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41–877—PDF 2007

S. HRG. 110–371

ADMINISTRATION’S 2007 TRADE AGENDA

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

FEBRUARY 15, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3

ADMINISTRATION WITNESS

Schwab, Hon. Susan, U.S. Trade Representative, Washington, DC ................... 3

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 31

Schwab, Hon. Susan:

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

Prepared statement .......................................................................................... 33

Responses to questions from committee members ......................................... 48

COMMUNICATIONS

Advanced Medical Technology Association (AdvaMed) ........................................ 101

American Forest and Paper Association ................................................................ 109

EXPORAMERICA .................................................................................................... 116

Peruvian Asparagus Importers Association .......................................................... 126

Retail Industry Leaders Association (RILA) ......................................................... 135

U.S. Chamber of Commerce .................................................................................... 139

U.S.-Russia Business Council ................................................................................. 149

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ADMINISTRATION’S 2007 TRADE AGENDA

THURSDAY, FEBRUARY 15, 2007

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Stabenow, Cantwell, Salazar, Grassley, Bunning, and Roberts.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

I am pleased to convene the first of many hearings that this committee will hold this year on international trade. I am happy to

welcome Ambassador Susan Schwab as our first lead-off, kick-off

witness. Ambassador Schwab has demonstrated a steely resolve to

promote America’s interests, and we thank her very much for that

resolve.

About a century ago, tens of thousands of people came to what

would become the State of Montana. They came from every corner

of the world. They came to a place that many saw as unknown, untamed, unsettled. But those who stayed saw something else: they

saw opportunity.

They saw opportunity for themselves, their families, and generations to come. Some saw opportunity in mining and farming, others

saw opportunity in hunting and trapping. One 21-year-old German

immigrant saw opportunity in ranching for himself and generations

to come. Those generations include me, his great-grandson.

Montanans seek opportunity. I grew up with that ethic, and it

has stuck with me in my nearly 30 years in the Senate. Today’s

trade agenda is a place that many see as unknown, as unsettled.

But I see opportunity.

I see the opportunity to increase the 12 million American jobs

that exports create. I see the opportunity to boost the international

trade that already accounts for a quarter of our Nation’s output,

and I see the opportunity to improve America’s economic leadership.

These and other opportunities begin with fast track negotiating

authority. Fast track expires in June. I believe we must seize the

opportunity to renew fast track. Just as importantly, we must seize

the opportunity to re-think it.

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We must re-think fast track to ensure that we pursue commercially significant agreements. We must re-think fast track to ensure that our agreements reflect our economy’s strengths.

We must re-think fast track to ensure that our trade agreements

raise labor and environmental standards, and we must re-think

fast track to ensure that our trade agreements improve working

conditions around the world.

However we re-think fast track, though, we must find a way so

that Congress feels it is listened to before the process begins, and

during the process. Too many in Congress feel that the administration does not adequately consult Congress. Many in Congress feel

they are not sufficiently listened to and want to be a truly equal

partner in trade.

Now, however we re-think fast track, we cannot consider it in

isolation. Instead, we must consider fast track in the context of

Americans’ growing unease over globalization, over international

trade, and out-sourcing.

We must consider fast track together with our growing record

trade deficits and foreign indebtedness. We must consider it with

the knowledge that many in Congress, and many in the country,

as I said, have felt left out of the trade policy process.

We must also consider fast track together with the policies that

buttress a successful trade agenda. That means making sure that

we have the right tools to vigorously enforce America’s trade agreements and trade laws. That means making sure that America’s export promotion programs work to their full potential, and it means

making sure that America’s economy is as competitive as it can be.

That means making sure that all American workers can compete

and can win on the global playing field. That means making sure

that America takes care of those workers whom trade leaves behind. For years I have called for expanding trade adjustment assistance programs to include services workers. I believe we must do

that.

I have also pushed for further innovation on these policies, and

we should move also to a kind of globalization adjustment assistance, not just trade adjustment assistance, that looks out for those

affected by all aspects of our changing economy.

Finally, we must consider our trade agenda together. Everyone

should have a voice. I plan a series of hearings to take stock of our

trade policy. We are going to dig down deep to make sure our policy

works better than it does, trying to determine what has worked

and what has not.

We need a consensus. As a next step, I plan to follow up on today’s hearing on the trade agenda with another when we return in

March. That hearing will include witnesses that share different

perspectives on our trade agenda.

It is always a pleasure to welcome you, Madam Ambassador. You

have proven yourself tenacious, and you are a tireless negotiator

and an exemplary public servant. You are someone who knows opportunity when you see it. I look forward to your testimony.

I would now like to turn to Senator Grassley.

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OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman. I have a long

statement and nine different items, and I am only going to refer

to three of them to save time.

One would be that a new Congress now, with new leadership,

has an opportunity to produce concrete results for the American

people. For me, that starts with implementing our pending trade

agreements with Peru and Columbia, soon to be joined by Panama.

I am going to have a meeting this afternoon with the President of

Panama on that very issue. At least, I think that is what he wants

to talk about.

I think these are critically important trade issues. And particularly with the trends that are going on in Venezuela, Bolivia, and

Ecuador, we ought to do what we can to promote free markets and

free political systems in these countries where we have an opportunity to support that. So, it would be irresponsible for Congress

not to act on those agreements.

We also need to reauthorize trade promotion authority. I do not

see this as a partisan issue, because every President, Republican

or Democrat, has had that authority. The success of the Doha

Rounds are only going to happen if we extend trade promotion authority first.

I was skeptical about that during November and December, but

I have heard so many good things, like just what you heard from

Chairman Baucus, that I believe that that’s possible. I know you,

Ambassador Schwab, have been working to move that along as

well.

One item that I want to point out, although it may be considered

something that we also discussed with the Secretary of Treasury,

but four members of Congress—Chairman Baucus, me, Senator

Schumer, and Senator Graham—are still very much concerned

about the China currency issue, and we need to be working to get

that issue done.

Then one other thing that I want to point out to colleagues, as

much as I do to you, Ambassador Schwab. It was an issue, as we

went out in adjournment last fall, both before the election and after

the election, and that is, this committee’s jurisdiction over Customs

and Border Protection to make sure that we do our oversight work

in that area, particularly as it involves Customs.

Thank you, Mr. Chairman. Then, I would like to submit my entire statement for the record.

The CHAIRMAN. It will be included. Thank you very much, Senator.

[The prepared statement of Senator Grassley appears in the appendix.]

The CHAIRMAN. Ambassador Schwab?

STATEMENT OF HON. SUSAN SCHWAB, U.S. TRADE

REPRESENTATIVE, WASHINGTON, DC

Ambassador SCHWAB. Mr. Chairman, thank you very much for

inviting me today to address our trade agenda for 2007 and provide

an update. I look forward to answering your questions.

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I have a fairly brief statement that I think has been provided to

members of the committee. But let me thank you in advance, and

thank Senator Grassley for your very thoughtful remarks about

trade promotion authority reauthorization, about the importance of

passage of free trade agreements with Peru, Colombia, and Panama. I will be speaking about all of these issues later.

A key, though, I think, is the importance of bipartisanship in

trade and in U.S. trade policy. Mr. Chairman, you and Senator

Grassley have been in the forefront for many years of trying to

make sure that U.S. trade policy stayed bipartisan, and I thank

you for that on behalf of the administration, but also on behalf of

many, many Americans, the majority of Americans who benefit

from a proactive and open trading system.

I am going to go through these slides, as I said, fairly quickly.

You have copies for the record. The first two slides really provide

a context for our discussion of the trade agenda.

The first slide articulates the strength of the current U.S. economy, and that’s particularly true vis-a`-vis other economies. One of

the reasons we see a trade deficit as large as it is, is because Europe and Japan, other developed countries, have simply not been

growing as fast as the United States.

Average U.S. GDP growth over the last several years has been

over 3 percent. We have added 2 million jobs last year, 2.2 million

jobs in the last year, and 7.4 million jobs since August of 2003.

Real compensation in the United States is up. Real manufacturing

output is up.

That said, there are concerns about trade. That is in spite of lots

of statistics, and data, and empirical evidence to the contrary.

There are some who are concerned about trade and their jobs, and

those are very real concerns and we need to be attentive to that.

You alluded to that in your opening statement, Mr. Chairman.

When we look at changes in the workforce, we need to acknowledge that productivity increases and technological change, as well

as global competition, have a great deal of impact. And even

though it is clear from all of the statistical evidence available that

only a very, very small minority of those who are unemployed can

attribute that unemployment to trade, those individuals and those

plants that are shut down and those communities that face the dislocation are facing very real problems, and we need to be cognizant

and understanding and seek solutions to help those Americans.

The day before yesterday, the 2006 trade statistics were issued.

