```

[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

                   TRADE AGENCY BUDGET AUTHORIZATIONS
                        AND OTHER CUSTOMS ISSUES

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 13, 1999

                               __________

                             Serial 106-90

                               __________

         Printed for the use of the Committee on Ways and Means

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
66-895                     WASHINGTON : 2001

_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Trade

                  PHILIP M. CRANE, Illinois, Chairman

BILL THOMAS, California              SANDER M. LEVIN, Michigan
E. CLAY SHAW, Jr., Florida           CHARLES B. RANGEL, New York
AMO HOUGHTON, New York               RICHARD E. NEAL, Massachusetts
DAVE CAMP, Michigan                  MICHAEL R. McNULTY, New York
JIM RAMSTAD, Minnesota               WILLIAM J. JEFFERSON, Louisiana
JENNIFER DUNN, Washington            XAVIER BECERRA, California
WALLY HERGER, California
JIM NUSSLE, Iowa

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.

                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 29, 1999, announcing the hearing...............     2

                               WITNESSES

Office of the U.S. Trade Representative, Hon. Richard Fisher, 
  Deputy U.S. Trade Representative...............................    16
U.S. Customs Service, Hon. Raymond W. Kelly, Commissioner........    31
U.S. International Trade Commission, Hon. Lynn M. Bragg, Chairman    48
U.S. Department of the Treasury:
    John P. Simpson, Deputy Assistant Secretary, Regulatory, 
      Tariff, and Trade Enforcement..............................    64
    Dennis S. Schindel, Assistant Inspector General for Audit, 
      Office of Inspector General................................    68
U.S. General Accounting Office:
    Norman U. Rabkin, Director, Administration of Justice Issues, 
      General Government Division................................    72
    Randolph C. Hite, Associate Director, Governmentwide and 
      Defense Information Systems, Accounting and Information 
      Management Division........................................    80

                                 ______

Air Courier Conference of America, James A. Rogers...............   141
Air Transport Association of America, Carol B. Hallett...........   131
Border Trade Alliance, and S.K. Ross and Assoc., P.C., Susan Kohn 
  Ross...........................................................   136
American Association of Exporters and Importers, and BASF Corp., 
  Richard J. Salamone............................................   110
GartnerGroup, J. Kurt Zimmer.....................................    96
International Mass Retail Association, Coalition for Customs 
  Automation Funding, and The Limited, Jane B. O'Dell............   115
Joint Industry Group, and Caterpillar Inc., Ronald Schoof........   103
National Customs Brokers and Forwarders Association of America, 
  Inc., and C.H. Powell Company, Peter H. Powell, Sr.............   107
National Treasury Employees Union, Robert M. Tobias..............   123
Rodriguez, Hon. Ciro D., a Representative in Congress from the 
  State of Texas.................................................     7

                       SUBMISSIONS FOR THE RECORD

American Iron and Steel Institute, statement.....................   153
American Textile Manufacturers Institute, statement..............   156
Coalition for Customs Modernization, New York, NY, M. Brian 
  Maher, and Stewart B. Hauser, statement........................   156
KPMG LLP, James J. Havelka, statement............................   158
Maritime Exchange for the Delaware River and Bay, Lewes, DE, 
  statement......................................................   159
National Association of Foreign-Trade Zones, Karen Sager, 
  statement......................................................   162
Science Applications International Corporation, Vienna, VA, 
  statement......................................................   164

 
      TRADE AGENCY BUDGET AUTHORIZATIONS AND OTHER CUSTOMS ISSUES

                              ----------                              

                        TUESDAY, APRIL 13, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                                     Subcommittee on Trade,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice at 11:01 a.m., in 
room B-318, Rayburn House Office Building, Hon. Philip M. Crane 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

March 29, 1999

No. TR-6

                    Crane Announces Hearing on Trade

                    Agency Budget Authorizations and

                          Other Customs Issues

    Congressman Philip M. Crane (R-IL), Chairman, Subcommittee on Trade 
of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on budget authorizations for fiscal 
years (FY) 2000 and 2001 for the U.S. Customs Service (Customs), U.S. 
International Trade Commission (ITC), Office of the United States Trade 
Representative (USTR), and on other Customs issues. The hearing will 
take place on Tuesday, April 13, 1999, in room B-318 Rayburn House 
Office Building, beginning at 11 a.m.
      
    Oral testimony at this hearing will be heard from both invited and 
public witnesses. Witnesses are expected to include representatives 
from Customs, ITC and USTR. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee or for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
    Budget Authorizations
      
    On February 1, 1999, President Clinton submitted his FY 2000 budget 
to the Congress. The submitted budget included proposals for Customs, 
ITC, and USTR. The President requested an increase over FY 1999 of $2.7 
million for ITC, $2.3 million for USTR, and $95.5 million for Customs. 
Additional legislative proposals contained in the budget are described 
below.
      
    Other Customs Issues
      
    Customs Automation: The current Customs automation system, the 
Automated Commercial System (ACS), is an aging 14-year-old system which 
has experienced several ``brownouts'' since last fall. ACS is operating 
on the average at 90 percent to 95 percent of its capacity, which is 
above its design specifications, creating difficulties in accommodating 
surges in filing Customs entry documentation that may occur daily or 
seasonally. Many observers, including Customs, have said that ACS is 
headed for a major system crash which may have an adverse impact on 
trade. They also believe that any serious failure of ACS could have 
widespread economic effect on U.S. businesses all along the supply 
chain including manufacturers, suppliers, brokers, and retailers.
      
    Customs plans to replace ACS with the Customs Automated Environment 
(ACE) over the next four to seven years depending on funding. Some of 
the main differences between ACS and ACE are that ACE reportedly will 
use a single integrated system, modern standards, processes, techniques 
and language, and will be compatible with commercial software. By 
contrast, ACS does not have an integrated system, uses outdated 
techniques and languages, and cannot use commercially compatible 
software.
      
    There are several issues for the Subcommittee to consider relating 
to ACE: (1) the cost of ACE, projected to be over $1 billion, (2) the 
lack of funding for ACE in the President's FY 2000 budget proposal, (3) 
the access fee for the use of Customs automation in the President's FY 
2000 budget proposal, (4) the question of whether Customs' ACE design 
and architecture will meet future requirements, and (5) the role of the 
trade industry in building ACE.
      
    International Trade Data System (ITDS): The ITDS is a Federal 
Government information technology initiative to create an integrated 
Government-wide system for electronic collection and dissemination of 
data relating to international trade. The ITDS is designed to be a 
front-end collection point to submit data and make payments required by 
all Federal Government agencies that regulate international trade 
transactions. It is also designed to provide the public with a single 
point for accessing data on international trade. The ITDS initiative is 
led by a Board of Directors chaired by the U.S. Department of the 
Treasury and composed of representatives from Government agencies, 
including the Customs Service, that are the major participants in 
government international trade data process. The President's FY 2000 
budget proposes to appropriate $13 million to be available in FY 2001 
for the ITDS to be offset by the assessment of an access fee for the 
use of Customs automated systems.
      
    Customs COBRA User Fees: The Consolidated Omnibus Budget 
Reconciliation Act of 1985 (COBRA) (P.L. 99-272) established user fees 
for certain inspectional services. Under COBRA, passengers arriving in 
the United States by commercial airline or vessel from a foreign 
location other than Canada, Mexico, or the Caribbean paid a $5 fee 
prior to 1994. The North American Free Trade Agreement Implementation 
Act (P.L. 103-182) increased the air- and sea-passenger processing fee 
from $5 to $6.50 for fiscal years 1994 through 1997 and removed the 
exemption for passengers arriving from Canada, Mexico, and the 
Caribbean. As of September 30, 1997, the fee reverted to $5, and 
Canada, Mexico, and the Caribbean regained their exemption. The 
President's FY 2000 budget proposes an increase in the passenger 
processing fee from $5 to $6.40 and removes the exemption for 
passengers arriving from Canada, Mexico, and the Caribbean.
      
    Compensation System for Customs Officers: COBRA fees fund overtime 
and premium pay for Customs officers. The original overtime pay system 
for Customs inspectors was created by the Act of February 13, 1911, 
known as the ``1911 Act.'' Section 13811 of the Omnibus Budget 
Reconciliation Act of 1993 (P.L. 103-66), known as the Customs Officer 
Pay Reform amendments, amended the 1911 Act in an attempt to eliminate 
abuses and mismanagement of the prior system. The reforms were intended 
to limit overtime and premium pay for Customs inspectors and canine 
officers to hours of work actually performed. In order to ``make 
inspectors whole,'' the law also allowed overtime compensation to be 
counted as part of the basic pay for the Civil Service Retirement 
System up to 50 percent at the $30,000 statutory overtime cap, or 
$15,000. Due to arbitration decisions, Customs must now pay overtime 
plus interest to Customs officers for hours not actually worked under 
certain circumstances: (1) for hours requested but not granted because 
the officers reached a dollar limit set by port directors, (2) for 
officers who were inadvertently passed over for a specific overtime 
assignment, and (3) for officers whose overtime was inappropriately 
assigned to part-time employees. In the 105th Congress, Chairman Crane 
introduced H.R. 3809, the ``Drug Free Borders Act,'' which made reforms 
to overtime and premium pay, and devoted savings to pay for additional 
enforcement activities. H.R. 3809 was approved by the House on May 19, 
1998, by a vote of 320-86. It was approved by the Senate in a different 
form, and no further action was taken.
      
    In announcing the hearing, Chairman Crane stated: ``As we approach 
the next millennium, we must make sure that our trade agencies have the 
tools they need to get their job done and done right, and maintain the 
capability to vigorously enforce our anti-drug and trade laws. However, 
we must do this in the most cost-
effective manner, and continue to pursue needed reforms at Customs and 
elsewhere to ensure that the taxpayers and others who pay for these 
services are getting their money's worth.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on budget authorizations for fiscal years 
2000 and 2001 for Customs, ITC, and USTR. In addition, the hearing will 
focus on other Customs issues, including: Customs automation and 
modernization efforts and the mechanisms needed to fund them; the need 
and funding for ITDS; the President's proposed changes to Customs 
passenger user fees; and the compensation system for Customs officers 
and related drug enforcement issues.
      

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Traci Altman or Pete Davila at (202) 225-1721 no later than the close 
of business, Thursday, April 1, 1999. The telephone request should be 
followed by a formal written request to A.L. Singleton, Chief of Staff, 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515. The staff of 
the Subcommittee on Trade will notify by telephone those scheduled to 
appear as soon as possible after the filing deadline. Any questions 
concerning a scheduled appearance should be directed to the 
Subcommittee on Trade staff at (202) 225-6649.
      
    In view of the limited time available to hear witnesses, the 
Subcommittee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing. All persons requesting to be heard, whether they are scheduled 
for oral testimony or not, will be notified as soon as possible after 
the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.In order to assure the most 
productive use of the limited amount of time available to question 
witnesses, all witnesses scheduled to appear before the Subcommittee 
are required to submit 200 copies, along with an IBM compatible 3.5-
inch diskette in WordPerfect 5.1 format, of their prepared statement 
for review by Members prior to the hearing. Testimony should arrive at 
the Subcommittee on Trade office, room 1104 Longworth House Office 
Building, no later than Friday, April 9, 1999. Failure to do so may 
result in the witness being denied the opportunity to testify in 
person.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Tuesday, April 
27, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways and 
Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Trade office, room 1104 Longworth House 
Office Building, by close of business the day before the hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                

    Chairman Crane. Will everyone please be seated, and we 
shall commence since we have a rather long hearing scheduled 
for today.
    And let me first pay tribute--we were a little delayed by a 
minute because Sandy was kind of slow getting here and Sam 
Gibbons forgot to come up here and just take that seat, or we 
would have started earlier.
    But Sam is our distinguished former chairman of the full 
Committee and of the Trade Subcommittee, and I enjoyed the many 
years we had a chance to work together.
    Let me welcome you to the Trade Subcommittee hearing on 
budget authorizations for fiscal years 2000 and 2001 for the 
U.S. Customs Service. The U.S. International Trade Commission 
and the Office of the U.S. Trade Representative and on other 
customs issues. The Office of the U.S. Trade Representative is 
responsible for developing, coordinating, and advising the 
President on U.S. international trade policy. USTR staff and 
consultants conduct our trade negotiations, seek new markets 
for U.S. goods and services, and defend our rights in the World 
Trade Organization. We should be impressed by the breadth and 
depth of USTR's work and accomplishments. We will also review 
the customs budget request during our hearing.
    As a multi-mission organization, Customs is expected to 
meet a variety of demands and responsibilities, some of which 
might be conflicting. Customs is expected to facilitate trade 
to meet the fast deadlines for goods and services delivery 
while playing a critical role in border inspection, anti-
terrorism, and drug interdiction, which often results in 
delays.
    Also, with the explosion of information technology and 
trafficking on the Internet, illegal trade and child 
pornography have moved beyond our land borders and out into 
cyberspace. To meet these challenges, customs must not only 
protect our borders but must create conditions that make drug 
traffickers and child pornographers know that their efforts 
will be unprofitable and that they will be caught. We applaud 
Customs initiative of establishing the cybersmuggling center 
for enforcing laws against trading in child pornography and 
illegal goods.
    But at the same time, Customs must recognize the need to 
facilitate the movement of legitimate commerce. This is where 
technology, such as non-intrusive inspection technology or 
automated screening systems can assist customs efforts. This is 
also where modern technology for trade data can also assist 
Customs' data processing efforts. It is essential to update 
U.S. Customs automated systems for U.S. industry and the 
population at large. Any potential slowdown or brown-out in 
U.S. Customs' electronic entry process system can adversely 
affect critical imports of health care products. For example, 
Baxter International, formerly a constituent and now on the 
border of my district, imports many critical medical therapies 
which are temperature and time sensitive. Any delay, even a 
couple of hours, could impact the ability to provide life-
saving medical products to U.S. patients who rely on these 
products.
    Today, we will hear views from Customs, the Treasury, the 
General Accounting Office, and the trade industry about 
modernizing and funding for automation to meet the increasing 
volume of trade data. Indeed, Customs faces enormous 
challenges, and everyday Customs officers rise to meet these 
challenges. We believe that Customs officers should be fairly 
compensated for their duties, including overtime duties. But 
the essential ingredient of fair overtime pay is pay for 
overtime hours actually worked. Today, we will hear from the 
Office of the Inspector General and the union on these Customs 
labor issues.
    In addition, Customs must take care that its integrity is 
intact and that its internal corruption tolerance rate is zero. 
Our ability to interdict drugs at our borders depends on 
maintaining sound integrity.
    Finally, I would like to recognize Inspector Virginia 
Rodriguez--Virginia, are you there? Virginia apprehended one of 
the FBI's Most Wanted Criminals, and we are all a little safer 
because of your efforts, and we thank you for your service, 
Virginia.
    [Applause.]
    But I do want to point out that Virginia made sure she had 
a cousin here as our first witness.
    We will also receive testimony from the International Trade 
Commission. The ITC has a unique role within the Federal 
Government as an independent non-partisan, quasi-judicial 
agency. The ITC conducts trade investigations, provides 
Congress with technical assistance in developing trade policy, 
maintains the harmonized tariffs schedule, and offers technical 
advise to businesses seeking remedies under the trade laws.
    The ITC and the Subcommittee have always enjoyed a close 
and supportive relationship. And now, I would like to recognize 
our Distinguished Ranking Member, Mr. Levin, for any statement 
he would like to make.
    Mr. Levin. Thank you, Mr. Chairman, and a special thank you 
to you, Ms. Rodriguez, and to you our colleague, Ciro 
Rodriguez.
    I am glad we are holding this hearing in that there are so 
many of us here in attendance. It shows the importance of this 
issue, the budget authorization for trade-related agencies. The 
international trade landscape is becoming increasingly complex. 
This fact was highlighted by last week's visit to Washington by 
Chinese Premier Zhu Rongji. The negotiation of a trade 
agreement that preceded his visit and that is continuing as we 
speak underscores the challenge of integrating into a single 
global trading system large economies that operate on different 
principles.
    The new challenges posed by the evolution of international 
trade translate into new demands on the agencies that 
administer U.S. trade laws. The U.S. Trade Representative is 
called upon to monitor and enforce U.S. rights under a growing 
number of trade agreements, as well as to negotiate new 
agreements that will further open markets. The greater volume 
of trade from diverse countries and over a wider range of 
product sectors requires the U.S. Customs Service to step up 
its efforts to protect the U.S. market from transshipment and 
shipment of contraband. And the potentially increased number of 
trade cases that comes with the greater volume trade is likely 
to place increased pressure on the U.S. International Trade 
Commission to monitor the effects of unfair trade practices. 
These trade-related agencies cannot perform the tasks assigned 
to them without the necessary resources.
    As we consider their budget requests for the coming 2 
years, we must bear in mind that while increased trade brings 
substantial benefits to the American economy, it also brings 
new responsibilities and costs to the agencies that administer 
the laws; and we must be prepared to meet those costs.
    Additionally, we will be hearing, as the chairman said 
today, about several important issues concerning the Customs 
Service, including its acquisition and development of new 
technology to enable more efficient processing of imports, 
Customs officers' pay, and increases in the fees charged to 
passengers arriving in the United States from overseas.
    I am hopeful that we will engage in a productive discussion 
on each of these issues. I expect that today's witnesses will 
enhance our understanding of the new and evolving demands on 
our agencies involved with trade, and I look forward to hearing 
from them on these important matters.
    Chairman Crane. Thank you, Sandy.
    Today, we will hear from a number of distinguished 
witnesses, and in the interest of time, I would ask you to try 
and keep your oral testimony to 5 minutes or less; and any 
longer statements, though, will be made a part of the permanent 
record.
    And our first witness, as I indicated before, will be 
Virginia's cousin, our distinguished colleague from Texas, Ciro 
Rodriguez. Welcome, Mr. Rodriguez.

   STATEMENT OF HON. CIRO D. RODRIGUEZ, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Rodriguez. Mr. Chairman, Ranking Members and Members of 
the Committee, thank you for allowing me this opportunity. I 
represent the 28th Congressional District in Texas, which 
reaches north from San Antonio, and south, 250 miles to the 
border. I represent two counties on the border, Zapata and 
Starr. Starr County has three in Rio Grande City, Roma, and 
Falcon Heights.
    I am here today to highlight trade needs along the U.S. 
Mexico border. Our Nation has seen significant increases in 
imports. In fact, we have seen nearly a 200 percent increase 
since the passage of NAFTA. Yet, since 1989, we have not seen 
an increase in Customs' budget, with the exception of increases 
on cost of living. I think it is important for us to recognize 
that this particular agency is on the forefront of our trade 
relations and makes a difference in the free flow of goods and 
services.
    I think one of the realities that we have to recognize is 
that we haven't kept our free trade promises. I would propose 
to you--that we hire an additional 2,000 people at the U.S. 
Customs Service. I would ask that you study some of the 
proposed Senate bills that suggest similar personel increases.
    As trade has increases--and I would hope it continues to 
increase U.S. Customs Service agency is going to be impacted. 
The agency's people are on the front line examining packages, 
and opening car trunks as people cross the border. It is the 
agency that shepards you through the airports and other ports 
of entry.
    U.S. Customs Service has seized more drugs than all of the 
other Federal agencies combined.
    Despite its success, we have failed to increase funding and 
modernize its technology capability.
    I want to stress the importance of equipping Customs with 
new technology that facilitates trade. Over the last 1\1/2\ 
years--18 months--some of the existing technology experienced 
failures. Customs backup is paperwork which is just 
unbelievable. A country such as ours, where businesses are 
required to pay fees as they bring their products across our 
borders shouldn't have to wait 4 or 5 hours on paperwork while 
not being inspected--just waiting is ridiculous. Business 
should not carry the burden for our fight against drugs. We 
have a responsibility to facilitate the free flow of legal 
goods and services along our borders. It is important for us to 
provide them the necessary equipment.
    I serve on the Armed Services Committee, we do not have any 
major opponents, but there is a fear of terrorism. I fear the 
transshipment of weapons across our border, and if that 
happens, our first line of defense is U.S. Customs Service. 
Customs has been there for us, and we need to be there for 
them.
    As we study trade data and the statistics that are provided 
us on trade growth, it's obvious the Administration's budget 
proposal is not adequate. The Senate is considering it's own 
budget and trying to hire an additional 2,000 Customs 
employees. And I hope that you seriously consider the Senate 
proposal.
    In addition to that, Mr. Chairman, Customs needs $1.2 
billion for its Automated Commercial Environment. As we start 
looking into the future, we should fund automated systems to 
ensure that we are prepared for the global economy. That 
automated system needs to be funded now, because it takes a 
while to implement. We need to move now. We need funding for 
extra staff now, because it takes time to train qualified 
people. You mentioned Virginia Rodriguez--you know, back in 
Texas that next to the Smith's you will find more Rodriguez's 
in the telephone book than anybody else.
    But Virginia, and people like herself, have front line 
experience and just by asking, ``Are you citizen?'' or by 
asking, ``What is your purpose in Mexico?'' She is able to 
detect by just the response whether there is some problem. I 
worked with heroin addicts for 7 years, and I could detect 
whether someone was using or not. Like myself, Customs agents 
are able to detect because of the experience that they have had 
and be able to tell whether people might be hiding something 
questionable or not.
    And so, briefly, you have my testimony before you. I want 
to ask--No. 1, that you support adding 2,000 additional staff 
to Customs.
    No. 2, look at upgrading automation and technology. We need 
$1.2 billion just for the Automation Commercial Equipment. When 
you look at small ports, don't ignore their technology needs. 
The ports in my district, Roma, and Rio Grande City have few 
commercial trucks, yet a lot of drugs go through there. We need 
that technology at these ports. It does not make any sense for 
the business community to send trucks through Roma and Rio 
Grande City and then won't as the vehicles are driven all the 
way to Pharr, 60 miles away and back, to be examined by x-ray 
machines. That is not good for business. That is not good for 
trade. That is not good for the border. And that is not good 
for America.
    We expect the expansion of trade to continue to increase, 
so I ask your help and your support to increase our primary 
tool for trade facilitation. And as I see the light, I will 
stop.
    [The prepared statement follows:]

Statement of Hon. Ciro D. Rodriguez, a Representative in Congress 
from Texas

    Good afternoon, Chairman Crane, Ranking Member Levin and Members of 
the Committee. I am Congressman Ciro D. Rodriguez representing the 28th 
Congressional District of Texas. It is a privilege to be here 
discussing the U.S. Customs Service and the important role this agency 
and its employees play along our nation's borders. On behalf of my 
constituents and the millions of people who live, work, and depend on a 
seamless flow of goods and services along the southwest border, thank 
you for this opportunity.
    The 28th Congressional District of Texas is a sprawling South Texas 
district anchored in the north by San Antonio and in the south by 
numerous communities along our international border with Mexico. Along 
the border, I represent Starr County, one of the poorest in our nation, 
which has three small land crossings at Rio Grande City, Roma, and 
Falcon Heights. These small ports of entry are sandwiched between two 
enormous ports of entry at Laredo and Hidalgo/Pharr. San Antonio has 
many trade resources, including the San Antonio International Airport 
and the closing Kelly Air Force Base, which the city is transforming in 
part into an inland port for international trade.
    I will put this as simply as I can: if we want to increase trade 
and stop more contraband at our border points of entry, then we must 
increase the number of Customs officers to meet the demand and equip 
them with the best technology we have. To ensure the best and most 
stable workforce for this critical work, we must support Customs 
employees with the pay and benefits they deserve. Anything less than 
this commitment will hamper the flow of goods and people while 
increasing the likelihood of drugs, weapons, and other illegal items 
entering our country.
    While each port of entry has unique needs, all share a common need 
for more Customs Service personnel and better enforcement and trade 
facilitation resources. Increased trade with Mexico is expanding 
economic growth along both sides of the southwest border. In addition 
to an explosion of a nearly 200 percent increase in imports over the 
past five years, the region has seen an expansion of trucking, 
warehousing, manufacturing, and transportation industries. Although 
many of the region's communities enjoy growth attributed to expanded 
trade, the growth is already straining the region's historically 
underdeveloped infrastructure. The growth in trade without a growth in 
resources causes delays and more for area residents and businesses.
    As people living and working on the border see it, the U.S. Customs 
Service is part of the underdeveloped infrastructure. Increasing the 
agency's budget should be natural in the face of booming trade. 
However, Customs' budget has not increased beyond the rate of inflation 
during the past ten years. This static budget is choking business and 
communities dependent on a seamless border. We need to increase U.S. 
Customs Service funding to create at least 2,000 new positions, 
including inspectors, canine enforcement officers, special agents and 
internal affairs officers. We also need to modernize trade facilitation 
by funding an Automated Commercial Environment and providing the agency 
with the most effective technology to ensure trade is not unduly 
burdened by our enforcement policies.
    The U.S. Customs Service is an outstanding agency. Its inspectors 
are the first line of defense for our nation's borders. They protect 
our citizens and businesses from smugglers attempting to put illegal 
narcotics, counterfeit goods, child pornography, and weapons of all 
kinds onto our streets. Under this enormous pressure to fulfill its 
enforcement goals, inspectors are also expected to be service-oriented 
and treat people with courtesy as they process forms, collect taxes and 
facilitate the speedy transaction of goods and services at every port 
of entry. This is not an easy task for anyone, let alone workers who 
face unprecedented growth in demand for their services.
    The U.S. Customs Service is the most successful and effective tool 
against drug trafficking. The agency seizes more drugs and contraband 
than all other federal agencies combined. Border communities do not 
want Customs' drug war efforts to relax or be stifled. The border 
population does want U.S. Customs to have the resources to employ the 
fastest and most effective means for inspecting cargo without 
compromising integrity.
    Along the southwestern land ports the agency has come under fire 
from community leaders for taking too long to process the free flow of 
good, services, and people. The complaint has extended beyond land 
ports to international airports and seaports. I have visited or 
contacted every land port between Brownsville, Texas and Eagle Pass, 
Texas. Nearly half of all commercial traffic from Mexico enters the 
United States through these ports of entry. At each entry the port 
director said they needed more personnel and equipment to process 
traffic more quickly and effectively capture more contraband.
    At small land ports such as Rio Grande City, which processes nearly 
16,000 commercial vehicles per year, and Roma, which processes nearly 
6,000 commercial vehicles per year, U.S. Customs thoroughly inspects 40 
percent to 75 percent of all commercial entries. Each inspection of a 
tractor trailer can take up to four hours if the vehicle is loaded with 
goods or is difficult to inspect due to hazardous materials. Legitimate 
businesses are forced to pay the cost of the drug war by having their 
vehicles sit still for hours at a port waiting to complete an 
inspection when its commercial cargo could be inspected effectively by 
X-ray machines in minutes. X-ray machines help inspectors determine 
wall density, detect false compartments where drugs are concealed, and 
highlight areas that could be hollow truck parts. The X-ray machines 
instantly reveal any concealed narcotics, laundered money or other 
contraband. U.S. Customs Service can streamline trade and strengthen 
its drugs and contraband interdiction efforts if it has more equipment 
such as X-ray machines, K-910 Busters, fiber optic scopes, radios, 
security cameras and more personnel to operate this equipment. This 
equipment is essential for the efficient movement of legitimate imports 
across the border.
    The lack of high-tech equipment plays havoc with the small 
communities along the border which are trying to attract businesses to 
their facilities. A 75 percent inspection rate for commercial cargo is 
ideal against the drug war but the likelihood that 3 out of 4 
commercial trucks will be held four hours is a poor economic selling 
point for a community. We need a high rate of inspections at a high 
rate of speed.
    Large ports along the southwestern border have the same needs for 
equipment and personnel as do smaller ports. The shear volume of 
vehicles and goods coming through our land ports strains resources and 
burdens businesses using the ports. Customs inspectors in Laredo 
somehow managed to inspect a whopping 20 percent of the nearly 600,000 
of the commercial vehicles entering the port in 1997. Traffic at Laredo 
is only going to increase.
    The math is simple. More traffic with less Customs employees and 
equipment to facilitate trade and seize drugs is irresponsible and 
severely hampers trade. Increasing resources for U.S. Customs Service 
as trade increases is good policy.
    In addition to asking Customs to fight the war on drugs more 
effectively, Congress should not lose site of Customs' service to the 
business community dependent on trade. We must broaden our view of the 
southwest border and bring trade facilitation into focus. Since the 
1980s, the U.S. Customs Service has committed to move from paper 
information flows to electronic information flows. Today, Customs 
processes more than 90 percent of all import entries electronically. 
However, the current Automated Commercial System is outdated and in 
danger of collapsing. System failure would halt the flow of $2.2 
trillion worth of goods at all ports of entry. Our nation would suffer 
a serious negative economic impact on U.S. businesses all along the 
supply chain from manufacturers, transportation suppliers, brokers to 
wholesalers and retailers.
    The U.S. Customs Service estimates it will cost about $1.2 billion 
to upgrade to a new Automated Commercial Environment while keeping the 
current system from failing. Congress should authorize and appropriate 
the money for the new system. Our current back-up system--to log 
entries by paper--is unrealistic. There is no time to waste. We must 
fund the solution before gridlock at the nation's ports chokes 
international commerce.
    Finally, I would like to praise the U.S. Customs Service inspectors 
who actually do the work each and every day. These folks are dedicated 
to their work. They take great risks at their jobs. Land ports are 
dangerous places to work. At our border with Mexico, inspectors run the 
risk of being run over by port runners who try to crash through to the 
United States. They inspect vehicles carrying hazardous materials for 
contraband.
    Customs employees also work long hours. Like most other Members, I 
complain about not seeing my family enough because of my busy schedule. 
But my schedule is not nearly as hectic and volatile as that of a 
Customs Inspector. They work shifting schedules plus long and odd 
hours. Today, a Customs inspector may work nine to five but tomorrow 
could work midnight to dawn the next day. Despite these grueling 
working conditions, the loyal inspectors stay on board for a salary 
ranging between $20,000 and $40,000 a year. If the committee decides to 
change the pay structure for Customs employees, I hope it is an effort 
to increase salaries. I could not support any Customs Authorization 
bill that attacks the employees doing the job.
    Mr. Chairman, thank you for the opportunity to share the views of 
my South Texas constituents with the committee. As the front line in 
our war against contraband and facilitation of trade, Congress must 
authorize and appropriate more funding to provide more personnel and 
better equipment without shortchanging the people who do this job for 
us day in and day out. Congress also needs to pull the U.S. Customs 
Service out of an electronic stone age by authorizing and later 
appropriating the $1.2 billion needed to reduce paper work and 
facilitate trade by building a new Automated Commercial Environment. I 
look forward to helping the subcommittee pass a Customs Service 
Authorization Bill that will meet these goals.

                                

    Chairman Crane. Thank you, Ciro.
    Mr. Rodriguez. Thank you.
    Chairman Crane. We strongly believe that Customs employees 
should be well compensated for their tremendous services. 
However, under current law a Customs officer can receive 
overtime and premium pay under certain circumstances without 
working those hours or can receive premium pay while working 
daytime hours. Do you agree that these anomalies are 
inappropriate and that it is reasonable to expect that Customs 
officers should be paid and well paid but only when they work 
these special hours?
    Mr. Rodriguez. I will agree, Mr. Chairman, that if we hired 
an additional 2,000 people, we would not have overtime. And I 
think we could do that. Customs agents get paid $20,000 to 
$40,000, and I think that we really need to kind of look at 
increasing that. And if we hired additional people, we would 
not have the problems you are describing now with overtime.
    Chairman Crane. Mr. Levin.
    Mr. Levin. I thank you. We have lots of witnesses, and we 
can go into that issue and others with them and not burden you 
with it. I personally--we have come to know each other--know 
how hard you work, so when you say that your schedule is not 
nearly as hectic and volatile as that of a Customs inspector, 
that is saying a lot. So, thank you for your testimony. We 
will, indeed, take it very seriously, and I assume if we have 
further questions, we will be able to talk to you personally.
    Mr. Rodriguez. Thank you.
    Mr. Levin. Thank you for your excellent testimony.
    Mr. Rodriguez. Thank you very much.
    Chairman Crane. Mr. Houghton.
    Mr. Houghton. Thanks, Ciro. Great to see you. If I 
understand the Customs Service has 17,000 to 18,000 people, is 
that right? And you think there ought to be another 2,000?
    Mr. Rodriguez. Yes, Sir.
    Mr. Houghton. Could you break that down a little bit? Why 
another 2,000?
    Mr. Rodriguez. I think there is a big gap between Customs 
and other agencies. For example, right now, looking at the 
INS--Chairman Lamar Smith wants us to begin checking people 
leaving the country. There is no way that can be done unless 
you double staff at the ports.
    The other reality is that some of these ports could be kept 
open 24 hours. They are not kept open 24 hours because of the 
fact that we need additional resources. In addition, right now, 
there are a hang up in terms of processing. If you visited 
ports from Brownsville to Eagle Pass, which processes a 
significant amount of the traffic through Texas, if you go into 
any of those ports, you will see the number of 18-wheelers has 
increased. You will notice there is no way that all those 18-
wheelers are being examined thoroughly. In Laredo--supposedly 
up to 20 percent of the vehicles are inspected. That is a high 
figure for just over 5,000 trucks a day, not to mention the 
cars and all the traffic.
    I think when we deal with drugs and traffic and counterfeit 
products, we need more staff. Customs is also the first line of 
defense against terrorism. We need more people that look you 
straight in the eye, and ask you, ``Are you a citizen?'' Or, 
``What is the purpose of your visit?'' or, to open your car 
trunk. I think that this is where our thrust should be. And it 
has not been there. They have not seen an increase despite the 
increase in traffic. Other agencies have been some increases 
and they also deserve to be looked at a little more seriously, 
but Customs has not. I think that we need to look at this 
disparity.
    Mr. Houghton. Well, the other number I wanted to ask you 
about was the $1.2 billion to upgrade the automated commercial 
equipment. You know, the problem with the Government, of 
course, is that you do not use the basic philosophy called 
return on investment. Therefore, we do not have a capital 
budget; so, therefore, you have to superimpose that up--and I 
do not know what percent increase that would be, along with the 
2,000 people, but it would probably be----
    Mr. Rodriguez. This is a $300 million per year for the next 
4 years--in the $1.2 billion. One of the things that we are 
also doing by not funding, we are also charging a lot of fees 
to a lot of the industries and the business. And it hurts the 
businesses right now, and I can attest to you that there have 
probably been some that have gone abroad because of the fact 
that it gets tangled up in the border, and it makes more sense 
to go abroad and do some of that instead of waiting for some of 
those products to come through there, because of the fees and 
also because of the wait. And so, as we move forward, I think 
that we are hoping that trade is going to double and triple; 
and it is expected to.
    Mr. Houghton. So you are saying the $1.2 billion would be 
spread out over how many years?
    Mr. Rodriguez. A 4-year period. I think the proposal is 
over a 4-year period. And there is a need for some additional 
technology. I have some ports that do not have any of the 
updated technology that is needed to seize drugs and facilitate 
traffic. Instead of those x-rays where agents can take a whole 
pallet and just check the whole pallet, agents in my district 
try to examine things item by item. Those x-ray machines are 
needed and automated commercial technology is needed too.
    Mr. Houghton. Thank you very much. All right. Thanks, Mr. 
Chairman.
    Chairman Crane. Mr. Camp.
    Mr. Camp. No questions.
    Chairman Crane. Mr. Becerra.
    Mr. Becerra. Mr. Chairman, just one question for my friend 
and colleague from Texas. Congressman Rodriguez, gives us a 
better sense of how this all plays out in the local communities 
along the border when you have the backup of some of these 
vehicles and the products that are being inspected. What does 
this do to the local economies in your district?
