the leading purchaser of IT

in the world, section 508 has spurred extraordinary cooperation among public sector

buyers, industry and consumers to meet that demand, which in turn has led to

rapid progress in the development of accessible products.

The applicable requirements of section 508 have already been incorporated into

the product-development process at SAP and many other companies. As a result,

section 508 has already generated significant innovation and benefits for all disabled users in the public and private sectors all over the world.

Depending on how the rules are implemented by the European Commission and

Member States, addressing accessibility through global SDOs and a public procurement approach could provide many advantages for European consumers. For example, if European requirements are harmonized with those of the United States, it

would more than double the market for conforming IT products and create an even

greater incentive for manufacturers to develop accessible products. Consumers will

reap the ultimate benefits in the form of lower costs, greater choices, and better

quality of life—and it will all occur sooner rather than later.

As the U.S. Access Board is now considering an update of section 508, we see this

as a great opportunity for trans-Atlantic cooperation. Ideally, we would like to see

a single set of rules governing the accessibility requirements in both regions. We

would also prefer to see that specific requirements refer to designated SDOs’ work

or that the requirements be performance and outcome-oriented.

This does not mean ignoring difference of language and culture; these are important and must be addressed in standards-setting processes. As global standards are

adopted, they must be published and promoted in multiple languages to facilitate

adoption by local authorities and to avoid misinterpretations. But language and cultural differences affect all people regardless of disabilities. Thus, there is no need

to create additional international trade barriers for the alleged benefit of accessibility. Instead, global SDOs should obtain inputs from regional experts and create

standards that are applicable in all geographic locations. This is of particular importance when we examine the complexity involved in Asian languages.

Mr. Chairman, I am pleased to report that early efforts to harmonize global accessibility standards are promising. The Special Working Group on Accessibility of the

Joint Technical Committee 1 (JTC 1) of the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) have already begun the work of gathering user requirements, taking inventory of existing

standards, and tracking laws and policy. Section 508 will be influential in that process. SAP, IBM, many of our peer companies, and the U.S. Access Board are supporting the working group’s efforts. We are eagerly anticipating the positive results

that it promises to deliver.

Within Europe, the European Commission has issued a Communication on ‘‘e-Accessibility’’ that recognizes the risk of a fragmented disability market and cites as

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its ‘‘main’’ objective ‘‘to promote harmonization on a voluntary basis and to help selfregulation.’’ Industry applauds this emphasis and urges deference to the international, consensus-based standards development process, which will be the most efficient and effective way to advance IT accessibility.

Mr. Chairman, to summarize, developing harmonized global standards through

SDOs and cooperative inter-governmental initiatives will enable IT vendors to focus

on innovating and competing in the global market, rather than on responding to a

patchwork quilt of redundant and contradictory requirements. Close cooperation between the United State and Europe is essential to making progress on this topic.

Failure to achieve cooperation would cause significant harm to the IT industry, the

economy, and, most importantly, people with disabilities.

Thank you for the opportunity to submit these comments. We look forward to further discussion and would be happy to answer any questions.

Senator ALLEN. Thank you, Mr. Duffy and Ms. West. Thank you

to both of you all on the IT accessibility issue. Let me first start

with you all to try to get a gist of what we can do here.

When you all are developing the IT accessibility products, services, clearly that is a smaller market. It is not a larger market. I

do not know if your companies, IBM or SAP, actually make any

money. Do you even make money? I do not want to get into proprietary information.

The reason I am asking this question is to the extent you end

up with a fragmented market, it makes it all the more costly as

an investment for IBM or SAP, wonderful companies that want to

be making sure people with a variety of different disabilities have

access to technology and information. If you do not make any profit

off of it, if you are doing this as a service or as a cost of doing business, how would this fragmentation and regulations that are unnecessarily burdensome affect the ability of folks with a variety of

disabilities to actually have access to your programs, so to speak?

Either one of you all or both can speak to that. If somehow this

is a violation of Sarbanes-Oxley to answer this question, you can

cite that as a reason for not answering it.