They offer an interesting and, in many ways, upbeat insight into

what is going on. U.S. nominal goods and services exports last year

grew by 13 percent. Imports also grew, but by less than that, by

10.5 percent.

Ninety percent of the increase in the U.S. trade deficit last year

can be attributed to the increased price of petroleum, so that is an

interesting note in terms of the composition of the trade deficit.

On an inflation-adjusted basis, also, U.S. exports are up much

more dramatically than imports. In fact, if you look at the role of

trade in the economy, in the broader economic growth picture, you

discover that exports accounted for over a quarter of real GDP

growth last year, and, in the fourth quarter, trade accounted for almost 50 percent of GDP growth.

5

In fact, on this inflation-adjusted basis, the trade imbalance was

largely unchanged last year. In fact, the imbalance, the trade deficit, shrank slightly, again, because of strong economic growth.

I note in the slides that strong U.S. exports help offset the downturn in the housing market. I also note that where we have jobs

related to exports—and you refer to those who benefit in the economy from such jobs—those jobs are better paying than the national

average.

Finally, the vast majority of Americans benefit from trade liberalization, and have benefitted from trade liberalization, and we

have offered just a few of those statistics.

Today I am going to talk about four elements of our trade agenda

and provide an update: first, the Doha Round negotiations; second,

trade promotion authority; third, trade agreements, including our

free trade agreements; and finally, and certainly not least, enforcement compliance and dispute resolution and how that is, indeed, an

active and integral part of the administration’s trade policy.

Let me begin with the Doha Round. A lot has been said about

that. The Doha Round has been sputtering, starting, moving ahead,

falling back for over 5 years now. The key to remember about the

Doha Round is that 95 percent of the world’s consumers live outside of our borders. Ninety-five percent of the markets are outside

of our borders, and we need to be cognizant of that, particularly

when we think about the importance of trade and exports to our

economy.

The other element we need to think about when we are talking

about these global trade negotiations is the development angle. The

Doha Round, named the Doha Development Agenda, was launched

after September 11, 2001 with a view to lifting out of poverty

many, many, many—in this case, tens of millions—of the world’s

poor.

If, for example, in the case of Africa, we were to be able to help

Africa and Africa were to be able to increase its share of global

trade from 2 percent to 3 percent—and I note that at one point Africa’s share of global trade was, in fact, 6 percent—but just an increase of 1 percentage point in world trade would be the equivalent

of $70 billion a year for sub-Saharan Africa, which is well in excess

of any kind of aid program, official aid program, that anyone could

identify.

I would note, as you noted, Mr. Chairman, a Doha Round, if we

are to achieve a successful outcome to the Doha Round, simply

could not be enacted, could not be implemented without trade promotion authority being reauthorized.

On page 6 of the slides we have a summary of the Doha Round’s

state of play. As you all know, in July of 2006 we walked away

from a bad deal. I would note, there is a trust element in trade promotion authority.

Mr. Chairman, you spoke about re-thinking trade promotion authority. Trade promotion authority is a contract between the executive and legislative branches of government. Part of that requires

an element of trust. Parts of it are written in stone.

One element of trust includes the United States not being stampeded into, or feeling forced by, a deadline such as the expiration

of trade promotion authority to embrace a bad deal.

6

Last July we showed that we were not going to embrace a Doha

Round agreement that we could not recommend to the Congress to

enact under trade promotion authority, even if it meant the expiration of trade promotion authority before we were able to close a

Doha Round agreement.

Since last July, we have had very intensive and much quieter negotiations going on, a lot of ‘‘what if’’ exercises on a bilateral basis

with key trading partners, where we are focusing on key priorities,

on key sensitivities, red lines, and trying to backward-integrate or

reverse-engineer into the top-line numbers.

Last year you will recall, we spent a lot of time pointing fingers

at each other on the top-line numbers. We were not going to get

to ‘‘yes’’ on the top-line numbers. We decided the key was to go

back and really focus on key export priorities, market access priorities, how could we get meaningful trade flows.

I am happy to say that last month, in an informal meeting in

Switzerland among 25 trade ministers, this sort of bottom-up approach was embraced by the members. That means that we still

have a lot of work to do, particularly in terms of market access,

whether we are talking about agriculture, or we are talking about

manufacturing, or we are talking about services, but that work is

ongoing, and I am cautiously optimistic that we could reach a

breakthrough in the coming months.

On page 7, we have more detail in terms of what I have been

describing in the Doha state of play, the Doha Round. I do not need

to explain to this committee why the Doha Round is, and could be,

phenomenally important for our farmers and ranchers.

Market access, again, is the key where the focus is on meaningful new trade flows. The challenge that we faced in the Doha

Round on these top-line numbers is that we are dealing with a

framework that really makes a lot of sense in many ways.

That framework in agriculture and manufacturing is a very progressive tariff-cutting formula, so the highest tariffs that are out

there would get cut the most. That is really important when you

are the country with the lowest agricultural tariffs in the world.

Our average agricultural tariff is 12 percent. The global average is

62 percent. India’s tariff average is 114 percent.

So, a tariff-cutting formula that is progressive makes a lot of

sense if you are looking for market access. The E.U.’s average is

23, 24 percent. However, within this framework there are also allowances for exceptions, sensitive products, special products, special safeguard mechanisms.

And we should not have been surprised when all the countries

that were worried about this progressive tariff-cutting formula suddenly decided to move their sensitive products, or the products they

did not want to cut tariffs on, into these sensitive product categories for special treatment, so now we are focused specifically on

those sensitive products and how to treat them.

One thing that we have managed to do already in the Doha

Round negotiations is get agreement on the elimination of agricultural export subsidies. And finally, you will not be surprised to

learn that U.S. trade-distorting domestic support, agricultural

trade-distorting domestic support, is key to this negotiation.

7

You have not been surprised to know that there is increased litigation vis-a`-vis our farm programs, in part because there are countries that are giving up on us being able to resolve some of these

issues through the Doha Round.

In terms of manufactured goods, in terms of services and other

key——

The CHAIRMAN. Madam Ambassador, let me say we are going to

have to be very succinct here this morning and get to the point of

all of this, because there will be three votes beginning at 10:30. We

will just have to work our way through that.

Ambassador SCHWAB. All right. Let me just go through this.

You have it in front of you. Manufactured goods. Again, a major

priority. Services. Eight out of ten U.S. jobs. Other key issues

under negotiation include trade remedies, environmental issues,

and development issues.

Trade promotion authority, Mr. Chairman. You spoke about

trade promotion authority. Every President since 1974 has had

trade promotion authority and been able to use it in the interests

of the U.S. economy, particularly U.S. exporters, to open markets.

In this game, if you are not on the field, you are not playing. If

you are not moving forward, you are probably moving backwards.

If the trade promotion authority is not extended, that does not

mean that other countries are not going to be out there negotiating

bilateral and regional trade agreements. Pages 10, 11, 12, and 13

refer to bilateral FTAs.

The CHAIRMAN. Right. Yes. Those are good summaries, those

slides. We have gone through them.

Ambassador SCHWAB. All right.

Just to note, U.S. exports to our FTA partners have gone up

more than twice as quickly as U.S. exports to the rest of the world.

These FTAs are very much in the interest of the United States’

economy.

The CHAIRMAN. I am going to have to ask you to wrap up if you

could, please.

Ambassador SCHWAB. Let me go to enforcement.

The CHAIRMAN. Quickly.

Ambassador SCHWAB. The last two slides. Enforcement is as important as negotiating trade agreements, enforcing those trade

agreements. What we have in the last two slides, we note that we

use all the tools in our arsenal to address barriers to trade. That

includes negotiating. That includes enforcing agreements, it includes litigation.

We have a results-oriented approach, whether it is China, whether it is Japan, whether it is the E.U., and we take that very seriously. We have a very strong record in terms of winning 88 percent

of the WTO cases that we have taken, and we have won over half

of the cases on an offensive and defensive basis.

The last slide, again, is an illustrative list of how we use the different tools at our disposal in a results-oriented approach to solve

problems and to open markets for U.S. exports.

[The prepared statement of Ambassador Schwab appears in the

appendix.]

The CHAIRMAN. Thank you, Madam Ambassador, very much.

8

One point I just want to remind you about. You said that FTA

is a contract between the two branches of government. That is incorrect. It is not a contract. It is solely up to Congress. A ‘‘contract’’

implies a negotiated agreement between two entities. That is not

a contract.

Under the Constitution, the U.S. Congress decides whether it

wants to delegate fast track to the administration. It is the sole

prerogative of the Congress to delegate fast track authority. That

is basically what this hearing is about. That is, what should the

conditions be under which Congress delegates that authority to the

administration? It is not a contract.