    Mr. Rodriguez. I represent Starr County, one of the poorest 
counties in the State, and it is probably the poorest in the 
Nation. It has a high unemployment rate, usually over 20 
percent It is sandwiched between two counties that are doing 
extremely well. The poor infrastructure hampers the 18-wheelers 
crossing there. U.S. Customs is also part of that 
infrastructure. Their staff has also been hampered by the fact 
that trade has doubled and tripled, and it is expected to 
double again. Their staff has remained at the same level and 
has to work lots of overtime and has not been able to examine 
as many of the trucks as they would like. And I think that as 
we proceed on the war on drugs, we should strengthen the front 
line and faciliate trade which we have not done and need to 
move on. We have not done enough, especially when it comes to 
purchasing technology--that quickens flow of traffic. It really 
hurts tourism, for example, people think twice about going to 
Laredo, because of the long lines. So it hurts tourism.
    And I want to go back again to business. The business 
community should not suffer because of our war on drugs. We 
need to facilitate the process of trade. We need to help out in 
business effort.
    Chairman Crane. Mr. Nussle.
    Mr. Nussle. Thank you, Mr. Chairman. I thank our colleague 
for coming here today. I just--I was not sure that you answered 
the chairman's question, the first question that was asked on 
the--on overtime pay.
    Mr. Rodriguez. I tried to avoid it.
    Mr. Nussle. You tried to avoid it. Well, that is part of 
the concern that we have got is that we--you know, the war on 
drugs is something we cannot avoid. We have got a step up to 
the plate, and this is a decision that, while it may be 
uncomfortable, it is a decision we are going to have to try and 
make. In fact, last year, the chairman introduced a law to try 
and change this, and I am wondering so your position is 
undecided or is it--are you in favor of changing it so that we 
think----
    Mr. Rodriguez. I am in favor of overtime. But I am saying 
that if you really want to solve the overtime issue, then we 
need to hire additional people. If you are really sincere about 
fighting the war on crime, we need to add some additional 
resources and additional technology on the border. We do not 
have it. We talk about having one x-ray machine to check for 
drugs. Well, it only checks eight trucks per hour. We have 
5,000 trucks in just one port, so there is a real need for us 
to focus on trade. This is one issue, pay and overtime, that 
will only divide, in a partisan manner. I hope that we would 
come together and do the right things for Customs and for us as 
a nation, because these people are on the front line of defense 
against drugs and the possibility of terrorism. They are the 
ones that check the packages for our businesses. They are the 
ones that make sure the commercial products flow freely. They 
also have caught more drugs than everyone else combined. And 
so, we need to be there for them.
    When it comes to this specific issue--overtime--I think, it 
is something that hopefully can be worked out by the Treasury 
Department. Rather than pay issues, I think we should 
concentrate on our responsibility to upgrade the computer 
system and other technology. If it breaks down, Customs goes 
back to paperwork.
    There is no way you can allow that--I mean, this is the 
United States. We should not let International Trade be slowed 
by paperwork, truck by truck. We need to provide that 
technology to Customs and the business community. And 
hopefully, we can, come to grips on pay issues which turn out 
to be a partisan.
    Mr. Nussle. I am wondering--I am just wondering from my 
constituents' benefit back home in Iowa, why is it a partisan 
issue that a person is asked to work for the time that they are 
paid, or not be paid for the time that they do not work. I 
mean, I do not--you either work--I mean, back in Iowa, if you 
are going to get paid for something, you have got to work for 
it. And they are probably wondering why it is that we pay 
people overtime when they do not work--I mean, certainly 
everything you just said on this is highly appropriate. These 
are the people. They do a fine job. They are unsung heroes, 
because they do not get some of the attention that maybe some 
of the other law enforcement areas do, and that is why we are 
having this hearing, and that is why it is so good that so many 
people show up.
    But I think it is just as irresponsible--and I am wondering 
why is it--why do you think it is a partisan--why is this a 
partisan issue that if you do not work, you should not get 
paid. This does not seem to me to be partisan at all. Why is 
this partisan?
    Mr. Rodriguez. I think it is the way that it is 
interpreted. I want them to have a more livable wage. And 
Customs agents are, working out there at bizarre hours earning 
$20,000 to $40,000. And they are working----
    Mr. Nussle. Well, actually, there is a cap at $30,000, are 
you aware of that?
    Mr. Rodriguez. The cap on $30,000 that you talk about is 
for the pension in terms that they cannot make overtime. But--
--
    Mr. Nussle. But the chairman's bill tried to increase the 
amount of money, and, in fact----
    Mr. Rodriguez. Well, that----
    Mr. Nussle. If I could finish--expand that cap, and then 
also allow for discretion from the Secretary to pay them more. 
And I--that is why I do not understand why this is a partisan 
issue.
    Mr. Rodriguez. Well, hopefully, it will not be a partisan 
issue. Hopefully, we can find a compromise on this issue 
without cutting pay. I hope you do not lose focus on the real 
issue. I hope that we focus on the need to upgrade technology 
and increase customs manpower. We might disagree on this one 
issue. But I hope that we can agree that something needs to be 
done to fight drugs and facilitate trade.
    Mr. Nussle. I guess I would--if I could just ask, you know, 
two things. First of all, I think you are exactly right in 
upgrading equipment, on technology. Certainly, technology from 
19--let us say 1989 or 1979 or 1969 is not appropriate in 1999. 
I think the same is true for a law that was written in 1911--
probably not as appropriate in 1999. And I--so upgrading 
equipment, upgrading pay, upgrading the law, upgrading the way 
things are operating, I think is appropriate to deal with a 
drug war and with people who understand rotations at the border 
better than we do; understand the way that people are 
compensated and the way the game is played at the border better 
than we do. And that is the people that are trying to smuggle 
in drugs.
    So, I would hope that you would reconsider your position 
and not make it a partisan issue. I think it is not a--does not 
have to be partisan at all. And then I would just conclude by 
suggesting that if you--if--you know, the people that were 
trying to reform this law last year took into consideration 
some of those very things that you are talking about so that we 
can give more support to these folks on the front line. It is 
just as--it is just as demoralizing to have to work a shift, 
whether you get paid straight time or overtime for it, and find 
out that your buddy is at home not doing anything, getting paid 
overtime or straight time for it. That does not seem to make 
much sense to them, anymore than it makes sense to my Iowa 
constituents. So, I would hope that this does not digress to a 
partisan issue and that we can change a 88-year-old law the 
same way we want to change 88-year-old technology. Thank you.
    Chairman Crane. Mr. Herger.
    Mr. Herger. I do not have any further questions, Mr. 
Chairman.
    Chairman Crane. If not, I want to thank you, Ciro, for your 
testimony. And we look forward to working with you and 
continuing on this path toward the reforms that so many of us 
feel are in order given the circumstances.
    Mr. Rodriguez. Thank you, Mr. Chairman.
    Chairman Crane. And now, I would like to invite our first 
panel of witnesses and that includes Deputy U.S. Trade 
Representative, Richard Fisher; Customs Commissioner, Raymond 
Kelly; and ITC Chairman, Lynn Bragg. Welcome, Mr. Fisher, and I 
would personally like to thank you and your staff again for 
your efforts on trade relations with China. And, Commissioner 
Kelly, I am pleased to welcome you in your first appearance 
before the Subcommittee. And we look forward to working with 
you and helping you meet the demands and responsibilities of 
the Customs Service. And, Chairman Bragg, we also look forward 
to working with you to further develop the close working 
relationship between the Commission and the Committee on Ways 
and Means, and we took our first giant step by giving you our 
former Chief of Staff from the Committee here in Thelma Askey, 
who is with you today.
    So, if you will proceed in order, and, as I indicated 
before, try and keep oral presentations to 5 minutes or less. 
And all written statements will be made a part of the permanent 
record. Richard.

           STATEMENT OF HON. RICHARD FISHER, DEPUTY 
                   U.S. TRADE REPRESENTATIVE

    Mr. Fisher. Thank you, Mr. Chairman. I welcome this 
opportunity to appear before your Subcommittee today to present 
our budget authorization request from the Office of the USTR. 
As I always do, I want to thank you and your colleagues for 
your consistent support for our mission, which is to open 
markets and expand trade and enforce trade laws and trade 
agreements. And we sincerely appreciate the close working 
relationship we have with this Committee.
    We are proposing a 2-year extension of USTR's authorization 
of appropriations for fiscal year 2000 and 2001. Our request 
recommends a fiscal year 2000 authorization level of 
$26,501,000, the amount requested in the President's budget for 
the fiscal year 2000. The authorization request for fiscal year 
2001 is for such sums as may be necessary.
    For each fiscal year, the representation fund authority 
would remain at $98,000, and the amount available to be carried 
over from one fiscal year to the next would remain at 
$1,000,000. In short, Mr. Chairman, the Administration is 
recommending straightforward extensions of existing 
authorizations for USTR.
    Now, Mr. Chairman, I regard it as a great privilege to work 
with the career employees of the Office of the USTR. We are one 
of the smallest agencies in the Government. Our budget request, 
as I mentioned, is just $26.5 million, and our staff request 
for next year is for 185 full-time employees, including support 
staff. I think you know, Mr. Chairman, I joined the 
Administration from the private sector a little more than a 
year ago, having run an investment firm for 20 years. And I can 
tell you, Mr. Chairman, I have found USTR to be as efficient 
and capable as any private sector business I have worked with 
or owned. And, Congressman Houghton, the Congress gets a superb 
return on investment in USTR.
    With our small staff, we address $2 trillion in trade 
volume. That is an increase of over $700 billion since 1992. We 
monitor and enforce our agreements, including over 270 trade 
agreements we have negotiated in this Administration. We 
navigate our way through the WTO, and we develop and execute 
our trade agenda. The budget authorization request reflects our 
need to upgrade security and add seven additional career, full-
time employees to help us address this much larger volume of 
trade and network of agreements, as well as the level of work 
required in agriculture and our several regional offices.
    At the same time, the request protects USTR's tradition as 
a lean agency, in which each full-time employee has great 
responsibility, and in which we can act quickly to deliver 
tangible results that you expect from us.
    Over the past 6 years, we have negotiated 270 trade 
agreements. Our volume of bilateral trade has expanded by 
three-quarters of a trillion dollars. This is inevitably meant 
a heavier workload for the USTR. Our budget request will allow 
us to meet this workload while protecting our tradition as a 
small and efficient agency. Our request represents the right 
resource level for allowing USTR to implement the ambitious 
work agenda with which we are charged.
    For fiscal year 2000, the budget request proposes, as I 
mentioned, 185 full-time employees--$26,501,000 in new budget 
authority. This represents a net increase of $1.8 million and 
seven career full-time employees over the last fiscal year. We 
would use the $1.8 million increase in five targeted areas.
    First, $1.2 million to fund the expected cost of legislated 
employee pay raises as well as non-pay inflation areas like 
rents and utilities and travel.
    Second, $400,000 for seven new career positions in areas 
with growing workloads. Six of the seven new positions would be 
trade specialists. One would be a support position. Of these 
positions, two each are in our agriculture and Africa units; 
one each in Japan, China, and Western Hemisphere offices.
    Third, $400,000 for negotiator travel, to meet rising 
numbers of trips to China, as you referenced, Japan, Africa, 
and other distant and costly negotiating sites.
    We need $225,000 for security-related projects in our 
Geneva and Washington offices, to guard against the threat of 
terrorism and to protect sensitive and classified information.
    And last, six, we need $100,000 to meet a growing demand 
for interpretation and translation services for use in 
negotiations enforcement proceedings and in renewing country 
proposals.
    This represents a total budget increase of $2.225 million, 
which is partially offset in fiscal year 2000 by a reduction of 
$498,000 in funding for Y2K improvements made available in the 
fiscal year 1999, on a 1-year time basis.
    Mr. Chairman, USTR needs every penny of the $26.5 million 
that we are proposing in our budget request. We are keenly 
aware of our responsibilities. And yet, we have virtually no 
further capacity to absorb higher costs in fiscal year 2000. 
Two-thirds of the USTR appropriation supports the salaries and 
benefits of employees, and the remaining one-third pays for 
building rent, utilities, security, and travel. Unlike larger 
Federal agencies, we do not have the option of cutting back in 
categories like grants and contracts, nor do we have the option 
of trimming layers of management or administration.
    We have already accomplished an enormous amount of belt-
tightening in the last 6 years, and any further budget savings 
would come at the expense of our core negotiating, policy 
coordinating, and enforcement programs.
    Let me give you some examples of the cutbacks that we have 
made internally.
    First, we rescinded authority for assistant USTRs to 
approve their own travel. We instituted a rigorous review 
process that requires the Chief of Staff to approve every 
single trip.
    Second, we mandated use of frequent flyer miles in order to 
increase the number of trips for the same amount of funds. In 
the last 5 years, we have funded a 126 trips with bonus 
coupons, saving the Government $275,000 in the cost of airplane 
tickets.
    We have also established policies that require all 
employees, including Ambassador Barshefsky and myself to fly in 
economy class unless the trip exceeds 12 hours of flying time. 
This is a more rigid rule than the governmentwide standard. We 
have reduced the amount of office space we used in the Geneva 
office, cutting rental costs by several hundred thousand 
dollars.
    And we have reduced our computer staff by more than half, 
saving more than a million dollars in payroll expenses while, 
at the same time, upgrading the computer network and installing 
an innovative system for receiving classified State Department 
cables.
    These are just some of the ways, Mr. Chairman, the USTR has 
economized over the past several years. These actions have 
resulted in an agency that is lean and mean, and without 
imparting any partisan sentiment, we are certainly not trying 
to be kinder and gentler. But we are one which has been quick 
to absorb our cuts, and for this reason, we need the support of 
this Committee and the full Congress in providing the full 
$26.5 million and the 185 full-time employees in fiscal year 
2000.
    I would just like to say one last point, Mr. Chairman. We 
are a small agency. I believe we have some of America's finest 
public servants. Our staff is talented. It is working very long 
hours, and I hope you will conclude, as we do, that it delivers 
results for the American people. I thank you for allowing me to 
testify before you.
    [The prepared statement follows:]

Statement of Hon. Richard Fisher, Deputy U.S. Trade Representative

    Mr. Chairman, I welcome this opportunity to appear before the 
Subcommittee to present the budget authorization request for the Office 
of the United States Trade Representative. This morning, I will present 
our authorization request, describe our program priorities and respond 
to questions the Subcommittee may have.
    Let me begin by offering my thanks to the Subcommittee for your 
consistent support of our mission to open markets, expand trade, and 
enforce trade laws and trade agreements. We appreciate our close 
working relationship, and hope to continue it into the future.

                         Two-Year Authorization

    We are proposing a two-year extension of USTR's authorization of 
appropriations, for fiscal years 2000 and 2001. The Administration's 
request recommends an FY 2000 authorization level of $26,501,000, the 
amount requested in the President's budget for FY 2000. The 
authorization request for FY 2001 is for such sums as may be necessary.
    For each fiscal year, the Representation fund authority would 
remain at $98,000, and the amount available to be carried over from one 
fiscal year to the next would remain at $1,000,000.
    In short, Mr. Chairman, the Administration is recommending 
straightforward extensions of existing authorizations.

                            The Trade Agenda

    Mr. Chairman, I regard it as a great privilege to work with the 
career employees of the U.S. Trade Representative. We are among the 
smallest agencies in government: our budget request is $26.5 million, 
and our staff request for next year is just 185 full-time employees.
    As you know, I joined the Administration from the private sector a 
little more than a year ago, having run an investment firm for twenty 
years. I am here to tell you, Mr. Chairman, that I have found USTR to 
be as efficient and capable as any private secotr busienss I have 
worked with. The Congress gets a superb return on its investment in 
USTR.
    With this staff we address $2 trillion in trade volume (an increase 
of over $700 billion since 1992); monitor and enforce our agreements, 
including over 270 trade agreements negotiated since 1992; and develop 
and execute our trade agenda for the future. The budget authorization 
request reflects our need to upgrade security and add seven additional 
career full-time employees to help us address this much larger volume 
of trade and network of agreements and the level of work required in 
agriculture and several regional offices. At the same time, the request 
protects USTR's tradition as a lean agency in which each full-time 
employee has great responsibility, and which can act quickly to deliver 
tangible results for Americans through new job opportunities, higher 
farm incomes and rising standards of living.
    These capabilities are evident in the results we have achieved. The 
expansion of trade in the past six years has helped create the best 
economic environment our country has ever enjoyed. Since 1992:
     Our economy has prospered. Our economy has expanded from 
$7.1 trillion to $8.5 trillion in real terms (1998 dollars), and we 
have the benefit of the longest peacetime expansion in America's 
history.
     Our country has created jobs. Employment in America has 
risen from 109.5 to 127.7 million jobs, a net gain of over 18 million, 
as unemployment rates fell from 7.3% to 4.2%.
     And our families have enjoyed higher living standards. 
Since 1992, average wages have reversed a twenty-year decline and have 
grown by 6.0% in real terms, to $449 a week on average. This family 
prosperity is reflected, for example, in record rates of home ownership 
and unprecidented individual investment in mutual funds and other 
claims of ownership of America's thriving business sector.
    Against this background, I am very proud to present our budget 
authorization request to the Subcommittee today.
    Let me now turn to the agenda we have set, in close consultation 
with Congress, for the future. Generally speaking, our trade policy 
seeks the following goals:
     Address the trade effects of the financial crisis which 
now directly affects nearly 40% of the world.
     Continue our progress toward open and fair world markets 
through a new negotiating Round, as well as our role as host and Chair 
of the WTO's Third Ministerial Conference, regional negotiations and 
bilateral talks.
     Advance the rule of law and defend US rights by ensuring 
full compliance with trade agreements and strongly enforcing our trade 
laws.
     Encourage the full participation of all economies, 
including economies in transition and developing nations, in the world 
trading system on a commercially meaningful basis;
     Ensure that the trading system helps lay the foundation 
for the 21st-century economy by offering maximum incentives for 
scientific and technological progress.
     Ensure that trade policy complements our efforts to 
protect the world environment and promote core labor standards 
overseas; and
     Advance basic American values including transparency and 
accessibility to citizens and involvement of civil society in the 
institutions of international trade.

                       Trade Agreement Authority

    As we pursue this agenda, the Administration will consult with the 
Subcommittee and Congress on the renewal of traditional trade 
negotiating authority. The President, in his State of the Union 
address, called for a new consensus on trade. He said we must find the 
common ground on which business, workers, farmers, environmentalists 
and government can stand together.
    Consistent with that approach, we believe negotiating authority 
should bolster the traditional bipartisan support for trade policy and 
allow us to pursue an agenda that reflects consensus goals. It is a 
tool which can help us negotiate with greater credibility and 
effectiveness on behalf of American economic interests, and thus 
contribute to our goal of opening markets, increasing growth and 
raising living standards.

                   Trade Effects of Financial Crisis

    Let me now address our agenda in detail. I will begin with the 
trade effects of the financial crisis affecting Asia, Russia and parts 
of Latin America. This crisis has now lasted a year and a half, and its 
effects on our trade interests have been severe. Countries which have 
implemented IMF reform programs have seen a number of good results, 
including currency stability and returning investor confidence. 
However, economies continue to suffer. Six major economies--Hong Kong, 
Indonesia, Malaysia, South Korea, Russia and Thailand--are likely to 
have contracted by 6% or more last year.
    As a result of this crisis, the American trade imbalance has 
widened. This reflects largely a sharp drop of about $30 billion in 
American exports to the Pacific Rim, and a consequent break with the 
pattern of rapid U.S. export growth of the past few years. Our overall 
import growth last year (with the principal exception of the steel 
sector, in which imports rose very rapidly in the second half of 1998, 
affecting thousands of jobs) remained consistent with growth rates in 
previous years. Thus the larger deficit largely reflects predictable 
macroeconomic factors.
    Our trade policy response begins by ensuring that our trading 
partners continue to live by commitments at the WTO and in our regional 
and bilateral agreements. The strength of the trading system is an 
enormous advantage here--despite the worst financial crisis in fifty 
years, the world has resisted the temptation to relapse into 
protectionism. This has greatly reduced the potential damage to our 
economy, and particularly to American manufacturing exporters and 
agricultural producers. In addition, other markets--particularly our 
NAFTA partners Canada and Mexico, to whom U.S. goods exports grew by 
$13 billion last year--have in part compensated, thanks to the more 
open North American market NAFTA has created, for some but not all of 
these lost exports.
    We continue with a policy response covering several areas:
     IMF Recovery Packages--We have supported reform packages 
with the IMF at the center in affected countries. Several of these 
contain trade conditionalities which we vigorously monitor. These 
packages are showing results: especially in Korea and Thailand, there 
are early signs of recovery, including a fairly strong recovery in 
American exports to both countries in the last quarter of 1998.
     Restored Growth in Japan--A return to growth in Japan, 
Asia's largest economy, is essential for the economic health of the 
region. The Administration's view is that this will require fiscal 
stimulus, financial reform, and deregulation and market-opening. USTR's 
responsibilities lie in this last area. In addition to an aggressive 
bilateral agenda, the agreement we reached in Japan last May sets out 
concrete deregulatory measures in telecommunications, housing, medical 
devices, pharmaceuticals and financial services sectors, measures to 
strengthen competition policy enforcement, transparency and 
distribution. Fully implemented, these would create opportunities for 
exporters and workers in America, other Pacific economies and Japan. We 
are now discussing new measures in these areas and energy as well and 
are in the process of negotiating with the Japanese over a second 
tranche of deregulatory measures under the U.S.-Japan Enhanced 
Iniditaive on Deregulation in advance of Prime Minister Obuchi's state 
visit the first week in May.
     Steel--The President's January 7 Steel Report to the 
Congress laid out a comprehensive action plan on the 1998 steel import 
surge. The plan provided for a roll-back of imports from Japan--the key 
source of the import surge--to pre-crisis levels, by stating that the 
Administration is prepared, if necessary, to self-initiate trade cases 
to ensure that this roll-back takes place. The plan also outlines 
actions taken by the Commerce Department to expedite ongoing dumping 
investigations and apply dumping margins retroactively. In addition, 
the Administration expressed strong support for an effective safeguards 
mechanism, and affirmed our commitment to continue to assess the 
effectiveness of steps taken to date, and to work closely with the 
industry, labor, and members of Congress, to assess additional steps. 
To assist in this ongoing review, we also began to release preliminary 
steel import data which are available about a month earlier than the 
normally released final import statistics, thus enabling the industry 
to react to imports on a more timely basis.
    This program is being implemented fully. Steel imports began to 
decline sharply beginning in December 1998. Since the release of the 
President's Steel Action Plan, the Commerce Department has announced 
preliminary dumping margins with respect to Japan, Russia and Brazil. 
We have initialed two agreements with Russia--a suspension agreement on 
the carbon flat rolled dumping case and a broader agreement under the 
market disruption article of the 1992 U.S. bilateral trade agreement 
with Russia. These agreements would roll back and cap steel imports 
from Russia, the second largest source of our 1998 steel import surge. 
In Korea, we have expanded discussions on steel with the objectives of 
real and substantive progress toward permanently getting the Korean 
government out of the steel business.
    Import statistics over the past several months have been 
encouraging. Between November and February, steel imports of carbon 
flat rolled products from Japan, Russia and Brazil which the Commerce 
Department found to be ``dumped'' declined 99, 100 and 64 percent 
respectively. At 2 million metric tons, February steel imports were 
below the average monthly import levels for 1996 and 1997. Substantial 
progress in addressing unfair trade practices and injury to U.S. steel 
producers and workers was thus achieved in a manner which enabled us to 
remain faithful to our international commitments. By sticking to 
international trading rules in this time of crisis, we have done our 
share to forestall a protectionist response to the global crisis by our 
trading partners and retaliation against U.S. exports which could 
endanger American agricultural and steel-intensive producers and their 
work force.

                 I. Growth and Higher Living Standards

    Let me now turn to our negotiating agenda. In this agenda, we seek 
enduring goals--growth, higher living standards, the rule of law, a 
rising quality of life, better protection of health, safety and the 
environment, and the advance of basic values. As President Clinton said 
in the State of the Union address, we need to find new methods of 
negotiating and address a broader array of issues to secure these goals 
in the next century.

1. New Round and WTO Ministerial Conference

    This is the basis of the President's call for a new, accelerated 
negotiating Round for the 21st century. The Round would begin at the 
WTO's Third Ministerial Conference, which Ambassador will chair and 
which will be held in Seattle from November 30th to December 3rd. This 
will be the largest trade event ever held in America, bringing 
government leaders, Trade Ministers, business leaders, non-governmental 
organizations and others interested in trade policy from around the 
world. It is an extraordinary opportunity for us to shape at least the 
next decade of multilateral trade negotiations and to highlight our 
economic dynamism to the world.
    At the outset, I would like to say a few things about funding for 
the WTO Ministerial. The Ministerial will be the largest international 
trade event ever held in the United States. Most of the funding for 
logistical preparations and on site Ministerial operations will be met 
by the Seattle community, including substantial in-kind contributions 
from major corporations from Washington State. Even with this local 
funding, the U.S. Government will bear some of the cost for managing 
the conference, and the President's FY 2000 Budget contains $2.0 
million in the State Department budget for that purpose. Over the next 
month, we will be discussing physical site requirements with the WTO, 
and appropriate financial contributions with the Seattle Host 
Committee.
    The Round President Clinton has called for would begin at this 
event. It would be somewhat different from previous Rounds, in that we 
should be able to pursue three dimensions simultaneously: first, a 
negotiating agenda to be completed on an accelerated timetable; second, 
institutional reforms and capacity-building at the WTO; and third, 
ongoing results in priority areas.
    To begin with, we would hope to advance a number of important 
initiatives in the months leading up to the Ministerial Conference and 
at the event itself. They may include:
      ``Information Technology Agreement II'' adding new 
products to the sectors already covered by the first ITA.
     Electronic Commerce--Extension of last May's multilateral 
declaration not to assess customs duties on electronic commerce, to 
make sure that the Internet remains an electronic duty-free zone.
      An agreement on transparency in procurement to create 
more predictable and competitive bidding, reducing the opportunity for 
bribery and corruption and helping ensure more effective allocation of 
resources.
     APEC Sectoral Liberalization--Building consensus on the 
sectoral liberalization initiative begun in the Asia-Pacific Economic 
Cooperation (APEC) forum. This would eliminate tariffs and in some 
cases liberalize services in chemicals; energy equipment and services; 
environmental goods and services; fish and fishery products; gems and 
jewelry; medical and scientific instruments; toys; and forest products. 
Meaningful participation by Japan in the fishery and forest products 
sectors would be essential to success.
    The second dimension of institutional reform would promote 
transparency, allow the WTO to facilitate trade and participation for 
less developed nations, help it coordinate more effectively with 
international bodies in other fields, and continue to strengthen public 
confidence in the WTO as an institution. Here we would hope to take up 
such issues as:
     Trade facilitation. Most of the world's regional trading 
arrangements--ASEAN, APEC, the European Union, Mercosur, NAFTA, the 
proposed FTAA--contain a critical element of trade facilitation, often 
beginning with customs reform to reduce transaction costs and make 
trade more efficient. The WTO can help accomplish this on a much 
broader scale.
     Capacity-building. We need to narrow the growing disparity 
between the rich countries and the poor countries. We have to ensure 
that the WTO can work effectively with member economies and other 
international institutions, particularly with respect to the least 
developed nations, to ensure that they have both access to markets and 
technical assistance to meet the kinds of obligations that will help 
them grow into reliable trading partners.
     Addressing the intersection between trade and 
environmental policies. As trade promotes growth overseas, we must at 
the same time ensure clean air, clean water and protection of our 
natural heritage, as well as effective approaches to broader questions 
like biodiversity and climate change.
     Addressing the intersection between trade and labor. 
Again, as in our domestic economy, growth can and should be accompanied 
by safer workplaces, elimination of exploitive child labor and respect 
for core labor standards. The WTO in particular can work in more 
coordination with the International Labor Organization on some of these 
issues. As the President has announced, the US will provide funds for a 
new multilateral program in the ILO to provide technical assistance for 
international labor rights initiatives, and through our own Department 
of Labor will help our trading partners strengthen labor law 
enforcement. These and other such efforts should be a focus of renewed 
cooperation with the ILO.
     Coordination with the international financial 
institutions, in a world where the separation of trade from financial 
policy has become entirely artificial. The WTO must work more 
effectively with the IMF and World Bank to achieve their common goals 
of a more stable, predictable and prosperous world.
     Transparency. We will also seek reform, openness and 
accountability in the WTO itself. Dispute settlement must be 
transparent and open to the public. Citizens must have access to panel 
reports and documents. Civil society must be able to contribute to the 
work of the WTO, to ensure both that the WTO can hear from many points 
of view including consumer, labor, business, environmental and other 
groups, and that its work will rest on the broadest possible consensus.
    With respect to the expedited negotiating agenda of this Round, we 
are now consulting with Congress, industry, and other interested 
parties on a detailed negotiating agenda for talks which would begin 
after the Ministerial. While the final scope of the agenda is yet to be 
determined, we believe that at a minimum they should include such 
issues as:
     Agriculture, where we envision broad reductions in 
tariffs, the elimination of export subsidies, and further reductions in 
trade-distorting domestic supports linked to production. We must seek 
transparency and improved disciplines on state trading enterprises, 
seek reform of the EU's Common Agricultural Policy, and ensure that the 
world's agricultural producers can use safe, scientifically proven 
biotechnology techniques without fear of trade discrimination.
     Services, in which we hope to see specific commitments for 
broad liberalization and market access in a range of sectors, including 
but not limited to audiovisual services, construction, express 
delivery, financial services, professional services, 
telecommunications, travel and tourism, and others.
     Government procurement, in which purchases are over $3.1 
trillion per year, much of it in sectors where America sets the world 
standard: high technology, telecommunications, construction, 
engineering, aerospace and so forth. At present, only 26 of the 133 WTO 
Members belong to the plurilateral WTO Government Procurement 
Agreement. We thus look to bring more countries under existing 
disciplines.
     Intellectual property, where our efforts to ensure full 
compliance with the existing provisions of the Uruguay Round will be 
combined with campaigns against piracy in newly developed optical media 
technologies such as CDs, CD-ROMs, digital video discs and others; and 
end-user piracy of software. This agenda item is particularly vital in 
the information age.
     Industrial tariff and non-tariff barriers, where we will 
seek to continue our progress in reducing bound and applied tariff 
levels, and continue to address non-tariff measures in industrials 
sectors.
     A forward work-program on newer issues for the 
multilateral system to consider, including how competition and 
investment policies help to assure fair and open trade, how the WTO can 
help create an international pro-competitive regulatory climate, 
particularly in services, and how it might further advance our efforts 
against bribery and corruption.
    We are also exploring ways to more fully integrate the least 
developed countries, particularly in sub-Saharan Africa, into the 
system. This includes both seeking deeper commitments, and technical 
assistance in fulfilling those commitments, and the African Opportunity 
and Growth Act now under consideration in the House.
    Finally, I am pleased to state that new market-opening provisions 
in financial services trade have entered into force, effective March 1, 
as a result of the 1997 WTO Financial Services Agreement. In the 
negotiations that concluded in December 1997, we obtained market access 
commitments in banking, insurance, and securities, from a wide range of 
countries including the key emerging markets of primary interest to 
U.S. industry. The agreement covers an overwhelming share of global 
trade in this sector, including the most important international 
financial services markets and encompassing $38 trillion in global 
domestic bank lending, $19.5 trillion in global securities trading, and 
$2.1 trillion in world wide insurance premiums, accounting for 
approximately 95% of bank lending, stock turnover, capitalization of 
stock markets and insurance premiums.
    Participating countries had until January 29, 1999, to complete any 
necessary domestic procedures and formally notify the WTO of their 
acceptance of the protocol for bringing their commitments into force. 
Fifty-two countries, including the United States, met the deadline. We 
are concerned that 18 countries did not meet the deadline. But, in 
consultation with this Committee's staff, staff of other relevant 
Committees, and our private sector, we concluded that a two-part 
strategy best served U.S. interests. First, we want our companies to be 
able to benefit from legally enforceable commitments in these 52 
countries, which account for the overwhelming share of international 
trade in banking, securities, and insurance. Second, we will work to 
ensure that the remaining countries recognize that we and other WTO 
Members expect them to ratify the agreement and bring their commitments 
into force as soon as possible. We have no information to date that 
would lead us to believe that they will do otherwise. With this 
strategy in mind, we have agreed to bring the agreement into force on 
March 1 with respect to the 52 countries that have ratified to date. We 
continue to press the remaining countries, in capitals and in Geneva, 
to follow through on their undertakings and ratify the agreement.

2. Regional Trade Agenda

    At the same time, we are pursuing an active agenda in each region 
of the world. A brief review is as follows:
    Canada--With Canada, our largest trade partner, we have serious 
concerns on a range of agriculture matters. We took an important step 
last December by concluding a market access package opening 
opportunities for American grain farmers, cattle ranchers and other 
agricultural producers. We will continue our work in these areas this 
year. We will also address major market access impediments to our 
magazine publishers and other media and entertainment industries. We 
will also continue to enforce our bilateral sectoral agreements. At the 
same time, we intend to work with Canada on bilateral issues of mutual 
interest, and on negotiations toward the Free Trade Area of the 
Americas and at the WTO where we share many goals.
    Mexico--Trade with Mexico has expanded rapidly since passage of the 
North American Free Trade Agreement--Mexico is now our second largest 
goods export market after Canada. We will continue to monitor 
implementation of Mexico's NAFTA commitments, scheduled to be complete 
by 2008, and address bilateral issues including land transportation, 
corn syrup and sugar, and telecommunications barriers as well as piracy 
in intellectual property rights. We have also stepped up our efforts in 
the trilateral work program now underway in more than 25 Committees and 
Working Groups of the NAFTA signatories, with the intention of 
maximizing our gains under the NAFTA.
    Western Hemisphere--The Miami and Santiago Summits of the Americas 
have called on us to complete work on a Free Trade Area of the Americas 
no later than the year 2005. This year, in accordance with Summit 
directions, we intend to achieve ``concrete progress'' toward the FTAA 
in our nine Negotiating Groups and through business facilitation and 
other measures. At the same time, we will seek approval from Congress 
of an expanded and improved Caribbean Basin Initiative with benefits 
similar to those now accorded Mexico and Canada.
    Europe--We are working to remove barriers and strengthen trade 
relations with the EU through the Transatlantic Economic Partnership 
begun last year. This includes negotiations on seven separate agenda 
items: technical trade barriers, agriculture (including biotechnology 
and food safety), intellectual property, government procurement, 
services, electronic commerce and advancing shared values such as 
transparency and participation for civil society. We are also working 
to ensure the protection of American interests as the EU expands to 
include Central and Eastern European nations. At the same time, we are 
enforcing European compliance with dispute settlement decisions and 
will address problems in our trade relations both bilaterally and 
through the new negotiating Round President Clinton has proposed.
    Asia--Under the Asia-Pacific Economic Cooperation (APEC) forum we 
are looking long-term toward free and open trade in the region. This 
year, as I noted earlier, we will seek WTO consensus on the nine-sector 
liberalization package begun in APEC, and begin work on six additional 
sectors. We will also address bilateral issues with Korea, the ASEAN 
nations and other Asian trade partners. This will include seeking 
Normal Trade Relations with Kyrgyzstan, Mongolia and Laos, and possibly 
negotiating a broad trade and commercial agreement with Vietnam.
    Japan--In trade relations with Japan, our largest overseas trade 
partner, we will continue our intense and sustained effort to open and 
deregulate the Japanese market. We have concluded 35 bilateral trade 
agreements with Japan since 1993; we monitor their implementation 
closely and enforce them vigorously.