Mr. DUFFY. I will take a shot at it, sir. I do not believe we do

not track down to that level whether we make money or not. But

clearly we invest a tremendous amount of money to serve that community, and we think it is good corporate citizen policy, in fact, to

do so.

But if we do have to get into many, many different fragmented

regulations, it really just kind of spreads the peanut butter a little

too far. When you want to go out and you want to get products to

market quicker and you want to give availability to folks with disabilities, because a computer is the lifeblood to a lot of folks with

disabilities, the more we can concentrate on a standard set of

standards, the more we can focus those resources on that.

Senator ALLEN. Ms. West.

Ms. WEST. From IBM’s standpoint, we actually started looking at

this market, and we actually foresee a tremendous business advantage of addressing accessibility. Like I mentioned earlier, the aging

trend is becoming a global issue. We already have seen industries

like the retail industry and the banking industry viewing people

with disabilities and the aging population as the target market. So

there is actually money to be had or business to be made in that

under-served market segment.

Secondly, with a self-declaration kind of a process that section

508 has introduced, it really helped IBM to focus building accessiVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
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bility requirements into the front end of our products. This is not

actually a very difficult thing to solve if you think about it ahead

of time. So by engaging our development team at the concept stage

of development, the cost of production actually has gone down significantly. And then the application of that accessible solution can

be broad-based to everybody who is experiencing aging. So then

again, the average return on the investment actually is quite substantial. So this is not an issue in our view of just kind of a social

responsibility issue. We actually view it as a tremendous economic

benefit.

Senator ALLEN. Well, thanks for that insight.

Now, both your companies have invested a great deal since 508

was adopted and enforced on companies. Obviously both you have

invested heavily, and maybe it is a good market share, maybe it

is good corporate citizenship to make your products accessible to

meet the 508 requirements. Briefly, if each of you could share with

me and obviously the committee—and, Ms. West, I just want to

close the loop on this. You in your testimony talked about if the

E.U. decides to adopt an accessibility standard which deviates from

508—and it may actually be a better standard. I do not know if it

is better or worse. But regardless, I was trying to follow that. What

impact would that have, for example, on IBM to meet a different

standard or a different set of requirements?

Ms. WEST. The section 508—I think from the accessibility standards standpoint, there actually has been very good dialogue between the U.S. committee and also the European Union community. We actually applaud the E.U. looking at 508 as a base because this is a new area and many extensions should be had. As

long as the E.U. does not go down a path that completely deviates

from the section 508 base, then I think it is definitely a very good

scenario because we too would like to participate in that second

generation of defining the accessibility standards. We just do not

want to start having differing standards, for example, by countries

or by regions. That will create a problem for us.

Senator ALLEN. Thank you, Ms. West.

Mr. Duffy, do you have anything you want to add to it? I just

wanted to clarify something in Ms. West’s testimony in that regard.

Mr. DUFFY. That is fine.

Senator ALLEN. Thank you.

Let me talk to our nanotechnologists here and ask you some

questions. As far as the regulatory agencies, whether they are here

in the U.S. or in the European Union, do you feel in either area,

whether it is U.S. or the E.U., that any of them headed in the

wrong direction in the development of regulations, environmental

regulations, for example, for nanotechnology? If so, let us know

how.

Mr. HARPER. Yes, Senator. I think it is a somewhat asymmetric

situation. Governments on both sides are just beginning to look.

Agencies are just beginning to look at how to regulate

nanotechnology. U.S. EPA I think has taken a very good first step

in the right direction. They are holding a meeting in late June

where they are bringing in stakeholders from all sides to look at

developing a pilot program for how you apply the Toxic Substances

Control Act, the primary chemical regulatory authority that ConVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
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gress has provided EPA, to nanotechnology. Fred had alluded to

that earlier.