I would like to ask you, though, on another subject, what the administration is doing and what you are doing to help get fast track

authority approved by the Congress. That is, to encourage the Congress to go ahead and extend it. What else are you doing? Those

are great statistics. Everybody has statistics.

But the real thing is, the American people and this Congress are

quite, quite skeptical about granting fast track authority. So what

are you doing to help persuade Congress that it should?

Ambassador SCHWAB. Mr. Chairman, when I referred to fast

track authority, trade promotion authority as a contract, it is clearly an understanding between the executive and legislative branches

of government. Article 1, section 8 of the Constitution gives the responsibility to the Congress, no question.

The last time the Congress tried to do its own trade negotiating

was in 1930 and the result was the Smoot-Hawley Tariff Act. Since

1934, that has been delegated to the executive branch. It was delegated in total up until 1974. Starting in 1974, when the negotiations involved non-tariff barriers, it became clear that——

The CHAIRMAN. All right. I do not want to get into an argument,

Madam Ambassador. I have many points to refute what you are

saying. I would like you to answer my question. My question is,

what is the administration doing to help persuade Congress and

the American people that Congress should extend fast track authority?

Ambassador SCHWAB. First and foremost, we are using fast

track, we are using trade promotion authority in a way that clearly

benefits U.S. exporters and U.S. economic interests. We are negotiating a Doha Round agreement and not settling for a ‘‘Doha light.’’

We are pushing for an agreement that clearly opens markets to

trade, both in terms of U.S. export interests, but also in terms of

global economic growth and development.

As I said in my opening remarks, we walked away from the outlines of a trade deal last July that would not have met those criteria, so that is the first thing. We are negotiating agreements like

the Peru and Colombia free trade agreements that level the playing

field. In those cases, those two countries have one-way free trade

access to the U.S. market.

Those countries have chosen to negotiate free trade agreements

with us that we need to implement under fast track whereby they

open their markets in their entirety to U.S. exports instead of a

one-way free trade situation. In the case of Korea, we are in such

a negotiation with Korea, the seventh-largest trading partner.

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The CHAIRMAN. You have not really answered my question in the

deeper sense of the term. You are basically going through trade

agreements. I do not think that is going to suffice. This Congress

is going to want to know more.

Let me give you some suggestions: enforcement. What is the administration doing to more aggressively enforce the current agreements? You have done some things, and I commend you on what

you are doing in China. But I can think of lots of examples where

the administration has been lax. So what are you doing about enforcement? That is one.

The second one is trade adjustment assistance. What do you propose expanding in trade adjustment assistance to make it work an

awful lot better? Those are two. I can think of many other things

the administration could and should do, and must do, if it is going

to get fast track authority granted by this Congress.

Ambassador SCHWAB. Mr. Chairman, let me refer you to the two

pages of my testimony that I skipped over on enforcement. Let me

begin by agreeing with you on enforcement, which is, enforcement

has to be an integral part and is just as important as negotiating

new agreements. We do not use trade promotion authority, per se,

to enforce.

We have all of the authorities that we need to enforce existing

agreements in terms of the antidumping/countervailing duty laws

that the Commerce Department administers, the dispute resolution

mechanisms, either bilateral or through the World Trade Organization.

And as I said, we have taken cases. The largest case ever taken

was taken on Airbus against the European Union. That case is

pending. We just launched a case less than 2 weeks ago against

China on prohibited subsidies. Those are subsidies that are prohibited export subsidies. We think they have identified six of them.

We have identified three import substitution subsidies that are

illegal and we believe to be prohibited under their WTO accession

commitments. So, we have gone into a preliminary stage, pre-litigation stage on that. Intellectual property rights.

The CHAIRMAN. For the benefit of members, Senator Grassley is

going to come back so we can just keep the hearing going. I must

say, I cannot think of anything else. Senators are just going to

have to figure out when they want to be here or not. But we will

have a continuous session because Senator Grassley and I can rotate back and forth. All right.

Senator Stabenow, it is going to be tight, but why do you not go

ahead?

Senator STABENOW. Yes. Well, thank you. I know it is tight. I

would say, first of all, just as a comment, when we look at the

numbers as you go through—and I will not have time to go through

all of them—I can show you a very different picture from middleclass America and what has happened as we look at the economy:

3 million lost manufacturing jobs, productivity being up but wages

being down. There is a whole different world that is out there.

I guess my first question would be, do you feel we have a level

playing field on trade for American businesses? Do we have a level

playing field?

10

Ambassador SCHWAB. I think it depends on the country. I think

that in some cases we do not have a level playing field, and that

is where we need to be applying our strongest enforcement compliance tools.

In some cases, there are trade barriers that are out there, tariff

and nontariff barriers that are out there, that are fully legal under

the international trading system. I will give you the example of

autos in Korea. You and I have spoken about this before.

Senator STABENOW. Right.

Ambassador SCHWAB. There, Korea has an 8-percent tariff, the

U.S. has less than a 3-percent tariff. Both of those tariffs are fully

legal under the WTO. To level that playing field, to get both countries with zero tariff, you can use a free trade agreement negotiation like the one we are using.

However, we need to make absolutely certain that behind the

tariff, the nontariff barriers in autos that we know the Koreans

maintain, whether it is standards, tax policies, those need to be

eliminated as well. So, there is a specific example where you need

to use a negotiation to accomplish it.

In some cases, I used a couple China examples. Where there is

not a level playing field and what China is doing is inconsistent

with its WTO obligations, then we need to get those problems resolved, get those barriers removed, or go to litigation to get them

removed, or to retaliate.

Senator STABENOW. Well, Madam Ambassador, just in terms of

South Korea, I would say you are acknowledging there is not a

level playing field on trade for autos, and I certainly could tell you

about appliances as well, manufacturers and so on.

I am assuming you will not come back to us with a trade agreement that does not level that, since it is in America’s interests to

level that. Anything short of that, there is going to be a tremendous amount of concern about. I would throw out again, as I did

in talking to you before, that we have seen, in other agreements

in the past, efforts that would create a threshold for market access.

I would suggest you look at something like a trigger that would

not open access until we reach certain penetration for our automobiles. There are ways to do this that would move us in the right

direction. It has been done before. I had mentioned to you, in 1991,

the semiconductor agreement with Japan. There was a targeted 20-

percent impact penetration by 1992, for the semiconductor market.

They did not reach it until 1994, but they moved in the right direction.

So I hope that you are going to come back with something, and

we would certainly be happy to work with you on the idea of some

kind of a trigger mechanism, but something needs to happen there.

And I would finally, as I know we are running out of time here,

there is much, much more I want to have an opportunity to talk

about, but I would also say this.

In your charts, as you talk about things like trade adjustment assistance to help the fewer than 3 percent of workers who have been

laid off due to import competition or overseas relocation, that is a

very narrow definition of people who have been impacted by trade.

I would encourage you, we have to work together to look at counterfeiting. We have lost over 200,000 jobs due to a $12 billion auto

11

parts counterfeiting market, though we toughened up our counterfeiting laws a couple of years ago. I do not see us using that to go

after that industry.

Over 1.5 million jobs have been lost due to currency manipulation. There are a whole lot more folks in America being impacted

by this. I am all for trade, but I want to trade our products, not

our jobs. Right now in America, we have too many jobs that we are

losing. Thank you.

Ambassador SCHWAB. Senator, let me answer your question specifically about Korea. We will not bring back a free trade agreement with Korea that does not level the playing field. I mean, that

is obviously a key component.

I would note that the 1991 semiconductor MOU that you are referring to was not a formal trade agreement, and the market access

language was an industry projection of what would take place. It

was not a government commitment.

We cannot be in a position of negotiating market share guarantees. We can be in a position of negotiating opportunities and fair

opportunities, and I think that is what we can be working together

to make sure.

In terms of trade adjustment assistance, the Chairman specifically talked about trade adjustment assistance. I did not have a

chance to respond. The President recently said that he wants to extend trade adjustment assistance.

I think it is important that trade adjustment assistance, and

quite frankly anything that we can do to help those who are negatively impacted by trade, I think that is a very important component of our trade policy, and I look forward to working with you

on it.

Senator GRASSLEY. Senator Cantwell, I will let you ask questions

if you do not think you are going to miss the vote.

Senator CANTWELL. I think I am going to have to ask the question and stay for a few minutes of it, but I think I am going to

make sure I make the vote.

But I think this Korean agreement is an interesting point, which

is, if we do not have TPA done in time to get the Korean deal, then

what will happen with the disparity? If you could just comment for

the record on the rate and speed at which the rest of the global

community is doing bilaterals.