    We will also address sectoral issues in Japan including steel, 
insurance, glass, film and other sectors. For example, we will be 
addressing a wide range of primary and third sector issues in 
consultations with Japan on insurance scheduled for this week. And as I 
noted earlier, we are pursuing an ambitious set of goals under the 
Enhanced Initiative on Deregulation and Competition Policy, both in 
individual sectors and in broader structural issues. Building on 
discussions at recent Vice Ministerial-level talks in Tokyo, we are 
looking to compile a substantive package of measures to deregulate 
Japan's economy that our leaders can endorse when Prime Minister Obuchi 
visits the United States in May as well as to agree by then on concrete 
measures Japan will take to address outstanding bilateral issues. We 
are also working to eliminate specific market access barriers in Japan 
through WTO dispute settlement, as well as through APEC and WTO 
negotiations and other regional and multilateral fora.
    China--In our bilateral relationship with China, broadly speaking 
we will monitor and strictly enforce our agreements on intellectual 
property and market access with China, and address bilateral trade 
problems in agriculture, direct marketing and other areas. Most 
recently, this has included an advance of fundamental importance to 
American farmers and ranchers: the Agreement on Agricultural 
Cooperation concluded during Premier Zhu Rongji's visit last week. This 
will immediately lift unfair bans imposed due to unscientific sanitary 
and phytosanitary standards on Pacific Northwest wheat, American meats, 
and citrus. It has the potential to create significant new markets for 
these commodities. Citrus producers posit that our resolution of this 
issue last week will lead to $700 million in new exports per year to 
China.
    At the same time, we will continue to seek broad market-opening 
through our negotiations toward China's accession to the World Trade 
Organization, on which we have made significant progress last week in 
all areas of concern--agriculture, services, industrial goods and the 
rules issued addressed in the Protocol--and which I address more fully 
below.
    Africa--USTR is implementing the President's Partnership for 
Economic Growth and Opportunity in Africa by supporting economic 
reform, promoting expanded trade and investment ties, and encouraging 
Africa's full integration into the world trading system by negotiating 
bilateral agreements, technical assistance and other measures, in 
particular Congressional approval of the African Growth and Opportunity 
Act.
    A sound policy framework in African countries that opens economies 
to private sector trade and investment offers the greatest potential 
for growth and poverty alleviation as well as trade opportunities for 
the U.S.. Last month, for example, we signed a Bilateral Investment 
Treaty with Mozambique, and Trade and Investment Framework Agreements, 
or TIFAs, with South Africa and Ghana. We hope to complete a similar 
TIFA with the West African Economic and Monetary Union. Broader efforts 
to encourage full integration of developing countries into the trading 
system will also bolster our Africa policy. In this regard, we will 
seek renewal of the Generalized System of Preferences.
    Middle East--Building upon our Free Trade Agreement with Israel, we 
have inaugurated a program that aims to bolster the peace process, 
while advancing American interests. Starting with a framework of 
bilateral trade and investment consultations in the region and a newly 
inaugurated industrial zones program, we will help the Middle Eastern 
countries work toward a shared goal of increased intra-regional trade. 
Most recently, we expanded the first Jordan-Israel Qualifying 
Industrial Zone at Irbid, designated another, and completed a Trade and 
Investment Framework Agreement with Jordan.
    OECD--We strongly support passage of the OECD Convention on 
Shipbuilding Subsidies and will work with you to ensure its success.

                     II. Enforcing the Rule of Law

    Second, US trade policy will support and advance the rule of law 
internationally by ensuring the enforcement of trade agreements and 
U.S. rights in the trading system.
    Much of our enforcement work takes place at the World Trade 
Organization. We have filed more complaints in the WTO--44 cases to 
date--than any other WTO member, and our record of success is strong. 
We have prevailed on 22 of the 24 American complaints acted upon so 
far, either by successful settlement or panel victory. In almost all 
cases, the losing parties have acted rapidly to address the problems. 
We will insist that this remain the case in all our disputes, including 
those with the European Union on beef hormones and bananas, and with 
Canada on magazines. The WTO arbitration panel's recent decision in the 
bananas case, finding $191.4 million worth of damage from EU policies, 
is an important indication of the success and utility of this system.
    At the same time, the U.S. has complied fully with all panel 
rulings it has lost, although these are few in number. And we will, of 
course, use our rights under the NAFTA to ensure open markets to our 
goods and services in Canada and Mexico.
    We continually monitor implementation of WTO commitments. All WTO 
developing country members are scheduled to fully implement their 
intellectual property commitments, and all members are required to 
implement customs valuation commitments by January 1, 2000. We will 
insist on strict compliance with these deadlines.
    Likewise, we are vigilant to ensure enforcement of textile quotas 
and implementation of textile market access requirements overseas. A 
number of our trading partners clearly have further work to do in 
market access, including some of our largest and fastest growing 
textile suppliers. We have and will continue to aggressively pursue our 
rights, whether through the consultation process or ultimately through 
the WTO dispute settlement regime.
    U.S. trade laws are also a vitally important means of ensuring 
respect for U.S. rights and interests in trade. We will continue to 
challenge aggressively market access barriers abroad using laws such as 
Section 301, ``Special 301'' and Section 1377, to open foreign markets 
and ensure fair treatment for our goods and services, ensure 
nondiscrimination in foreign government procurement and ensure 
compliance with telecommunications agreements.
    To ensure that we have the maximum advantage of domestic trade 
laws, the Administration has extended by Executive Order the substance 
of two laws for which authority has lapsed: ``Super 301'' and Title 
VII. We will issue a report on these issues by April 30th.
    The Administration is also, of course, committed to full and 
vigorous enforcement of our laws addressing dumping and subsidies, and 
on injurious import surges.

                 III. Integrating Transition Economies

    Third, our trade policy will continue our progress toward 
integrating China, Russia and other economies in transition into the 
trading system. This will both advance specific American trade 
interests, and contribute to our larger goal of a more secure peace in 
the next century.
    This task is the last great step in the process which began with 
formation of the GATT and continued with the admission of Germany and 
Japan: the creation of a world-wide trading system which ensures 
respect for fairness, transparency and the rule of law. Specifically, 
we are pursuing the accession of 30 economies to the World Trade 
Organization: Latvia, whose accession is complete and awaiting 
ratification; and Albania, Algeria, Andorra, Armenia, Azerbaijan, 
Belarus, Cambodia, China, Croatia, Estonia, Former Yugoslav Republic of 
Macedonia, Georgia, Jordan, Kazakstan, Laos, Lithuania, Moldova, Nepal, 
Oman, Russia, Samoa, Saudi Arabia, Seychelles, Sudan, Taiwan, Tonga, 
Ukraine, Uzbekistan, Vanuatu and Vietnam. In all cases we seek a 
commercially meaningful accession with the greatest possible 
commitments to all WTO agreements.
    As you can see, two groups of economies make up the bulk of these 
accessions: a set of Middle Eastern nations on one hand, and China, 
Russia and 16 other nations in transition from communist planning 
systems to the market. Their entry will make membership in the trading 
system nearly universal; and the accession of the transition economies 
will be a fundamentally important step in their domestic reforms as 
well. This would remove large distortions in world markets, 
dramatically enhance market access for American producers, and bolster 
international stability by giving these nations a greater stake in 
world prosperity beyond their borders.
    Let me say a few words in particular about the transition 
economies, because these are the largest nations and largest traders 
outside the system today. To support rather than undermine both 
domestic reform in these economies and the rules of the trading system, 
these countries must be brought into the WTO on commercially meaningful 
terms. The result must be enforceable commitments to open markets in 
goods, services and agricultural products; transparent, non-
discriminatory regulatory systems; and effective national treatment at 
the border and in the domestic economy.
    Central European countries like Poland, Hungary and the Czech 
Republic have succeeded, and their experience shows that WTO membership 
has assisted their domestic economic reform policies. The most recent 
successful WTO applicants, Latvia and Kyrgyzstan, have had the same 
experience.
    In the months to come, we will negotiate intensely with all 
acceding economies, including China--the largest prospective WTO 
member. We made significant progress with China in the months leading 
up to the visit of Premier Zhu Rongji in all our areas of concern. This 
includes:
     Agriculture--Agreement to apply scientific sanitary and 
phytosanitary standards; major tariff cuts in meats, dairy, fruits and 
nuts, and bulk commodities (examples include reducing the beef tariff 
from 45% to 12% by 2004, and reducing tariffs on soybeans to 3%); the 
establishment of liberal tariff-rate quotas in all commodities of 
importance to farm exporters, including wheat, rice, barley, soybeans, 
corn and others; agreement not to provide export subsidies; and rapid 
phase-ins of concessions, with significant benefits immediately on 
accession, all benefits phased in within five years, and all tariffs 
bound.
     Industrial Products--Provision of full trading rights and 
distribution rights; major tariff reductions in all areas, from 24.6% 
average in 1997 to 9.44%, with the average tariff for our priority 
products reaching 7.1% (for example, the tariff on autos will fall from 
80-100% to 25% within five years, and tariffs on construction equipment 
will fall by half); Commitment to meet Information Technology Agreement 
phaseouts of tariffs on high-tech goods by 2004; and abolition of all 
quotas by 2005.
     Services--Grandfathering of all current licenses, 
contracts and shareholder agreements; participation in the Basic 
Telecommunications Agreement and the Financial Services Agreement; very 
broad distribution commitments, significant liberalization of the 
insurance sector; opening of the telecommunications sector to foreign 
investment for the first time; and other significant commitments in 
these sectors along with banking, audiovisual, travel and tourism, the 
professions, and others.
     Protocol--China must also complete negotiations on a 
Protocol covering rules with respect to safeguards, dumping, investment 
restrictions and other matters. The commitments addressed in the 
Protocol must meet our concerns, and must also be acceptable to other 
WTO members. Here, we have secured agreement to continue use of ``non-
market economy'' methodology for anti-dumping cases; bans on investment 
restrictions including offsets, technology transfer requirements, local 
content requirements and others; product-specific safeguards; measures 
to address unique features of the Chinese economy such as the high 
involvement of the government in state-owned enterprises and state-
invested enterprises; and others.
    The negotiations are far from complete, however. Issues remain to 
be resolved in three service sectors (banking, securities and 
audiovisual), and we continue to discuss both substantive issues and 
duration periods on the Protocol. China must also conclude bilateral 
market access agreements with other trading partners, and complete 
significant multilateral work at Geneva before accession. We will not 
accept anything less than an accession which is commercially meaningful 
in all these areas, and will consult with Congress closely as 
negotiations proceed, building upon the 55 separate China briefing 
sessions we have held with Committees of jurisdiction since 1997 and 
the many individual meetings Ambassador Barshefsky and I have had with 
Members.
    Likewise, at the most recent summit with Russia (September 1998), 
President Yeltsin agreed to work to intensify Russia's WTO accession 
efforts. Russia's current economic difficulties clearly present 
challenges and Russian Cabinet reshuffling has slowed the process, but 
we will continue to consult with the Russians toward a commercially 
viable accession package.

                      IV. The 21st-Century Economy

    Fourth, trade policy will help lay the foundation for the 21st-
century economy by ensuring that the trading system is compatible with 
rapid advances in civilian science and technology.
    In medicine, environmental protection, agriculture, entertainment, 
transportation, materials science, information and more, science is 
advancing at extraordinary speed. This offers the world tremendous 
potential to increase wealth, raise productivity, improve health care, 
reduce hunger, protect the environment and promote education. These are 
also areas in which the United States has a significant comparative 
advantage.
    Under President Clinton, our trade policy has made high technology 
a strategic priority. Consistent with national security, we have aimed 
to ease the development and commercialization of new technologies, and 
ensure strong incentives for scientific and technological progress. We 
have negotiated far-reaching new agreements in sectors like computers, 
semiconductors, information technologies and many other areas. This 
work continues in multilateral, sectoral and regional negotiations.
    In the multilateral system, the rapid advance of technology 
requires us to improve the trading system's institutions and 
negotiating methods. In a world where successive generations of new 
products arise in a matter of months, and both information and money 
move instantaneously, we can no longer take seven years to finish a 
negotiating Round, or let decades pass between identifying and acting 
on trade barriers. We will have to move faster and more efficiently, 
which is a significant reason for the President's call for an 
accelerated Round.
    We must also ensure that trade policy, both in the WTO and in our 
regional and bilateral negotiations, helps ensure that we can take 
advantage of our comparative advantage in knowledge industries and 
other new technologies. Three broad issues cut across many sectors:
    Intellectual Property Rights--Our success in this field over the 
past decade owes a great deal to the work of Congress, both in the 
Trade Act of 1988 with its creation of ``Special 301,'' and on the 
Uruguay Round. Today, the vast majority of our trading partners have 
passed modern intellectual property laws and are improving levels of 
enforcement. In this area, we will spend a great deal of time ensuring 
that all WTO members comply with their obligation to introduce full 
intellectual property protection by January 1, 2000. (For countries, 
like China, which are not WTO members, we will vigorously monitor 
compliance with bilateral agreements.)
    We have also launched campaigns against worldwide piracy of new 
optical media technologies, and against end-user piracy of software. 
These issues are integral parts of our regional negotiating agenda in 
Asia, Latin America, Europe, Africa and the Middle East. Looking ahead, 
we must extend protection of intellectual property rights beyond basic 
laws and enforcement to protect new technologies like genetically 
engineered plant varieties.
    Global Electronic Commerce--In accordance with the President's 
Global Electronic Commerce initiative, USTR seeks to preserve 
electronic trade over the Internet as duty-free. At the last WTO 
Ministerial Conference, in May of 1998, we won agreement to a 
``standstill'' for tariffs on electronic transmissions. As I noted 
earlier, we will seek to extend that agreement this year. Likewise, in 
our negotiations toward the Free Trade Area of the Americas, at APEC 
and in the Transatlantic Economic Partnership, we have created special 
committees to advise us on ways to ensure all participants can take 
maximum advantage of electronic commerce.
    Biotechnology--A third top priority for us in this area is 
biotechnology. Among the chief sources of innovation in this field are 
American agriculture and medicine. USTR will seek to ensure that 
pharmaceutical companies, farmers and ranchers can use safe, 
scientifically proven techniques like biotechnology to make agriculture 
both more productive and friendly to the environment, without fear of 
encountering trade discrimination. This is a priority for us in the 
Transatlantic Economic Partnership negotiations and in developing our 
agenda for future WTO negotiations.
    Sectoral--We also have an active sectoral high-tech agenda. This 
includes, for example, the ITA II agreement I discussed earlier. We are 
also working closely with our civil aircraft industry to ensure its 
future and combat foreign, particularly European, subsidies and other 
unfair practices; and with the semiconductor industry on the 
appropriate next steps for the international semiconductor agreement. 
This work extends into many other fields.

                       V. Rising Quality of Life

    Fifth, U.S. trade policy seeks to ensure that worldwide as in the 
United States, trade and growth go together with a rising quality of 
life, including setting high standards of environmental protection, the 
observance of core labor standards, and high levels of consumer 
protection.
    As in our domestic economy, we regard environmental quality and 
protections for workers as essential parts of economic policy. Trade 
policy has an important role to play, in coordination with our efforts 
in other fora, to ensure growing respect for internationally recognized 
core labor standards and sustainable development worldwide.

1. Trade and the Environment

    Our Administration believes that prosperity through open trade and 
the protection of health, safety and the environment need not conflict, 
and should be mutually supportive. This is the case in our domestic 
economy, where in the past three decades our GDP has risen in real 
terms from $3.7 to $8.5 trillion--while our percentage of fishable and 
swimmable rivers and streams doubled, the number of citizens living in 
cities with unhealthy air fell by half, and many endangered or 
threatened species, including the bald eagle, the symbol of American 
pride, are recovering.
    The Preamble of the WTO recognizes this in the international 
setting, stating that sustainable development is a central objective of 
its work. Where there are potential conflicts, we should strengthen our 
ability to resolve them in a manner that protects the environment, 
health and safety and does not undermine the trading system. This 
includes working to ensure that the proper expertise is brought to bear 
on complex technical and scientific issues, particularly those with 
environmental, health and safety dimensions.
    In many cases elimination of trade barriers will also contribute to 
a cleaner environment and the conservation of natural resources. For 
example, this can help countries gain access to cost-effective 
equipment and technology. APEC's work toward an agreement to liberalize 
trade in environmental goods and services, part of which has now moved 
to the WTO, can help countries monitor, clean up and prevent pollution, 
and ensure clean air and water. Likewise, the APEC initiative on energy 
equipment and services can promote rapid dissemination of efficient 
power technologies, thus allowing production of power with reduced 
carbon emissions and contributing to international efforts to address 
climate change.
    At the same time, as the trading system ensures that members avoid 
using environmental standards as disguised trade barriers, in 
eliminating barriers to trade we must not compromise on the achievement 
and maintenance of high levels of environmental, health and safety 
protection. And the system must work together with multilateral 
environmental institutions.
    We continue to support the effective implementation of the North 
American Agreement on Environmental Cooperation in conjunction with the 
NAFTA. Cooperative activities that have occurred as a result of this 
agreement have improved environmental protection in a number of 
different areas--for example, an agreement on the conservation of North 
American birds; the creation of a North American Pollutant Release 
Inventory; an agreement on regional action plans for the phase-out or 
sound management of toxic substances, including DDT, chlordane, PCBs 
and mercury; and the creation of a trilateral working group that has 
improved the enforcement of environmental protection laws. Benefits 
have also resulted from the implementation of the Border Environment 
Cooperative Commission (BECC) which was also entered into in 
conjunction with the NAFTA. The BECC has fifteen environmental 
infrastructure projects under construction today, funded in part by the 
North American Development Bank, including the first wastewater 
treatment plants in Juarez.

2. Trade and Core Labor Standards

    Likewise, the trade system must help to assure the dignity and 
safety of workers. Here again, we can draw lessons from our experience 
at home, where since 1970, as manufacturing production doubled, the 
number of workplace deaths fell 60%. Our efforts here include seeking 
closer cooperation between the WTO and the International Labor 
Organization, bolstering ILO capabilities to address exploitative child 
labor and other violations of internationally recognized labor rights 
as well as ensuring safe and healthy workplaces, and working with 
individual trade partners to advance our goals.
    At the Singapore WTO Ministerial Conference in 1996, the WTO for 
the first time recognized the importance of labor standards and 
cooperative work with the International Labor Organization, while 
clearly separating advocacy of labor rights from protectionist trade 
policies. We wish to build on this to ensure that the trading system 
works more effectively with the International Labor Organization, with 
businesses and with citizen activists to ensure observance of 
internationally agreed core labor standards--banning forced labor and 
exploitive child labor, guaranteeing the freedom to associate and 
bargain collectively and eliminating discrimination in the workplace.
    We have thus proposed in Geneva that the WTO establish a forward 
work-program to address trade issues related to labor. We also have 
raised labor standards in country policy reviews under the Trade Policy 
Review Mechanism. In these reviews each WTO member's trade regime is 
examined, and other members are provided an opportunity to raise 
questions. We have used this opportunity, for example in the recent 
Swaziland review, to seek clarifications about labor practices that we 
believe are inadequate.
    To bolster these efforts, the President recently announced a $25 
million program to help the ILO work with developing countries to put 
in place basic labor protections, safe workplaces and guarantee worker 
rights and enforce their own laws so that workers everywhere can enjoy 
the benefits of a strong social safety net. (The U.S. has already 
funded ILO child labor programs in Bangladesh, Thailand, the 
Philippines, Africa, and Brazil.) These are fundamental human rights 
and common concerns, and trade policy has a place in addressing them.
    We are also taking steps in a number of other areas directly 
related to trade policy. The Administration has directed the Customs 
Service to step up its efforts to ensure that items made by forced or 
indentured child labor are not imported into the United States. USTR is 
enforcing provisions of existing law that impose penalties for clear 
violations of worker rights. For example, we partially removed GSP 
trade preferences from Pakistan over child labor concerns. At the same 
time, however, the Administration has worked through the Labor 
Department to develop long-term solutions to the problem, by addressing 
specific Pakistani industries. As a result, 7,000 children have been 
removed from jobs stitching soccer balls and 30,000 children from jobs 
knotting carpets.
    Likewise, we are finding ways to address core labor standards as we 
advance our trade policy goals. The North American Agreement on Labor 
Cooperation under NAFTA is one example. Another is our recent textile 
agreement with Cambodia, which includes provisions requiring Cambodia 
to improve the enforcement of its labor laws in the garments sector.

                     VI. Advancing American Values

    We will seek to advance basic American values and concepts of good 
governance, by making the institutions of trade more transparent, 
accessible and responsive to citizens.
    The President has said that, as trade grows, the rules of trade do 
more to ensure that markets are open to our goods and services. The 
trading system coordinates more fully with environmental, labor and 
financial institutions, and the need for transparency, accessibility 
and responsiveness grow. This is natural and a development we both 
support and promote.
    One principal forum here is the WTO, where we are seeking 
agreements on more rapid release of documents, ensuring that citizens 
and citizen organizations can file amicus briefs in dispute settlement 
proceedings, and that dispute settlement proceedings be open to public 
observers. In the interim, President Clinton has made a standing offer 
to open any dispute panel involving the United States to the public, if 
our dispute partner agrees.
    A second forum is the FTAA negotiations, in which--for the first 
time in any trade negotiation--we have created a Civil Society 
Committee to give business associations, labor unions, environmental 
groups, student associations, consumer representatives and others a 
formal means of conveying concerns and ideas to all of the governments 
involved in the talks.
    A third is our encouragement of new Transatlantic Dialogues with 
the European Union for consumers, labor and environment as part of the 
Transatlantic Economic Partnership. Through this effort we are 
promoting our shared values with Europe in the activities and 
negotiations we are undertaking as part of the TEP and multilaterally.

FY 2000 Budget Level

    Over the past six years, as I noted earlier, we have negotiated 
over 270 trade agreements since 1992, and our volume of bilateral trade 
has expanded by nearly three quarters of a trillion dollars. This has 
inevitably meant a heavier workload for the USTR. Our budget request 
will allow us to meet this workload while protecting our tradition as a 
small and efficient agency. The FY 2000 budget authorization request 
will support USTR's FY 2000 work agenda. This request represents the 
right resource level for allowing USTR to implement the ambitious work 
agenda I have outlined today.
    For FY 2000, the budget request proposes 185 FTEs and $26,501,000 
in new budget authority to support this trade agenda. This represents a 
net increase of $1.8 million and 7 career FTEs over FY 1999. We would 
use the $1.8 million increase in five targeted areas:
     $1.2 million to fund the expected cost of legislated 
employee pay raises, as well as non-pay inflation in areas like rents, 
utilities and travel;
     $400,000 for 7 new career positions in areas with growing 
workloads. Six of the seven new positions would be Trade Specialists 
and one would be a support position. Of these positions: 2 each are in 
USTR's Agriculture and Africa units; and one each are in Japan, China, 
and Western Hemisphere offices;
     $400,000 for negotiator travel to meet rising number of 
trips to China, Japan, Africa and other distant and costly negotiating 
sites;
     $225,000 for security-related projects in USTR's Geneva 
and Washington offices to guard against the threat of terrorism, and to 
protect sensitive and classified information from unauthorized access; 
and $100,000 is to meet a growing demand for interpretation and 
translation services for use in negotiations, enforcement proceedings 
and reviewing country proposals.
    This represents a total budget increase of $2.225 million, which is 
partially offset in FY 2000 by a reduction of $498,000 in funding for 
Y2K improvements made available in FY 1999 on a one-time basis under 
the Omnibus Consolidated and Emergency Supplemental Appropriations Act 
(P.L. 105-277). Thus the net increase is $1.8 million.
    Mr. Chairman, USTR needs every penny of the $26.5 million we are 
proposing in the FY 2000 budget authorization request. We are keenly 
aware of our responsibilities for first attempting to absorb the 
requested cost increases by reordering work priorities, cutting 
administrative overhead, improving management or otherwise economizing.
    Yet, USTR has virtually no capacity to absorb higher costs in FY 
2000. Two-thirds of the USTR appropriation supports the salaries and 
benefits of employees, and the remaining one-third pays for building 
rent, utilities, security, travel to negotiating sites and other direct 
day-to-day operating expenses. Unlike larger Federal agencies, we do 
not have the option of cutting back in categories like grants and 
contracts, nor do we have the option of trimming layers of management 
or administration. We have already accomplished an enormous amount of 
``belt-tightening'' in the last 6 years, and any further budget savings 
will come at the expense of our core negotiation, policy coordination 
and enforcement programs.
    In fact, between FY 1991 and FY 1997, USTR's appropriations for 
basic operations rose by less than $1 million, roughly 4.4 percent over 
the 6-year period, or about seven-tenths of one percent annually. Over 
the 6 years, we had to absorb about $400,000 a year, just to meet the 
cost of legislated employee pay raises and rising costs in non-pay 
categories like utilities, office rent, airfares and per diem charges. 
We absorbed a cumulative total of nearly $2.5 million through a series 
of financial management improvements and cuts in administrative 
overhead. Let me give you some examples:
     We rescinded authority for Assistant USTRs to approve 
their own travel, and instituted a rigorous review process that 
requires that the Chief of Staff approve every single trip. Such 
individual attention has not only reduced the number of trips, but the 
number of persons going on the same trip;
     We mandated use of frequent flyer coupons in order to 
increase the number of trips with the same amount of funds. In the last 
five years, we have funded 126 trips with bonus coupons, saving the 
Government $275,000 in the cost of airplane tickets;
     We also established policies that required all employees 
to fly in economy class, unless the trip exceeds 12 hours of flying 
time--a more rigid rule than the government wide standard;
     We reduced the amount of office space we used in the 
Geneva Office, cutting rental costs by several hundred thousand 
dollars;
     We reduced our computer staff by more than half, saving 
more than $1 million in payroll expenses, while at the same time 
upgrading the computer network and installing an innovative system for 
receiving classified State Department cables, which reduced the time it 
takes our negotiators to read cables and the expense of transporting 
and coping hard copy versions of the cables.
    These are just some of the ways that USTR has economized over the 
past several years. These actions have not only resulted in an agency 
that is ``lean and mean'' by any measure, but one that has been cut to 
the quick, which finds itself unable to absorb the kind of budget needs 
presented in the USTR's FY 2000 budget request. For this reason, we 
need the support of the Committee, and the Congress, in providing the 
full $26.5 million and 185 FTEs in FY 2000.
    One last point. USTR is a small agency. But I believe we have some 
of America's finest public servants. Our staff is talented, talented, 
works long hours, and delivers results for the America people. On their 
behalf, I am proud to present this budget to the Subcommittee today.

                               Conclusion

    In conclusion, Mr. Chairman, much has changed in the international 
economy in the fifty-one years since the United States led 23 countries 
in creation of the GATT. Our national interest in economic events 
beyond our borders has grown, our people have found new opportunities 
and new challenges in trade, and many new nations have become active in 
trade.
    We have developed an agenda that will cement the progress we have 
made, and take it forward into a new century. I am very proud to be 
associated with the staff of the Office of the U.S. Trade 
Representative in this effort. The work ahead is challenging. But I can 
assure you and the members of the Subcommittee that we are ready for 
these challenges. With the approval of our appropriation request and 
the continued support of the Subcommittee, I am confident that we can 
continue successfully to carry out our mission and meet the challenges 
before us.
    This concludes my formal statement. I would be pleased to answer 
any questions you may have.
    Thank you very much, Mr. Chairman and Members of the Subcommittee.

                                

    Chairman Crane. Thank you, Mr. Fisher.
    Mr. Kelly.

       STATEMENT OF HON. RAYMOND W. KELLY, COMMISSIONER, 
                      U.S. CUSTOMS SERVICE

    Mr. Kelly. Thank you, Mr. Chairman, Mr. Levin, other 
Members of the Committee.
    It is a privilege to appear before the Subcommittee today 
to present the U.S. Customs Services recent accomplishments, 
future plans, and fiscal year 2000 budget request. I have a 
prepared statement, which I asked to be included in the record 
in its entirety.
    Chairman Crane. Without objection, so ordered.
    Mr. Kelly. Before I begin, I want to thank the Members 
gathered here for the strong support you have given to customs, 
trade, and enforcement activities.
    Customs is the oldest U.S. law enforcement agency, one with 
a proud history and an extraordinary record of achievement. Our 
mission is not an easy one, serving, as we do, as the front 
line of defense at our Nation's borders and as the guardian of 
our systems of lawful international trade, the lifeblood of our 
economy. But we continue to find ways to rise to the challenges 
we face every day, using the resources that we have been given 
to the best of our ability.
    Nineteen ninety-eight was an outstanding year for Customs. 
We seized more heroin, cocaine, and marijuana than any other 
law enforcement agency--over 1.1 million pounds. That is more 
than a million pounds of drugs that won't find its way onto our 
streets or into our schools and communities.
    Our trade activity was no less prolific. Customs processed 
19.7 million trade entries, 1.8 million more than in 1997, and 
a total of $955 billion in goods. We maintained the total trade 
compliance rate of 81 percent and a compliance rate for imports 
in primary focus industries of 84 percent. And we are 
continuing to try to improve this rate. Customs processed 
almost 460 million passengers and pedestrians, 13.1 million 
more than 1997. We also moved 135 million conveyances through 
our borders and port of entry, 4.4 million more than the 
previous year.
    While 1998 was an extraordinary year for Customs, we are by 
no means resting on our many positive results. As we look 
toward the future, Customs has laid out an ambitious agenda to 
meet the challenges of global trade. One of our most critical 
issues in this regard is trade automation. Investments in 
systems modernization remain a top priority for Customs.
    On the enforcement side, our successes last year ranged 
from high-profile narcotics seizures to major money laundering 
stings, to the successful dismantling of Internet child 
pornography ring. We continue to build on the success of 
Operation Brass Ring, our major counter-smuggling initiative of 
1998.
    Customs set a new precedent for interdiction efforts with 
this operation, which utilized the many innovative tactics 
devised by our field personnel to catch drug smugglers. Thanks 
to our success with Brass Ring, we are headed for another 
record year for narcotics seizures in 1999. In May 1998, 
Customs concluded Operation Casablanca, the largest, most 
comprehensive drug money laundering case in the history of U.S. 
law enforcement. The investigation spanned 5 years, involved 
the work and dedication of more than 200 Federal agents, 
resulted in the arrest of more than 168 individuals, the 
indictment of three Mexican banks, and the seizure of large 
quantities of drugs and laundered money.
    Customs has also extended its crime fighting expertise into 
the world of cybercrime. Operation Cheshire Cat led Customs 
agents via the World Wide Web into the diabolical world of 
international child pornography and sexual exploitation. What 
we uncovered in Cheshire Cat was an international alliance of 
approximately 200 sexual predators operating in 47 countries. 
Thirty-five search warrants were executed, resulting in 13 
arrests in the United States, and more arrests are currently 
pending.
    I mentioned just a few of the many tough, challenging, and 
successful investigations our agents carried out last year. To 
describe them would take weeks of hearing.
    I provide these examples to highlight the danger diversity 
and complexity involved in the investigations Customs personnel 
handle day in and day out. As proud as we are of these 
accomplishments, we continue to work on areas within our 
organization that need to be strengthened.
    We have developed a document referred to as Action Plan 
1999. It identifies the actions under way to improve Customs 
management and procedures in areas ranging from integrity to 
training, to automation.
    I know many of you may already have copies of the plan, but 
I certainly can make new versions available for anyone who 
needs them.
    One of the key priorities in our action plan is the 
intensive review of our passenger processing services. As many 
of you know, Customs carries out personal searches on a small 
percentage of the over 70-million airline passengers we process 
each year. When allegations arose that Customs was engaged in 
racial bias in the selection of travelers for personal 
searches, we responded rapidly. Just last week, we announced 
the formation of an independent commission to review our 
passenger search procedures. The Customs Personnel Search 
Review Commission, made up of prominent public leaders in race 
relations and government affairs, will have unfettered access 
to Customs personnel and facilities. My sincere hope that the 
Commission will air this issue completely. There is simply no 
place for bias or even a perception of bias in the Customs 
service.
    I have offered you a sense of Customs' recent past and what 
is happening in our present. Now, let me share with you a sense 
of our future. One of the most important issues for the Customs 
Service, as I mentioned, is the movement toward modernization 
of our automated system. Continued reliance on a 16-year-old 
automated commercial system, or ACS as we call it, poses great 
risks for Customs and for the U.S. trade. ACS simply cannot 
support the business of the future. Recognizing this early on, 
Congress passed the Customs Modernization Act in December 1993. 
The Mod Act compelled U.S. Customs to redesign its trade 
compliance process and the automation that supports it. We 
responded with the development of the concept of ACE, our 
commercial system for the 21st century, that is the Automated 
Commercial Environment.
    ACE will help us manage the dynamic growth in global trade. 
It will allow us to do business the way business does business. 
It will also support our enforcement efforts by enhancing 
compliance. Customs will have better intelligence on shipments 
arriving in our ports, allowing for more focus on high-risk 
groups and less time spent on costly time-consuming 
inspections. Customs wants to calm whatever doubts remain as to 
our ability to manage and maintain this system.
    We hired a Chief Information Officer with extensive 
experience in enterprise architecture and major systems 
acquisition. We reorganized the Office of Information 
Technology to improve accountability and program control. And 
we are seeking the funding to hire a prime contractor to help 
plan, implement and manage our information technology 
modernization efforts.
    The contractor will be responsible for developing the 
software programs that customs will adopt. We will also assume 
the risks involved in delivering ACE components and related 
software projects. Following the successful path of other 
agencies, we have also hired a congressionally-chartered, 
federally-funded research and development center, MITRE, as it 
is called. The center will help guide every phase of systems 
acquisition from management of the prime contractor to systems 
implementation and performance review. We should have this 
center on board in May. All of these actions reinforce the 
commitment Customs has made to getting ACE done and getting it 
done right.
    Our biggest challenge now is to keep our current ACS system 
operational until ACE comes on line. Nothing less than the 
unimpeded flow of trade is at stake. I am confident that 
Customs has the support, the experience, and the safeguards in 
place that we would need to now move forward with ACE. With the 
continued assistance of the Congress, Customs and the Trade 
will get the system we both want and the system we both need.
    That concludes my remarks, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Raymond W. Kelly, Commissioner, U.S. Customs Service

    Good morning, Mr. Chairman and Members of the Subcommittee. It is a 
privilege to appear before the Subcommittee today to present to you our 
recent accomplishments, future plans, and the fiscal year 2000 budget 
request. Before I begin though, I would like to personally thank you 
for the strong support you have continued to provide to Customs. It has 
been a challenging year for us and I am proud to play a part in the 
effort we share to protect the Nation's borders and ensure the Nation's 
prosperity.
    Customs is an agency with a long and rich history, many proud 
traditions, and an extraordinary record of achievement. We recognize 
that our mission is not an easy one-standing as the front line of 
defense at the Nation's borders--but we continue to find ways to rise 
to the challenges that we face every day.

                            Accomplishments

Operation Casablanca

    In May 1998, Customs concluded Operation Casablanca, the largest, 
most comprehensive drug money laundering case in the history of U.S. 
law enforcement. This 3-year investigation conducted by our Los Angeles 
office exposed a relationship between a large number of Mexican banks 
and the Cali and Juarez drug cartels. This relationship allowed the 
drug cartels to launder their U.S. drug proceeds through accounts 
opened by corrupt bankers.
    The case was made possible because of the extraordinary undercover 
work performed by Customs special agents. They posed as money couriers 
and Cali Cartel operatives. They were so convincing that members of the 
Juarez and Cali Cartels introduced them to corrupt Mexican and 
Venezuelan bankers, who, in turn, introduced the undercover agents to 
other corrupt bankers. Members of the Juarez Cartel were so confident 
in the undercover special agents that they introduced the agents to 
high level members of the Juarez Cartel.