We think that the tools of TSCA and the authorities of TSCA can

be made to apply quite well to nanotechnology, but there are some

unique issues and there are some unique science, and we think

that the pilot project approach is a good way for the agency and

everyone else to work their way through that process. I think there

is a good deal of goodwill on all sides, including industry and the

environmental community, to try and make this work.

In Europe, it is a very different situation. They are even earlier

in their stage of looking at nanotechnology, and I think it will be

a longer time before they get around to it simply because they are

in the midst of rewriting their entire chemical regulatory legislative framework. They have something called the REACH regulation

which is working its way through parliament, as we speak. I think

it is clear that nanotechnology will be handled under the umbrella

of the REACH regulation. How that will occur I think is still very

much up in the air because a lot of the details of the REACH regulation are still very much up in the air.

But right now, at least in the United States, we think things are

headed in the right direction. EPA in our view has shown the right

amount of attention to this, and the jury is still out on how it is

going to turn out, as it is in Europe as well. But because both sides

are in the early stages of looking at this issue and how to apply

their existing or future tools in the case of Europe, we think there

is great opportunity for the two sides to collaborate and share their

thoughts to maximize the chances that the two regulatory regimes

will be very similar going forward in time.

I do not know what Fred thinks.

Dr. KLAESSIG. I agree with Steve. Overall, the issue I think that

will come up in terms of the science, both groups have the goodwill

to use the best science and global science. When there are difficulties, especially with the newer and more novel materials that are

being generated in the laboratories today, I think the issue will

come up of evaluation tools, toxicity mechanisms, the type of issues

that normally are assumed to be carried by industry when it has

a product in hand and a market to go after. But when you do not

know what the right test is or if the definition of the material does

not cause you to go to the EPA or other agency for proper review,

that will be the area where I think—call it a gap, call it a developing issue might arise. And then, of course, individual groups will

start having definitions of what precaution really means.

I agree with Steve on the issue of the E.U.. The group that seems

to becoming prominent on this topic is OECD, which I do not know

how to rank it in all the different discussions here, but the OECD

is working on this. They do get involved with standardized tests

and test methodologies. So what may happen in this case is the

United States EPA takes the lead. The OECD takes the energy and

the effort over in Europe, while the E.U. is involved with Project

REACH. So it may be a plight of the Parisian OECD.

Senator ALLEN. Thank you.

Let me ask you this one last question on nanotechnology. Are

there any types of commercial products that are currently in use

and in what way? And are there any differences that you foresee

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at this time between the U.S. and Europe marketplaces, if there

are any of these differences?

Dr. KLAESSIG. From existing materials, the marketplaces are

very similar. From future marketplaces, I think the main issue for

me would be that the United States has been more encouraging of

smaller firms, start-up firms, university type of offshoots, and no

matter what size a firm is, you have to go through this regulatory

stage to commercialize your product. So I would think that just as

the EPA has taken the lead on trying to incorporate these issues

into their TSCA scheme, we will also be the first that will be involved with a start-up firm not being aware of the topic, and just

when they want to go to commercialization and when their investors are insisting on quick commercialization, finding out that they

did not even know they had to register, did not even take the underlying tests, and had difficulty finding out what the right test

methodologies were. So I think that sort of an issue will also arise

here in the United States first.

Mr. HARPER. Yes. I would just like to add to that. The uses for

the nanomaterials that are now out on the marketplace, sun block,

nanomaterials that harden tennis balls, harden tennis rackets—I

mean, there are a number of applications. The real interesting

areas of exploration are still, by and large, in the R&D labs.

While the U.S. and the E.U. governments are trying to figure out

how to make their existing or, in the case of Europe, new regulatory regimes apply to nano, a lot of folks in industry, including

Fred’s company and my own, are active in industry and in some

cases industry and environmental group collaborations and academic collaborations to try and develop, for lack of a better term,

best known methods for handling these materials in our facilities

so that we make sure that issues do not arise between now and

when EPA has fully figured out, for example, how to regulate

nanotechnology in the workplace or the marketplace.