If we do not have TPA, are we going to lose ground? So not only

do we not get these issues that are on an unlevel playing field for

the United States right now and Korea, if we do not have TPA to

actually go forth, how do we prevent ourselves from losing ground

on that issue if the rest of the world is moving much faster on

these bilaterals and we are without that capacity?

You will just have to excuse me. I do not want to miss the vote.

Senator Reid is being very diligent about the 15-minute rules these

days, so I may not stay, but I will have the record. To me, this is

a very important question.

Ambassador SCHWAB. Senator, I understand. You raised two

very, very important questions. If the United States walks off the

field, which is effectively what we do if we do not have trade promotion authority, other countries will continue to negotiate bilateral and regional deals, as they are currently doing, that are going

12

to exclude us. That is likely to be to the detriment of our negotiators.

In terms of Korea, we hope that that free trade agreement can

be negotiated in time to use the current allocation of trade promotion authority. But obviously if we are unable to do that, if we

are unable to reach a bilaterally satisfactory FTA with Korea by

the end of March, then the issues that Senator Stabenow and you

have pointed out will not be addressed, or will certainly not be addressed as well as they could be in a free trade agreement.

Senator GRASSLEY. I am going to ask my questions now. Then

when Senator Baucus comes back, I have to run and vote. So, we

are going to do that over the course of these two or three votes.

Congress recently extended the Andean Trade Preference Program until June 30. We need to implement our trade agreements

with Peru and Colombia by that date. I spoke to that in my opening comment as to how important I think that is, not only for Peru

and Colombia, leveling the playing field for American farmers and

manufacturers, because Peru and Colombia have all this stuff coming in here relatively duty-free and we do not, and under this

agreement we get that, so we have a level playing field. That is

why all this is a no-brainer.

But I have also stated that we have countries down there that

are nationalizing everything, like Ecuador, Bolivia, and Venezuela.

So, we want to promote free economies like Peru and Columbia

have, and obviously not anti-America economies, as Venezuela has

tended to be, and as Chavez is kind of working with Bolivia and

Ecuador for them to become.

So with respect to Ecuador and Bolivia, I do not see why we

should reward bad behavior by extending trade preferences for

those two countries. What is the administration’s point of view?

And I hope it is not different than mine, that I do not think they

deserve the benefits. Ecuador was starting to negotiate with us,

then they nationalized something and we backed off. They do not

keep their commitments, so why should we continue to give them

the benefits?

Ambassador SCHWAB. Senator, you point out that, whether we

are talking about free trade agreements or preference agreements,

in many cases we are looking at both commercial value and we are

looking at geopolitical implications.

In the case of the Andean preferences and the free trade agreements that have been negotiated with Peru and Colombia, obviously both come into play, as well as our anti-narcotics objectives

in the region.

I thank you for your strong endorsement of the Peru and Colombia free trade agreements. Those are, in fact, critical not just to

those economies, but to our economy as well. They are very, very

strong commercially and have very important geopolitical implications.

In terms of extension of preferences, last year when we addressed this issue the administration’s position favored extension of

preferences for all four of the Andean countries, as you know.

That position has not changed. Obviously, if there is a piece of

legislation as we approach the expiration of the current prefVerDate 11-MAY-2000 15:27 May 15, 2008 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 41877.000 SFIN1 PsN: SFIN1
13

erences, we will go back and revisit our position as an administration.

But the last official administration position at the end of last

year was for at least a 1-year extension of all four of the preferences. We are very comfortable with the extension for Peru and

Columbia such that that should give us time to enact the FTAs into

law and have them enter into force.

Senator GRASSLEY. Well, just to remind you, and I accept your

answer for now, we have made some mistakes in regard to Venezuela. The first mistake we made was when we sent observers

down to the first referendum on whether Chavez ought to be in office the way he is, and run the country the way he is.

There is all sorts of evidence that that election was rigged, and

our people, whoever they were that went down there—and I suppose it is probably some people from the State Department, and

you sometimes wonder whether America is first or America is second in their determinations—and they said that it was a legitimate

election. Everything indicates that it was not a legitimate election.

So, we need to send strong signals, if we believe that the direction of these countries is wrong, that they are wrong. I think that

is one way to do it for Bolivia and Ecuador.

You are well aware of my concerns about Korea’s de facto ban

on imports of U.S. beef. I also have major concerns about Korea’s

treatment of another major Iowa product, pork. Korea is currently

a large export market for our pork and there remains significant

potential for growth.

But Chile, a major U.S. competitor, recently implemented a free

trade agreement with Korea, and Chilean pork will be duty-free in

Korea. U.S. pork will be at a disadvantage then unless an ambitious outcome is reached in our negotiations with the Koreans.

So I encourage you to negotiate an agreement with Korea on

pork that is based on the standards set in the Peru and Colombia

free trade agreements.

Ambassador SCHWAB. Senator Grassley, beef, we have spoken of

on a number of occasions. You have been an avid and enthusiastic

advocate of making sure that U.S. beef exports to Korea, to Japan,

to China resume the levels that they have had in the past, and

then some, and that these countries adhere to OIE standards,

internationally recognized standards in terms of their treatment of

U.S. beef exports. We will continue to pursue that, and we are certainly doing so in the case of Korea.

Similarly, with pork, we find, as you know, in a number of countries, including Korea, including the European Union, quite frankly, that we are frequently facing SPS—sanitary and phytosanitary—barriers to U.S. exports. It is a very, very high priority

of ours to see that those are eliminated.

Senator GRASSLEY. All right. Before I go to Senator Roberts, my

last point will be a status on our engagement with the European

Union over the biotech moratorium and the E.U. member state

bans. How are you working to see that the E.U. comes into compliance with the WTO obligations?

Ambassador SCHWAB. Senator, that is a very good example of

how the U.S. Government uses our compliance tools to address a

trade problem, an unfair trade barrier in this case. This is a WTO

14

case that we took against the European Union on biotech products.

We won that case.

The E.U. maintains that it is now in compliance with the WTO

standard. We do not believe that that is the case, even though

there have been some approvals of biotech product entry. As you

note, member states are still not in compliance. We continue to

monitor that and will return to the WTO to make sure those are

enforced.

Senator GRASSLEY. Yes. I did not get a very good response from

the European Union Commissioner on Agriculture, even though

she is, I think, somewhat personally sympathetic to getting this

solved.

There was a lot of hope of getting it solved, considering this 10-

or 15-year-old statement you always get from the Europeans, that

somehow there is consumer resistance to our GMOs (genetically

modified organisms). Then the fact that they say, well, it is labeled,

that is tantamount to a ban on our products as well.

Senator Roberts?

Senator ROBERTS. Thank you, Mr. Chairman. Pardon me. Thank

you, Senator. I had a momentary lapse there. But at any rate——

Senator GRASSLEY. Sounded good.

Senator ROBERTS. Yes. [Laughter.] Maybe we want a recount on

some of these. Well, never mind.

Senator GRASSLEY. Yes. We had better just accept the——

Senator ROBERTS. Yes, I know that. I know that.

Senator GRASSLEY [continuing]. The verdict of the people.

Senator ROBERTS. Yes. I am perfectly willing. And now I have 4

minutes remaining. [Laughter.]

But I want to thank you and the Chairman for holding this hearing. Ambassador Schwab, if in fact Margaret Thatcher was the Iron

Lady, you are now the Steel Lady, apparently, by the Chairman referring to your steely resolve. I thought ‘‘Steely Resolve’’ was a rock

group, but that is another whole thing.

You have been described as tenacious. But the thing that I like

is that you know when to hold them and when to fold them. That

is a Dodge City term, where I am from. You made a point of that.

I think that was very important to let our competitors know that

we are not going to accept something that is simply not right.

I want to commend you for aggressively pursuing the Airbus

Aviation case before the WTO dispute settlement panel, and then

also pressing for some kind of a negotiated settlement.

I do not understand. Well, I understand, but I think it is being

very disingenuous, to say the least—that is the nicest word I can

say—for the E.U. to come back and say, well, now that Boeing is

making a profit we have to have more subsidies. That is unbelievable to me. So, I want to thank you for doing that.

Do you have any comment on that particular issue?

Ambassador SCHWAB. As you state, we would prefer to be able

to resolve this issue without continuing the litigation, with the

elimination of launch aid on the part of the Europeans. That has

not been possible up to this point and could be getting worse, so

we continue to pursue the litigation. We feel we have a strong case.

Senator ROBERTS. Well, hold them, do not fold them.

15

This is going to be repetitive. The distinguished Senator from

Iowa has brought up the fact that I have more cows than people,

and so does he. Maybe hogs. I am not sure.

Senator GRASSLEY. Thirteen million five hundred thousand hogs

in Iowa.

Senator ROBERTS. I see.

Senator GRASSLEY. Thirteen million five hundred thousand.