    When it was over, 26 Mexican banking officials from 12 commercial 
Mexican banks were indicted on charges of money laundering. Three 
Mexican banks, Confia, Banca Serfin, and Bancomer, and five associates 
of Venezuelan banks, were also indicted on money laundering charges. 
Through the course of the investigation, Customs special agents 
arrested 168 people and seized over $100 million. In addition, Customs 
special agents seized over four tons of marijuana and two tons of 
cocaine from both cartels.

Operation Cheshire Cat

    Operation Cheshire Cat, a Customs-initiated worldwide investigation 
into the diabolical world of international child pornography and child 
sexual exploitation, exposed to the world the dark side of the 
Internet--a side that is invasive, insidious and incalculable. This one 
investigative action uncovered an international alliance of 
approximately 200 sexual predators in 47 countries including Australia, 
Great Britain and the United States.
    Before Operation Cheshire Cat, many people in the U.S. had a 
tendency to think of child pornography and child sexual exploitation as 
random acts involving nameless victims in some places far away from 
where they live. Operation Cheshire Cat proved those thoughts to be 
false. Forty-one search warrants were executed in big cities and small 
towns throughout the U.S. To date, 16 suspects have been arrested and 
more are anticipated. Four suspects committed suicide prior to arrest. 
One of the most gratifying results of this operation was that 18 
children who had been sexually molested by strangers, neighbors and 
even their own relatives, were located and referred to social services 
for counseling. The ring of sexual predators identified during 
Operation Cheshire Cat is indicative of the level of computer expertise 
possessed by criminals encountered by Customs in cyberspace. This 
particular ring utilized advanced communication methods and even an 
encryption technology, developed by the KGB for use during the Cold 
War, to distribute its morally abhorrent smut. Such expertise and 
technology have greatly complicated law enforcement's activity in this 
area.

Operation Brass Ring

    Operation Brass Ring was a 180-day enforcement effort 
intended to dramatically increase drug seizures and the 
outbound illicit proceeds generated from the narcotics business 
at high-risk ports of entry. Enforcement action focused on the 
use of innovative, unpredictable and random enforcement 
operations at air, sea and land border ports of entry. It was a 
multi-faceted partnership effort that included inspectors, 
special agents, and union representatives. Unique in Customs 
enforcement history, Operation Brass Ring was field-based and 
field-driven, with emphasis on local solutions to local 
problems and sharing of best practices nationwide. Although 42 
high-risk ports were initially required to participate in 
Operation Brass Ring, ultimately 129 ports of entry submitted 
and carried out action plans as part of this historic 
operation.
    As a result of Operation Brass Ring, total amounts of 
cocaine, marijuana and heroin seized from February 1 to July 
31, 1998, increased by 45 percent over the same time period as 
the last year. The amount of marijuana seized increased by 47 
percent, the amount of cocaine increased by 32 percent and the 
amount of heroin increased by 13 percent. Controlled deliveries 
skyrocketed by an incredible 100 percent during the same time 
period. The controlled deliveries resulted in an 82 percent 
increase in arrests. Outbound currency seizures experienced a 
59 percent increase in the amount of currency seized compared 
to the same time period in FY 1997.
    Operation Brass Ring seizures totaled 548,262 pounds of 
marijuana, 72,535 pounds of cocaine, and 1,280 pounds of 
heroin. Customs also seized $40.6 million in outbound 
undeclared currency and conducted 220 controlled deliveries, 
resulting in 414 arrests. Customs will continue to build upon 
the success of this operation by capitalizing on the creativity 
and innovation that Operation Brass Ring engendered.
    Building upon the success of Operation Brass Ring, Customs 
established the Joint Narcotics Interdiction Plan (JNIP). The 
goal of JNIP is to maintain the momentum of Operation Brass 
Ring and to continue the increase of narcotics and currency 
seized and controlled deliveries conducted. The long term goal 
of this initiative is to achieve a 20 percent increase in these 
areas over the next 4 years. This approach supports the Office 
of National Drug Control Policy drug interdiction plan.
    The JNIP requires each Special-Agent-in-Charge (SAIC) and 
Customs Management Center (CMC) to submit a comprehensive 
narcotics interdiction plan and will include a plan for each 
Resident-Agent-in-Charge and Port Director in their area of 
responsibility. The JNIP will be agreed to and signed by each 
SAIC and CMC Director and will have included the National 
Treasury Employees Union (NTEU) in the formulation of all plans 
within their respective areas. Field visits and quarterly 
reports will be used to review the progress of the JNIP.

Financial Management

    The General Accounting Office (GAO) removed Customs from 
its list of high-risk federal government programs this year 
because of the significant improvements made in our financial 
management. Customs, in fact, was the only agency to be removed 
from the list this year.
    Customs demonstrated that it had addressed the weaknesses 
that originally contributed to its designation as a high-risk 
organization. These weaknesses involved revenue and trade 
compliance issues; asset management and control issues; core 
financial system issues; and computer security, access, and 
development issues.
    The corrective actions which influenced the decision to 
remove the high-risk designation include: (1) receiving 
unqualified opinions on financial statements for the past two 
fiscal years; (2) statistically sampling commercial 
importations at ports of entry to better focus our enforcement 
efforts by projecting the level of the trade community's 
compliance with trade laws and associated loss of revenue; (3) 
improving the ability to detect and prevent duplicate or 
excessive drawback claims by enhancing the Automated Commercial 
System to identify those drawback claims exceeding the total 
amount of duty and tax paid on related import entries; and (4) 
aggressively pursuing collection of delinquent receivables, 
resulting in collections of over $37 million. Customs currently 
has several ongoing initiatives which will continue to improve 
Customs financial management.

Performance Goals Met or Exceeded

    Customs had an outstanding year in narcotics enforcement 
results and in currency and monetary instrument seizures. It 
also continued to make progress in some key trade areas. This 
is even more significant since the results achieved were made 
while processing 19.7 million entries, worth an estimated $955 
billion. This is more than 1.8 million entries above last 
fiscal year. Customs also processed almost 460 million 
passengers and pedestrians, 13.1 million more than last fiscal 
year, and 135 million conveyances, 4.4 million more than last 
fiscal year.
    Seizures of heroin, cocaine, and marijuana were above 
expectations. We seized approximately 1.12 million pounds of 
these three narcotics which exceeded our goal by 167,000 
pounds. These impressive results were, in part, the result of 
Operation Brass Ring. Overall, Customs accounted for a record 
number of seizures--more than 1.3 million pounds of all 
narcotics or controlled substances. As in past years, Customs 
continues to seize more illegal drugs than any other federal, 
state, or local law enforcement agency.
    Customs also exceeded its goal for seizures of currency, 
bank accounts, and other monetary instruments involving 
financial investigations. It ended the year with seizures 
totaling $362.9 million or 166 percent above projections. The 
culmination of Operation Casablanca contributed to this 
significant total with the seizure of over $100 million from 
Mexican and U.S. bank accounts. Overall, Customs seized or 
participated in the seizure of $426 million in currency and 
other monetary instruments. Of that amount, $68.4 million was 
outbound undeclared currency seized at ports as it was being 
smuggled out of the U.S. in passenger baggage, vehicles, and 
cargo.
    In the area of Trade Compliance, Customs successfully 
maintained a high compliance rate, and refined the analysis by 
which noncompliance is detected and addressed. Recognizing that 
all discrepancies are not equal, Customs convened two task 
forces, one internal and one in cooperation with the trade 
community. These groups determined the types of discrepancies 
to be considered materially significant, as opposed to 
``letter-of-the-law'' discrepancies. The overall import 
compliance rate was maintained at 81 percent, while the 
compliance rate for imports in primary focus industries 
increased from 83 percent to 84 percent. Considering only the 
materially significant discrepancies, the compliance rate was 
89 percent overall, and 90 percent for imports in the primary 
focus industries.
    Customs has also undertaken a new initiative called ``Focus 
On Non-Compliance'' (FONC). This initiative analyzes resource 
expenditures as compared to discrepancies found, and has 
allowed Customs to see which efforts are paying off and which 
are not. This improved focus and other improvements have 
resulted in Customs detecting more noncompliance. Becoming more 
effective at finding noncompliance has the effect of lowering 
measured compliance levels, but results in improved compliance 
in the long term. These refinements make year-to-year 
comparisons of performance difficult at this time, but the 
targeted improvements in compliance achieved by Customs are 
significant and well-supported.
    Finally, the air passengers' compliance rate increased 
slightly over last year to 97.7 percent. The rate of 
participation in the Advance Passenger Information System by 
the airlines improved to 75 percent, which is 10 percent above 
projected results.
    Customs attained these accomplishments with a remarkably 
high level of support from the trade community and the public. 
Operation Brass Ring had the support of the trade community, 
even though they knew that it would mean more intensive 
examinations of imported goods. In addition, customer surveys 
from the trade and the public reflect satisfaction with Customs 
performance.

                            Ambitious Agenda

    Despite all the areas in which Customs is achieving unprecedented 
success, we recognize there are areas of our organization which need to 
be strengthened. The following are some of the areas of responsibility 
we will be changing in order to produce a more disciplined and 
effective Customs Service.

Integrity

    The Office of Internal Affairs (IA) currently has changes underway 
to protect and enhance the integrity of Customs through various 
initiatives, programs, and processes. Most recently, Customs as a 
whole, with IA as pivotal participants, commenced a ``strategy for 
action'' to reshape our capability to swiftly and effectively address 
integrity violations and other allegations of misconduct. Specifically, 
the process for reporting allegations of misconduct has been 
standardized and streamlined. In addition, the manner in which IA 
intakes, evaluates, and processes cases has been centralized at 
Headquarters. Specialized training for investigators and fact-finders 
has been developed and is currently being conducted. Further, we have 
established a servicewide Discipline Review Board to ensure fair and 
consistent imposition of discipline in misconduct cases. Finally, we 
are raising to an appropriate level in the Customs organization, the 
authority to propose, decide, and settle disciplinary actions; thus, 
increasing decision-making consistency and accountability.
    IA is also working to enhance an automated case management system 
and integration with the Disciplinary and Adverse Action Tracking 
System (DAATS). Systems improvements will enhance Customs efficiency in 
reporting and monitoring investigations and administrative inquiries. 
Moreover, systems enhancements will permit useful analysis of trends 
and timeliness and improve identification of corrective actions. The 
Office of Human Resources Management is making comparable changes in 
its DAATS, in tandem with IA. When completed, these changes will allow 
Customs to track all identified allegations against Customs employees, 
from initial allegation through investigation, resolution, and the 
appeals process, if invoked. These changes are a measured step to 
insure that aspects of timeliness and equity of treatment are 
components of both the public and employee view of the Customs 
discipline process. Design work is commencing on a replacement for the 
IA and Human Resources systems.
    Finally, we have recently announced the selection of a new 
Assistant Commissioner for IA who has proven expertise as a career 
prosecutor and strong credentials working in the Department of 
Justice's Public Integrity Sector. This new AC will give Customs the 
leadership and credibility necessary to ensure the most effective 
function of our IA operations.

Self Inspection

    One of our highest priorities is to build management accountability 
and strengthen management oversight throughout Customs. We are 
redesigning our Management Inspection Program to establish a self-
inspection framework for our managers and to increase the frequency of 
on-site inspections by our Management Inspections Division.
    Customs has redirected the efforts of our current Management 
Inspection Program from conducting comprehensive inspections primarily 
of our ports and Special-Agents-in-Charge offices every 5 to 6 years to 
the development of a self inspection program. We want managers at all 
levels to evaluate their success in managing, assessing, reporting, and 
certifying the state of their operations every six months. Our 
Management Inspections Division will conduct inspections every 18-24 
months to verify and validate the self-inspection results of every 
unit. The redesign is well underway. The first full self inspection by 
all units began in late March; inspections by our Management 
Inspections Division will begin in July.

Management Accountability Model

    To ensure that the service Customs provides to the trade and the 
traveling public is delivered in a consistent and uniform manner, we 
have implemented a Management Accountability Model which strengthens 
the Headquarters and field organizations by establishing greater 
management accountability and oversight within the organization. As 
such, we have created clear and specific service standards for which we 
intend to hold our employees and managers accountable.
    Our initial goal in implementing this model was to clarify 
managers' roles and responsibilities, improve effectiveness, achieve 
operational uniformity and enhance levels of service. We have 
accomplished this by clearly defining roles and responsibilities for 
Headquarters, Customs Management Centers (CMC) and Port managers; 
strengthening the Headquarters and CMC organizations in order to 
clarify lines of authority and provide greater operational oversight; 
holding managers accountable for their actions and operations; 
establishing a national Management Inspection Program; and establishing 
uniformity in policy dissemination, implementation, execution and 
oversight.

Realigning organizational authorities

    Because Customs aviation and marine programs have such 
complementary missions, it is critical that the activities of these two 
interdiction components be coordinated. This is essential to ensure the 
employment of a cohesive interdiction strategy necessary to fulfill the 
Customs mission in support of the National Drug Control Strategy. In 
recognition of this, Customs is consolidating its Aviation and Marine 
Programs. The intent of this consolidation is to provide a better 
integrated, more efficient, and robust interdiction capability. 
Beginning in calendar year 1999, the Aviation and Marine Program began 
implementing an ambitious strategy to improve its efforts to combat 
marine smuggling through the creation of a unified Air and Marine 
Interdiction Division. Currently comprised of 114 operational aircraft 
and 87 vessels, the mandate of Customs Air and Marine Interdiction 
Program is to disrupt the flow of drugs and other contraband into the 
United States by vessel and/or aircraft.
    This mission will be accomplished through implementation of a 
three-pronged, intelligence, interdiction and investigative approach. 
This approach is already in use for aviation interdiction and will now 
encompass the marine threat as well, which is complemented by our 
ongoing coordination with the U.S. Coast Guard.
    Customs aviation assets and personnel will continue to support the 
President's International Drug Control Strategy, Ambassadors and 
Country Teams by providing detection and monitoring, interceptor 
support and training for employment in Mexico, Central and South 
America, and the Caribbean.
    In order to enhance the effectiveness and efficiency of the Office 
of Investigations (OI), three new SES Headquarters positions (Executive 
Directors, East, Central and West) were recently created. 
Responsibilities include overseeing and directing the investigative 
activities of all domestic field offices (Special Agent in Charge 
Offices). Another recent change included the creation of another SES 
Headquarters position: Executive Director for Investigative Programs 
whose responsibilities will include overseeing all Headquarters 
functions (Fraud, Strategic, Cybersmuggling, Financial, Smuggling and 
Investigative Programs). OI realigned organizational authority by 
having these four positions, along with the Executive Director, Foreign 
Operations Division, report directly to the Deputy Assistant 
Commissioner, OI. This change in itself has strengthened oversight of 
and coordination between foreign and domestic offices.
    Recent changes within the Office of Intelligence and Communications 
include creating a new Communications Branch to administer and manage 
the Customs Wireless Communications Program from the Headquarters 
level; adding line authority over the Area Intelligence Units (AIUs), 
which currently report to SAIC Offices, and adding functional authority 
over the Intelligence Collection and Analysis Teams (ICATS).

Training/professionalism

    Professionalism means knowing your job, performing it well, and 
with courtesy. Customs regularly reviews its operations and training 
programs to ensure that our officers maintain a high level of 
professionalism. We have developed Passenger Interview and Vehicle 
Inspection Technique training for our land border inspectors. This 
program reviews the skills necessary to identify high-risk vehicles and 
passengers, and officer safety issues. It also provides training on how 
to prevent search inquiries from becoming confrontational.
    Passenger Enforcement Rover Training is conducted for inspectors 
from all over the country at Miami and JFK Airports to improve 
observational analysis and interview skills. The training has been 
developed and is delivered by our most successful enforcement 
inspectors. This training has generated a number of significant 
seizures by the inspectors within days of returning to their home 
ports.
    National Outbound Airport Currency Interdiction Training is being 
conducted to improve outbound inspectors' exam and interview skills. 
The training was developed and is delivered by the outbound inspectors 
at JFK. Inspectors attending the training have subsequently been 
involved in significant seizures upon return to their home ports. One 
example is the seizure of more than $1.6 million in outbound currency 
at Chicago O'Hare Airport. In addition, land border inspectors from 
Ports of Entry across the country travel to the Port of Nogales, AZ, to 
receive training that will improve their targeting, examination, and 
interview skills.
    To draw upon outside expertise, Customs has contracted with the 
International Association of Chiefs of Police (IACP) to provide two 
major programs to our workforce. The IACP is presenting cultural 
awareness training to inspectors at the top 15 airports, where 84% of 
our passengers are processed. IACP has also begun training in decision-
making for inspectors along the Southwest Border. This training 
enhances their ability to respond appropriately to violent, potentially 
life-threatening situations.
    In addition, Customs is establishing an Assistant Commissioner for 
Training and Development to provide leadership and direction to all 
Customs training programs and personnel engaged in training activities. 
All training and development activities, including technical training 
and support, specialty training, and supervisory and managerial 
development, will report to the Assistant Commissioner. The office will 
continue to rely on operating functions to ensure that mission-related 
training is provided, and on expertise outside of Customs to adapt the 
best practices for Customs use.

Focus on the Recruitment of the Best

    Quality Recruitment provides an effective process for hiring the 
best qualified candidates. It includes utilizing multiple screening 
stages which rely upon objective, quantifiable data; using an 
electronic rather than paper process, and targeting an applicant pool 
with reasoning skills needed for the new millennium. The process, which 
is currently being used for entry level inspector, canine enforcement 
officer and pilot positions, will be implemented for agents in the near 
future.
    Quality Recruitment will result in the availability of a diverse 
applicant pool of highly qualified candidates for entry level 
inspector, canine enforcement positions, agent and pilot positions. As 
a result, the quality of the Customs workforce will increase, thereby 
better enabling Customs to accomplish its mission.
Customer Service

    Customs has begun a number of activities to improve the public's 
understanding of our processes and authorities. We are developing 
improved informational outlets and working with airport authorities to 
put up signs that will better explain our authorities and travelers' 
rights. We will post instructions for registering complaints at the 
time of the incident or by mail or phone, and we have made comment 
cards available in the inspection area. These improvements will also be 
incorporated at our land border facilities.
    As part of the Border Coordination Initiative (BCI) to address our 
southern land border, Customs and the Immigration and Naturalization 
Service are working to establish queue time standards that give 
inspectors sufficient time to accomplish their respective enforcement 
missions while providing predictable service to the traveling public. 
We are establishing partnerships with the communities to foster a 
better appreciation of our enforcement responsibilities and agreement 
on how the wait times are measured.
    At international airports we continue to meet the goal of releasing 
95% of compliant travelers within 5 minutes of baggage claim. We 
continue to enhance the Passenger Service Representative program to 
ensure that traveler complaints can be handled on-the-spot.
    A Customer Satisfaction Unit has been established at Customs 
Headquarters to monitor all complaint and complimentary correspondence 
and phone calls. We will track and analyze complaints and ensure that 
corrective actions are taken if there is a recurring problem or a 
disproportionate number from a given location. We are also in the 
process of implementing a 1-800 number for people to call with any 
questions about Customs matters. The personnel assigned to this unit 
will have broad knowledge of our processes and will ensure the 
appropriate routing of a call that they cannot personally answer.
    Customs has conducted 356 formal workshops around the country for 
exporters and shippers (over 11,000 participants) to make them aware of 
export laws, rules, regulations, and port procedures. Individual 
contacts are also made with freight forwarders and consolidators, 
exporters, carriers, etc., to discuss specific and general export 
issues.
    Our responsiveness to information requests from the public will be 
reflected by the ``Contact Us'' feature of the Customs Web site, which 
will permit Web visitors to comment, ask questions, or request 
information by means of electronic mail. This service will be 
established in the next few months. Also, the Customs Electronic 
Bulletin Board (CEBB), long utilized by the trade as an information 
resource, has been linked to the Customs Web site to make access even 
easier by more persons.
    On the local level, a test program is underway in five ports 
(Champlain, NY; Charleston, SC; Nogales, AZ; Orlando, FL; and San 
Francisco, CA) in which Internet electronic mailboxes have been 
established for port directors at these locations, and these e-mail 
addresses published on the Customs Web site. The public and the trade 
are being encouraged to communicate with these port directors on issues 
of local concern and for requests for locally specific information. If 
successful, this program will be expanded to all service ports.

                              Partnerships

    Customs has established important partnerships with groups both in 
the private and public sectors. We continue to work in partnership with 
the National Treasury Employees Union (NTEU) on a number of issues 
facing Customs. While there are always issues on which union and 
management disagree, we have found the partnership to be a productive 
effort. We have gained invaluable employee input into our decision 
making process, allowing us to tap into the wealth of firsthand 
experience our people on the front line have. This input has resulted 
in better decisions on our part, and improved operations.
    One of the most successful examples of partnership was Operation 
Brass Ring which focused on aggressive, unpredictable, multi functional 
action plans proposed, designed, and implemented at the field level in 
cooperation with the NTEU. These plans were developed by Port 
Partnership Councils in conjunction with field offices of the Office of 
Investigations. Partnerships, such as Operation Brass Ring and the ones 
discussed below, are critical to the success of Customs mission in 
securing our borders without impeding the flow of legitimate trade.

Border Coordination Initiative

    The Border Coordination Initiative (BCI) is a tactical plan 
developed by the Immigration and Naturalization Service (INS) and 
Customs in partnership to increase cooperation on the Southwest Border 
and to enhance the interdiction of drugs, illegal aliens, and other 
contraband. The purpose of the BCI is to create a seamless process at 
and between land border ports of entry by building a comprehensive, 
integrated border management system that effectively achieves the 
mission of each agency.
    During the past year, INS and Customs have built a strong platform 
of cooperation based on eight core initiatives: Port Management, 
Investigations, Intelligence, Technology, Communications and Aviation/
Marine, Integrity and Performance/Budget. BCI will give direction to 
those efforts over the next five years.
    The drug and illegal immigration threat on the Southwest Border is 
the initial focus. However, as the BCI builds momentum and generates 
the anticipated results, we will expand it to other locations. A joint 
Office of Border Coordination has been established with both INS and 
Customs. Two Border Coordinators are responsible for overseeing border 
operations and ensuring the implementation of the BCI Action Plans. The 
unions at both agencies have also been involved, in partnership, in 
these activities.

Industry

    In addition, Customs continued to expand its ``Industry 
Partnership'' programs with the development of the Americas Counter 
Smuggling Initiative (ACSI). Building upon the successes of the Carrier 
Initiative Program (CIP) and the Business Anti-Smuggling Coalition 
(BASC), ACSI will strengthen and expand Customs anti-narcotic security 
programs throughout Central and South America. These programs allow 
Customs to work with the trade community, both domestic and foreign, to 
reduce the ability of drug smugglers to compromise legitimate 
commercial shipments and conveyances. During FY 1998, information from 
these programs resulted in 136 domestic and foreign seizures and 
interceptions totaling 63,882 pounds of narcotics.

      Long-Term Commitment to the Automated Commercial Environment

    Investments in trade modernization remain a priority for Customs. 
Continued reliance on the sixteen year old Automated Commercial System 
(ACS) will subject both Customs and the trade to risks of degraded 
service. ACS relies on old technology that is costly to maintain and is 
not conducive to supporting the requirements of the re-engineered trade 
compliance process. In the period from mid-September 1998 through 
early-March 1999, ACS experienced significant processing slow downs 
that adversely affected the trade's ability to process entries quickly 
and cost-effectively. Recent investments at the Customs data center 
will alleviate the problems in the short term. However, we can 
anticipate reoccurrences of these problems without additional and 
substantial investments at our data center; in a modernized data 
network technology; and in personal computers and desktop software to 
support our field personnel.
    Customs remains committed to the development of the Automated 
Commercial Environment (ACE) as the commercial system for the 21st 
century. ACE is necessary to: cope with 10 percent annual growth in 
international trade; meet legislative requirements for informed 
compliance and for improved financial controls over the nearly $20 
billion in duties collected annually; and meet the requirements 
articulated by the trade and Customs field personnel as part of the 
trade process re-engineering effort.
    Given the size of the investment that ACE represents, it has 
received substantial scrutiny. As a result, a number of issues have 
been raised about Customs ability to justify such a large project and 
to manage it successfully.
    Customs takes these concerns seriously and has taken or commits to 
take a series of actions to strengthen its ability to manage ACE and 
all other information technology projects and to improve the 
justification for the large investment that is required.
    To improve project management, Customs:
     Hired a Chief Information Officer (CIO) with extensive 
experience in enterprise architecture and major systems acquisition.
     Reorganized the Office of Information Technology to 
provide for improved accountability and program control. An important 
element of the reorganization was the establishment of staff offices 
for Technology and Architecture, Strategic Planning, Program 
Monitoring, and Resource Management that are responsible to the CIO 
for: improved investment management; further progress on the enterprise 
architecture; enhanced controls over software development; and the 
development and implementation of software process improvement plans.
     Entered into negotiations with a Federally Funded Research 
and Development Center (FFRDC) to acquire critical support in the areas 
of strategic management, acquisition support, program management, 
technical management, and evaluation and audit. Customs expects to be 
able to have the FFRDC on-board in May.
     Plans to acquire the services of a prime contractor to 
help plan, implement, and manage its information technology 
modernization efforts. The contractor will be responsible for 
implementing mature software development processes which Customs will 
adopt, and will assume the risks associated with delivering functional 
components of ACE and other software projects. Modeled after the 
experience of the Internal Revenue Service in addressing concerns about 
its tax modernization efforts, Customs will utilize the experience of 
the FFRDC from initial acquisition strategy development through 
solicitation development and source selection, award and contract 
management, to include support to Customs in overseeing prime 
contractor performance. Customs intends to give this the highest 
priority with the goal of having a contract in place within 12 months 
from the time of initiation. However, before the contract process 
begins, Customs needs a commitment on a reliable source of funding.
    To improve the justification for the investment in ACE, Customs:
     Engaged a contractor to update and improve the Automated 
Commercial Environment (ACE) cost-benefit analysis (CBA) which will be 
available for external review in the coming weeks. This CBA will 
incorporate analytical approaches responsive to direction previously 
provided by General Accounting Office staff, including reflecting use 
of the International Trade Data System as the trade interface for ACE. 
However, Customs recognizes that still more work is required beyond the 
current effort and commits to follow-on work that will (a) analyze the 
costs and benefits of ACE functional increments; and (b) rigorously 
analyze alternative approaches to building ACE.
     Engaged Klynveld Peat Marwick Goerdeler Limited Liability 
Partnership (KPMG) to provide an independent review of Customs 
methodology and assumptions for software development and infrastructure 
costs. KPMG's preliminary review found our approaches for cost 
estimation to be sound and appropriate. KPMG is now reviewing the 
completed CBA referenced above and advising on the follow-on work.
     Will complete the enterprise architecture work regarding 
its trade compliance process in May 1999. As part of its investment 
management process, Customs has initiated a documented review process 
that ensures that all proposed investments comply with its architecture 
standards and are not redundant of other information technology 
projects.
    Before leaving the issue of justifying the investment in ACE, an 
important point should be made. The continuing controversy surrounding 
ACE is masking the issue of making the necessary investments in 
infrastructure modernization that are required to meet Customs mission 
responsibilities. Approximately 54 percent of estimated costs 
associated with ACE are for software development and maintenance over 
an eight year period. The rest of the investment is required to replace 
an outdated and problem plagued data network, to acquire additional 
computing capacity at the Customs data center, and to provide for 
regular updating of desktop computing capabilities necessary to stay 
abreast of rapidly changing technology. Almost all of these 
infrastructure investments are necessary even if Customs is forced to 
continue to rely on the outdated ACS.
    Customs inability to invest in infrastructure modernization is also 
adversely affecting its ability to implement targeting systems to 
better combat narcotics smuggling, better screen international 
travelers, and provide automated mission support to achieve improved 
management controls and operational efficiencies.
    The actions listed above are in progress and demonstrate Customs 
commitment to improve its management of information technology. These 
actions reflect Customs recognition of the concerns and we are working 
vigorously to correct them.

                         Narcotics Enforcement

    The demand for illegal drugs in the U.S. remains strong. In 
response, drug smuggling organizations continue to introduce their 
contraband into our country using every conceivable route and method. 
Drugs entering the country through the Southwest Border, South Florida, 
and Puerto Rico are transported to distribution and control centers in 
major cities like New York, Chicago, Miami, and Los Angeles. Unchecked 
and allowed to flourish, drug trafficking organizations bring with them 
violent crime, public corruption, money laundering, and the socially 
crippling effects of drug abuse.
    Drug smuggling organizations are as resilient as they are 
insidious. Successful dismantling of such criminal enterprises requires 
a balanced and comprehensive strategy, one that interfaces the 
functions of all Customs enforcement disciplines: investigations, 
intelligence, air and marine operations, and interdiction. Our strategy 
exploits the interrelationship of drug transportation and distribution 
by building an ``Investigative Bridge'' between border smuggling 
activity and criminal organizations located inland. We build this 
bridge each time the seizure of illegal drugs at the border leads to 
the identification of the controlling criminal organization hundreds of 
miles inland. We build it again when investigation of a trafficking 
group in an inland city leads to a drug seizure on the border. 
Controlled deliveries, undercover operations, and Title III 
investigations are our primary inroads into drug smuggling 
organizations. These tools complement and solidify the Investigative 
Bridge.
    It sounds simple and it really is. Customs recognizes that neither 
interdiction nor investigations individually add up to effective drug 
enforcement. Only by integrating the two processes can we put forth our 
best efforts in stemming the flow of drugs across our borders.
    Between our regular appropriations and the emergency supplemental, 
Customs received substantial additional funding in FY 1999 to enhance 
our counterdrug operations. In the investigative area, this money will 
enable us to fill 27 new agent positions and to purchase radios, 
firearms, protective vests and vehicles for these new positions. The 
funding we received for our Marine Program will allow us to repair and 
outfit two Bluewater Vessels in inventory in South Florida, outfit one 
47' Bluewater Vessel in New Orleans that was acquired from the Coast 
Guard and develop and construct a NightCat 40' Interceptor Vessel. The 
$80 million received for Non-Intrusive Inspection Technology enabled 
Customs to accelerate its Five Year Technology Acquisition Plan for the 
Southern Tier. In addition, the $10 million provided for Port Integrity 
will be used to not only stop the flow of drugs, but combat internal 
cargo conspiracies and cargo theft.
    The 1999 emergency supplemental provided $186 million for Air 
Program enhancements; $153 million of which is to fund the procurement 
of 6 additional P-3 aircraft. The current schedule calls for an October 
and December 2000 delivery of the two P-3 AEW aircraft. Delivery of the 
4 new P-3 ``Slicks'' is scheduled to begin in early-to mid-FY 2001 at a 
rate of one every four months.

                              Child Labor

    Addressing the illegal importation of merchandise manufactured or 
produced with forced or bonded child labor is one of the most difficult 
tasks faced by Customs. Customs is pursuing a thorough, impartial and 
aggressive policy towards imports suspected of being produced with 
forced child labor.
    In recent months, special agents have visited Indonesia, Nepal, 
India, and Pakistan to meet with foreign government officials, non-
government organizations and industry representatives on this very 
sensitive issue. Foreign law enforcement and other government agencies 
have stated their desire to work with Customs.
    Our public outreach program thus far has included mass mailings to 
U.S. importers of merchandise, often associated with forced child 
labor, advertisements in trade publications, participation in trade 
shows, presentations on the Customs Webpage and various press releases 
in print and television in the U.S. and several other countries. 
Additionally, our forced child labor special agents are meeting 
regularly with various non-government agencies that monitor child labor 
and other human rights violations in an effort to address issues as 
they arise.
    Our actions are beginning to bear fruit. Customs has identified 
some manufacturers of hand-knotted carpets who are believed to have 
produced carpets with forced child labor. Detention orders are in place 
to stop imports from those manufacturers at our borders. Should an 
importation from one of these manufacturers be attempted, Customs will 
require a certificate from the manufacturer stating that the goods were 
not produced with forced child labor. Customs will investigate the 
validity of the certificate submitted by the manufacturer. If the 
investigation substantiates the certificate, the goods will be allowed 
into the U.S. If the certificate proves to be false, we will not allow 
the goods to enter the U.S and will continue our investigation for any 
potential criminal or civil violations.
    Increased staffing will soon be in place in several of our foreign 
offices. Special agents have been added to our Bangkok, Hong Kong and 
Montevideo offices. These additional special agents will be dedicated 
to investigating allegations, and training and working jointly with 
foreign law enforcement agencies to address the child labor issue.

                            Money Laundering

    Customs has a broad grant of authority to conduct international 
financial crime and money laundering investigations. Jurisdiction is 
triggered by the illegal movement of criminal funds, services, or 
merchandise across our national borders and is applied pursuant to the 
authority under the Bank Secrecy Act, the Money Laundering Control Act 
and other Customs laws. Combined with our border search authority, 
Customs formidable enforcement efforts focus on the most significant 
international criminal organizations, whose corrupt influence often 
impacts global trade, economic and financial systems. Customs 
enforcement efforts are not limited to drug related money laundering; 
they extend to the proceeds of all crime.
    Customs has implemented an aggressive strategy to combat money 
laundering. Our approach involves interdiction efforts by Customs 
inspectors, criminal investigations by Customs special agents, and in 
partnership with Treasury, FinCEN, and others, the design and 
implementation of innovative regulatory interventions, unique to 
Treasury, that dismantle and disrupt systems, organizations and 
industries that launder ill gotten gains. Applying these techniques, 
New York's El Dorado Task Force, led by Customs, had tremendous success 
in removing and preventing the wire remitter industry from being 
exploited by drug kingpins to launder money.
    Customs also continues to pursue an aggressive program of 
undercover investigations directed at money launderers. The two largest 
single seizures of cash in the history of Federal law enforcement were 
made as a result of Operation Casacam in Miami and Operation Omega in 
Los Angeles. Together, these two seizures totaled over $41 million in 
cash. Moreover, it was Customs undercover operations that first exposed 
the criminal laundering activities of both Bank of Credit and Commerce 
International and American Express Bank International. And last May, 
Customs concluded Operation Casablanca, the largest, most significant 
drug money laundering investigation in the history of U.S. law 
enforcement.
    Customs operates the Money Laundering Coordination Center (MLCC) 
which has gone on-line this year. Physically located at FinCEN, and 
staffed by special agents and intelligence analysts, the MLCC is 
designed to coordinate intelligence between all U.S. Customs undercover 
money laundering investigations. It will be opened up to other agencies 
in the future. The MLCC will also be instrumental in developing a 
strategy to combat the black market peso exchange which has been 
described as the single most efficient and extensive money laundering 
system in the Western hemisphere.
    With funding approved by the Treasury Executive Office of Asset 
Forfeiture, Customs has trained and equipped 19 highly specialized 
Asset Identification and Removal groups consisting of special agents, 
auditors and data analysts. These groups, established throughout the 
United States, are designed to identify, track, and seize the assets of 
criminals and their organizations. They are responsible for the seizure 
of over $172 million in the past three years and have been integral to 
high profile investigations such as the Ruiz Masseiu case and Operation 
Casablanca.
    As we look toward the future, Customs plans on continuing to work 
in concert with other Treasury and federal agencies to dismantle and 
disrupt the systems used by international criminal organizations.

                             Anti-Terrorism

    Equally challenging is our responsibility to protect the American 
public from the threat of international terrorism. Easier access to 
sophisticated technologies, including weapons of mass destruction, 
means that the destructive power available to terrorists is greater 
than ever. Customs is the first line of defense at our Nation's borders 
to prevent the introduction of weapons of mass destruction and other 
instruments of terror into the U.S. from abroad, and to prevent 
international terrorists from obtaining weapons of mass destruction 
technologies and materials, funds, and other support from sources in 
the U.S.