One of the concerns I think Fred and I both share is that a lot

of this work is being done in start-up companies that do not have

environmental management teams like Intel or Degussa has or

academic research labs. One of the challenges for companies like

ours is in the development of these approaches in the labs particularly but also in the manufacturing environment, that we share

those approaches with these smaller companies and with these academic research institutions that, as I say, do not have the capability to develop these approaches themselves. We are working on

that. That is really an obligation I think on industry’s end.

Senator ALLEN. What is your motivation to do that? You do not

want to have some small company cause some problem and have

an overreaction?

Mr. HARPER. I will speak for Intel. In our case, there is a long

tradition in our company of not making environmental, health, and

safety practices a competitive issue. So we will share our environmental, health, and safety practices, which have been widely recognized as leadership practices, with anybody, including our fiercest

competitors. We feel like that is the right thing to do.

In addition, through one of our subsidiaries, Intel Capital, we

have venture capital investments in several of the principal startup companies that are developing these new applications. We feel

60

a stewardship responsibility there because we are part owner of

that enterprise.

Then I think, finally, you touched on the other aspect that I mentioned in my testimony. If these materials are deployed in the

wrong way, even if it is only in the research and development environment, there is a possibility that these technologies—and it is

plural, not singular—could get held up in regulation or in public

oversight or public lack of acceptance, much like in the GMO environment, and we want to avoid that.

Dr. KLAESSIG. Yes. Loss of public confidence in both the materials and also the system by which we make findings of safety,

leading to a chilling effect on innovation even by those who are following responsible procedures. Again, if there is an incident or

something that causes great public alarm, then the precautionary

principle, which is more resident in Europe than it is here in the

United States, will be used everywhere as opposed to in a reasonable and consistent fashion.

Senator ALLEN. Thank you, Dr. Klaessig. Thank you both, gentlemen.

Finally, on the European collection societies, Mr. Patton and Mr.

Hassell, you are talking about our approach versus the Europeans.

The Europeans have multiple, apparently redundant, often extremely excessive levels of levies and taxation; whereas, as far as

we are concerned in this country, I have always felt like it’s better

to leave it free. Let innovation go forward and let the consumers,

the marketplace make a decision, particularly on not taxing Internet services.

Clearly, I assume you all, regardless of Europe or the U.S., feel

the U.S. approach, keeping Internet services free of taxation and

regulation is a preferable approach for consumers, not just for businesses. Would you agree with that assertion or statement?

Mr. HASSELL. Yes, Mr. Chairman, we would. I think the United

States’ approach is we trust the market. We trust the market to

help solve this problem. I think there are lots of companies that are

producing great technologies to balance the need to protect intellectual property. We want to protect our intellectual property at HP.

We are against stealing. However, we do not think having this taxlike levy system is going to encourage any solution to this problem.

So we appreciate your leadership. You, I think, understand in

your gut that you do not tax the Internet, and we have had one

of the biggest economic booms in our country’s history. So we certainly support that position.

Mr. PATTON. I think it is fair to ask whether an ebay or a Google

or an iTune service could have really flourished if we had a practice here in the United States to go after it and tax it because it

is an available and growing source of revenue.

The way the European collecting societies focus on innovation I

think has an absolutely detrimental effect on innovation, and it stifles it. It works this way: If there is an innovation of a new category of products, such as there is beginning to be in Europe in

flash memory devices and personal digital systems and PC’s and

everything else in the digital age, these collection societies are

viewing those as sources of revenue. They are developing these excessive levels of levies. You do not know, as they meet to determine

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what level of tax they are going to put on, what that is going to

be.

We currently are reserving about $8 for a DVD recorder in Spain

for putting in reserve to wait to find out what the levy is going to

be. It may be $8; it may be $10; it may be $15; it could be $20.

When they finally decide what to apply to this DVD recorder in

Spain, we could find that we have been selling it in the market for

9 months, 12 months, 18 months, 2 years at a loss, and we will not

know it until it is applied.