Senator ROBERTS. We have more cattle. I am not going to get

into the numbers, but we have more cattle than people, and they

are usually in a better mood. [Laughter.] But at any rate, U.S. beef

continues to be blocked. And I have a whole series of questions

about that, and I am not going to get into all the adjectives and

adverbs, from the Korean market, and we have problems with

Japan as well.

The FTA negotiations appear to be moving forward. What happens if the negotiators come to an agreement on FTA and the beef

issue remains unresolved? Because you are not going to get support. We have laid that one down very clearly here in the Senate.

Would such a circumstances weaken your negotiating position on

the trade resumption?

Ambassador SCHWAB. The issue of Korean beef is one that is

very, very high priority for us, U.S. exports of beef to Korea, and

we have been extremely disappointed up to this stage in terms of

the reaction.

Those negotiations are separate from the free trade agreement

negotiations, but I think it has been very clear to any Korean official who has been listening to the U.S. Congress, that the chances

of us being able to close a free trade agreement and expect it to

be approved by the U.S. Congress if the beef issue has not been resolved is pretty slim, and I think the key, really, is for Korea to

adopt internationally recognized standards for beef consumption.

Korea has every right to protect its consumers, its consumer

health and welfare. There is no question about that. But Korea is

not adhering to OIE standards, and Korea needs to be adhering to

OIE standards.

Senator ROBERTS. Well, that was my next question. I do not

mean to interrupt you, but that is what I am doing.

What is your sense that, once the United States receives a determination from the OIE on the BSE risk, that we can use that as

leverage on not only Korea, but Japan and China?

Ambassador SCHWAB. I think that is very, very important. The

agreements that we reached, the FTA agreements with Peru, and

Colombia, Guatemala, lay the groundwork and set some very good

precedents.

With the OIE recommendations scheduled at the end of this

month, sometime in March, we assume the United States would be

designated a so-called ‘‘controlled risk’’ country, which we believe

we are already, if not ‘‘negligible risk.’’

That should make it a lot easier for governments, for vets to explain to their people. But quite frankly, it is very clear under current OIE standards that there is no risk whatsoever from U.S. beef

as long as SRMs (specified risk materials) are removed, as you

know.

16

Senator ROBERTS. I know, in dealing with something called

FIFRA, which is an acronym for the amount of risk in regard to

our food supply, and I have been sentenced with that ever since I

have had the privilege of public service, but instead of saying ‘‘negligible risk,’’ why do we not use ‘‘sound science risk?’’

That is the one I think—you cannot let false barriers and fake

science determine market access. So, it is part of a larger issue

even though it is separate.

One other quick comment. My time is over and I know we have

several votes, although there does not seem to be anybody here

other than the distinguished Senator.

Stalled Doha talks. I think that many of my colleagues would

agree that any bill—and I am talking about the farm bill now and

the farm bill debate—first and foremost, should be written to the

benefit of our farmers.

So I understand where Canada is coming from. No, I really do

not. I do not know why they filed this. It just does not make any

sense to me. And I know where Brazil came from on the cotton

case. But we are going to write the farm bill the best we can to

benefit our farmers and ranchers, period.

I hope we have success in the Doha Round, and I certainly hope

we do not go back to the Tear Gas Round in Seattle, or something

like that. That was devastating. I just, again, want to thank you

for being so steadfast. You can ride shotgun with us in Dodge City

any time. Thank you.

Ambassador SCHWAB. Thank you, Senator.

Senator GRASSLEY. Another question that I have deals with corn

in Canada and their complaint against us. What is the status of

the complaint and what effort is the administration making to see

that U.S. interests are fully defended if Canada moves their complaint to the WTO?

Ambassador SCHWAB. As you know, Canada formally asked for

consultations with the United States over our corn program. I

think Senator Roberts was referring to that case as well. We think

it is most unfortunate that they have done so, and a number of

other countries have joined in that case.

Consultations are under way, but I fully expect, ultimately, the

Canadians will decide to go ahead with a formal filing of the case.

We believe that our corn program, our commodity program is fully

consistent with our WTO obligations, and we will be defending that

program.

The issue of our commodity programs, though, and the farm

bill—and this goes to the question of the current farm bill—that

the administration is proposing that we are working with the Senate House Agriculture Committee on, is not a Doha Round offer.

It is a farm bill proposal where reforms are recommended because they are good for our farm program, not because this is a

particular offer in the Doha Round. That said, the fact that the

Doha Round has not moved ahead more quickly, in part because

of agricultural issues, means that we are seeing, and we will probably continue to see, additional litigation against not just our farm

programs, but additional litigation period, around the world over

trade issues.

17

One of the tools that you use to address trade compliance and potential litigation is negotiation, and some of that was going on in

the Doha Round. As you know, with the so-called ‘‘peace clause’’ expiring a year ago under which there was no agricultural litigation,

we then found the cotton case was filed, the corn case has now

been filed.

Again, we believe that in the cotton case, for example, that we

are now fully in compliance with the WTO panel finding, and in

the corn case we will defend our current programs.

But surely a better way to go for all parties concerned is a Doha

Round agreement where we have new market access for trade

flows, meaningful new trade flows in agriculture and more disciplines on trade-distorting domestic support.

Senator GRASSLEY. Thank you very much.

On another issue, the Generalized System of Preferences, GSP

for short, as part of this extension that we passed last year—December, I think—we authorized the President to limit the availability of GSP benefits for super-competitive products.

Is the administration currently taking steps to see that these

benefits are indeed revoked for super-competitive products, including products from—and I am mentioning these countries for two

different reasons. One, is Venezuela, as I expressed before, because

of the Castro-ization of that country.

Number two, Brazil and India, because Brazil and India are

countries that have been dragging their feet on moving ahead on

Doha without our taking further action, which we have now taken,

and I have not seen that they have made any moves since then.

Maybe you know more about that than I do. But right now let us

deal with the super-competitive product issue.

Ambassador SCHWAB. We very much appreciated the extension of

the Generalized System of Preferences at the end of last year and

Congress’s request that we use the competitive need limits to address some of these countries that are exporting certain products

where they clearly do not need, or should not need, preferences to

have access to the U.S. market.

We are undergoing the review anticipated by the extension of the

GSP program and will, in the near future, be finalizing that review

and announcing the results.

Senator GRASSLEY. All right.

In regard to Doha, most of the time we talk about agriculture.

I would like to mention services. Obviously, even in the United

States this is the really growing part of our economy. Services account for nearly 80 percent of our private sector employment here

in this country. Our trade surplus in services is now growing from

$66 billion 2 years ago to $72 billion last year.

What is the status of the services negotiations in Doha, and

where do we go from here? How do we ensure that, if an agreement

is reached in other parts of the negotiation, that we will reach an

equally ambitious outcome with respect to liberalization of services?

Ambassador SCHWAB. That is an extremely good question. As you

note, services is such a fundamental part of the U.S. economy.

Eight out of ten jobs in the United States is related to the service

18

sector. Many of those jobs are knowledge-intensive jobs and highskilled jobs, and very, very important to us.

In the services negotiations, or in the Doha negotiations, we have

formulas that are fairly well-established in the framework, in the

Doha declaration and so on, for agriculture and industry, and I described those earlier.

In terms of services, it is more complicated. It is more of a traditional request/offer process that we used to use with agriculture. It

involves a plurilateral, or groups of like-minded countries where we

have a focus on specific sectors, different countries have come together, coalitions of countries to work with other countries to try

to get more liberalization, computer services, telecommunication

services, environmental goods and services, as a matter of fact, financial services, and so on.

We are trying to make sure that those negotiations proceed at

the same pace as agriculture, as manufacturing, and as some of the

others, but we are very conscious of trying to keep the momentum

going in the services negotiations because we have such an important interest in terms of enhancing U.S. exports.

And, quite frankly, in the development objective, services trade

liberalization, even unilateral services trade liberalization, can provide tremendous development benefits to developing countries.

Senator GRASSLEY. Yes. What about our protocol for accession of

Russia to the World Trade Organization and the Working Party report that goes with it? Are we inclined to continue in that direction,

even considering Putin’s re-Sovietization of their political system?

Ambassador SCHWAB. The state of play, as you know, in terms

of Russia’s accession to the World Trade Organization is, last year,

toward the end of last year, we were able to complete the bilateral

component of the U.S.-Russia accession negotiations for Russia’s

accession to the WTO.

In that bilateral agreement, Russia made commitments to not

just increase its market access and lower its barriers to trade, but

also discipline intellectual property rights, and eliminate some of

the SPS problems that we have faced, for example, in beef, in pork,

and poultry—beef and pork in particular.

The next phase, the current phase, is the multilateral phase.