    Customs is active on a number of fronts to combat this threat. We 
are developing and deploying examination technologies, such as 
radiation detection equipment, to our ports for use in detecting and 
interdicting nuclear, chemical and biological materials in 
international shipments. We work in partnership with the Federal 
Aviation Administration and the airline industry to enhance security on 
international flights originating in the United States. We aggressively 
enforce U.S. export laws to prevent the illegal export of arms, 
military equipment and dual use technologies to proliferous countries 
and terrorist groups, and enforce U.S. economic sanctions to deny funds 
and other support to international terrorists. We actively participate 
in Department of Justice-sponsored Joint Terrorism Task Forces.
    Among the results of our strategic investigations this year, were 
the convictions of two weapons traffickers who not only had negotiated 
the sale of Russian-produced, shoulder fired surface to air missiles to 
undercover Customs special agents, but who had indicated they could 
also supply tactical nuclear weapons stolen from the Former Soviet 
Union. Also, indictments were handed down against seven individuals for 
weapons smuggling charges after members of the group were intercepted 
en route to South America in an attempt to assassinate Cuban president 
Fidel Castro.
    Customs also has a leadership role in working in partnership with 
our counterparts in foreign customs and law enforcement agencies in 
strengthening export control and law enforcement programs to deny 
weapons of mass destruction and other support to international 
terrorists. We provide training and technical assistance to the 
countries of the Former Soviet Union and South East Europe under the 
U.S. Customs/Department of Defense Counter Proliferation Program. And 
we co-chair joint U.S./Russian working groups coordinating customs and 
law enforcement matters related to non-proliferation and export 
control.
    The threat of international terrorism is perhaps one of the most 
serious national security threats emerging as we enter the 21st 
century. Customs is at the forefront of our Nation's efforts to address 
this threat. We are committed to providing the tools and the training 
necessary to our Customs inspectors and special agents to enable them 
to meet these challenges.

                      Cybercrime/Child Pornography

    As we are all aware, technology, particularly in the realm of 
electronic information and communication technology, continues to 
advance at an astonishing rate. We see the results of such advancements 
in everything we do. We can talk to virtually anyone anywhere via 
e:mail; we can research any topic via the Internet from the warmth and 
comfort of our living rooms; and we can even order groceries from the 
neighborhood food market without ever leaving our homes. The same 
technology that provides us with the seeming sense of security that we 
get from being able to do so much over our home-based personal 
computers is the very same technology that allows the criminal element 
to penetrate even the most secure of our homes. Cyberspace recognizes 
no borders, no sovereignty, and no walls or doors. Neither does 
cybercrime.
    Without exception, violations of all of the over 400 laws enforced 
by Customs can, in some way, be abetted through the use of cyberspace. 
Indeed, three violations investigated by Customs, money laundering, 
Intellectual Property Rights violations, and child pornography/child 
sexual exploitation, can actually be committed via the Internet. 
Although money laundering and Intellectual Property Rights violations 
impact greatly the economic fabric of our Nation, it is child 
pornography and child sexual exploitation that tear at the moral fabric 
of our Nation and our future.
    For this reason, Customs has established the Customs CyberSmuggling 
Center in Fairfax, Virginia. The Customs CyberSmuggling Center is 
tasked with conducting all cyberspace-based investigations on behalf of 
Customs. In addition, the Cyber-Smuggling Center is providing training 
to thousands of Federal, state, local, and foreign law enforcement 
officers annually. In FY 1998 alone, the CyberSmuggling Center trained 
over 3,000 law enforcement officers from four continents.
    Cybercrime is the newest challenge for law enforcement. Hardest hit 
by cybercrime are the holders of trademarks and copyrights. The actual 
losses attributed to counterfeiting and piracy can severely impact our 
economic stability if the problem is not adequately addressed. Customs 
and FBI co-chair the National Security Counsel (NSC), Special 
Coordinating Subgroup on Intellectual Property Rights and Trade Related 
Crime. As a result of the work being conducted by the subgroup, the NSC 
has requested a proposal for a single agency to be responsible for the 
coordination of all U.S. government activities in this area.
    Customs has proposed, through the NSC, to take the lead and 
responsibility for coordinating these efforts. We are proposing a 
multiagency effort to address law enforcement, training, intelligence 
and policy for the U.S., both domestically and internationally. This 
coordination effort will also include representatives from industry and 
trade groups as appropriate.

            Technology for Better Enforcement and Targeting

    In implementing our Five-Year Technology Acquisition Plan for the 
Southern Tier, we have sought to steadily increase the risk of 
detection across the Southern Tier from San Diego to San Juan. Without 
this across-the-frontier approach, our enforcement efforts in one area 
will be mitigated by the smugglers' ability to rapidly shift operations 
to an area where the threat of detection is lower. What remains 
however, is to begin installing this technology at high-risk ports 
elsewhere in the country, ports like Charleston, SC, where last fiscal 
year we had a seizure of almost 3,100 pounds of cocaine; and Newark, 
NJ, where we have historically seen commercial quantities of both 
marijuana and cocaine. We have started to look beyond the Southern 
Tier, to install automated targeting systems and other technology.
    With the increased funding we received in FY 1999, Customs is 
aggressively pursuing a mix of technologies designed to complement one 
another and present a layered defense to smuggling attempts. Some of 
the technologies we are currently testing and evaluating include a 
mobile truck x-ray which has the same or better capabilities as our 
fixed-site truck x-rays and has the added benefit of over-the-road 
mobility allowing us to use it at several ports. This introduces more 
unpredictability into our operations since the smuggler can never be 
sure where the x-ray will show up next. In addition, a gamma-ray 
inspection system has been developed for trucks, other vehicles and 
railcars.
    Customs has been a good steward of the funding provided by the 
Congress. We are nearing completion of the truck x-ray system 
installation program. Seven of the nine systems are installed and have 
proven to be an effective law enforcement tool for the interdiction of 
smuggled drugs. In fact, the top five seizures made using these truck 
x-ray systems amount to almost 13,000 pounds of drugs. Customs is also 
seeing a decrease in the number of inspections per seizure giving us a 
preliminary indication that the x-rays are becoming the force 
multiplier we envisioned them to be. We have also fielded two mobile 
truck x-rays with two more prototypes in development.

Land Border Automation

    We are working with our counterparts in the Immigration and 
Naturalization Service to install license plate readers (LPRs) and 
automated permit ports (APPs) and replace the terminals used by the 
inspectors to query the Interagency Border Inspection System (IBIS) 
database. Southwest Border ports and the major crossings on the 
Northern Border will also receive this LPR equipment. LPRs have the 
capability to count the number of vehicles, identify stolen vehicles, 
and identify vehicles which are positive IBIS hits. LPRs will allow 
Customs to gather intelligence from the data, plus data mining will 
enhance inbound and outbound targeting.
    One type of APP being tested at several locations along the 
Northern Border is the Remote Video Inspection System. This combination 
of card reader, video and audio technology allows travelers to cross at 
small, remote locations when there is no inspector on duty. Canada is 
installing a similar system at the adjacent ports to our test sites.
    Inspectors have at their disposal a wide range of technology and 
tools including the large truck x-rays, pallet x-rays, optical 
fiberscopes, laser rangefinders, and portable contraband detectors 
(a.k.a. busters) to name a few. What must be remembered is that without 
the consistent funding to operate and maintain these technologies in 
Customs base, the benefits will be short-lived.

Compliance Measurement Examination Data Collection Process 
(COMPEX)

    Customs uses the Compliance Measurement Examination data collection 
process (COMPEX), a random selection program in operation at major 
airports and nearly all land border ports to determine the overall 
compliance rate of arriving passengers and the threat at each location. 
We continue to work with the ports to reduce the burden of collecting 
the information and improve the data quality. We will be working to 
develop COMPEX for passengers arriving at small airports and by vessel, 
train, or bus, as well as COMPEX for outbound airport passengers.

Anti-proliferation/Anti-terrorism

    Using the Nunn-Lugar anti-proliferation funding, and working 
jointly with the Department of Defense, Customs is evaluating 
technology to provide our inspectors with a device that not only 
quantifies the presence of radiation, but can classify the source of 
the radiation against a database to tell the inspector if the source is 
medical, industrial, or weapon-related material.
    We have also fielded approximately 1,500 personnel radiation 
detectors (a.k.a. radiation pagers) with the eventual goal of deploying 
3,800 around the country. We are installing radiation detector 
equipment in all Customs x-ray systems thereby providing a simultaneous 
screening for contraband and drugs as well as undeclared radioactive 
material.
    Better technology will allow Customs to maximize the efforts of the 
limited number of outbound inspectors. Better technology will allow 
inspectors to ``target smarter'' and with less wait-time for the 
traveling public and trade. Technology can be utilized to target 
undeclared outbound currency, stolen vehicles, munitions, and items 
which may pose a risk to aviation safety and security.
    To support antiterrorism and aviation safety and security efforts 
at 17 of the largest international airports, Customs has spent 
approximately $18 million of the $ 35.2 million authorized under the 
1996 Omnibus Appropriation to purchase and so far deploy the following 
equipment: 24 mobile x-ray vans equipped with explosive and radiation 
technology; 18 mobile support system airport tool trucks that provide 
inspectors the necessary tools to inspect cargo; 11 portable x-ray 
systems and 12 particle detectors capable of detecting trace amounts of 
explosives for mail/courier facilities; and 675 radiation pagers to 
address the threat of nuclear smuggling. Customs is currently working 
toward identifying additional non-intrusive inspection systems that can 
be purchased with the approximately $17 million remaining in ``no 
year'' funds to support aviation safety and security.

Automated Targeting Systems

    The Automated Targeting System for Anti-Terrorism (ATS-AT) is a 
rule-based expert system designed to facilitate the targeting of high-
risk outbound cargo. This could include terrorist devices, weapons, 
undeclared hazardous material and other contraband. The system was 
prototyped at John F. Kennedy International Airport and will be 
deployed to 14 additional airports in FY 1999. ATS-AT allows inspectors 
to review more outbound documentation for potentially high-risk 
shipments, in less time.
    ATS is also being used in the air passenger environment. Customs is 
in the process of migrating a data base which will enhance the 
capability of the Passenger Analysis Units and line inspectors in the 
targeting of suspect travelers. The enhanced capability will ultimately 
result in more effective interdictive measures and passenger processing 
and will increase the opportunity of locating and positively 
identifying high-risk travelers involved in drug smuggling, terrorism 
and other transnational criminal activity. However, failure to provide 
funding to this project, which is funded out of base resources, will 
result in decreased connectivity to the first line inspectors in the 
field.

                         FY 2000 Budget Request

    Customs proposed funding level for FY 2000 totals $1,929,735,000 
and 17,389 Full Time Equivalents (FTE), of which $1,617,335,000 will be 
directly appropriated, and $312,400,000 will be derived from a proposed 
increase to the passenger processing fee. Also, $35,000,000 is 
requested from the Treasury Forfeiture Fund Super Surplus Fund.

Integrity (6 million, 0 FTE)

    Corruption and unethical behavior results in serious repercussions 
to law enforcement, including an erosion or destruction of public 
confidence, which is difficult to restore. While there is no systemic 
problem of corruption in the Customs Service, this initiative is 
required to increase the likelihood that new hires to Customs will 
possess honesty and ethical principles, ensure that Customs complies 
with statutory provisions concerning periodic reinvestigations, and 
reinforce the awareness of all agency employees to possible integrity 
threats, e.g., bribery attempts and unethical behavior. Specifically, 
the funding is required to conduct polygraph examinations, upon Office 
of Personnel Management approval, for candidates applying for positions 
which are most susceptible to corruption (criminal investigators, 
Customs inspectors, canine enforcement officers, and contractors). This 
request will also fund the contracting out of the required periodic 
investigations, as well as fund the corruption prevention awareness 
efforts of the agency.

Training ($5 million, 8 FTE)

    In order to attain the highest level of training, integrity and 
professionalism, Customs is requesting additional resources to 
establish a new office at the Assistant Commissioner level. This office 
will manage and direct the establishment of a comprehensive education, 
training, and workforce development program which covers the entire 
career of Customs personnel with an emphasis on law enforcement 
positions. In-service training and development will be provided on a 
regular and recurring basis, and programs will be implemented to 
maintain and improve on-the-job effectiveness. Special attention will 
be given to continuous training for law enforcement personnel on the 
day-to-day application of the unique border search authorities granted 
to Customs officers (including, but not limited to: 19 U.S.C. 
Sec. Sec. 482, 1461, 1467, 1496, 1581, 1582, and 1646b, 22 U.S.C. 
Sec. 401, and 31 U.S.C. Sec. 5316).

Non-intrusive Mobile Personal Inspection Technology (9 million, 
0 FTE)

    International commercial air travel is increasing each year and the 
numbers of narcotics couriers who ingest or conceal narcotics on or 
within their body are increasing dramatically. Detection of internal 
carriers can only be accomplished through the use of x-ray. Current 
procedures require that the suspected courier be transported from the 
international arrivals area of the airport, accompanied by two Customs 
officers, to a medical facility where the x-ray is administered. This 
procedure is time consuming and an inefficient use of staffing due to 
the time required and the safety precautions which must be observed 
(i.e., handcuffing the suspect for transport), and the procedure is 
exceedingly unpleasant for those suspects whose x-rays are negative.
    Therefore, as the fight to deter drugs and other contraband from 
coming into the United States continues, so does the development of new 
non-intrusive detection technology. Customs has developed a way to 
examine a suspected courier, with less embarrassment (in the likelihood 
of a pat-down and/or strip search), by using a facility staffed with an 
x-ray technician and equipped to digitally transmit the x-ray to a 
radiologist at a medical facility who will determine whether the x-ray 
indicates the presence of a foreign substance in the body. The facility 
will either be a fixed building in, or immediately adjacent to, the 
international arrivals area of the airport or a bus which is designed 
to fit into a custom docking facility built as an extension to Federal 
Inspection Services (FIS). Thus, the suspected courier could be 
transferred without handcuff restraints and through U.S. Customs 
Service corridors to avoid loss of control of the subject as well as 
public exposure. Customs is seeking a contractor who will provide a 
``turn key'' operation.

Land Border Blitzes ($1.4 million, 0 FTE)

    The additional funding requested would allow Customs to conduct 
``blitz'' type operations at land border ports. This initiative 
implements some of the lessons learned from last year's successful 
Operation Brass Ring. Blitz operations are characterized by the rapid, 
unpublicized deployment of a team of Customs Inspectors, Canine 
Enforcement Officers, and Special Agents into a targeted port or base 
port for varied durations (a day to several weeks) to conduct intensive 
inspectional and investigative operations. The size of the port being 
blitzed, the duration of the operation, and the objectives of the 
operation would determine the actual makeup of each team. The teams 
would perform the blitzes at unscheduled times moving from border 
crossing to border crossing, from one port to another, and within a 
port among passenger primary, secondary inspection, cargo inspection, 
and outbound areas. This flexibility will maximize the unpredictability 
of the operations to Drug Smuggling Organizations (DSOs). 
Unpredictability is a corruption deterrent as well. Use of non-
intrusive technology would also be maximized. Mobile or transportable 
systems would be utilized at ports which do not have fixed NII 
technology. In other instances, suspect conveyances would be convoyed 
to other ports which have fixed NII technology.
    Customs Air Operations Support is vital to the rapid, fluid 
deployment of the teams. The use of air assets will allow the teams to 
maintain the element of surprise and maximize their time in the port 
instead of in lengthy transits between geographically dispersed border 
crossings. During Operation Brass Ring, the use of aircraft was shown 
to disrupt the normal activities of Drug Smuggling Organizations (DSOs) 
at the ports of entry. In addition, air assets provide enhanced 
security measures for ground personnel in the event of any escalated 
incidents.

Forced Child Labor ($2 million, 3 FTE)

    The Customs Service is continuing its efforts to address the issue 
of forced child labor. Customs intention is to establish regional 
offices in Asia and increase staffing in foreign countries where there 
is significant potential for goods to be produced by forced child 
labor. This funding would provide for the hiring of special agents/
representatives and a staff assistant.
    The need for foreign-based agents rather than domestic agents is 
crucial to the success of this initiative. Regular interaction with 
foreign governments and non-government organizations (NGOs) ensure that 
Customs can maintain an enforcement presence and exert pressure because 
ultimately verification of the use of child labor will require 
inspection of the suspect foreign facility and its records.

Money Laundering (Outbound) Technology ($2 million, 0 FTE)

    The majority of undeclared currency going out of the U.S. involves 
proceeds from narcotic trafficking activities. The ever-increasing 
volume of cross-border traffic means that Customs should conduct more 
examinations more effectively, in order to keep up with the activities 
of the drug cartels. Outbound enforcement examinations are currently 
conducted on a very limited basis. In FY 1998, although outbound exams 
were conducted only intermittently and with minimal resources, Customs 
seized more than $68.4 million in outbound currency. In order to 
maximize Customs enforcement efforts, non-intrusive technology and 
equipment (and infrastructure) are necessary to efficiently interdict 
undeclared currency.
    Technology will strengthen outbound enforcement efforts, while 
facilitating the public and legitimate trade. Due to the vast amount of 
cargo being exported out of the United States, Customs can only examine 
a percentage of these shipments. The procurement of mobile x-ray vans, 
tool trucks, and contraband detection kits will assist Customs in the 
examination of more cargo and conveyances at seaports, courier hubs, 
and on the Southern land border.

                               User Fees

    The FY 2000 budget request includes two new user fee proposals. 
They are:

Passenger Processing Fee

    The Administration proposes to increase an existing fee paid by 
travelers arriving by commercial aircraft and commercial vessel from a 
place outside of the United States, and to remove certain exemptions 
from this fee. Proceeds of the fee increase would partially offset 
Customs costs associated with air and sea passenger processing. 
Subsequent to the budget, authorization legislation will be transmitted 
to allow the Secretary to increase the fee paid by air and sea 
passengers and to remove existing exemptions from this fee. In order 
for Customs to be able to collect $312.4 million for FY 2000, 
collections would have to begin on July 1, 1999.

Automation Modernization Fee

    The Administration proposes to establish a fee for the use of 
Customs automated systems. The fee will be charged to users of Customs 
automated systems. Proceeds of the fee will offset the costs of 
modernizing Customs automated commercial operations and an 
international trade data system, and will be available for obligation 
after FY 2000. Subsequent to the budget, authorization legislation will 
be transmitted to allow the Secretary to establish a fee for the use of 
Customs automated systems.
    This concludes my statement for the record. I appreciate the 
opportunity to appear before you today. I particularly want to express 
my appreciation to this Subcommittee for its tremendous support in 
providing Customs with increased funding in FY 1999. This funding will 
provide Customs with the much needed tools to accomplish our mission, 
and I assure you that we will use these resources in the manner in 
which Congress intended them to be utilized, in the furtherance of 
international counterdrug efforts and our critical mission to protect 
the Nation's borders and to reduce the flow of drugs into the United 
States.

                                

    Chairman Crane. Thank you, Mr. Kelly.
    And now Ms. Bragg.

          STATEMENT OF HON. LYNN M. BRAGG, CHAIRMAN, 
              U.S. INTERNATIONAL TRADE COMMISSION

    Ms. Bragg. Mr. Chairman, Mr. Levin, and Members of the 
Subcommittee, I am pleased to have this opportunity to discuss 
the budget request of the U.S. International Trade Commission 
for fiscal year 2000 and fiscal year 2001. I also would like to 
recognize Commissioner Askey and thank her for accompanying me 
here today. She has been extremely supportive of my 
chairmanship and I guess I could say your loss is definitely 
the Commission's gain.
    I would like to express my appreciation also to both the 
leadership and individual Members of the Committee for their 
support regarding the agency's appropriations last year. Those 
letters of support on our behalf were extremely helpful. 
Hopefully, our work continues to merit your interest and 
confidence and that you will be inclined to provide similar 
support this year. I believe my written testimony submitted 
earlier presents a persuasive complete picture of our needs 
which corresponds to our increased responsibilities in 
administering the trade laws of the United States.
    The agency's budget request represents a consensus proposal 
and has the unanimous support of all members of the Commission. 
For fiscal year 2000, we are submitting a request for 
$47,200,000, which represents a 6.1 percent increase over the 
fiscal year 1999 appropriation of $44,495,000. At the request 
of the Subcommittee, the Commission has also estimated its 
funding needs for fiscal year 2001. We propose a fiscal year 
2001 authorization level of $49,750,000, an increase of 
$2,550,000 or 5.2 percent over our fiscal year 2000 request.
    This budget request reflects that the Commission has 
undertaken substantial belt-tightening and streamlining in the 
past. It continues the Commission's commitment to doing more 
with less. But on balance, it is a conservative request for a 
modest increase which basically allows us to maintain our 
personnel status quo and fulfill our commitment to producing a 
quality and timely work product, but, at the same time, take on 
significant workload increases.
    We continue to be conservative in our staffing practices. 
First, our personnel levels now stand at about 365 full-time 
personnel, much lower than in fiscal year 1993 when the agency 
employed almost 100 more employees. Put another way, over the 
past 6 years, the agency has reduced its employees by almost 25 
percent, an important downsizing accomplishment for a small 
agency.
    Furthermore, the agency has consistently sought to avoid 
adding career employees to meet peak workloads. For that 
reason, we actively pursued the option of hiring limited-term 
employees because of the anticipated short-term nature of the 
increase in our workload due to the Sunset Review 
investigations. As part of this policy, we have also reassigned 
or detailed a number of employees to other offices facing the 
heaviest workload demands.
    My prepared testimony provides important details regarding 
our current caseload, which emphasizes our increased resource 
needs related to the additional 324 Sunset Reviews mandated by 
the Uruguay Round Amendments Act which we started this fiscal 
year and must finish by June 2001. Also, I note that our 
caseload in other areas, such as section 201 and section 337 
intellectual property investigations continues to increase or 
hold steady. We also have more anti-dumping petitions being 
filed than expected as well as additional 332 studies being 
prepared for the executive branch and our congressional 
oversight committees.
    Since so much of our current situation reflects the impact 
of Sunset Reviews, I thought you might be interested in a brief 
snapshot of the progress in reviewing the outstanding orders 
and what the results of the initial reviews are. To date, we 
have instituted a total of 154 Sunset Review investigations, 
which are now in different procedural stages. Of this total, 78 
have been fully processed through the initial phase which 
determines whether there should be an expedited investigation 
or a full investigation. Of those 78 cases, 33 have been 
revoked by the Department of Commerce because of no domestic 
response or interest. Of the remaining 45, 33 have been 
continued by the Commission and will receive a full 
investigation. Twelve will be, or have been, expedited without 
a hearing. The Commission has made its determination in seven 
of these expedited reviews, voting to revoke the order in one 
and not revoke the order in six.
    As you know from my written testimony and the testimony of 
past chairmen, historically personnel costs account for almost 
75 percent of the Commission's budget, with building rent 
accounting for another 12 percent. Therefore, only about 12 
percent remains to be allocated for administrative needs such 
as computers, travel, and training. We have few other options 
in adjusting to diminished funding except to reduce personnel 
levels.
    Finally, we continue to take important initiatives to make 
information resources available more widely to our key 
customers, 
Congress, and the executive branch, the public we serve, and 
our employees. In particular, I want to mention two pilot 
projects underway on electronic initiatives discussed in 
further detail in my prepared remarks.
    The first is our electronic document imaging system. All of 
our filings are scanned electronically to provide self-service 
public access to submissions in trade cases in our onsite 
meeting room. The second pilot is our trade and tariff data 
web. This system enables the user to custom design retrievals 
of the trade information about specific products and countries.
    Thank you again for the opportunity to appear this morning. 
Business is brisk, but we are meeting the challenge at the 
Commission. We continue to pursue innovative, cost-effective 
strategies in administering our statutory responsibilities. I 
am prepared to address any questions you may have.
    [The prepared statement follows:]

Statement of Hon. Lynn M. Bragg, Chairman, U.S. International 
Trade Commission

    Mr. Chairman and Members of the Subcommittee, I am pleased to have 
this opportunity to be here today to discuss the budget request of the 
United States International Trade Commission for fiscal year (FY) 2000 
and FY 2001.
    The U.S. International Trade Commission is an independent, 
nonpartisan agency with a wide range of trade-related mandates. Because 
of its independence and bipartisanship, the Commission acts as a focal 
point in government for receiving views of the public and private 
sectors on international trade issues. The trade laws administered by 
the Commission encompass quasi-judicial investigations of import injury 
and unfair practices in import trade; major trade studies, research, 
and economic analysis; trade monitoring; data collection; development 
of uniform statistical data; and issues concerning the Harmonized 
Tariff Schedule of the United States. While the Commission is not a 
policy-making entity, through information and analysis provided to the 
President and the Congress, the agency contributes objective trade 
advice and policy support to the Congress, the President, the Office of 
the U.S. Trade Representative, and other interagency groups.

                             Budget Request

    The Commission's FY 2000 budget request is $47,200,000, which 
represents a 6.1% increase over the FY 1999 appropriation of 
$44,495,000. At the request of the Subcommittee, the Commission has 
also estimated its funding needs for FY 2001. We propose an FY 2001 
authorization level of $49,750,000--an increase of $2,550,000 or 5.2 
percent over our FY 2000 request.
    Before addressing the details of our request, please let me begin 
by briefly reviewing the Commission's five major operations as 
identified in our strategic plan. First, are the import injury 
investigations which include antidumping and countervailing duty (AD/
CVD) cases, conducted under Title VII of the Tariff Act of 1930. These 
investigations involve products that are unfairly traded in that they 
are either sold at less than fair value, or are subsidized in their 
production, manufacture, or export. Further, beginning in July 1998, we 
began five-year sunset reviews of all outstanding AD/CVD orders, as 
mandated by the Uruguay Round Agreements Act of 1994, to determine 
whether to retain or revoke the old orders if no longer necessary. As I 
will detail later, our FY 2000 budget request is considerably impacted 
by our resource needs related to these new review investigations.
    In addition, there are several other types of import injury 
investigations we administer. Chief among these are Section 201 (of the 
Trade Act of 1974) or so-called ``escape clause'' or global safeguards 
investigations. Such cases are generally initiated by a petition from a 
domestic industry which alleges injury as a result of increased 
imports. The Commission conducts a six-month investigation--four months 
for the injury phase, followed by a two-month remedy phase (if injury 
is determined)--in which remedy recommendations are proposed to the 
President. It is then up to the President to determine what action, if 
any, will be taken.
    The second Commission operation is the conduct of intellectual 
property-based investigations, more commonly referred to as Section 337 
(of the Tariff Act of 1930) investigations. These investigations 
address allegations of infringement of intellectual property rights by 
imported items. The Commission has three administrative law judges 
(ALJs) who consider these cases; their initial determinations are 
subsequently reviewed by the Commission. Generally these cases 
encompass very technical issues, and most involve products having 
multiple patents. Many cases involve the high tech sectors of computer 
hardware and software.
    The third operation is the Commission's research program. The most 
important element of this activity is Section 332 (of the Tariff Act of 
1930) investigations which we prepare at the request of Congress and 
the President; the probable economic effects studies (pursuant to 
Section 131 of the Tariff Act of 1930); and the overall function as a 
resource for the gathering and analysis of international trade data. 
For these activities, the Commission draws on its economic and industry 
sector expertise which covers the spectrum of these disciplines. 
Another component of this function is to provide ``quick response'' 
research, technical advice, and analysis for policy makers in the 
executive branch and Congress.
    The fourth Commission operation is trade information services. This 
comprises trade remedy assistance to small businesses; legislative 
reports; library services; maintenance of the Harmonized Tariff 
Schedule; Schedule XX; U.S. Schedule of Services Commitments under the 
General Agreement on Tariffs and Trade/World Trade Organization; 
preparations to the Integrated Database of the World Trade 
Organization; preparation of Presidential proclamations; and certain 
other information gathering, processing, and dissemination activities. 
The Commission is a member of an interagency committee, the 
International Trade Data System, established to coordinate and 
streamline trade data collection and dissemination. In addition, the 
ITC actively participates in interagency measures to streamline data 
preparation for international forums.
    Trade policy support is the final agency operation. Although the 
Commission itself is not a policy-making body, it plays an active role 
in providing objective expertise to the executive branch and Congress 
for the formulation of trade policy. The trade policy community draws 
on the Commission's technical proficiency and factual advice in a 
variety of trade issues, ranging from commodity-specific matters and 
industry sectors, to the impact of international trade agreements.

                      Conservative Budget Request

    We believe that our budget request is very conservative--especially 
given the sizeable expansion in the Commission's workload. The 
International Trade Commission has entered one of the most challenging 
eras in our 83-year history. Chief among the challenges is to address a 
considerable expansion in the agency's workload within a very modest 
increase in resources. The increase in our budget request this year is 
modest by any standard. It reinforces past belt-tightening, 
streamlining, and refocusing of priorities. The Commission is now 
operating with a smaller budget and less staff than in FY 1993.
    The FY 2000 increase is attributable solely to the new sunset 
review requirements and the mandatory cost-of-living adjustment for 
salaries. Since we are a personnel-intensive agency, there is little 
margin. Personnel costs account for 74% of our budget, and rent for 
12%. No programs, loans or grants are administered by the agency. 
Therefore, there is virtually no discretionary spending in the 
Commission's budget. With only a 6.1% increase, we plan to manage a 
more than twofold increase in our AD/CVD workload--as well as absorb a 
COLA for our personnel-intensive operation.
    Similarly, our estimate for FY 2001 reflects our continuing 
conservative approach to resource needs. The estimate basically funds 
anticipated increases in salaries and benefits due to mandated Federal 
pay raises and the usual grade and step increases that occur in the 
course of any year. This figure assumes no net increase in Commission 
personnel or total funded permanent positions. In fact, we anticipate 
some easing of staffing levels and workload towards the end of FY 2001 
as the term appointments start to expire and the transition sunset 
cases diminish. This requested funding level assumes that funds 
available for operating needs in FY 2001 will not change from FY 2000 
levels, and that non-personnel expenditures will be funded from savings 
and reallocations from existing resources.

                  New Sunset Reviews--Budgetary Impact

    As with last year, the entire increase in this year's Commission 
budget request is related to the Congressionally-mandated five-year 
sunset reviews of all (AD/CVD) investigations, as well as mandatory 
cost-of living adjustments for personnel.
    The 1994 Uruguay Round Agreements Act requires that five-year 
sunset reviews be conducted for all outstanding AD/CVD investigations--
past, present, and future. That provision of law, which became 
effective as of July 1998, instructs the Commission to review all the 
outstanding AD/CVD orders (324 past cases) to determine whether those 
orders should remain or be revoked. A 3-year ``transition'' period 
calls for reviews of all orders in place before 1995 to be completed by 
June 2001. Beginning in FY 2000, the Commission must initiate five-year 
reviews on all orders put in place after 1995. Further, all future 
orders must be reviewed every five years to determine whether they 
should be maintained or repealed.
    This new review requirement also has substantially increased the 
Commission's workload--particularly during the 3-year transition phase. 
This enhanced authority means more than a doubling of the workload for 
AD/CVD cases during this 3-year time frame, as well as a tripling of 
the litigation workload related to these cases. Over the long term, the 
net result is a permanent increase in the Commission's workload (by an 
anticipated 30%), as new orders are put in place and reviewed every 
five years thereafter.

        Efforts to Conserve and Wisely Use Commission Resources

    Ever-cognizant of budget constraints, the Commission consistently 
makes a concerted effort to safeguard and wisely utilize Commission 
resources--particularly in an era of diminishing appropriations and 
rising workloads.
    The Commission has undertaken substantial belt-tightening and 
streamlining in the past. Both voluntary downsizing of personnel and 
other cost-saving measures were undertaken, beginning in 1995. 
Reductions in personnel and rental space, as well as consolidation of 
offices and elimination of management layers were implemented. Paring 
administrative directives by more than 50% has also helped to simplify 
agency procedures and operations. All of these measures have 
contributed to streamlining and greater efficiency of the Commission's 
operations.
    Streamlining, along with re-prioritizing of activities, has enabled 
the Commission to creatively refocus energies and resources to the most 
critical needs. As a result, the Commission is better prepared to 
address our own internal resource requirements and also improve the 
delivery of services to our key customers and the public. We regularly 
review all our activities to ensure that the most efficient and 
effective processes are in place.
    Importantly, however, not all of our resource needs are focussed on 
the demands of sunset review investigations. We are also mindful of the 
need to attend to the resource demands posed by section 332 fact-
finding investigations, which have been rising significantly over the 
past few years. There are now more requests for investigations on 
increasingly more complex and difficult topics, to be completed in 
shorter time-frames, often 6 months or less, instead of the more 
customary 9-12 months.
    So far in FY 1999, we have 30 section 332 reports underway, of 
which 17 are requests concerning new, previously unaddressed subject 
matter by us, up from the average of 13 at this time of the year. Among 
the studies currently underway are China's WTO accession, India/
Pakistan sanctions as a follow-on to the previous sanctions overview, 
Africa trade flows, and APEC tariff and non-tariff barriers. In 
connection with WTO and FTAA negotiations, the Commission is conducting 
a comprehensive probable economic effects study of possible tariff 
modifications on U.S. industries and consumers under multiple 
scenarios.
    In terms of resource allocation, this 332 probable economic effects 
study is likely to be one of the largest we have undertaken; it is an 
eight-month study crossing all areas of the Commission's expertise, 
involving economists, attorneys, and nearly all of our industry 
analysts. Staff anticipates that this will be a three-volume study, in 
excess of 3,000 pages total, requiring more than 10 work years to 
complete, at an estimated cost in excess of $660,000.
    Similarly, our section 201 global safeguard investigations have 
increased. Usually, we anticipate one, or perhaps no petitions in a 
year for section 201 investigations. In FY 1998, we conducted two 
safeguard-related investigations. In the first 6 months of FY 1999, we 
have already received two petitions, with the prospect of more. These 
cases are handled by our Office of Investigations, which also conducts 
all Title VII cases and sunset reviews.

                      Limiting the Budget Increase

    As was the case last year, the Commission has continued to work 
hard to restrict the size of our budget request for FY 2000 and our FY 
2001 estimate, despite the impact of sunset review investigations and 
other case load demands I have just described. First, we established a 
policy of hiring fixed-term employees in targeted offices most affected 
by review-related activities; this avoids committing future valuable 
resources to fund career Federal employees for whom there may be 
insufficient work to perform, as our workload surge runs its course. 
Next, in lieu of hiring a larger number of people, we shifted a number 
of permanent personnel internally to those offices in order to meet the 
heaviest workload demands of the agency. However, that means that those 
employees, largely from the Office of Industries, are not available to 
perform their normal trade monitoring, policy support functions, and 
other work on trade studies, in particular 332 studies. The Commission 
will continue to reassess and reorder its priorities to ensure that the 
most important needs are met first.
    As a measure of the past and current efforts to limit our resource 
needs, our overall personnel levels are down considerably from the FY 
1993 level of 461. At the end of February 1999, the Commission had 
365.5 full-time personnel on board. Even with the contemplated 
additional employees to address the increasing sunset review caseload, 
the Commission's staff will remain well below prior levels during the 
rest of FY 1999 and FY 2000. And, most of the new employees will not be 
career employees, but instead one- to two-year fixed-term employees to 
handle the short-term upsurge in workload. Therefore, we expect the 
staff level to peak in FY 2000 and early FY 2001, then to decrease as 
the AD/CVD workload trends subside.

           Enhanced Computerization and Electronic Activities

    The Commission has explored important new technological ways of 
doing business; in doing so, we have helped our employees to do more 
with less, and have improved our outreach to our customers and to the 
public we serve. At the same time, we hope that we have enhanced the 
transparency of our administration of the trade laws and the decision-
making process.