This is not a way to enter a market. We can deal with normal

market conditions and market forces. We can deal with regulations

when they are appropriate. We can deal with all of the legal framework for what you sell in a marketplace, but you cannot enter a

market that is so intensively competitive around the globe, as it is

today in the new digital era, and wait to find out what kind of margin you might be able to squeak out based on the excessiveness of

the tax.

Senator ALLEN. Well, it strikes me in that market—you were

mentioning Austria—in a market like that, if you had a world market like that—if the United States was like that and Europe is the

way they are, as you describe it—it would strike me that you would

reduce research and development into some of these new innovations with that uncertainty. You would not even know what your

market would be. You would expect out of European countries that

share much of our heritage and similar values that they would understand these just basic economic principles of predictability. If

you are going to go in a market, you need to know what your risks

are, what your costs are.

I would hope that as we have this meeting, conference, summit,

whatever you want to call it, next month, that just these basic

things—you are Philips, of course, a Dutch company, and hopefully

they will listen to you. They ought to listen, of course, to HewlettPackard and IBM and Intel. But it would seem to me that the European companies, in particular, might have the greatest influence

on our partners or potential partners in Europe on such matters.

It just does not make sense to have to face that sort of a situation

or to try to get in the market and, therefore, harm those consumers’ ability to have the most advanced technologies, whether it

is for commerce, whether it is for information, or whether it is for

entertainment.

Mr. PATTON. It is an appropriate moment to suggest that our

voices in unison perhaps are more powerful than us speaking singularly, and we had the opportunity with HP to collaborate on lots

of exciting and innovative new technologies.

But it is also important to point out that we do commend the European Commission for trying to push member states to implement

the E.U. copyright directive in ways that do recognize the new reality of the digital era in the marketplace in Europe. They have

certainly made great strides since the introduction of the single

market, and it is a single market that consumers are benefiting

from.

Your first question about looking around for other places to buy

a product so that they do not have to pay the excessive taxes is absolutely spot-on in terms of one of the distortions. Never underestiVerDate 11-MAY-2000 12:06 Dec 12, 2005 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6602 EUREG.TXT SFRELA2 PsN: SFRELA2
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mate the consumers’ ability to go find a better deal. And Europe

will make strides, I am sure.

Mr. HASSELL. If I may, Mr. Chairman. I just want to emphasize

that the E.U. is very receptive to our position. We have been working together with other companies, and I think they share our position that we need to somehow address the spread of levies. So they

are receptive at the E.U. level. We just need to apply that directive

and make sure it is enforced.

Senator ALLEN. Thank you both.

There was a reason that you all were selected here on these

three large topics, whether it is accessibility, whether it is the technology standards, or whether it was the taxes, levies, or

nanotechnology and one from a European company and a U.S. company. There was a group made up of business leaders on both sides

of the Atlantic—and it is still in existence—called The Atlantik

Bru ̈ ecke (The Atlantic Bridge). I find that the business leaders from

European companies and U.S. companies have much more compatibility, on a one-on-one basis. As far as governmental officials, we

do not have good personality agreements and friendliness, but

sometimes the governments need to listen. I think it makes a great

deal of sense to listen to people in the free enterprise system, listen

to the innovators, the inventors as we are making policy so we are

making the right policy. And all of your companies are international in scope. But to the extent you find U.S.- and E.U.-based

businesses and business leaders saying the same thing, that does

have an influence on us, and I think it would also have a positive

influence on the representative democracies of Europe as well.

So I thank you all for taking time from your busy schedules,

sharing with us your insight on these important subjects. As this

meeting takes place next month, there will be certain things as you

requested. We will follow up on it. So I thank everyone here, Mr.

Harper, Dr. Klaessig, Ms. West, Mr. Duffy, Mr. Patton, a good Virginian, Mr. Hassell, a wayward Virginian who I know will come

back before too long.

Thank you all so much, and we will keep innovating and we will

keep leading. Thank you all so much.

Hearing adjourned.

[Whereupon, at 4:45 p.m., the subcommittee was adjourned.]

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