These accession discussions are focused primarily, almost exclusively, on the commercial issues. They are not proceeding as well

or as quickly as I think Russia had hoped. Russia is not moving

ahead with the kind of WTO commitments that it would need at

this point to become a full-fledged member of the WTO.

Senator ROBERTS. Mr. Chairman, could I ask a question on that?

Senator GRASSLEY. You sure can. When Senator Hatch comes—

he is not on the list here, but he wants to ask questions. So if other

people who are not on the list arrive, then Senator Hatch would

take over. Go ahead.

Senator ROBERTS. The second vote has started, as staff has informed me. But I was intrigued by your comment in regards to

Russia and their current posture.

Have you read the remarks by Putin? I mean, he could have

taken his shoe off and pounded the table.

Senator GRASSLEY. The ones he made in Munich, you mean?

19

Senator ROBERTS. Yes, in Munich, with the NATO security situation, where he talked about building bridges to Iran by assisting

them with their nuclear weaponry, then castigated the United

States for being in step with Poland and Czechoslovakia. Hello.

That is the politics of it.

I can tell you, on a not-too-recent trip to Russia with Saxby

Chambliss, who was leading a delegation to talk about agriculture

and to talk about our efforts with APHIS, helping the Russians

with the BSE problem and the fact that we have inspected 600,000

animals, and we would certainly like some progress, at least, to increase our exports of beef, or anything that we raise, to Russia. The

individual that was in charge of that, wearing his Armani suit, was

not very helpful and complained about a 1988 case of BSE in mink.

Ambassador SCHWAB. It was polar bears.

Senator ROBERTS. Well, polar bears and mink, I suppose. We do

not have too many polar bears in Kansas. We are not opposed to

them, but we just do not have them. So I told this fellow, after this

tirade, which is what it was, we got nowhere. Saxby was being

nice. Finally, I just got up and left and said, I will send you a picture so that you can determine the difference between a cow and

a mink. I do not see much give in that direction, more especially

with the political posturing that they are doing now. So I think the

Chairman’s question was certainly worthwhile.

The only other thing that I wanted to ask you was, in 1996,

somebody—I do not remember who it was—crafted a new farm bill

that directed direct payments to farmers, and it was green. It is

not easy being green. But that was green. Basically they were

called AMPTA payments. It was a transition payment. I do not

think we can go back to that.

But my question to you is, I am not very excited about this

counter-cyclical program where people who do not have a crop do

not get any assistance, but I am very much interested in direct

payments. I think probably that would help you out in regards to

your negotiations. Is that a yes?

Ambassador SCHWAB. Two quick comments. One, the beef issue

in Russia, we think we have resolved that issue since your trip as

part of the bilateral WTO accession.

Senator ROBERTS. Maybe my walking out helped, I do not know.

Ambassador SCHWAB. In terms of direct payments, those are generally considered to be so-called green box payments.

Senator ROBERTS. Yes.

Ambassador SCHWAB. As you know, it is amber box and blue box.

Senator ROBERTS. Right.

Ambassador SCHWAB. It is the trade-distorting payments that

are the ones that are questionable and are disciplined under the

World Trade Organization. So, obviously to the extent we move

away from amber box commodity programs toward green box programs, that would help us a great deal.

Senator ROBERTS. Thank you for your comments.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator, very much.

Ambassador Schwab, what are we doing about China? What are

the top three things you are doing to address American concern

about China?

20

Ambassador SCHWAB. We are doing many more than three

things.

The CHAIRMAN. What are the top three?

Ambassador SCHWAB. The top three? The top three are, we are

negotiating. Let me begin with the most obvious. We are using the

compliance tools that I referred to earlier, including litigation, settlement negotiations, clearly trying to get results and get unfair

barriers removed.

Where China is not in compliance with their WTO obligations

and we are not able to resolve it, we are taking cases to the WTO.

I can address some of those, but most recently, the auto parts case

and the prohibited subsidies case.

The CHAIRMAN. But which of those do you think is the highest

profile, the most significant? Again, I am trying to do two things

here. One, is do what is right by our people, but second, show to

everyone we work for that the administration does care about enforcement. So which examples can you give that fulfill both those

objectives?

Ambassador SCHWAB. If you were an auto parts manufacturer,

you believe that the auto parts case——

The CHAIRMAN. That is right.

Ambassador SCHWAB. Or if you are an auto mechanic——

The CHAIRMAN. If you are in a manufacturing State.

Ambassador SCHWAB. That is exactly right. So I am reluctant to

say one case is more important than another case. If we have gone

so far as to threaten a case and then to take a case to the WTO,

it means it is very, very serious. So the most recent case that we

have sought formal consultations under, that is the prohibited subsidies case.

There, we are talking about prohibited subsidies—six export subsidies, three import substitution subsidies—that we believe are prohibited under China’s WTO obligations. Those are subsidies that

come in the form of tax breaks, other kinds of breaks to foreign invested enterprises in China.

Foreign invested enterprises account for 58 percent of China’s exports, so the scope of this case could be extremely significant. If you

are talking about who is affected in the United States, it is workers

and, in particular, small- and medium-sized companies that are not

invested in China that either compete with Chinese products in

this market, compete to export to the Chinese market where perhaps the import substitution subsidies keep them out, or compete

with Chinese products in third markets. So, that is the most recent

case.

We sought formal consultations. We will see whether we can actually resolve these, get these subsidies eliminated in the consultation phase. If not, we will go to formal litigation. That is the most

recent example.

But we have, as I said, the auto parts case that is also pending.

We were about to take a kraft liner board case, and that problem

was resolved 24 hours before we were supposed to file that case.

We have won a case related to semiconductors and the value-added

tax 2 years ago. We have the potential for other cases. We have the

potential for an intellectual property rights case if we are not able

to——

21

The CHAIRMAN. What about that? That has been hanging around

for years. There has been a lot of talk, and I know it is a difficult

case to make, I guess, in some respects. But it is getting embarrassing, frankly. It has been years now. There is a lot of talk about

counterfeiting and piracy in China. I know it is true in other countries, too. We are talking about China right now. Do you not think

it is kind of embarrassing that we are not doing something about

that?

Ambassador SCHWAB. It is. We walk a very fine line between

wanting to be able to get results and not getting sufficient results

and opting for litigation. If you go into litigation, sometimes you

end up in an 18-month period where nothing happens. You are in

a stalemate until you get a panel decision. If you can work out the

problems, you really are helping the U.S. producers, the U.S. property rights holders.

But in answer to your fundamental question, intellectual property rights: counterfeiting is a very, very serious problem in China.

The Chinese leadership have been very public, very up front about

wanting to address the problem, and in some ways they have

through, for example, our Joint Commission on Commerce and

Trade, which is a bilateral vehicle that we have.

The Chinese pledged, last year, last April, to have any computers

manufactured in China load legitimate operating software before

they leave the factory.

The CHAIRMAN. But by what percentage is that addressing the

problem? What proportion?

Ambassador SCHWAB. That has turned out to be very, very significant.

The CHAIRMAN. Like, how much? Is that half the problem?

Ambassador SCHWAB. Half of the software problem? We do not

know. We know that there are enforcement problems, serious enforcement problems, in terms of thresholds, in terms of criminal enforcement. We know that there are problems associated with government agencies, provincial level agencies that are not buying legitimate software.

We have, as part of our Special 301 process, engaged in our first

provincial-level IP review. So we know that the issue is very big.

We know, for example, that well over 70 percent of the counterfeit

products that are stopped at our borders come from China. We also

know that the Chinese authorities, while they are trying to resolve

the problem, have not done enough.

The CHAIRMAN. So again, I think it is embarrassing that this

country has not addressed counterfeiting/piracy sufficiently in

China, and it has been going on for years and years, as you know

as well as anybody, right next to our embassy in Beijing. There

were sales of pirated products right there.

That was an effrontery to have that out there right next to the

embassy, and they finally moved that a few blocks away. That is

gone, I guess. I have not been over there lately. But I think most

people, most companies feel that this country has not sufficiently

addressed the problem.

Ambassador SCHWAB. Mr. Chairman, I believe that China has

not done enough. We have documented——

The CHAIRMAN. How do we get them to do more?

22

Ambassador SCHWAB. We are taking an approach that, by any

definition, is results-oriented. We are in very close consultation

with the industry. When we were about to file a case last fall, we

had an intellectual property case ready to file.

We had informed the Chinese we were about to file it. The Chinese asked for some more time for us to try to resolve the problems. The U.S. industry felt that that was a good idea. The industry endorsed us not filing the case at that time. But that is a potential case, and the Chinese know it.

There is a market access case that also is related to intellectual

property rights. That one is also out there. It is a potential case.

The CHAIRMAN. Do you have sort of a strategic plan, a kind of

road map to address the imbalances?