    We are continually working to make information resources available 
more widely to our own staff, our key customers, and the public. The 
main ITC website posts many Commission publications, general trade law 
and investigative information, press releases, trade resource 
information and links to other relevant sites. Use of the website has 
enabled broader dissemination of publications, and reduced some 
production and mailing costs. Efforts are underway to enable greater 
public access to information produced and compiled by the ITC. The 
Commission has operated under a fundamental philosophy that information 
collected at public expense should, to the extent feasible, be made 
publicly available.
    Specifically, pilot projects are underway on two electronic 
initiatives to determine the best means of providing the public with 
helpful information. The pilot projects will explore and assess various 
aspects of these initiatives, including costs, benefits, resource 
demands, and user fees.
     EDIS (and EDIS Online, its web companion)--the electronic 
document imaging system of our Dockets Section currently provides self-
service public access in our on-site Reading Room to filings and 
submissions in trade cases. Over the next two years (FY 1999 and FY 
2000), we are pilot testing the costs and benefits of providing access 
to these public documents from anywhere, via the Internet through our 
general website [www.usitc.gov]. This web-based version of EDIS is EDIS 
Online. Preliminary feedback from the main users of this information in 
the international trade bar has been very positive. Longer term, we 
will explore the possibility of providing Internet access to 
confidential case information to eligible parties to the 
investigations. We will proceed carefully to ensure confidentiality of 
sensitive proprietary business information.
     Trade and Tariff DataWeb--this system is unique in 
combining trade and tariff information. It enables the user to custom-
design retrievals of trade information about specific products and 
countries. The password feature enables users to save and update their 
tailor-made product lists for future sessions. Information is available 
to both government agencies and the public. This month, the public 
access pilot project became operational. In response to a letter from 
the International Trade Data System (ITDS), which is the interagency 
trade data coordinating entity chaired by the Department of the 
Treasury, the ITC's DataWeb link was officially established for public 
availability. Our trade and tariff DataWeb can now be accessed directly 
from its own website [http://dataweb.usitc.gov], the ITC homepage, and 
from a link on the ITDS website.
    To date, all of these initiatives have been internally funded, 
within existing resources, and with no additional budget requests. 
Depending on the results of our two pilot projects, we may request 
funds in the future if resources appear inadequate to support public 
expansion of these endeavors.
    I also would like to address one remaining important element 
regarding our technological status. The Commission is aggressively 
preparing to meet the Year 2000 computer issue. We believe we have 
successfully anticipated our agency needs and are prepared to meet this 
challenge. The agency has no customized software, nor do we have any 
mission-critical functions which could result in harm to national 
security, public safety, health, or income maintenance. The Commission 
expects to receive vendor fixes or upgrades to software affecting our 
internal operations. Now underway is an agency-wide hardware upgrade to 
Y2K compliancy for all client PCs and network servers which should be 
completed this spring. The Inspector General has reviewed the agency's 
actions and continues to monitor our response to Y2K needs. No specific 
funding for Y2K remediation has been requested, and as of now none is 
anticipated. We will have contingency plans in place to address 
unanticipated problems which may arise.

                    Strategic and Performance Plans

    I understand that the Committee is interested in the agency's work 
on our Strategic and Performance Plans. In October, the Commission 
issued the third edition of its Strategic Plan, which covers the five-
year period ending September 30, 2003. It is accompanied by a two-year 
Performance Plan which identifies performance goals to meet the 
strategic goals, and describes performance indicators to measure them.
    Efforts to correlate the agency's strategic and performance plans 
with the budget are underway. The first two of the five key agency 
operations correspond with the budget justification (import injury and 
intellectual property-based investigations). For the next budget cycle, 
the Commission expects to have the same correlation with the strategic 
and performance plans and the budget for the other three agency lines 
of business (research, trade information services, and trade policy 
support).
    In concluding my comments today, I would like to highlight a phrase 
from the agency's strategic plan which states ``. . . The Commission 
recognizes the importance of striving for excellence in all aspects of 
its mission.'' These are words that the agency takes to heart.
    This concludes my prepared comments for today's hearing. Thank you 
again for the opportunity to present them, and I am prepared to address 
any questions or concerns you might have.

                                

    Chairman Crane. Thank you, Ms. Bragg.
    Mr. Fisher, why hasn't Canada lived up to its WTO 
obligations to admit U.S. magazines into their market on the 
same basis as domestically produced magazines, as called for in 
the WTO's decision in 1997 and what is the USTR going to do 
about?
    Mr. Fisher. Congressman, this is the darndest issue. As you 
just mentioned, in 1997 a WTO panel found their magazine regime 
to be in violation of their international trade commitments. 
They have put forward a bill known as Bill C-55. It has passed 
the lower house in Canada. This bill would impose criminal 
fines on foreign publishers if they run advertisements aimed at 
Canadian customers. In other words, they would criminalize this 
activity.
    We are in the midst of negotiations with Canada on this 
subject and, by the way, they are proceeding with good faith 
and we are making progress. Their insistence that the purpose 
of this bill is to protect Canadian culture, if it were to be 
passed, would trigger the terms of the cultural industries 
provision agreed by Canada in its 1988 Free Trade Agreement 
with the United States which was subsequently incorporated into 
the NAFTA under annex 2106 of the NAFTA. This allows the United 
States, if they were to pass this bill by insisting that it was 
for the purposes it now ostensibly is for, to receive 
compensation by taking what are known as measures of equivalent 
commercial affects in retaliation without their having recourse 
to dispute settlement.
    Now this is an example of enforcement. Here is one of our 
duties. Another country was found to be in violation of their 
obligations. We are pursuing this case aggressively. They have 
instead tried to substitute a different regime, ostensibly, as 
it means in this case, preserving Canadian culture. But, 
clearly, it is unacceptable if it were to proceed.
    I say all that against the back drop of the fact that we 
are in negotiations with the Canadians. It is good faith 
negotiations. I believe that we will be able to negotiate a 
proper solution here and we are working very hard to do so, Mr. 
Chairman.
    Chairman Crane. Hopefully.
    Now, Commissioner Kelly, the President's budget includes a 
legislative proposal for an automation user fee to generate 
funding as an offset for automated commercial environment, ACE, 
and the international trade data system. But these funds would 
not be available until fiscal year 2001. If I understand your 
testimony, the Administration proposes to fund ACE from 
resources jointed provided by the trade community and 
appropriated resources. Yet there are no appropriated resources 
in the fiscal year 2000 budget request. Can you explain that, 
first of all, and is it the Administration's intent to put ACE 
development on hold for fiscal year 2000?
    Mr. Kelly. The budget calls for the collection of fees, Mr. 
Chairman, in the fiscal year 2000, for ACE, not to be expended 
until fiscal year 2001. It is an area of concern to me, quite 
frankly. I think ACE is vitally important. We want to move 
forward with it as quickly as possible. As you know, there is a 
negotiation process that goes on within the Administration. 
Customs argued for funds upfront, immediately, and certainly in 
the fiscal year 2000 budget, to move forward with ACE and that 
was not forthcoming. The more quickly we can get underway with 
ACE, I think the better off the country will be, the trade 
community will be, the Customs Service will be.
    Chairman Crane. There are many figures circulating as to 
what building ACE will cost. What, in your estimation, will it 
cost?
    Mr. Kelly. The latest estimate is $1.4 billion. Obviously, 
this is dependent on bids that are put out and responses on the 
part of many contractors. But we brought in Peat Marwick to 
take a look at our estimate procedures, the way we were going 
about it and they said that they were reasonable and they 
thought that the process that we used to estimate the cost was 
a good one. So, as I say, now it is $1.4 billion. Certainly it 
is possible that it may change up and down. As technology 
develops, in fact, the cost may go down.
    Chairman Crane. Can you please update us on the ongoing 
dispute with the labor union over the use of a very successful 
drug interdiction approach called pre-primary roving in El 
Paso? In addition, when we examined the issue last year, less 
than 25 percent of JFK's work force was available to work 
Saturday and Sunday as regular workdays when those days made a 
part of that officer's regular work week, despite the statutory 
requirement that these days be deemed regular workdays under 
those circumstances. And has there been any resolution of this 
issue with the union?
    Mr. Kelly. Well, the pre-primary in El Paso, in essence, 
what it means is that inspectors go out before vehicles reach 
the booth and they will open trunks.
    Chairman Crane. That is with the dogs, right?
    Mr. Kelly. That is with the dogs or it can be done without 
dogs, just having people pop trunks. There was some dispute as 
to whether or not that was an appropriate activity for the 
inspectors to do. To the best of my knowledge, that has not 
been resolved, although we are doing pre-primary inspections in 
other locations along the border. We do local bargaining. I 
believe that is still an outstanding issue, but I could be 
wrong.
    As far as the staffing at JFK, if I understand that 
question?
    Chairman Crane. And workdays, regular workdays. When we 
checked this last year, less than 25 percent of the work force 
at JFK was available to work Saturday and Sunday as regular 
workdays when those days make up part of that officers regular 
work week, despite the statutory requirement that these days be 
deemed regular workdays under those circumstances. And has that 
issue been resolved with them?
    Mr. Kelly. We have embarked on a project called port 
certification which takes a look at staffing levels for all of 
our ports to see if they are adequate, to see how overtime is 
being distributed. In addition, we are in the final stages of 
receiving a resource allocation model from Price Waterhouse, an 
independent contractor that has to look at the entire agency to 
give us a clean sheet of paper view. I think that will go a 
long way to telling management how we should have people 
distributed. Right now, distribution is, to a large extent, the 
function of local bargaining with the union and we need a 
better view as to how we should have our people distributed. 
Both the port certification project and the Price Waterhouse 
model that we should be obtaining in the next couple of weeks 
will be helpful in telling management where people should be 
assigned.
    Chairman Crane. Thank you. And, Chairman Bragg, the ITC is 
being faced with a more than doubling of its title VII workload 
due to the Uruguay Round Agreements Act that mandated 5-year 
Sunset Reviews of all past and future anti-dumping 
countervailing duty investigations. How are you managing that 
increase?
    Ms. Bragg. I guess a short answer would be--very carefully. 
We primarily have responded to the increase through the use of 
internal transfers within the Commission, reassigning employees 
from one office to another, as well as, with the fixed-term 
hires. These fixed-term hires would be for 1- or 2-year 
periods. We anticipate internal transfers to be approximate--up 
to 19 people and then a total Sunset hire of possibly 34, 
depending on need. And that would include, also, the 
reassignments of 19 internally. It would depend on how our work 
is progressing and how many reviews actually go into full 
investigations and have full-blown hearings (as opposed to 
simpler expedited reviews).
    Chairman Crane. Very good. Mr. Levin.
    Mr. Levin. Thank you, Mr. Chairman. First of all, I want to 
indicate how much I agree with Mr. Fisher's characterization of 
the professionalism of USTR and that very much applies to the 
other agencies that are here today and to the four of you who 
are here to represent them. I think we should all listen when 
there are plaudits for efforts of government employees.
    Second, I think I will resist asking you about substance. 
It is tempting. Ms. Bragg and Ms. Askey, to talk to you about 
section 201. Your increased workload, as you know, Mr. Houghton 
and I, working on a bipartisan basis, we hope both with the 
House and Senate, feel the need to take a further look at 
section 201, but I think, perhaps, we should focus on the 
staffing issues, authorization levels, and not get into 
substance. Because, Mr. Fisher, I would like, otherwise, to 
talk to you about a number of issues: Section 301; your report 
of a few weeks ago and the forthcoming report; Japan, the visit 
of the Prime Minister; talk about China. That could take us a 
few hours.
    I do urge everybody to look at your testimony on page 14 
where you do talk about the negotiations, ongoing negotiations 
with China and your characterization that there are outstanding 
issues to be resolved, sectoral issues as well as what have 
been called protocol issues. Your characterization that the 
negotiations have moved ahead, but they are far from complete 
and that you will consult with Congress closely. I hope you 
will do that. My own view is that that accession needs to be 
done and it needs to be done right.
    Mr. Kelly, I think I will kind of focus on you, if I might. 
[Laughter.]
    In terms of authorization levels and personnel issues and 
the like. So let me just ask you two questions. I think you are 
under some limitations as to what you can say in terms of 
authorization levels. You are part of the Administration. Any 
views on authorization levels? And let me combine it with 
asking you to comment about authorization personnel levels and 
I am asking you to comment on the relations with your 
employees.
    On page--actually, I guess it is not numbered, but you say, 
``We continue to work in partnership with the NTEU.'' And I 
think it might be helpful to us, before we get into specific 
issues--we will probably do that later on with other 
witnesses--any thoughts you have about the State of employer-
employee relationships within your agency?
    And then, last, if I might just ask you, you know there is 
going to be later testimony about your automation. And there 
have been some criticisms of your work to date. So if you could 
comment on personnel levels, general labor-management relations 
within the service, and, also, the last issue, how you are 
coming on automation.
    Mr. Kelly. As far as authorized strength levels are 
concerned, I believe that the Customs Service needs more 
resources, needs more personnel. I think Congressman Rodriguez 
mentioned that there are many ports, for instance, along the 
border that want to operate on a 24-hour basis that simply 
can't because you don't have the personnel to do it.
    The resource allocation model that is coming on board here 
from Price Waterhouse, holds great promise. It will, for the 
first time, take a look at a total agency. We have asked them, 
tell us what do you think we need to do? Our mission? It has 
been before for parts of agencies. Now, for the first time, we 
are going to have kind of a clean sheet of paper view on what 
the Customs Service needs to do its mission. And, at the very 
least, it will give us a sense of proportionality as to where 
people will be assigned.
    Mr. Levin. And that is due, again, when?
    Mr. Kelly. Actually we should have a draft in the next few 
days. We have to look at it and it is a model. It has in it 
formulas that you can adjust for workload. If the workload goes 
up or down, it will tell you how many people you need to do a 
particular function.
    Mr. Levin. Will that give us some idea of their 
recommendations on overall personnel levels as well as 
proportionality?
    Mr. Kelly. Yes, it will. Yes, Sir.
    Mr. Levin. And when do you think we will know about that?
    Mr. Kelly. Well, we have to take a look at it ourselves and 
look at it and play with it, you might say, to see how it 
works. And then we will certainly, obviously, make it available 
to the Committee. I would say probably within a month we will 
be able to do that.
    Mr. Levin. So we ought to have that input before we are 
very much further along in the budget and appropriation 
process?
    Mr. Kelly. Hopefully, we will have it within the next 
month.
    Mr. Levin. And if that has some major recommendations of 
increased personnel levels, we will need to take that into 
account?
    Mr. Kelly. Yes, Sir. It sounds to me that that is the way 
to go. We have had a, a systematic examination of the functions 
of the agency that will result in not only port-specific and 
unit-specific recommendations, but also for the agency as a 
whole.
    Mr. Levin. You wouldn't be totally surprised if they came 
forth with a recommendation for increased personnel levels?
    Mr. Kelly. I would not be surprised because I know the work 
that the Customs Service is doing and the strains that are on 
the Customs Service now with our present manning levels so, 
yes, I have reason to anticipate that there is going to be a 
recommended increase. How much I have no idea.
    Mr. Levin. And, quickly, on the other two issues.
    Mr. Kelly. I think our relations with our employees are 
good. Clearly, the relationship with the union and unionized 
employees, I am told, is much better than it was, say, 10 years 
ago, pre-partnership. The partnership is the Administration's 
concept of working more closely with its unionized employees. 
We have done organizational assessment surveys. The employees 
are generally happy to work in the Customs Service. Like any 
big organization, almost 20,000 employees, there are some 
pockets, there are some issues that, that create some tension, 
but, overall, I think our relations are good.
    As far as the union is concerned, I meet with Mr. Tobias. I 
try to meet on a weekly basis. I am not certain he does that 
with any other agency head, but we try to communicate as much 
as possible. So I would characterize our relationship as good, 
not perfect.
    Mr. Levin. And technology, quickly, the criticisms of ACE?
    Mr. Kelly. Right. We have had some criticism as to our 
ability to manage a big information technology project such as 
ACE and I think the things we have done--I have outlined in my 
oral presentation. We have gotten a first-rate chief 
information officer, Woody Hall, who is here now. We have done 
some reorganization in our IT shop.
    We are now moving toward a prime contractor. We have 
learned from the lessons of other governmental agencies. I 
believe we need a prime contractor to lead us down the path to 
develop ACE. And to do that, we have contracted--again, as I 
said in my oral comments--with Mitre, which is a government-
sponsored research firm that will kind of develop an RFP 
process for us, the acquisition process.
    GAO has made some sound recommendations and we are doing 
everything that we can to adopt those recommendations. We have 
made significant changes. And we are not looking for the pride 
of authorship or ownership here. We want ACE to go forward and 
the prime contractor, to me, is the way to go. So we are 
adopting that notion. We do need money to do that, though, 
quite frankly.
    Mr. Levin. Thank you.
    Chairman Crane. Mr. Houghton.
    Mr. Houghton. Thank you, Mr. Chairman. I only have one 
question and that is to Fisher.
    This is a competitive game, as you know from your 
negotiations on manufactured goods and things like that with 
China. How do we stack up in terms of our budget with--although 
it is difficult to compare exactly the numbers--with other 
countries? I mean, do you have the research? Do you have the 
resources? When you go into negotiations, do you feel that you 
have the back up and the people that are necessary to do the 
job? Compared to any of the other nations that you are dealing 
with?
    Mr. Fisher. Well, first, Congressman, it is very hard to 
sort out our competitors in terms of the number of personnel 
they have, their budgets. I had dinner last night with the 
Minister of another country and their representatives, much 
smaller than we are by a small fraction. They had 400 people 
and a budget that dramatically exceeds ours. But when you look 
it and you break it down and analyze it, it is actually 
combining what we have in our Commerce Department, large 
sections of it, and what we have at USTR. So it is very 
difficult to compare, run a comparison.
    Do we feel that we have adequate back up? We have an 
unusual structure at USTR. We push decisionmaking down to the 
lowest possible level. It is a good business practice, as you 
know. We have very able negotiators at the assistant level and 
then, hopefully, at the deputy level and so on. And we work in 
a very thin organization. We have very little bureaucracy at 
USTR. I know that is hard to believe coming from someone that 
works in a bureau of the U.S. Government, but the fact is that 
anybody can walk into my office that needs to at any time. They 
don't abuse that privilege. Similarly, we can do that with 
Charlene Barshefsky. And I think we survive significantly on 
our wits, to be frank. But, at the same time, having taken the 
bureaucracy out of our little bureaucracy, I think we are able 
to be much more efficient than we would otherwise be if we had 
rigid formulae.
    We are happy with the budget request that we have made. 
Frankly, we are making up for some lost time. We went through a 
very dry period for quite a while. But we have the 
responsibility to cut costs. I mentioned including using 
frequent flier miles and cutting out a lot of the stuff. And it 
makes it harder on our negotiators, but we have this duty to 
the taxpayer. And I would say, Congressman Houghton, we are 
very satisfied with what we have. Obviously, everybody would 
like more in their wallets.
    And if I just may say one other thing here. We are very, 
very fortunate--forgive me for saying this in this hearing. We 
have a USTR that has been on the job 6 years. She is very 
unique. Usually there is rapid turnover. She went from my 
position to acting and then to USTR. There is a tremendous 
repository of knowledge in that woman's brain. And that allows 
us to gear ourselves much more efficiently than we would 
otherwise be able to.
    Mr. Houghton. Not only knowledge, but energy. My lord. I 
don't know that she ever sleeps. Thank you, Mr. Chairman. That 
is it.
    Chairman Crane. Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman. If I could ask 
Commissioner Kelly a question regarding a followup of sorts on 
the question that Congressman Levin asked regarding management 
and employee relations. Is there anything, Commissioner, that 
you are aware of with regard to the collective bargaining 
agreement that you have with the employee union that has 
affected or impeded the ability of Customs to interdict drugs 
or interfered with that process at all?
    Mr. Kelly. No, I have no indication that, as a result of 
the collective bargaining agreements, we are unable to do our 
job.
    Mr. Becerra. And, at this stage, you mentioned that you 
were in the process of sitting down with representatives from 
the employees union to try to straighten out any differences 
the agency has with its employees in regards to work place and 
benefits and so forth.
    Mr. Kelly. We have ongoing negotiations, both national 
level, local level, on a myriad of issues, yes, Sir.
    Mr. Becerra. And that goes on even with the current 
collective bargaining agreement in place. Is that correct?
    Mr. Kelly. That is correct. Yes, Sir.
    Mr. Becerra. Thank you. That is it, Mr. Kelly. If I could 
ask a question to you, Mr. Fisher. The question of whether or 
not we are going to get into this whole debate with China's 
accession to WTO, there is a great concern that, at the end of 
the day, if they come in--and, Ms. Bragg, this is probably 
something I should address to you as well--that we will not 
have a way to enforce the agreements.
    Is there anything you can tell us that will give us 
confidence that you all will be equipped, should we get to the 
stage of seeing China enter into the WTO, that we can be sure 
to enforce the new provisions under which China would operate 
in this new trade setting? You have got very small budgets and 
your enforcement capabilities are probably stretched to begin 
with, but is there anything that you could tell us to lead us 
to believe that, with your current budgets, that you would be 
able to address the enforcement needs of this country to ensure 
that China is fulfilling its obligations under WTO?
    Mr. Fisher. Well, Congressman, first, we haven't completed 
our negotiations. I think that is an important marker. Second, 
we will be discussing a lot of the specifics of what we have 
achieved later this week with you and your fellow members of 
this Committee. Generally speaking, let me say this: Assuming 
that we are able to complete this negotiation, the purpose of 
the negotiation is for China to accede to membership of the 
WTO. Presently, we invoke our own trade laws because they are 
not members of the WTO and we are endeavoring in this 
negotiation--and thus far we have--to secure the right for us 
to use our trade laws.
    As regards other enforcement, though, we believe that there 
is a benefit for them to be accountable to the 133 other 
nations that are members of the WTO. Any temptation, whether it 
is on intellectual property rights or any other aspect of the 
keeping of their commitments to us and to the WTO, forces 
within China or others in that economy to say, well, you know, 
we can play hardball here. It is much easier for their leaders 
to say, wait a minute, we have now a commitment to the rest of 
the world. It is not just a bilateral commitment to the United 
States.
    This allows us, then, to use the monitoring and the 
enforcement mechanisms of the WTO. This is where USTR spends a 
great deal of time as litigants, when necessary. And it 
strengthens our hand to be able to have that additional layer 
of requirements for meeting their obligations to the 
international community.
    Mr. Becerra. So you are not asking for additional monies 
for your general counsel office, are you?
    Mr. Fisher. No, Sir, we are not. I must tell you, though, 
we did fill 10 new positions in fiscal year 1998. We 
substantially extended our own enforcement mechanism in terms 
of the role we play. And we are now digesting those new 
employees. We are not asking for any more this year. Seven of 
those were litigants or lawyers, rather, and then additional 
staff on top of that.
    And the short answer, Congressman, is that, again, this 
would expand in terms of comfort--assuming it is done right, 
assuming we complete this package--the ability to bring the 
laws of the international community to the enforcement table in 
addition to our own bilateral trade laws. And we would be happy 
to give you a detailed briefing on that whenever you wish.
    Mr. Becerra. I would appreciate that.
    Ms. Bragg. Congressman, as far as the International Trade 
Commission is concerned, I think the framework is already in 
existence as far as any unfair trade practices that any Chinese 
company may engage in in the United States. And those are 
through the existing anti-dumping and countervailing duty laws, 
as well as any other practice that would be subsumed within the 
section 201 escape clause mechanism. And, also, our section 337 
intellectual property framework.
    Mr. Becerra. Ambassador, I should probably follow up with 
you on that opportunity.
    Mr. Fisher. Please do. Please call me.
    Mr. Becerra. Thank you, Mr. Chairman.
    Chairman Crane. Just a followup on the question to you, Mr. 
Kelly. My understanding is you told me that the union prevents 
you from using pre-primary in El Paso. Right?
    Mr. Kelly. I am not certain if that issue was resolved or 
not. It was an issue. I am not certain. It was an issue that 
was under discussion and I don't know how that was resolved or 
if it is still under discussion. But pre-primary roving, as it 
is called, is going on in other ports on the border.
    Chairman Crane. And everywhere except there, right?
    Mr. Kelly. Well, yes.
    Chairman Crane. Well, is it that the policy isn't effective 
in interdiction?
    Mr. Kelly. The policy is, I think, an effective one.
    Chairman Crane. Effective.
    Mr. Kelly. Yes, Sir.
    Chairman Crane. Not ineffective.
    Mr. Kelly. Yes, Sir.
    Chairman Crane. And, yet, you don't know the answer to the 
question about El Paso?
    Mr. Kelly. I don't know the status of the negotiation in El 
Paso. I don't know if that dispute has been resolved.
    Chairman Crane. Well, is it not fair to say that the union 
has had an adverse effect, then, on drug interdiction because 
of holding up that resolution of that question?
    Mr. Kelly. Well, it is something that is in negotiation. I 
mean, if something were permanently----
    Chairman Crane. But how long has this been going on?
    Mr. Kelly. I don't have the answer to that question.
    Chairman Crane. Because I heard it was several years.
    Mr. Kelly. No, no. It is certainly not several years. It is 
a fairly recent issue that surfaced. I was in El Paso when I 
was Under Secretary, which was less than a year ago and, to the 
best of my recollection, pre-primary examinations were ongoing.
    Chairman Crane. I was just handed the notification here. 
Since early 1995, Customs and the National Treasury employees 
union local in El Paso have been negotiating over work 
conditions there involving that pre-primary provision.
    Mr. Kelly. Well, I will have to get back to you on that, 
Mr. Chairman. I just simply don't know.
    [The following information was subsequently received:]
    [GRAPHIC] [TIFF OMITTED] T6895.001
    
      

                                

    Chairman Crane. Well, thank you all for your testimony. 
And, with that, you are excused.
    And I would like to invite our next panel of witnesses. 
John P. Simpson, Deputy Assistant Secretary for Regulatory, 
Tariff, and Trade Enforcement; Dennis Schindel, Assistant 
Inspector General for Audit, Office of Inspector General; 
Norman J. Rabkin, Director, Administration of Justice Issues; 
and Randolph Hite, Associate Director, Governmentwide and 
Defense Information Systems.
    And if you will all take your seats, we will proceed after 
the transition is concluded. If you folks can hold on for a 
second here. We have got a major flow going out that door.
    And now I think we can commence with Mr. Simpson first.

   STATEMENT OF JOHN P. SIMPSON, DEPUTY ASSISTANT SECRETARY, 
 REGULATORY, TARIFF, AND TRADE ENFORCEMENT, U.S. DEPARTMENT OF 
                          THE TREASURY

    Mr. Simpson. Thank you, Mr. Chairman. I am here this 
morning representing the many agencies of the U.S. Government 
that have joined together to build an international trade data 
system. But we are not as well known as we would like, so 
perhaps I could take a moment to tell you what the 
international trade data system is and why we are building it.
    Over the years, as Congress has enacted laws to protect 
public health and safety, to protect animal and plant health, 
to protect the environment, to protect endangered species, to 
help protect intellectual property, to extend great benefits to 
countries with whom we have trade agreements, to impose 
sanctions on countries that threaten our national security, the 
agencies of the executive branch that are responsible for 
administering these laws have imposed reporting requirements on 
the international trade community. Over the years, these 
reporting requirements have accumulated to the point where 
there are now 40 different agencies administering 400 different 
laws at the border.
    We are conscious of the fact that not all of these laws 
necessarily applies to any single transaction. But it is 
actually possible for several of them to apply to one 
importation of goods. Just to give you a simple example. If 
this morning a shipment of strawberries crosses the border in 
Nogales, Arizona, Customs Service would get information about 
that shipment; Immigration and Naturalization Service will get 
information about the driver; the Federal Highway 
Administration will increasingly want information about the 
truck and the driver's status as a commercially licensed 
operator.
    But then, in addition to that, the Food Safety Inspection 
Service will be concerned that the strawberries have been 
rinsed in dirty water, handled by workers with dirty hands. 
They are concerned about hepatitis and they will want 
information on that. The Animal Plant Health Inspection Service 
will be concerned that the strawberries may be infected with 
some sort of a fruit pest or that the wood cartons in which the 
strawberries are imported are infected with some sort of a 
pest. EPA is concerned about pesticide residues. And, of 
course, the Census Bureau, the Farm Agriculture Service, the 
Agriculture Marketing Service, and State agriculture 
authorities all want information for statistical purposes.
    So, for a fairly simple transaction such as that, there is 
the potential for the international trade community to be 
burdened with very heavy reporting requirements. We don't know 
exactly what the cost is in the United States for parties 
importing into the United States. But about 4 years ago, the 
United Nations Council on Trade and Development estimated that 
worldwide, the cost of reporting or preparing documents for 
governments and doing the record keeping to support those 
documents averages about 4 to 6 percent of the value of the 
goods. In other words, it is an indirect tax of about 4 to 6 
percent on international trade. We have some reason to think, 
because of some work done by one American company, that that 
figure is probably in the ballpark for the United States.
    So, with the international trade data system, we are trying 
to do something about that cost. There are several objectives 
that we want to accomplish with the international trade data 
system. We want a single window for dealing with the government 
for the international trade community. Over the last few years, 
we have taken--the last 2 years, we have taken hundreds of 
government forms and thousands of data items and we have 
compressed them into a single electronic message. We don't want 
separate front ends. As Federal Government agencies move from 
paper reporting processes to electronic reporting, we don't 
want the government to incur the expense of investing in 
duplicative systems or duplicative interfaces with trade.
    We want to be sure that there is Internet access to the 
government to accommodate the needs of small businesses. 
Currently, many of the systems for reporting to government use 
what are called bands, value-added networks or dedicated lines 
that are simply beyond the resources of small businesses to 
use.
    We want to use transponder technology at the border to 
speed up the movement of trucks. Right now, when a truck 
approaches the border, an inspector takes several seconds to 
key in information about that truck. When the inspector is 
doing that, not only is the truck delayed, but the inspector is 
not doing what we train them to do. He is being used as a data 
input operator rather than as someone who is there to look at 
the crop, look at the driver, make sure that everything is in 
order before the truck moves on. So that is a key objective for 
us.
    On what we call the back end, we want the public to have a 
single point of access for international trade data maintained 
by a wide variety of U.S. Government agencies. Today, if you 
are a researcher at the University of Illinois and you want to 
know about the impact of international trade on the economy of 
Illinois, you have to go to many sources. We would like the 
international trade data system to be a single window, not only 
for academic researchers, but also for policymakers in the 
government, such as Members of Congress, USTR, the U.S. 
International Trade Commission to get better data and more 
timely data.
    We also want to be prepared to outsource the operation and 
maintenance of the system. One of the things we have learned is 
that Federal Government agencies do not do a good job of 
maintaining and upgrading sophisticated automation systems. So 
we want to be prepared to arrange for this to be done in the 
private sector.
    We are starting on some pilots this year, Mr. Chairman, in 
three different locations and we hope to be able to report to 
the Committee soon. Thank you.
    [The prepared statement follows:]

Statement of John P. Simpson, Deputy Assistant Secretary, Regulatory, 
Traiff, and Trade Enforcement, U.S. Department of the Treasury

    Mr. Chairman, on behalf of the Treasury Department and all of the 
agencies of the federal government who are working together to create 
an international trade data system I want to thank you and the members 
of the Subcommittee for giving us the opportunity to appear here today.

                            The Environment

    Let me begin by describing to you the environment in which we are 
working. The United States is the world's largest exporter and its 
largest importer. On the export side, the U.S. economy depends heavily 
on world markets to support a higher rate of growth. Although exports 
in 1998 were down slightly from the previous year, largely because of 
the Asian financial crisis, they were up by a little over 70 percent 
from 1990. About one of every ten U.S. jobs, and one of every five 
manufacturing jobs, is supported by exports.
    The U.S. economy is also heavily dependent on imports. The 
competitiveness of U.S. manufacturers and the quality of life for U.S. 
consumers depend on having access to materials and goods from around 
the world. Indicative of this, the value of imports into the United 
States in 1998 was up by about 85 percent over 1990.
    Because international trade is so important to the U.S. economy, 
the cost of government procedural requirements affecting international 
trade, and specifically information reporting requirements imposed on 
import and export transactions, is a burden on the performance of the 
economy as a whole.
    This burden is not imposed as a matter of conscious policy. Rather, 
as laws have been enacted to implement trade agreements; prevent unfair 
trade practices; protect the environment, consumers, animal and plant 
health, and endangered species; ensure highway, rail, and air safety; 
better regulate immigration; impose economic sanctions on hostile 
regimes; and prevent export of sensitive technologies to inappropriate 
destinations, new requirements for reporting have been superimposed one 
on top of another, despite efforts to limit the cumulative burden.
    Although there are no reliable cost figures for the United States 
alone, the United Nations Council on Trade and Development estimates 
that worldwide the cost of documentation requirements for international 
trade accounts for 4 to 6 percent of the cost of goods traded. In other 
words, the cost of preparing documentation is equivalent to a tax of 4 
to 6 percent on the value of goods.
    Today, separate reporting and data systems are maintained by U.S. 
federal government agencies involved in all aspects of the 
international trade process, including regulation of goods, 
transportation, and immigration. Exporters and importers deal with 
numerous paper and electronic systems, and are confronted with 
duplicative, incompatible, and non-uniform data reporting and record-
keeping requirements.
    These multiple information collection systems are not only costly 
and burdensome for both government and the trade community, they also 
limit the effectiveness of individual agencies in carrying our their 
enforcement and regulatory responsibilities at the border. Agencies 
generally do not have access to information that other agencies 
collect, or have the benefit of knowing what enforcement or regulatory 
actions other agencies have taken in response to that information. They 
act in isolation rather than in concert with each other.
    Finally, those who need access to statistical data on international 
trade, including Congressional committees that enact trade policy into 
law, must often research several potentially incompatible sources 
because the systems do not use standard data or technology.
    The International Trade Data System (ITDS) is intended to 
rationalize the federal government's collection and use of 
international trade data. ITDS is aimed at:
    (1) reducing the cost and burden of processing international trade 
transactions and transport for both government and the private trade 
community by substituting standard electronic messages for the multiple 
and redundant reporting--often on paper forms--that occurs today;
    (2) improving enforcement of and compliance with laws and 
regulations that apply at the border to carriers (for example, highway 
safety and vessel clearance), people (drivers and crews of commercial 
conveyances), and goods (several hundred laws including those 
addressing public health and safety, animal and plant health, consumer 
protection, enforcement of trade agreements, etc.); and
    (3) providing convenient access for Congress, Executive Branch 
agencies, and the public to international trade data that are more 
accurate, complete, and timely.
    The ITDS will serve many agency automated systems, including 
Customs' Automated Commercial Environment (ACE), by distributing to 
those systems information collected electronically from importers, 
exporters, carriers, and other parties to international trade. The 
information collected will consist of a standard set of data that meets 
the needs of all U.S. Government agencies.
    ITDS will also serve as a common payment point for taxes and fees 
paid to multiple government agencies, much as American Express or VISA 
provides a single billing and collection point for a variety of charges 
incurred by its customers.
    Finally, ITDS will serve as a custodian of records for information 
it collects, and as a convenient, single point of access to all Federal 
government data international trade bases for persons--who will have 
different levels of access--seeking information about U.S. 
international trade.
    The International Trade Data System (ITDS) Project Office has been 
established at the Department of the Treasury in accordance with the 
Vice President's memorandum of September 15, 1995. The need for the 
implementation of the ITDS to be managed by an inter-agency board was 
the recommendation of a government-wide task force representing fifty-
three of those agencies. The board was to be given the authority to 
``recommend and, if necessary, direct individual agencies to modify 
their processes and systems to conform with the principles for an 
integrated International Trade Data System.'' The task force report 
concludes that ``authority to make cross-agency decisions that would be 
vested in this Board is the only way possible to obtain the multi-
agency re-engineering of the international trade processes that will be 
required to make the International Trade Data System a reality.'' 
Agencies represented on the Board include Treasury, the Customs 
Service, the Food and Drug Administration, the Immigration and 
Naturalization Service, the Transportation Department, the Agriculture 
Department, the Commerce Department, the U.S. Trade Representative, and 
the U.S. International Trade Commission.

ITDS Development

    Initially, it was envisioned that there would be three principal 
tasks to construction of an ITDS: (1) creation of a standard set of 
data to satisfy the needs of all users without redundancy, (2) design 
of a single point of collection from which data would be distributed to 
all agencies requiring them, (3) and design of a single point for 
accessing all data collected by the system, regardless of where they 
are stored.
    However, as the project developed, participants have taken 
advantage of opportunities created by the project to address other 
objectives. For example, a module for data on trade in services will be 
included in the ITDS, certain processes for clearing trucks and trains 
entering the U.S. will be re-engineered to take advantage of dedicated 
short-range communications technology (transponder readers) being 
deployed by the Department of Transportation, and data definitions will 
be developed with an eye toward the possibility of future harmonization 
of U.S. trade data with data collected by our major trading partners, 
particularly the G7 countries and Mexico.
    Much of the ground work has been accomplished. With the 
participation of all the involved agencies, an effort to identify their 
international trade data requirements was completed in 1997. Those data 
requirements are being converged with harmonized data sets being 
developed by the G7 countries so that we will be closer to the vision 
of having a ``passport'' for goods that will be universally accepted 
for both export and import purposes.
    The ITDS information architecture, or design report, was completed 
in September 1998 and presented for public review and comment on the 
Internet through 
http://www.itds.treas.gov, and at a public hearing on November 5, 1998. 
Key sections of the report are the Project Summary, the Concept of 
Operations, the Project Implementation and Transition Plan, and the 
Cost/Benefit Analysis. These can be found at the above Internet 
address.

Pilot Projects

    ITDS pilots are being deployed this year at the Ambassador Bridge 
in Detroit, the Peace Bridge in Buffalo, and at the rail crossing at 
Laredo, Texas. The current plan is for the Customs Service, the 
Immigration and Naturalization Service, the Federal Highway 
Administration, and the Food and Drug Administration to be the initial 
participating federal agencies. However, in order for the pilot to 
succeed, the Customs Service must agree to process the electronic 
message received from ITDS through Customs' border cargo selectivity 
system. We are hopeful that we can complete arrangements with Customs 
in time to keep to the schedule for beginning the pilots this year.

The Way Forward

    At this time, no decision has been made to advance the ITDS beyond 
completion of the Design Report, although the project is funded at the 
level of $5.4 million in FY 1999, with a similar amount proposed in FY 
2000, in order to conduct pilots and to continue testing. If a decision 
is made to deploy the ITDS, full system functionality could be achieved 
in three years, and full deployment to all ports and all agencies could 
be achieved in a fourth year (although major ports and major users 
would be served at an earlier time). The full four-year cost for 
deploying the system would be $268 million. This cost projection 
assumes that all ports of entry will be provided with equal 
capabilities. However, alternative deployment strategies are being 
analyzed that may significantly reduce this cost estimate.
    There are a number of actions that are needed for the ITDS to 
proceed. These include providing for the long-term interagency 
management of the ITDS, removing any statutory or regulatory obstacles 
to sharing of a single collection of data among the agencies that need 
them, and working on outsourcing of operation of the system to the 
private sector under government ownership and supervision.
    Allow me again to thank you and your colleagues, Mr. Chairman, for 
your interest in the International Trade Data System Project, and for 
giving us an opportunity to appear here today. I shall be happy to 
answer any questions you may have and to provide any written material 
you may want.
    Thank you.

                                

    Chairman Crane. Thank you.
    And our next witness is Mr. Schindel.

 STATEMENT OF DENNIS S. SCHINDEL, ASSISTANT INSPECTOR GENERAL 
FOR AUDIT, OFFICE OF INSPECTOR GENERAL, U.S. DEPARTMENT OF THE 
                            TREASURY

    Mr. Schindel. Thank you, Mr. Chairman, Mr. Levin, Members 
of the Subcommittee. I am pleased to appear before you today.
    A year ago I testified before this Subcommittee on the 
results of an audit that we conducted on the impact of U.S. 
Customs Service officers pay reform amendments, otherwise known 
as COPRA. Our audit, which was completed in September 1996, 
found that, while the COPRA legislation was expected to reduce 
Customs overtime costs for inspectional services, it, in fact, 
resulted in an increase in total overtime and premium pay 
costs. In a moment, I will explain why that occurred.
    When I testified last April, this Subcommittee had a bill, 
H.R. 2262, under consideration that would have revised a number 
of provisions in COPRA which contributed to the increased costs 
in overtime and premium pay. However, H.R. 2252 was not passed 
into law and the provisions of COPRA that contributed to the 
increase are still in existence today.
    COPRA became law as part of the Omnibus Budget 
Reconciliation Act of 1993 that took effect January 1, 1994. 
COPRA created a new and exclusive overtime compensation premium 
pay system for Customs Officers performing inspectional 
services. The intent behind COPRA legislation was to more 
closely match earnings to hours worked. The House report dated 
May 25, 1993 estimated that COPRA changes would result in 
overtime savings of $12 million in fiscal years 1994 and 1995 
with total savings through fiscal year 1998 of $52 million.
    After we initiated our audit what we found, however, was 
that premium pay expenses for Customs, specifically the night 
differential pay, substantially increased. So much so, that 
instead of a significant reduction in Customs overtime costs as 
COPRA was anticipated to provide, costs increased when both 
overtime and premium pay were added up. Clearly this was not 
the expected result when COPRA was passed in 1993.
    I would like to direct your attention to the bar chart 
which graphically depicts the Customs' overtime costs before 
and after COPRA.
    If I can get a little high-tech here. Actually, I had to 
wrestle this away from my 10-year-old daughter this morning. 
They are very popular with the kids. This first bar shows the 
cost to Customs' overtime in fiscal year 1993. This was the 
last full year under the prior pay legislation commonly known 
as 1911 Act overtime. As you can see, the costs for total 
overtime were $99.2 million. Of this amount, the small amount 
there, $51,000 represents the cost of night differential 
premium pay.
    Now, in the next year, fiscal year 1995 we have up here, 
that is the first full year, first full fiscal year, under the 
new COPRA legislation. And in that year, the total overtime 
costs went up to $106.1 million and the night differential 
portion of that went to $8.9 million from $51,000.
    Now Customs has continued to experience higher costs each 
year. The remaining two bars show the costs for fiscal years 
1997 and 1998. In fiscal year 1997, total overtime pay, 
including the premium pay, was $106.8 million with $9.3 million 
attributable to night differential. In fiscal year 1998, you 
can see that the costs went up to $136.9 million with $11.9 
million attributable to night differential.
    Now let me discuss the reasons why COPRA contributed to the 
increase in Customs' overtime costs and, more specifically, the 
night differential premium pay. One of the major reasons is 
that the enactment of COPRA greatly increased the number of 
available hours in which a Customs' officer could earn night 
differential. Also, COPRA increased the night differential 
amount from 10 percent of basic pay to 15 and 20 percent, 
depending on the time of day.
    Now this next chart here will graphically depict, I hope, 
exactly how this works.
    It is a little busy, so let me walk you through it. First, 
you will need to change your orientation slightly because this 
is a 24-hour clock. So, going down the righthand side, we have 
the 12 hours of the day that run from midnight to 12 noon. And 
then going up the left side, we have the 12 hours of the day 
that run from 12 noon to midnight. Now the time period that 
qualifies for night differential premium pay is represented by 
this black band here. That covers the period from 3 p.m. to 8 
a.m. or 17 out of the 24 hours in a day. The two thin blue 
arrows here represent the two periods of that night 
differential period that qualify for the premium pay rate, 15 
percent. On the left side, 20 percent. On the right side. So, 
so far we see, then, that COPRA has established a night 
differential period that covers all but 7 hours of the day and 
2 higher premium pay amounts, 15 and 20 percent.
    Now the night differential provision in COPRA legislation 
also provides that if the majority of a shift falls within a 
night differential period, then the entire shift qualifies for 
night differential premium. Now, to illustrate the impact of 
this, we have three sample shifts, which are represented in the 
color bands in the inner circle here. In these three shifts, 
the entire shift would qualify for night differential. For 
example, looking at the blue band, a Customs' officer can earn 
a 15 percent night differential for the entire 8 hours of a 
shift that starts at 12 noon and ends at 8 p.m. In addition, 
that officer can earn a 20 percent night differential for an 
entire 9-hour shift that starts at 3 a.m. and continues to 12 
noon, as represented by this green band here. Likewise, in the 
red band, we have a shift that runs from 8 p.m. to 4 a.m., 
which would also qualify for 8 hours of night differential pay 
at the 20 percent rate.
    What this all means is that, essentially, all 24 hours of 
the day can qualify for night differential, premium pay and a 
tour of duty, such as 12 noon to 8 p.m., which most of us would 
consider primarily day-time hours, qualifies for 8 hours of 
night differential, premium pay.
    Another factor increasing Customs night differential 
expenses was an arbitration ruling which was issued toward the 
conclusion of our audit. On December 9, 1995, a panel 
arbitrator ruled in favor of the National Treasury Employees 
Union which had protested Customs' refusal to pay night 
differential to Customs' officers who were on leave for periods 
of 8 hours or longer. The ruling essentially required Customs 
to pay officers COPRA night differential even when they are on 
leave if those leave days would normally qualify for night 
differential had the officers been at work. This created a 
situation where officers received night differential premium 
pay even if they were on vacation.
    The bottom line is that the overall cost to Customs for 
overtime has shown an increase rather than a decrease after the 
passage of COPRA. It has steadily increased every year since 
1995. The night differential portion of that total cost has 
steadily increased from $51,000 in fiscal year 1993 to now 
$11.9 million in fiscal year 1998. That substantial increase 
will remain a part of Customs' total overtime costs and 
continue its upward trend unless the provisions of COPRA that I 
have outlined in this testimony are eliminated or modified 
through new legislation.
    Mr. Chairman, this concludes my remarks. I will be happy to 
answer any questions you or others may have.
    [The prepared statement follows:]

Statement of Dennis S. Schindel, Assistant Inspector General for Audit, 
Office of Inspector General, U.S. Department of the Treasury

    Mr. Chairman, members of the Subcommittee, I am pleased to appear 
before you today. Last April, I testified on the results of an audit we 
conducted on the impact of the United States Customs Service Officers 
Pay Reform Amendments (COPRA). Our audit which was completed in 
September 1996, found that while the COPRA legislation was expected to 
reduce the United States Customs Service (Customs) overtime costs for 
inspectional services, it in fact resulted in an increase to total 
overtime and premium pay costs.
    When I testified last April this Committee had a bill H.R. 2262, 
under consideration that would have revised a number of provisions in 
COPRA that contributed to the increased costs of overtime and premium 
pay. However, H.R. 2262 was not passed into law and the provisions of 
COPRA that contributed to these increases are still in existence today.
    COPRA became law as part of the Omnibus Budget Reconciliation Act 
of 1993. It took effect January 1, 1994. COPRA created a new and 
exclusive overtime compensation and premium pay system for Customs 
officers performing inspectional services. The intent of the COPRA 
legislation was to more closely match earnings to hours worked. House 
Report 103-111, dated May 25, 1993, estimated that COPRA changes would 
result in overtime savings of $12 million in both Fiscal Year (FY) 1994 
and 1995 with total savings through FY 1998 of $52 million.
    After we initiated our audit, we found that premium pay expenses 
for Customs, specifically, the night work differential, substantially 
increased under COPRA. Instead of the significant reduction in Customs 
overtime costs that COPRA was anticipated to provide, costs increased 
due to the use of both overtime and premium pay. Clearly, this was not 
the expected result when COPRA was passed in 1993.
    According to data available from Customs budget account summaries, 
we determined that in FY 1993, the last full year under the prior pay 
legislation, commonly known as ``1911 Act overtime,'' Customs' total 
overtime costs including shift differentials were $99.2 million. Of 
this, $51,000 was due to night differentials. Looking at FY 1995, the 
first full year under COPRA, we found that total overtime costs 
increased to approximately $106.1 million. Of this, $8.9 million was 
specifically attributable to night shift differentials. Therefore, 
COPRA substantially increased Customs costs for night differential pay 
from $51,000 in 1993 to $8.9 million in 1995.
    Customs has continued to experience higher costs each year. In FY 
1997 total overtime pay, including premium pay was $126.8 million of 
which $9.3 million was due to night differentials. In FY 1998 the costs 
were $136.9 million and $11.9 million respectively.
    One of the major reasons for the increase in Customs premium pay 
costs, and more specifically the night differential is that the 
enactment of COPRA greatly increased the number of available hours in 
which a Customs Officer could earn night differential. Also, COPRA 
increased the night differential amount from 10 percent of basic pay to 
15 percent or 20 percent depending on the time of day.
    Specifically, the time period that qualifies for night differential 
premium pay extends from 3 p.m. to 8 a.m. or 17 out of the 24 hours in 
the day. The period from 3 p.m. to 12 a.m. qualifies for the 15 percent 
differential and the period from 11 p.m. to 8 a.m. qualifies for the 20 
percent differential. The night differential provision in the COPRA 
legislation also provides that if the majority of a shift falls within 
the night differential period, then the entire shift qualifies for the 
night differential premium. For example, a Customs officer can earn a 
15 percent night differential for the entire 8 hours of a shift that 
starts at 12 noon and ends at 8 p.m. In addition, that officer can earn 
a 20 percent night differential for an entire 9 hour shift that starts 
at 3 a.m. and continues through 12 noon. Likewise, a shift that runs 
from 8:00 p.m. until 4:00 a.m. would also qualify for night 
differential pay, at the 20 percent rate. Essentially, all 24 hours of 
the day can qualify for night differential premium pay and a tour of 
duty such as 12 noon to 8 p.m., which most of us would consider 
primarily daytime hours, qualifies for 8 hours of night differential 
premium pay.
    Another factor increasing Customs night differential expenses was 
an arbitration ruling which was issued toward the conclusion of our 
audit. On December 9, 1995, a panel arbitrator ruled in favor of the 
National Treasury Employees Union which protested Customs refusal to 
pay night differential to Customs officers who were on leave for 
periods of 8 hours or longer. The ruling required Customs to pay 
officers COPRA night differential even when they are on leave, if those 
leave days would normally qualify for night differential had the 
officers been at work. This created a situation where officers received 
night differential premium pay even if they were on vacation. While 
this situation was addressed temporarily in FY 1997 and again in FY 
1998 through language in the Customs appropriation, a permanent 
correction is needed through a revision to the COPRA pay legislation.
    In summary, the overall cost to Customs for overtime has shown an 
increase rather than a decrease after the passage of COPRA and has 
steadily increased every year since 1995.
    The night differential portion of that total cost has steadily 
increased from $51,000 in FY 1993 to $11.9 million in FY 1998. That 
substantial increase will remain a part of Customs' total overtime 
costs and continue its upward trend unless the provisions of COPRA 
outlined in this testimony are eliminated or modified through new 
legislation.

                                

    Chairman Crane. Thank you, Mr. Schindel.
    Mr. Rabkin.

  STATEMENT OF NORMAN J. RABKIN, DIRECTOR, ADMINISTRATION OF 
   JUSTICE ISSUES, GENERAL GOVERNMENT DIVISION, U.S. GENERAL 
                       ACCOUNTING OFFICE

    Mr. Rabkin. Thank you, Mr. Chairman, Mr. Levin, Members of 
the Subcommittee. I am pleased to be here today to discuss the 
work that GAO has done, mostly for this Subcommittee, 
addressing the Customs Service's effort to interdict drugs, to 
combat corruption, and to comply with the Government 
Performance and Results Act. My testimony on these subjects is 
based on reports that we have issued since 1997.
    You also asked me to discuss the basis for the $163 million 
estimate of revenues to be produced by a fee to be charged to 
nongovernment organizations for the use of Customs automation 
systems. My statement contains a thorough discussion of these 
issues and it has references to our issued reports for more 
details. I will just summarize the key points for you.
    First, on interdiction of drugs. We reported on four 
different areas. The first relates to Customs' efforts to 
interdict drugs being smuggled through the ports while it moves 
legitimate traffic through the ports as quickly as possible. We 
reported on several ways Customs tries to identify and 
segregate low-risk traffic, that is, repeat shipments from 
known manufacturers or known truckers or with known importers. 
Then Customs tries to devote most of its inspectional activity 
to higher risk traffic. We pointed out some of the problems 
Customs was having with those programs and made recommendations 
to improve them.
    Second, in the area of drug interdiction, we reported on 
the Custom's aviation program. The program has three 
interdiction-related missions. The main point of our report was 
that, over the past 3 years, Customs has spent about half of 
its aviation resources helping on investigations; about 25 
percent conducting surveillance operations in Central and South 
America; and the remaining 25 percent on interdiction 
activities along the Southwest border.
    Third, we are issuing a report today to the Senate 
Appropriations Committee on the status of field testing of a 
technology designed to help Customs determine whether specific 
illegal drugs are in sea or truck containers. Although Customs 
has not been very supportive of this new technology, it is 
working with the Pentagon and the Federal Aviation 
Administration to support further testing, which is scheduled 
to begin later this year.
    And, finally, in the area of drug interdiction, we reported 
last year on the missions and funding of Federal agencies that 
collect or produce drug intelligence. Customs has a sizable 
intelligence function and focuses on drug smuggling 
individuals, organizations, transportation networks, and 
patterns.
    Next, on the issue of drug-related corruption, we recently 
reported that Customs and the Immigration and Naturalization 
Service could be doing more to prevent corruption. Our work 
focused on drug-related corruption along the Southwest border. 
Although there have been only a relatively few cases of 
documented drug-related corruption, we found that Customs 
wasn't conducting reinvestigations of key personnel as often as 
it had planned. We also recommended that Customs follow up on 
cases where employees are convicted of corruption, determine 
how it happened, and then make the appropriate changes so it 
wouldn't happen again.
    The next area I would like to comment on is strategic 
planning and resource allocation. Customs' strategic planning 
generally meets the requirements and intents of the Results 
Act. It covers the major missions and has result-oriented 
goals. Customs annual performance plans should also be helpful 
to decisionmakers such as this committee in reviewing how well 
Customs has been achieving its goals and setting priorities for 
coming years.
    Regarding the allocation of resources, specifically 
personnel, among Customs' 301 ports, as Commissioner Kelly 
mentioned this morning, the agency has begun to develop a more 
rigorous data based system, as we had recommended in reports 
issued last year.
    Finally, you asked us about the proposed automation fee, 
user fee for the automation systems. The President's budget 
proposes this fee and it shows a $163 million revenue that is 
to be generated by it. The collection of the fee is tentatively 
scheduled to start in fiscal year 2000 and continue for at 
least the following 4 years.
    According to Treasury and OMB and Customs officials, the 
estimate was based on the following three assumptions. First, 
Customs will develop and implement ACE over a 4-year period at 
a cost of about $1 billion. The second assumption was the 
Treasury would develop and implement the new international 
trade data system over the same period at a cost of about $250 
million. And the third assumption was that the Federal 
Government and the trade community would share these costs 
equally. Therefore, the first year's costs, which, in this 
case, would be a quarter of the total amount, about $325 
million, would be shared equally, $162.5 million each, $163 
million by the trade community to be represented by the user 
fee and by the Government.
    Mr. Chairman, this completes my summary and I will be glad 
to answer your questions.
    [The prepared statement follows:]

Statement of Norman J. Rabkin, Director, Administration of Justice 
Issues, General Government Division, U.S. General Accounting Office

           U.S. Customs Service: Budget Authorization Issues

    Mr. Chairman and Members of the Subcommittee: I am pleased to be 
here today at this Customs oversight hearing to discuss work we have 
done, mostly for this Subcommittee, addressing Customs' efforts to 
interdict drugs, combat corruption, and comply with the Results Act.\1\ 
For the most part, our testimony is based on products we have issued on 
each of these subjects since 1997. You also asked us to discuss the 
basis for the $163 million access fee to be charged to nongovernment 
organizations for the use of Customs' automation systems as included in 
the President's fiscal year 2000 budget. Our discussion of the user fee 
is based on interviews with the Office of Management and Budget (OMB), 
the Department of the Treasury, and Customs officials and a review of 
sections of the President's fiscal year 2000 budget.
---------------------------------------------------------------------------
    \1\ Government Performance and Results Act of 1993, P.L. 103-62.
---------------------------------------------------------------------------
    Created in 1789, the U.S. Customs Service is one of the federal 
government's oldest agencies. Customs is responsible for collecting 
revenue from imports and enforcing customs and related laws. Customs 
collects revenues of about $22 billion annually while processing an 
estimated 15 million import entries and 450 million people who enter 
the country. A major goal of Customs is to prevent the smuggling of 
drugs into the country by creating an effective drug interdiction, 
intelligence, and investigation capability to disrupt and dismantle 
smuggling organizations. Customs' workforce totals almost 20,000 
employees at its headquarters, 20 Customs Management Centers, 20 
Special Agent-in-Charge (SAC) offices, and 301 ports of entry around 
the country.

                           Drug Interdiction

    Our work on Customs' efforts to interdict drugs has focused on four 
distinct areas: (1) internal controls over Customs' low-risk cargo 
entry programs; (2) the missions, resources, and performance measures 
for Customs' aviation program; (3) the development of a specific 
technology for detecting drugs; and (4) Customs drug intelligence 
capabilities.

Low-Risk Cargo Entry Programs

    In July 1998, at the request of Senator Dianne Feinstein, 
we reported on Customs' drug-enforcement operations along the 
Southwest border of the United States.\2\ Our review focused on 
low-risk, cargo entry programs in use at three ports--Otay 
Mesa, California; Laredo, Texas; and Nogales, Arizona. To 
balance the facilitation of trade through ports and the 
interdiction of illegal drugs being smuggled into the United 
States, Customs initiated and encouraged its ports to use 
several programs to identify and separate low-risk shipments 
from those with apparently higher smuggling risk. The Line 
Release Program was designed to expedite cargo shipments that 
Customs determined to be repetitive, high volume, and low risk 
for narcotics smuggling. In 1996, Customs implemented the Land 
Border Carrier Initiative Program, which required that the Line 
Release shipments across the Southwest border be transported by 
Customs-approved carriers and driven by Customs-approved 
drivers. After the Carrier Initiative Program was implemented, 
the number of Southwest Border Line Release shipments dropped 
significantly. We identified internal control weaknesses in one 
or more of the processes used at each of the three ports we 
visited to screen Line Release applicants for entry into the 
program. These weaknesses included (1) an absence of specific 
criteria for determining applicant eligibility at two of the 
three ports, (2) incomplete documentation of the screening and 
review of applicants at two of the three ports, and (3) lack of 
documentation of supervisory review and approval of decisions. 
During our review, Customs representatives from northern and 
southern land-border cargo ports approved draft Line Release 
volume and compliance eligibility criteria for program 
applicants and draft recertification standards for program 
participants.
---------------------------------------------------------------------------
    \2\ Customs Service Drug Interdiction: Internal Control Weaknesses 
and Other Concerns With Low-Risk Cargo Entry Programs (GAO/GGD-98-175, 
July 31, 1998).
---------------------------------------------------------------------------
    The Three Tier Targeting Program--a method of targeting 
high-risk shipments for narcotics inspection--was used at the 
three Southwest border ports that we visited. According to 
officials at the three ports, the Three Tier program had two 
operational problems that contributed to their loss of 
confidence in the program's ability to distinguish high-from 
low-risk shipments. First, there was little information 
available in any database for researching foreign 
manufacturers. Second, local officials doubted the reliability 
of the designations. They cited examples of narcotics seizures 
from shipments designated as ``low-risk'' and the lack of a 
significant number of seizures from shipments designated as 
``high-risk.'' Customs suspended this program until more 
reliable information is developed for classifying low-risk 
importations.
    One low-risk entry program--the Automated Targeting 
System--was being pilot tested at Laredo. It was designed to 
enable port officials to identify and direct inspectional 
attention to high-risk shipments. The Automated Targeting 
System is designed to assess shipment entry information for 
known smuggling indicators and thus enable inspectors to target 
high-risk shipments more efficiently. Customs is evaluating the 
Automated Targeting System for expansion to other land-border 
cargo ports.
Aviation Program

    In September 1998, we reported on Customs' aviation program 
missions, resources, and performance measures.\3\ Since the 
establishment of the Customs Aviation Program in 1969, its basic 
mandate to use air assets to counter the drug smuggling threat has not 
changed. Originally, the program had two principle missions:
---------------------------------------------------------------------------
    \3\ Customs Service: Aviation Program Missions, Resources, and 
Performance Measures (GAO/GGD-98-186, Sept. 9, 1998).
---------------------------------------------------------------------------
     border interdiction of drugs being smuggled by plane into 
the United States and
     law enforcement support to other Customs offices as well 
as other federal, state, and local law enforcement agencies.
    In 1993, the Administration instituted a new policy to control 
drugs coming from South and Central America. Because Customs aircraft 
were to be used to help carry out this policy, foreign counterdrug 
operations became a third principal mission for the aviation program. 
Since then, the program has devoted about 25 percent of its resources 
to the border interdiction mission, 25 percent to foreign counterdrug 
operations, and 50 percent to other law enforcement support.
    Customs Aviation Program funding decreased from about $195 million 
in fiscal year 1992, to about $135 million in fiscal year 1997--that 
is, about 31 percent in constant or inflation-adjusted dollars. While 
available funds decreased, operations and maintenance costs per 
aircraft flight hour increased. Customs Aviation Program officials said 
that this increase in costs was one of the reasons they were flying 
fewer hours each year. From fiscal year 1993 to fiscal year 1997, the 
total number of flight hours for all missions decreased by over one-
third, from about 45,000 hours to about 29,000 hours.
    The size of Customs' fleet dropped in fiscal year 1994, when 
Customs took 19 surveillance aircraft out of service because of funding 
reductions. The fleet has remained at about 115 since then.\4\ The 
number of Customs Aviation Program onboard personnel dropped steadily, 
from a high of 956 in fiscal year 1992 to 745 by the end of fiscal year 
1997.\5\
---------------------------------------------------------------------------
    \4\ Customs' fleet will increase because additional aircraft were 
funded in the fiscal year 1999 Omnibus Consolidated and Emergency 
Supplemental Appropriations Act, P.L. 105-277, 112 Stat 2681-553, 2681-
583.
    \5\ Staffing for the Aviation program is expected to grow to 817 in 
fiscal year 2000, according to Customs' latest budget justification.
---------------------------------------------------------------------------
    Customs has been using traditional law enforcement measures to 
evaluate the aviation program (e.g., number of seizures, weight of 
drugs seized, number of arrests). These measures, however, are used to 
track activity, not measure results or effectiveness. Until 1997, 
Customs also used an air threat index as an indicator of its 
effectiveness in detecting illegal air traffic.\6\ However, Customs has 
discontinued use of this indicator, as well as selected other 
performance measures, because Customs determined that they were not 
good measures of results and effectiveness. Having recognized that 
these measures were not providing adequate insights into whether the 
program was producing desired results, Customs says it is developing 
new performance measures in order to better measure results. However, 
its budget submission for fiscal year 2000 contained no new performance 
measures.
---------------------------------------------------------------------------
    \6\ The air threat index used various indicators, such as the 
number of stolen and/or seized aircraft, to determine the potential 
threat of air drug smuggling.

---------------------------------------------------------------------------
Pulsed Fast Neutron Analysis Inspection System

    The pulsed fast neutron analysis (PFNA) inspection system is 
designed to directly and automatically detect and measure the presence 
of specific materials (e.g., cocaine) by exposing their constituent 
chemical elements to short bursts of subatomic particles called 
neutrons. Customs and other federal agencies are considering whether to 
continue to invest in the development and fielding of this technology.
    The Chairman and the Ranking Minority Member of the Subcommittee on 
Treasury and General Government, Senate Committee on Appropriations, 
asked us to provide information about (1) the status of plans for field 
testing a PFNA system and (2) federal agency and vendor views on the 
operational viability of such a system. We are issuing our report on 
that work today.\7\
---------------------------------------------------------------------------
    \7\ Terrorism and Drug Trafficking: Testing Status And Views on 
Operational Viability of Pulsed Fast Neutron Analysis Technology (GAO/
GGD-99-54, Apr. 13, 1999).
---------------------------------------------------------------------------
    Customs, the Department of Defense (DOD), the Federal Aviation 
Administration (FAA), and Ancore Corporation--the inspection system 
inventor--recently began planning to field test PFNA. Because they are 
in the early stage of planning, they do not expect the actual field 
test to begin until mid to late 1999 at the earliest. Generally 
speaking, agency and vendor officials estimated that a field test 
covering Customs' and DOD's requirements will cost at least $5 million 
and that the cost could reach $8 million if FAA's requirements are 
included in the joint test. Customs officials told us that they are 
working closely with the appropriate applicable congressional 
committees and subcommittees to decide whether Customs can help fund 
the field test, particularly given the no-federal-cost language of 
Senate Report 105-251.\8\ In general, a complete field test would 
include (1) preparing a test site and constructing an appropriate 
facility; (2) making any needed modifications to the only existing PFNA 
system and its components; \9\ (3) disassembling, shipping, and 
reassembling the system at the test site; and (4) conducting an 
operational test for about 4 months. According to agency and Ancore 
officials, the test site candidates are two seaports in California 
(Long Beach and Oakland) and two land ports in El Paso, Texas.
---------------------------------------------------------------------------
    \8\ Senate Report 105-251 (July 1998) on the fiscal year 1999 
Treasury and General Government Appropriations bill directs the 
Commissioner of Customs to enter into negotiations with the private 
sector to conduct a field test of the PFNA technology at no cost to the 
federal government.
    \9\ The existing (prototype) PFNA system is located at the vendor's 
plant in Santa Clara, CA.
---------------------------------------------------------------------------
    Federal agency and vendor views on the operational viability of 
PFNA vary. While Customs, DOD, and FAA officials acknowledge that 
laboratory testing has proven the technical feasibility of PFNA, they 
told us that the current Ancore inspection system would not meet their 
operational requirements. Among their other concerns, Customs, DOD, and 
FAA officials said that a PFNA system not only is too expensive (about 
$10 million to acquire per system), but also is too large for 
operational use in most ports of entry or other sites. Accordingly, 
these agencies question the value of further testing. Ancore disputes 
these arguments, believes it can produce an operationally cost-
effective system, and is proposing that a PFNA system be tested at a 
port of entry. The Office of National Drug Control Policy has 
characterized neutron interrogation as an ``emerging'' or future 
technology that has shown promise in laboratory testing and thus 
warrants field testing to provide a more informed basis for deciding 
whether PFNA has operational merit.

Federal Counterdrug Intelligence Coordination Efforts

    At the request of the Subcommittee on National Security, 
International Affairs, and Criminal Justice, House Committee on 
Government Reform and Oversight,\10\ in June 1998 we identified the 
organizations that collect and/or produce counterdrug intelligence, the 
role of these organizations, the federal funding they receive, and the 
number of personnel that support this function.\11\ We noted that more 
than 20 federal or federally funded organizations, including Customs, 
spread across 5 cabinet-level departments and 2 cabinet-level 
organizations, have a principal role in collecting or producing 
counterdrug intelligence. Together, these organizations collect 
domestic and foreign counterdrug intelligence information using human, 
electronic, photographic, and other technical means.
---------------------------------------------------------------------------
    \10\ This is now the Subcommittee on National Security, Veterans' 
Affairs, and International Relations of the House Committee on 
Government Reform.
    \11\ Drug Control: An Overview of U.S. Counterdrug Intelligence 
Activities (GAO/NSIAD-98-142, June 25, 1998).
---------------------------------------------------------------------------
    Unclassified information reported to us by counterdrug intelligence 
organizations shows that over $295 million was spent for counterdrug 
intelligence activities during fiscal year 1997 and that more than 
1,400 federal personnel were engaged in these activities. The 
Departments of Justice, the Treasury, and Defense accounted for over 90 
percent of the money spent and personnel involved.
    Among its many missions, Customs is the lead agency for 
interdicting drugs being smuggled into the United States and its 
territories by land, sea, or air. Customs' primary counterdrug 
intelligence mission is to support its own drug enforcement elements 
(i.e., inspectors and investigators) in their interdiction and 
investigation efforts. Customs is responsible for producing tactical, 
operational, and strategic intelligence concerning drug-smuggling 
individuals, organizations, transportation networks, and patterns and 
trends. In addition to providing these products to its own drug 
enforcement elements, Customs is to provide this information to other 
agencies with drug enforcement or intelligence responsibilities. 
Customs is also responsible for analyzing the intelligence community's 
reports and integrating them with its own intelligence. Customs' in-
house collection capability is heavily weighted toward human 
intelligence, which comes largely from inspectors and investigators who 
obtain information during their normal interdiction and investigation 
activities.

                               Corruption

    On March 30, 1999, we issued a report to the Chairman of the Senate 
Caucus on International Narcotics Control on the efforts of Customs and 
the Immigration and Naturalization Service to address employee 
corruption on the Southwest border.\12\ We said that both agencies 
could do more to prevent drug-related employee corruption. The 
following reflects our findings and recommendations relative to Customs 
and Customs' response to our report.
---------------------------------------------------------------------------
    \12\ Drug Control: INS and Customs Can Do More to Prevent Drug-
Related Employee Corruption (GAO/GGD-99-31, Mar. 30, 1999).
---------------------------------------------------------------------------
    Customs has policies and procedures designed to ensure the 
integrity of its employees. These policies and procedures consist 
mainly of mandatory background investigations for new staff and 5-year 
reinvestigations of employees, as well as basic integrity training. As 
required, Customs generally had completed background investigations for 
new hires by the end of their first year on the job. However, 
reinvestigations were typically overdue, in some instances by as many 
as 3 years. Customs officials said that the basic training that new 
employees are to receive includes integrity training. Agency records 
for 88 of 100 randomly selected Customs employees on the Southwest 
border showed that they received several hours of integrity training as 
part of their basic training. According to Customs officials, the 
remaining employees likely received basic training, but it was not 
documented in their records.
    However, Customs was not taking full advantage of these policies 
and procedures, as well as the lessons it should have learned from 
closed corruption cases, to address fully the increased threat of 
employee corruption on the Southwest border. Some Customs employees on 
the Southwest border have engaged in a variety of illegal drug-related 
activities, including waving drug loads through ports of entry, 
coordinating the movement of drugs across the Southwest border, 
transporting drugs past Border Patrol checkpoints, selling drugs, and 
disclosing drug intelligence information. Customs' Office of Internal 
Affairs is required to formally report internal control weaknesses 
identified from closed corruption cases, but has not done so. Our 
review of nine cases involving Customs employees assigned to the 
Southwest border who were convicted of drug-related crimes between 
fiscal years 1992 and 1997, revealed internal control weaknesses that 
were not formally reported and/or corrected.\13\ These weaknesses 
included instances where:
---------------------------------------------------------------------------
    \13\ If employees entered guilty pleas, we considered them to have 
been convicted of the crime.
---------------------------------------------------------------------------
     drug smugglers chose the inspection lane at a port of 
entry,
     employees did not recuse themselves from inspecting 
individuals with whom they had close personal relationships, and
     employees disclosed drug intelligence information.