Ambassador SCHWAB. Yes.

The CHAIRMAN. Our trade imbalances with China are certainly

out of hand. Not only imbalances. What is your road map to deal

with the economic trade-related problems that we have with

China? What is it? What is the plan?

Ambassador SCHWAB. The road map, the plan in terms of addressing trade imbalances with China, basically I laid out in my

testimony this morning.

The CHAIRMAN. If you could just summarize it, maybe.

Ambassador SCHWAB. It is a combination of negotiating for additional access, for example, in certain financial services areas where

China, we believe, made insufficient commitments in the WTO accession process. We need to negotiate, through the Doha Round, additional financial services commitments.

We are using the strategic economic dialogue for the longer-term,

macroeconomic strategic issues, including the financial services

area. In financial services, where China has made commitments as

part of its WTO accession process, we are bearing down very hard

to see that those commitments are complied with. If they are not

complied with, we go to litigation.

Similarly, we will use all of the tools in our arsenal to level the

playing field when it comes to unfair trade practices. Now, I am

talking primarily on the export side. Obviously if Carlos Gutierrez,

Secretary of Commerce, were here, he could be talking about the

use of our antidumping/countervailing duties.

But when it comes to U.S. trade policy and the trade agenda, recognizing that the trade imbalance between the United States and

China is the result of multiple factors, including macroeconomic

factors related, as you know, to our savings rate or lack thereof——

The CHAIRMAN. Let me address something else that is similar. As

you know, when PNTR was negotiated with China—something I

pushed for and supported strongly because I think we have to engage China, eyes wide open, without illusions, but certainly engage—included in that legislation, as you know, is a provision,

known as the section 421 safeguard, that permits action to adjust

to surges of Chinese products in the United States.

Four separate times, the ITC has determined that China’s imports would cause market disruption and recommended relief, as

you well know. But in every case, the President disregarded the

ITC finding and provided no relief, and thousands of jobs were lost

23

as a consequence. So those are cases where the administration

backed off and did not do what ITC recommended.

Now, I ask a deeper question. How in the world is this Congress

going to trust the administration on trade negotiations, FTAs, and

PNTR if, at the same time, you do not enforce the law? How are

you going to get Congressional trust if you do not enforce the law,

if you do not follow up on ITC recommendations, or at the very

least come up with a compelling reason not to address the problems

that those surges caused?

Ambassador SCHWAB. Mr. Chairman, let me address your question in two parts, one specifically on 421 and, secondly, on the

broader issue of trade promotion authority and trust.

In terms of 421, there have been a number of such requests, as

you note. The administration takes that provision very seriously. In

the last case, for example, the ITC made its recommendation. The

ITC makes its recommendation on the basis of certain criteria.

The administration then needs to look at, what is in the national

economic interest? In that particular case, since I am more familiar

with that one than the previous cases, there were over 50 other

suppliers of the product, so using 421 would not have helped the

U.S. suppliers, and U.S. users would have been charged 5 times

what they were paying for the product. So the sense there was, 421

is an important piece of statute——

The CHAIRMAN. Why is it even in the statute then?

Ambassador SCHWAB. To be used when it is in the national economic interest.

The CHAIRMAN. And when has the administration found it to be

in the national economic interest to trigger 421 and implement

safeguards? When? What examples are there?

Ambassador SCHWAB. Well, up to this point there have not been

that many cases filed.

The CHAIRMAN. Well, I gave you four examples.

Ambassador SCHWAB. And in those cases they were found not to

be in the national economic interests.

The CHAIRMAN. That is correct. The perception for many in Congress is that ‘‘not in the national economic interest’’ is a loophole

through which the administration drove, not a Mack truck, but a

huge locomotive.

Ambassador SCHWAB. Well, let me suggest, on 421, I would be

happy to sit down with you, with members of the committee, and

above all with Secretary Gutierrez, because this is technically

under his jurisdiction, and talk about the use of 421. But the administration takes it very, very seriously. It had a very thorough

process, thorough review to determine whether or not to apply it

in this case.

Let me address your broader issue, though, in terms of trust and

in terms of trade agreements.

The CHAIRMAN. Yes. That would be helpful.

Ambassador SCHWAB. Let me give you a couple of numbers here.

In terms of formal and informal consultations with the Congress on

the Panama free trade agreement, we have counted 84 consultations. In the case of Peru, we have counted 170 consultations. In

the case of Colombia, 168 consultations.

24

On the issue of China trade alone last year, over 60 consultations

going on between the U.S. Trade Representative’s office—this is not

other parts of the administration, this is my office—and the Congress, primarily with this committee, with the Ways and Means

Committee, and any other interested parties.

I think, first and foremost, when it comes to the delegation of authority to the executive branch to conduct trade policy, it is incumbent upon us to make sure that there is an open channel of communication. That is with you, with the members, with your staff,

and on a regular basis so that there are no surprises on either one.

The CHAIRMAN. Yes. But there is a sense, I think, on the Hill

with those so-called consultations, that those are used to some degree—and do not take this in the pejorative sense—by the administration to just learn what is the least amount it can do to get by.

That is, by talking to members of Congress, what is the least

amount we in the administration have to do to get by, and maybe

squeeze out a one-vote win on a trade agreement. There is that

sense. I have been involved in many, many consultations with

many, many of your predecessors, many of them in addition to you.

I can tell you, it is not what it could, and should, be.

That is why a lot of members in Congress are thinking of changing fast track so that it requires more direct participation by Congress—not just consultation, but participation by Congress.

You and I have discussed several ways that that could be

changed, but I just suggest that you deal with those because the

administration’s response to 421 does not help your case.

Ambassador SCHWAB. A specific point, then, again, addressing

your more general point.

One of the things we do in terms of trade negotiations is, before

we table any text in a trade negotiation, we are up here at least

5 days in advance to work with your staff. There is a huge amount

of very serious, not notification, but consultation that goes on that

is a two-way exchange.

If that process does not work, we need to know about it because

it is not in our interests to have members of Congress feel that

they are not being consulted—not notified, consulted, a two-way exchange.

Which goes to the broader point, which is, you will notice that,

when the President called for renewal of trade promotion authority,

when I have spoken about renewal of trade promotion authority,

we have not sent up an administration bill that says we need it for

this many years for all of these purposes, and here are the conditions. What we have said is, it is time for us to consult with the

Congress as to what that trade promotion authority should look

like.

The CHAIRMAN. Let us go to part of that, labor standards. I think

we are past the day when FTAs provided that, in our agreements,

we merely require our trading partners to enforce their own laws.

We are past that. We are now at the point that they have to raise

their labor standards to internationally accepted levels.

I would ask your thoughts on that. How do we go about finding

proper ways to raise other countries’ labor standards? It is insufficient to say they will not reduce them. Those days are over. How

can we raise them?

25

Ambassador SCHWAB. In terms of raising labor standards, I think

we can make a compelling case, looking backward, that the free

trade agreements—all of the free trade agreements that have been

negotiated in the last 5 years—have in fact had the impact of raising the labor standards in each of the countries where we have engaged in FTA negotiations. That has been more on an ad hoc basis

and has been the product, quite frankly, of a huge amount of consultation back and forth.

We believe that we should try to bridge the gap in terms of Republicans’ and Democrats’ differences over the treatment of labor

and environment on these trade agreements. We have been having

discussions in the Ways and Means Committee with Chairman

Rangel, with Congressman McCreary; your staff, Senator Grassley’s staff have been involved in that. The question there is, what

kind of approach, template——

The CHAIRMAN. I know what the question is. I am asking you

what your answer is. We all know what the approach is. I am a

part of all the discussions. I want to know the administration’s

view: to what degree does the administration say, and how in the

administration’s view do we raise labor standards in these agreements? That is the question I am trying to ask you. You are our

Trade Representative. What is the administration view?

Ambassador SCHWAB. I will give you the following answer, and

I am not being glib. One, in any free trade agreement that you negotiate, even without labor standard provisions, you are almost by

definition raising labor standards.

Two, in the agreements that we negotiate, we raise labor standards. Countries make significant changes and make commitments

associated with those improvements in the FTAs. However, in

terms of the current dialogue—and I am not going to negotiate in

public. That is a conversation that is going on between my office,

others in the administration, and your leadership—I think it is

clear that countries should not be able to backslide in terms of

labor commitments.

We are talking about internationally recognized labor rights and

we are talking about issues relating to enforceability, and those are

issues where we are engaging in a conversation, and we hope that

we will be able to bridge the gap.

The CHAIRMAN. Right. The more you are forthcoming, the more

likely you are going to get fast track renewal. That is a major factor.

I urge you to go back to your staff and urge them to find a way

to do this. It is not sufficient to say labor standards have the effect

of going up. That is not sufficient. You are going to have to find

a way to make sure they come up more quickly.

Ambassador SCHWAB. I appreciate that, Mr. Chairman.

The CHAIRMAN. You have a lot of experience with trade laws that

have expired, based upon when you worked here on the Hill, for

example. 301, Special 301, Super 301, all those. WTO superseded

some of that. But what leverage can you suggest that we enact or

pursue to help the United States?

Ambassador SCHWAB. I think, actually, the Congress does a very

good job in terms of building leverage. The tools are very much in

26

place. You were involved in the 1984 and 1988 Acts where the National Trade Estimate Reports were put into law.

Those National Trade Estimate Reports have become a very important vehicle for us to research, review, and identify where the

most egregious barriers are, unfair trade practices are, to U.S. exports, U.S. trade, including a variety of barriers.

Similarly, the Special 301 report, which articulates the intellectual property rights challenges we face abroad. Those lay out a lot

of the key barriers and assess and offer a sense of priorities. We

then use the tools that we have.

301 is on the books. We use 301 as a statute to impose retaliation. But in the last number of years, companies or groups that

have trade problems do not need to file a formal 301 complaint.

They come in, they talk to us.

We try to put together and try to assess what kind of case they

have, and we just go with the case. They do not need to file a 301

case. It saves them money, saves them time, saves us time.

We have a strong staff on enforcement, compliance, and litigation. We have added enforcement personnel, particularly vis-a`-vis

China. We have an enforcement task force we have created. We

have a new USTR person who is going to be at the U.S. Embassy

in Beijing. That is a first for us. We have a new Chief Counsel for

China Enforcement. So where we need to add capacity, we have

been adding capacity. I think the tools are there.

I think interacting with you when you have constituents who

have problems, making sure they come to us so we can see what

kind of a case it is and see whether, are we are talking about a

practice that is WTO-compliant, are we talking about a practice

that needs to be negotiated in the context of a free trade agreement

or in the context of a Doha Round agreement, that is very, very

helpful.

The CHAIRMAN. Canadian lumber. Provinces are not abiding by

the agreement. What are you doing about it?

Ambassador SCHWAB. We are extremely concerned that a very

important and needed bilateral softwood lumber agreement that we

reached with the Canadians is being threatened by provincial governments in Ontario and in Quebec.

I have spoken to the Canadian Trade Minister, Minister David

Emerson, about this. We are convening a group the week after

next, a binational group, to take on this issue. But it is of great

concern. I have expressed, both in writing and in person, our concerns to the Canadian government, and we will continue to pursue

this. There are dispute resolution options under the SLA.

The CHAIRMAN. Well, maybe that is why the federal government

agreed: they knew that the provinces could backslide.

Ambassador SCHWAB. The provinces also agreed. The provinces

are not supposed to be backsliding. So we need to be working with

the federal government, and they with the provincial governments,

to make sure that whatever they do is fully compliant with the

softwood lumber agreement.

The CHAIRMAN. So, as you know, in the Canadian system, provinces have a lot more power than do States in the U.S. So what

leverage do you have at the federal level, or with the provinces?

27

Ambassador SCHWAB. I think that both sides understand the importance of this softwood lumber agreement succeeding and surviving for at least the 7 years that it is supposed to be in place.

I think I would like to start with that positive leverage, which

is the interest that we all have, and the commitments of the provinces to the original agreement, to remind them that certain types

of subsidies and subsidies that are going to be in violation of that

agreement will not work.

The CHAIRMAN. I appreciate that, because that has to be enforced, that agreement. It is disappointing that provinces are not

abiding by it.

I would like to go back a little bit to how we change fast track

to get more Congressional approval. As you know, in another year,

in the time of the Canadian free trade agreement, Congress had a

much earlier role up front.

Back in that time—I do not know if it was Congress, I do not

recall, or whether it was the Finance Committee and Ways and

Means Committee, but they could choose which countries the administration would negotiate with. That is, the administration had

to send up a list of countries it intended to negotiate with, if my

facts are right, if my recollection is right.

Ambassador SCHWAB. The committee could reject an administration proposal.

The CHAIRMAN. Correct. And that was very important. Very important. I remember with Canada, it was 10–10, or virtually a tie.

But the main thing there is, the Congress, therefore, had a little

leverage over permissions it wanted going into negotiations with

Canada, and Congress got a couple of things out of that because

the administration wanted to negotiate with Canada.

Why is that not a good procedure to reinstitute?

Ambassador SCHWAB. Let me suggest that the ultimate leverage

that Congress has when trade promotion authority is in place, is

the leverage to reject a trade agreement.

The CHAIRMAN. I beg to differ with you, Madam Ambassador.

That is not the ultimate leverage. It is not. That is way often too

late for many members of Congress. I think it is better to look on

preventive measures as opposed to remedial. There is no remedy at

the end.

Right now, essentially, the administration can do what it wants

to do if it has fast track. It can negotiate with any country it wants

to if it has fast track. It can so-called consult, talk to Congress, try

to figure out what you can get by with the least amount, and then

send it up and Congress has no role. None. None whatsoever, effectively, except to reject it. It is all Congress can do.

Congress cannot pick the countries now. The administration

picks them. Moreover, the mock mark-ups are irrelevant by this

administration’s treatment. They thumb their nose at the Congress

on the mock mark-ups.

When legislative language comes up, this committee can say no.

That, too, is irrelevant. It still goes to the floor. The committee is

discharged automatically under current law. So basically right now,

Congress has no leverage except to say no. That is basically the situation right now.

28

Ambassador SCHWAB. Mr. Chairman, let me respectfully disagree

with you, and I will do so on the basis that our negotiators, day

in and day out, are interacting with members of Congress, with

your staff, with constituent groups, with private sector advisory

committees who also come and talk to you, and we change and

adapt what we are doing in the negotiations every single day based

on those consultations.

Maybe that is not apparent from the Hill. If that is not apparent

from where you sit, then there is a problem, because I can tell you

that the Congress of the United States, particularly the Finance

Committee and the Ways and Means Committee, influence what

we do day in and day out in terms of the cases we bring, in terms

of the priorities we set, in terms of the text of the negotiation.

There is very, very strong interaction between the committees.

That said, we are not always able to get, in a negotiation, everything we want, everything Congress would want. We are not always able to avoid giving things that constituent groups may object

to. The mock mark-up, we take very, very seriously.

But rather than quibble over the specifics, let me suggest this.

The fact that you are concerned about this is of great concern to

me, and it means the process is not working as well as it should

be working.

You have my commitment as we go forward and talk about trade

promotion authority and a renewal of trade promotion authority to

talk about what needs to be in there to make sure that Congress

is convinced that Congress is being heard and is a full partner in

this exercise, and in a way that does not tie the administration’s

hands as our negotiator.

The CHAIRMAN. Well, that is right. We are a unique country. We

are not a parliamentary form of government, we are a democracy.

I know it is corny. It is overstated. I repeat too often a Winston

Churchill quote, which I will not quote properly, the point that democracy, for all its fits and starts and inefficiencies, is the world’s

worst form of government, except we have none better. That is true

more in this country than I think it is in a parliamentary form of

government. So, it is hard.

But there is a sense, I think, in the Congress that cooperation

has to be better, and Congress is going to try to find ways, properly, to intercede its role in trade.

I just urge you to respect that, understand that, and not fight it,

but get to ‘‘yes.’’ What should those provisions be? That will help

very, very much. In addition to all the other things that have to

be done: enforcement, talking about labor standards—we have not

talked much about TAA and how much TAA could, and should, be

expanded, for example.

Many other countries do a much, much better job than does this

country in dealing with worker angst and job loss, whether the job

loss is directly related to trade or whether it is not, whether it is

caused by globalization or whether it is caused by increases in advances in technologies, and so forth.

We do not do a very good job in this country—no pun intended—

of dealing with job loss in this country. I just urge you to think

much more deeply, and the administration to think much more

29

deeply—I do not want to be critical in this sense—about caring for

Americans, the American people.

There is a real sense, and I have heard many very influential

members of Congress say—and do not take this the wrong way—

USTR is for the CEOs. That is a CEO operation, just helping

American multinationals get good deals so they can fatten up their

profits and operate worldwide. That is the perception that is fairly

widely held by many very influential and high-ranking members of

Congress. You have to change that.

I am asking tougher questions to urge you to think more deeply

about how to change it, because we have the same goal, and that

is fast track. But it has to be the right fast track. The right fast

track. That is what is critical here.

Thank you very much for your patience. More Senators did not

come back because Senator Reid scheduled a caucus at 11:30, so I

will adjourn.

[Whereupon, at 11:40 a.m., the hearing was concluded.]

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