    Also, Customs had not formally evaluated its integrity procedures 
to determine their effectiveness. For example, we determined that 
financial information required for background investigations and 
reinvestigations was not fully reviewed.\14\
---------------------------------------------------------------------------
    \14\ The Department of the Treasury's Office of Professional 
Responsibility published a report on corruption with findings that are 
consistent with ours. See An Assessment of Vulnerabilities to 
Corruption and Effectiveness of the Office of Internal Affairs, U.S. 
Customs Service (Feb. 1999).
---------------------------------------------------------------------------
    We recommended that Customs:
     evaluate the effectiveness of integrity assurance efforts, 
including training, background investigations, and reinvestigations;
     comply with policies that require employment 
reinvestigations to be completed when they are due;
     document that policies and procedures were reviewed to 
identify internal control weaknesses in cases where an employee is 
determined to have engaged in drug-related criminal activities;
     strengthen internal controls at Southwest border ports of 
entry; and
     fully review financial disclosure statements to identify 
financial issues, such as cases in which employees appear to be living 
beyond their means.
    Customs generally concurred with our recommendations and indicated 
that it is taking steps to implement them. However, Customs requested 
that we reconsider our recommendation that it fully review the 
financial disclosure statements provided by employees as part of the 
background and reinvestigation process. Customs indicated that 
implementing this recommendation may violate the provisions of the 
Computer Matching Act.\15\ Our recommendation expects Customs to make a 
more thorough examination of the financial information it collects to 
determine whether employees appear to be living beyond their means. We 
leave it to Customs' discretion to determine the type of examination to 
be performed. Since implementing the recommendation does not require 
electronically matching financial disclosure information with other 
data, the Computer Matching Act would not apply.
---------------------------------------------------------------------------
    \15\ The Computer Matching and Privacy Protection Act of 1988, P.L. 
100-503, generally requires that agencies engaging in computer matching 
must do so pursuant to written matching agreements that state such 
things as the purpose and legal authority of the match, the 
justification for the matching program, its anticipated results, a 
description of the records to be matched, as well as other information 
on the program.
---------------------------------------------------------------------------

                           Strategic Planning

    In the past 18 months, we have reported on Customs' compliance with 
provisions of the Government Performance and Results Act. We have also 
reported on how it has determined its need for inspectors and how it 
has allocated inspectional positions to ports around the country.

Performance Planning

    Under the Results Act, executive agencies are to develop 
strategic plans in which they, among other things, define their 
missions, establish results-oriented goals, and identify 
strategies they plan to use to achieve those goals. In 
addition, agencies are to submit annual performance plans 
covering the program activities set out in the agencies' 
budgets (which began with plans for fiscal year 1999); and the 
plans are to describe the results the agencies expect to 
achieve with the requested resources and indicate the progress 
the agency expects to make during the year in achieving its 
strategic goals.
    The strategic plan developed by the Customs Service 
addressed the six requirements of the Results Act. Concerning 
the elements required, the mission statement was results 
oriented and covered Customs' principal statutory mission--
ensuring that all goods and persons entering and exiting the 
United States do so in compliance with all U.S. laws and 
regulations. The plan's goals and objectives covered Customs' 
major functions--processing cargo and passengers entering and 
cargo leaving the United States. The plan discussed the 
strategies by which Customs hopes to achieve its goals. The 
strategic plan discussed, in very general terms, how it related 
to annual performance plans. The plan discussed some key 
factors, external to Customs and beyond its control, that could 
significantly affect achievement of the strategic goals, such 
as the level of cooperation of other countries in reducing the 
supply of narcotics. Customs' strategic plan also contained a 
listing of program evaluations used to prepare the plan and 
provided a schedule of evaluations to be conducted in each of 
the functional areas.
    In addition to the required elements, Customs' plan 
discussed the management challenges it was facing in carrying 
out its core functions, including information and technology, 
finance, and human resources management. However, the plan did 
not adequately recognize Customs' need to improve:
     financial management and internal control systems,
     controls over seized assets,
     plans to alleviate Year 2000 problems,\16\ and
---------------------------------------------------------------------------
    \16\ Customs has established effective Year 2000 program management 
controls, including structures and processes for Year 2000 testing, 
contingency planning, and Year 2000 status reporting. See Year 2000 
Computing Crisis: Customs Has Established Effective Year 2000 Program 
Controls (GAO/AIMD-99-37, Mar. 29, 1999).
---------------------------------------------------------------------------
     plans to improve computer security.\17\
---------------------------------------------------------------------------
    \17\ See Customs Service: Comments on Strategic Plan and Resource 
Allocation Process (GAO/T-GGD-98-15, Oct. 16, 1997) and Results Act: 
Observations on Treasury's Fiscal Year 1999 Annual Performance Plan 
(GAO/GGD-98-149, June 30, 1998).
---------------------------------------------------------------------------
    We reported that these weaknesses could affect the 
reliability of Customs' performance data.
    Further, our initial review of Customs' fiscal year 2000 
performance plan showed that it is substantially unchanged in 
format from the one presented for 1999. Although the plan is a 
very useful document for decisionmakers, it still does not 
recognize Customs' need to improve its internal control 
systems, control over seized assets, or plans to improve 
computer security.

Resource Allocation

    Regarding Customs' resource allocation process, in April 1998 we 
reported on selected aspects of the Customs Service's process for 
determining its need for inspectional personnel--such as inspectors and 
canine enforcement officers--for its commercial cargo or land and sea 
passengers at all of its 301 ports.\18\
---------------------------------------------------------------------------
    \18\ Customs Service: Process for Estimating and Allocating 
Inspectional Personnel (GAO/GGD-98-107, Apr. 30, 1998); Customs 
Service: Inspectional Personnel and Workloads (GAO/GGD-98-170, Aug. 14, 
1998); and Customs Service: Inspectional Personnel and Workloads (GAO/
T-GGD-98-195, Aug. 14, 1998).
---------------------------------------------------------------------------
    Customs officials were not aware of any formal agencywide efforts 
prior to 1995 to determine the need for additional cargo or passenger 
inspectional personnel for its 301 ports. However, in preparation for 
its fiscal year 1997 budget request and a new drug enforcement 
operation called Hard Line,\19\ Customs conducted a formal needs 
assessment. The needs assessment considered (1) fully staffing all 
inspectional booths and (2) balancing enforcement efforts with the need 
to move complying cargo and passengers quickly through the ports. 
Customs conducted two subsequent assessments for fiscal years 1998 and 
1999. These assessments considered the number and location of drug 
seizures and the perceived threat of drug smuggling, including the use 
of rail cars to smuggle drugs. However, all these assessments were
---------------------------------------------------------------------------
    \19\ Operation Hard Line was Customs' effort to address border 
violence and drug smuggling through intensified inspections, improved 
facilities, and advances in technology.
---------------------------------------------------------------------------
     focused exclusively on the need for additional personnel 
to implement Hard Line and similar initiatives,
     limited to land ports along the southwest border and 
certain sea and air ports considered to be at risk from drug smuggling,
     conducted each year using generally different assessment 
factors, and
     conducted with varying degrees of involvement by Customs' 
headquarters and field units.
    We concluded that these limitations could prevent Customs from 
accurately estimating the need for inspectional personnel and then 
allocating them to ports. We further concluded that, for Customs to 
implement the Results Act successfully, it had to determine its needs 
for inspectional personnel for all of its operations and ensure that 
available personnel are allocated where they are needed most.
    We recommended that Customs establish an inspectional personnel 
needs assessment and allocation process, and it is in the process of 
responding to that April 1998 recommendation. Customs awarded a 
contract for the development of a resource allocation model. Customs 
officials told us that the model was delivered in March 1999 and that 
they are in the early stages of deciding how to use the model and 
implement a formal needs assessment system.

                  Proposed Automated Systems User Fee

    Customs plans to spend more than $1 billion over the next few years 
to modernize its systems environment for certain core missions, 
including facilitating international trade, enforcing laws governing 
the flow of goods across the borders, and assessing and collecting 
about $22 billion annually on imported merchandise. To pay for the 
development and implementation of new automated systems, the 
President's budget for fiscal year 2000 proposes a Customs automation 
systems access fee to be charged to nongovernment organizations using 
the system--generally, importers or their brokers. As currently 
proposed by the administration, the fee will amount to $1.80 per 1,000 
bytes of information processed by Customs for commercial users and 
should generate an estimated $163 million in revenue per year. 
Collection of this fee is tentatively scheduled to start in fiscal year 
2000 and to continue for at least the following 4 or 5 years.
    You asked us to discuss the basis for the $163 million estimate. 
According to Treasury officials, the estimate is based on the following 
three assumptions:
     Customs will develop and implement the Automated 
Commercial Environment (ACE) over a 4-year period (from fiscal year 
2001 to fiscal year 2004) at a total cost of over $1 billion.\20\
---------------------------------------------------------------------------
    \20\ In 1997, Customs developed a $1.05 billion estimate to 
develop, operate, and maintain ACE over the 15-year period from 1994 to 
2008, and it is still Customs' current official life cycle cost 
estimate.
---------------------------------------------------------------------------
     Treasury will develop and implement its new International 
Trade Data System (ITDS) over the same period at a cost of about $256 
million.
     The federal government and the trade community will share 
the cost of these systems. Therefore, the $325 million annual cost 
($1.3 billion/4 years, the period to develop and implement the two 
systems) would be split--$162.5 million each.
    In addition to the $163 million generated by the user fee, 
additional funds would be needed from other sources, including direct 
appropriations, in each of the four fiscal years beginning in 2001. OMB 
and Treasury officials told us that additional appropriated funds 
already in the budget base will be directed to the development and 
implementation of the systems. These officials also said that current 
estimates are preliminary and are likely to change when a contract to 
develop the systems is awarded.
    Customs projected that it will process about 90.5 billion bytes of 
data annually for commercial users of its system. Dividing the $163 
million annual cost proposed to be borne by the trade community by the 
expected volume yields a charge of $1.80 per 1,000 bytes of 
information.
    Mr. Chairman, this completes my statement. I would be pleased to 
answer any questions.

                                

    Chairman Crane. Thank you, Mr. Rabkin.
    And, finally, Mr. Hite.

      STATEMENT OF RANDOLPH C. HITE, ASSOCIATE DIRECTOR, 
GOVERNMENTWIDE AND DEFENSE INFORMATION SYSTEMS, ACCOUNTING AND 
INFORMATION MANAGEMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Hite. Chairman Crane, Mr. Levin, thank you for inviting 
me to participate in today's hearing. My testimony will focus 
on Customs' management of ACE is based on a recent report in 
which we identified a number of management and technical 
weaknesses facing Customs on ACE that jeopardize the successful 
delivery of needed system capabilities on time and within 
budget.
    Mr. Chairman, before I summarize the ACE weaknesses, I 
would like to make two points. First, the need to leverage 
information technology to improve the way that Customs 
approaches import processing is undeniable. I have seen 
firsthand the outdated import processes that Customs currently 
uses. These processes are paper-laden and they are time-
consuming and they are out of step with the just-in-time 
inventory processes of the trade. Moreover, Customs import 
processes are transaction based rather than account based. That 
is analogous to you and I receiving a separate bill and making 
a separate payment on our credit cards for each transaction 
that we make.
    Second, as the Commissioner outlined earlier, Customs 
concurs with our findings and is committed to implementing 
them. And, as the Commissioner outlined, they have already 
taken some steps to begin implementing them. We are very 
encouraged by this and wish to commend the Commissioner for his 
commitment and personal involvement in ACE.
    I would now like to briefly discuss the three categories of 
ACE weaknesses that we found and the steps that Customs has 
begun taking to implement our recommendations. First, we found 
that Customs has not been building ACE within the context of a 
complete and enforced enterprise systems architecture. In lay 
terms, an architecture is a blueprint of an organization's 
future systems environment. Its purpose is basically the same 
as that of any construction blueprint, to provide a standards 
based and analytically derived framework within which to 
construct interrelated and interdependent components. Without 
enterprise architectures, our work has shown that incompatible 
systems are produced that require additional time and resources 
to interconnect and maintain and that suboptimize overall 
organizational performance.
    In response to recommendations that we made last year on 
this matter, Customs reports that it plans to complete its 
architecture next month and that it has already modified its 
procedures to provide for effective enforcement of the 
architecture.
    Second, we found that Customs did not have a firm basis for 
knowing whether its proposed system solution was the right 
thing, meaning that it is the most cost-effective alternative 
to pursue. When investing in information systems, organizations 
should do three things: (1) identify and analyze alternative 
system solutions; (2) reliably forecast system return on 
investment, as Mr. Houghton mentioned, and invest in the 
alternative providing the highest return on investment; and (3) 
manage large investments by breaking them into a series of 
smaller increments and forecasting expected and validating 
actual return on investment from one increment at a time.
    In the case of ACE, we found that Customs did not satisfy 
any of these requirements. For example, Customs forecasts of 
return on investment was based on unreliable estimates of cost 
and benefits; did not consider alternative system solutions and 
approaches; and was predicated on an all-or-nothing investment 
approach that has proven to be ineffective in managing large 
modernization investments.
    In response to our recommendations in this area, as the 
Commissioner mentioned, they are now analyzing alternative 
approaches to ACE and they are developing the capability to 
perform cost-
benefit analyses and post-implementation analyses on system 
increments. Customs also plans to have these analyses 
independently validated.
    Third, we found that Customs processes for developing and 
acquiring ACE software lacked engineering rigor and discipline. 
One measure of such rigor and discipline is the Software 
Engineering Institute's capability maturity models. We 
evaluated ACE software processes against SEI's criteria for a 
repeatable level of software maturity, which is the second 
level on a five-level maturity scale. Customs did not fully 
satisfy any of these criterion and, thus, its capability to 
either develop or acquire software is, by definition, ad hoc, 
at times chaotic, and not effective.
    In response to our recommendations, Customs reports that it 
is developing plans to achieve SEI level two maturity and then 
level three maturity; that it is preparing a directive to 
require level two capabilities of all software contractors; and 
that is exploring engaging a systems integration contractor 
with at least a level three capability to assist it.
    In conclusion, successful systems modernization is critical 
to Customs ability to function in the 21st century. Success, 
however, depends on doing the right thing and doing it the 
right way. To be right, Customs must invest in and build 
systems within the context of an enterprise systems 
architecture; make informed, data-driven decisions about 
investment options based on reliable analyses of expected and 
actual return on investment for system increments; and it must 
build its system increments using mature software processes. 
Our work on other challenged modernization programs has shown 
that to do less increases the risk of delivering less-than-
promised capabilities late and for more than projected cost.
    Fortunately, Customs acknowledges its weaknesses and is 
committed to correcting them. We are equally committed to 
working with Customs in this endeavor and working with the 
Congress in overseeing Customs' efforts. This concludes my 
statement. I will be happy to answer any questions you may have 
at this time.
    [The prepared statement follows:]

Statement of Randolph C. Hite, Associate Director, Governmentwide and 
Defense Information Systems, Accounting and Information Management 
Division, U.S. General Accounting Office

    Mr. Chairman and Members of the Subcommittee: Thank you for 
inviting me to participate in today's Customs Service oversight 
hearing. My statement will focus on Customs' Automated Commercial 
Environment, better known as ACE. Through ACE, Customs intends to 
implement much needed improvements in the way it currently enforces 
import trade laws and regulations, and assesses and collects import 
duties, taxes, and fees, which total $22 billion annually.
    The need to leverage information technology to improve the way that 
Customs does business in the import arena is undeniable. Customs' 
existing import processes and supporting systems are simply not 
responsive to the business needs of either Customs or the trade 
community, whose members collectively import about $1 trillion in goods 
annually. These existing processes and systems are paper-intensive, 
error-prone, and transaction-based, and they are out of step with the 
just-in-time inventory practices used by the trade. Recognizing this, 
Congress enacted the Customs Modernization and Informed Compliance Act, 
or ``Mod'' Act, to define legislative requirements for improving import 
processing through an automated system.\1\
---------------------------------------------------------------------------
    \1\ Customs refers to Title VI of the North American Free Trade 
Agreement Implementation Act (Public Law 103-182, 19 U.S.C. 1411 et 
seq) as the Customs Modernization and Informed Compliance Act or 
``Mod'' Act.
---------------------------------------------------------------------------
    Customs fully recognizes the severity of the problems with its 
approach to managing import trade and is modernizing its import 
processes and undertaking ACE as its import system solution. Begun in 
1994, Customs' estimate of the system's 15-year life cycle cost is 
about $1.05 billion, although this estimate is being revised upwards. 
In light of ACE's enormous mission importance and price tag, Customs' 
approach to investing in and engineering ACE demands disciplined and 
rigorous management practices. Such practices are embodied in the 
Clinger-Cohen Act of 1996 \2\ and other legislative and regulatory 
requirements, as well as accepted industry system/software engineering 
models, such as those published by the Software Engineering Institute 
(SEI).\3\
---------------------------------------------------------------------------
    \2\ Although the Clinger-Cohen Act (Public Law 104-106) was passed 
after Customs began developing ACE, its principles are based on 
practices that are widely considered to be integral to successful IT 
investments. For an analysis of the management practices of several 
leading private and public sector organizations on which the Clinger-
Cohen Act is based see Executive Guide: Improving Mission Performance 
Through Strategic Information Management and Technology, (GAO/AIMD-94-
115, May 1994). For an overview of the IT management process envisioned 
by Clinger-Cohen see Assessing Risk and Returns: A Guide for Evaluating 
Federal Agencies' IT Investment Decision-making (GAO/AIMD-10.1.13, 
February 1997).
    \3\ Software Development Capability Maturity ModelSM 
(SW-CMM) and Software Acquisition Capability Maturity 
ModelSM (SA-CMM). Capability Maturity 
ModelSM is a service mark of Carnegie Mellon University, and 
CMM is registered in the U.S. Patent and Trademark Office.
---------------------------------------------------------------------------
    Unfortunately, Customs has not employed such practices to date on 
ACE. Our February 1999 report on ACE,\4\ upon which my testimony today 
is based, describes serious management and technical weaknesses in 
Customs' management of ACE. The ACE weaknesses are: (1) building ACE 
without a complete and enforced enterprise systems architecture, (2) 
investing in ACE without a firm basis for knowing that it is a cost 
effective system solution, and (3) building ACE without employing 
engineering rigor and discipline. My testimony will address each of 
these points as well as our recommendations for correcting them. 
Customs agrees with our findings, and it is committed to implementing 
our recommendations.
---------------------------------------------------------------------------
    \4\ Customs Service Modernization: Serious Management and Technical 
Weaknesses Must Be Corrected (GAO/AIMD-99-41, February 26, 1999).
---------------------------------------------------------------------------

                          ACE: A Brief History

    Customs began ACE in 1994, and its early estimate of the cost and 
time to develop the system was $150 million over 10 years. At this 
time, Customs also decided to first develop a prototype of ACE, 
referred to as NCAP (National Customs Automation Program prototype), 
and then to complete the system. In May 1997,\5\ we reported that 
Customs' original schedule for completing the prototype was January 
1997, and that Customs did not have a schedule for completing ACE. At 
that time, Customs agreed to develop a comprehensive project plan for 
ACE.
---------------------------------------------------------------------------
    \5\ Customs Service Modernization: ACE Poses Risks and Challenges 
(GAO/T-AIMD-97-96, May 15, 1997).
---------------------------------------------------------------------------
    In November 1997, Customs estimated that the system would cost 
$1.05 billion to develop, operate, and maintain throughout its life 
cycle. Customs plans to develop and deploy the system in 21 increments 
from 1998 through 2005, the first four of which would constitute NCAP.
    Currently, Customs is well over 2 years behind its original NCAP 
schedule. Because Customs experienced problems in developing NCAP 
software in-house, the first NCAP release was not deployed until May 
1998--16 months late. In view of the problems it experienced with the 
first release, Customs contracted out for the second NCAP release, and 
deployed this release in October 1998--21 months later than originally 
planned. Customs' most recent dates for deploying the final two NCAP 
releases (0.3 and 0.4) are March 1999 and September 1999, which are 26 
and 32 months later than the original deployment estimates, 
respectively. According to Customs, these dates will slip farther 
because of funding delays.
    Additionally, Customs officials told us that a new ACE life cycle 
cost estimate is being developed, but that it was not ready to be 
shared with us. At the time of our review, Customs' $1.05 billion 
estimate developed in 1997 was the official ACE life cycle cost 
estimate. However, a January 1998 ACE business plan specifies a $1.48 
billion life cycle cost estimate.

        Customs Is Developing ACE Without A Complete Enterprise 
                          Systems Architecture

    Customs is not building ACE within the context of an enterprise 
systems architecture, or ``blueprint'' of its agency-wide future 
systems environment. Such an architecture is a fundamental component of 
any rationale and logical strategic plan for modernizing an 
organization's systems environment. As such, the Clinger-Cohen Act 
requires agency Chief Information Officers (CIO) to develop, maintain, 
and implement an information technology architecture. Also, the Office 
of Management and Budget (OMB) issued guidance in 1996 that requires 
agency IT investments to be architecturally compliant. These 
requirements are consistent with, and in fact based on, information 
technology management practices of leading private and public sector 
organizations.
    Simply stated, an enterprise systems architecture specifies the 
system (e.g., software, hardware, communications, security, and data) 
characteristics that the organization's target systems environment is 
to possess. Its purpose is to define, through careful analysis of the 
organization's strategic business needs and operations, the future 
systems configuration that supports not only the strategic business 
vision and concept of operations, but also defines the optimal set of 
technical standards that should be met to produce homogeneous systems 
that can interoperate effectively and be maintained efficiently. Our 
work has shown that in the absence of an enterprise systems 
architecture, incompatible systems are produced that require additional 
time and resources to interconnect and to maintain, and that 
suboptimize the organization's ability to perform its mission.\6\
---------------------------------------------------------------------------
    \6\ Air Traffic Control: Complete and Enforced Architecture Needed 
for FAA Systems Modernization (GAO/AIMD-97-30, February 3, 1997).
---------------------------------------------------------------------------
    We first reported on Customs' need for a systems architecture in 
May 1996 and May 1997.\7\ In response, Customs developed and published 
an architecture in July and August 1997. We reviewed this architecture 
and reported in May 1998 that it was not effective because it was 
neither complete nor enforced.\8\ For example, the architecture did not
---------------------------------------------------------------------------
    \7\ Customs Service Modernization: Strategic Information Management 
Must Be Improved for National Automation Program To Succeed (GAO/AIMD-
96-57, May 9, 1996) and Customs Service Modernization: ACE Poses Risks 
and Challenges (GAO/T-AIMD-97-96, May 15, 1997).
    \8\ Customs Service Modernization: Architecture Must Be Complete 
and Enforced to Effectively Build and Maintain Systems (GAO/AIMD-98-70, 
May 5, 1998).
---------------------------------------------------------------------------
    (1) fully describe Customs' business functions and their 
relationships,
    (2) define the information needs and flows among these functions, 
and
    (3) establish the technical standards, products, and services that 
would be characteristic of its target systems environment on the basis 
of these business specifications.
    Accordingly, we recommended that Customs complete its enterprise 
information systems architecture and establish compliance with the 
architecture as a requirement of Customs' information technology 
investment management process. In response, Customs agreed to develop a 
complete architecture and establish a process to ensure compliance. 
Customs is in the process of developing the architecture, and reports 
that it will be completed in May 1999. Also, in January 1999, Customs 
reported that it changed its internal procedures to provide for 
effective enforcement of its architecture, once it is completed. Until 
the architecture is completed and enforced, Customs risks spending 
millions of dollars to develop, acquire, and maintain information 
systems, including ACE, that do not effectively and efficiently support 
the agency's mission needs.

       Customs Is Not Managing Its Investment In ACE Effectively

    Effective IT investment management is predicated on answering one 
basic question: is the organization doing the ``right thing'' by 
investing specified time and resources in a given project or system. 
The Clinger-Cohen Act and OMB guidance together provide an effective IT 
investment management framework for answering this question. Among 
other things, they set requirements for
    (1) identifying and analyzing alternative system solutions,
    (2) developing reliable estimates of the alternatives' respective 
costs and benefits and investing in the most cost-beneficial 
alternative, and
    (3) to the maximum extent practical, structuring major projects 
into a series of increments to ensure that each increment constitutes a 
wise investment.
    Customs did not satisfy any of these requirements for ACE. First, 
Customs did not identify and evaluate a full range of alternatives to 
its defined ACE solution before commencing development activities. For 
example, Customs did not consider how ACE would relate to another 
Treasury proposed system for processing import trade data, known as the 
International Trade Data System (ITDS), including considering the 
extent to which ITDS should be used to satisfy needed import processing 
functionality. Initiated in 1995 as a project to develop a coordinated, 
governmentwide system for the collection, use, and dissemination of 
trade data, the ITDS project is headed by the Treasury Deputy Assistant 
Secretary for Regulatory, Tariff and Trade Enforcement. The system is 
expected to reduce the burden federal agencies place on organizations 
by requiring that they respond to duplicative data requests. Treasury 
intends for the system to serve as the single point for collecting, 
editing, and validating trade data as well as collecting and accounting 
for trade revenue. At the time of our review of ACE, these functions 
were also planned for ACE.
    Similarly, Customs did not evaluate different ACE architectural 
designs, such as the use of a mainframe-based versus client server-
based hardware architecture. Also, Customs did not evaluate alternative 
development approaches, such as acquisition versus in-house 
development. In short, Customs committed to and began building ACE 
without knowing whether it had chosen the most cost-effective 
alternative and approach.
    Second, Customs did not develop a reliable life-cycle cost estimate 
for the approach it selected. SEI has developed a method for project 
managers to use to determine the reliability of project cost estimates. 
Using SEI's method, we found that Customs' $1.05 billion ACE life-cycle 
cost estimate was not reliable, and that it did not provide a sound 
basis for Customs' decision to invest in ACE. For example, in 
developing the cost estimate, (1) Customs did not use a cost model, (2) 
did not account for changes in its approach to building different ACE 
increments, (3) did not account for changes to ACE software and 
hardware architecture, and (4) did not have historical project cost 
data upon which to compare its ACE estimate.
    Moreover, the $1.05 billion cost estimate used to economically 
justify ACE omitted relevant costs. For instance, the costs of 
technology refreshment and system requirements definition were not 
included (see table 1). Exacerbating this problem, Customs represented 
its ACE cost estimate as a precise point estimate rather than 
explicitly disclosing to investment decisionmakers in Treasury, OMB, 
and the Congress the estimate's inherent uncertainty.

    Table 1.--Estimated Costs Omitted From Customs' ACE Cost-Benefit
                                Analysis
------------------------------------------------------------------------
         Excluded Cost Description             Excluded Cost Estimate
------------------------------------------------------------------------
Hardware and software upgrades at each      $73 to $172 million
 port office (e.g., desktop workstations,
 and operating systems, application and
 data servers, database management
 systems)..
Security analysis, project planning and     $23 million
 management, and independent verification
 and validation..
Requirements definition, component          No estimate available
 integration, regression testing, and
 training..
------------------------------------------------------------------------

    Customs' projections of ACE benefits were also unreliable because 
they were either overstated or unsupported. For example, the analysis 
includes $203.5 million in savings attributable to 10 years of avoided 
maintenance and support costs on the Automated Commercial System 
(ACS)--the system ACE is to replace. However, Customs would not have 
avoided maintenance and support costs for 10 years. At the time of 
Customs' analysis, it planned to run both systems in parallel for 4 
years, and thus planned to spend about $53 million on ACS maintenance 
and support during this period. As another example, $650 million in 
savings was not supported by verifiable data or analysis, and $644 
million was based on assumptions that were analytically sensitive to 
slight changes, making this $644 million a ``best case'' scenario.
    Third, Customs is not making its investment decisions incrementally 
as required by the Clinger-Cohen Act and OMB. Although Customs has 
decided to implement ACE as a series of 21 increments, it is not 
justifying investing in each increment on the basis of defined costs 
and benefits, and a positive return on investment for each increment. 
Further, once it has deployed an increment at a pilot site for 
evaluation, it is not validating the benefits that the increment 
actually provides, and it is not accounting for costs on each increment 
so that it can demonstrate that a positive return on investment was 
actually achieved. Instead, Customs estimated the costs and benefits 
for the entire system--all 21 increments, and used this as economic 
justification for ACE.
    Mr. Chairman, our work has shown that such estimates of many system 
increments to be delivered over many years are impossible to make 
accurately because later increments are not well understood or defined. 
Also, these estimates are subject to change in light of experiences on 
nearer term increments and changing business needs. By using an 
inaccurate, aggregated estimate that is not refined as increments are 
developed, Customs is committing enormous resources with no assurance 
that it will achieve a reasonable return on its investment. This 
``grand design'' approach to managing large system modernization 
projects has repeatedly proven to be ineffective across the Federal 
Government, resulting in huge sums invested in systems that do not 
provide expected benefits. Failure of the grand design approach was a 
major impetus for the IT management reforms contained in the Clinger-
Cohen Act.

     Customs Is Not Managing ACE Software Development/Acquisition 
                              Effectively

    Software process maturity is one important and recognized measure 
of determining whether an organization is managing a system or project 
the ``right way,'' and thus whether or not the system will be completed 
on time, within budget, and deliver promised capabilities. The Clinger-
Cohen Act requires agencies to implement effective IT management 
processes, such as processes for managing software development and 
acquisition. SEI has developed criteria for determining an 
organization's software development and acquisition effectiveness or 
maturity.
    Customs lacks the capability to effectively develop or acquire ACE 
software. Using SEI criteria for process maturity at the ``repeatable'' 
level, which is the second level on SEI's five-level scale and means 
that an organization has the software development/acquisition rigor and 
discipline to repeat project successes, we evaluated ACE software 
processes. In February 1999,\9\ we reported that the software 
development processes that Customs was employing on NCAP 0.1, the first 
release of ACE, were not effective. For example, we reported that 
Customs lacked effective software configuration management, which is 
important for establishing and maintaining the integrity of the 
software products during development. Also, we reported that Customs 
lacked a software quality assurance program, which greatly increased 
the risk of ACE software not meeting process and product standards. 
Further, we reported that Customs lacked a software process improvement 
program to effectively address these and other software process 
weaknesses. Our findings concerning ACE software development maturity 
are summarized in table 2.
---------------------------------------------------------------------------
    \9\ Customs Service Modernization: Ineffective Software Development 
Processes Increase Customs System Development Risks (GAO/AIMD-99-35, 
February 11, 1999).

         Table 2.--Summary of ACE Software Development Maturity
------------------------------------------------------------------------
                                                                 Not
              Key Process Areas                 Satisfied     Satisfied
------------------------------------------------------------------------
Requirements management......................  ...........            X
Software project planning....................  ...........            X
Software project tracking and oversight......  ...........            X
Software quality assurance...................  ...........            X
Software configuration management............  ...........            X
------------------------------------------------------------------------
Note: These represent five of six level 2 key process areas in SEI's
  Software Development Capability Maturity Model. We did not evaluate
  ACE in the sixth level 2 key process area--software subcontract
  management--because Customs did not use subcontractors on ACE.

    As discussed in our brief history of ACE, after Customs developed 
NCAP 0.1 in-house, it decided to contract out for the development of 
NCAP 0.2, thus changing its role on ACE from being a software developer 
to being a software acquirer. According to SEI, the capabilities needed 
to effectively acquire software are different than the capabilities 
needed to effectively develop software. Regardless, we reported later 
in February 1999\10\ that the software acquisition processes that 
Customs was employing on NCAP 0.2 were not effective. For example, 
Customs did not have an effective software acquisition planning process 
and, as such, could not effectively establish reasonable plans for 
performing software engineering and for managing the software project. 
Also, Customs did not have an effective evaluation process, meaning 
that it lacked the capability for ensuring that contractor-developed 
software satisfied defined requirements. Our findings concerning ACE 
software acquisition maturity are summarized in table 3.
---------------------------------------------------------------------------
    \10\ GAO/AIMD-99-41, February 26, 1999.

         Table 3.--Summary of ACE Software Acquisition Maturity
------------------------------------------------------------------------
                                                                 Not
              Key Process Areas                  Satisfied    Satisfied
------------------------------------------------------------------------
Software acquisition planning................  ...........            X
Solicitation.................................  ...........            X
Requirements development and management......  ...........            X
Project office management....................  ...........            X
Contract tracking and oversight..............  ...........            X
Evaluation...................................  ...........            X
Transition and support.......................  ...........            X
Acquisition risk management..................  ...........            X
------------------------------------------------------------------------
Note: These represent seven level 2 key process areas in SEI's Software
  Acquisition Capability Maturity Model. We also evaluated one key
  process area associated with the ``defined'' level of process maturity
  (level 3)--acquisition risk management.

     Customs Has Committed to Implementing Our Recommendations for 
                      Strengthening ACE Management

    To address ACE management weaknesses, we recommended that Customs:
    (1) analyze alternative approaches to satisfying its import 
automation needs, including addressing the ITDS/ACE relationship;
    (2) invest in its defined ACE solution incrementally, meaning for 
each system increment (a) rigorously estimate and analyze costs and 
benefits, (b) require a favorable return-on-investment and compliance 
with Customs' enterprise systems architecture, and (c) validate actual 
costs and benefits once an increment is piloted, compare actuals to 
estimates, use the results in deciding on future increments, and report 
the results to congressional authorizers and appropriators;
    (3) establish an effective software process improvement program and 
correct the software process weaknesses in our report, thereby bringing 
ACE software process maturity to a least an SEI level 2; and
    (4) require at least SEI level 2 processes of all ACE software 
contractors.
    In his February 16, 1999, comments on a draft of our report, the 
Commissioner of Customs agreed with our findings, and committed to 
implementing our recommendations. On April 1, 1999, the Commissioner 
provided us a status report on Customs efforts to do so. In brief, the 
Commissioner stated that Customs:
    (1) is conducting and will conduct additional analyses to consider 
alternative approaches to ACE, and will base these analyses on the 
assumption that Customs will use and not duplicate ITDS functionality;
    (2) is developing the capability to perform cost/benefit analyses 
of ACE increments, and is and will conduct post-implementation reviews 
of ACE increments;
    (3) has retained an audit firm to independently validate cost/
benefit analyses;
    (4) is developing software process improvement plans to achieve 
software process maturity of level 2 and then level 3, and;
    (5) is preparing a directive to require at least level 2 processes 
of all Customs software contractors.
    Additionally, the Commissioner stated that Customs is developing a 
plan for engaging a prime integration contractor that is at least SEI 
level 3 certified. Under this approach, the prime would assist Customs 
in implementing effective system/software engineering processes, and 
would engage subcontractors to meet specified system development and 
maintenance needs.

                              Conclusions

    Successful systems modernization is absolutely critical to Customs' 
ability to perform its trade import mission efficiently and effectively 
in the 21st century. Systems modernization success, however, depends on 
doing the ``right thing, the right way.'' To be ``right,'' 
organizations must (1) invest in and build systems within the context 
of a complete and enforced enterprise systems architecture, (2) make 
informed, data-driven decisions about investment options based on 
expected and actual return-on-investment for system increments, and (3) 
build system increments using mature software engineering practices. 
Our reviews of agency system modernization efforts over the last 5 
years point to weaknesses in these three areas as the root causes of 
their not delivering promised system capabilities on time and within 
budget.\11\
---------------------------------------------------------------------------
    \11\ Tax System Modernization: Management and Technical Weaknesses 
Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156, July 
26, 1995); Tax Systems Modernization: Actions Underway but IRS Has Not 
Yet Corrected Management and Technical Weaknesses (GAO/ AIMD-96-106, 
June 7, 1996); Tax Systems Modernization: Blueprint Is a Good Start but 
Not Yet Sufficiently Complete to Build or Acquire Systems (GAO/AIMD/
GGD-98-54, February 24, 1998); Air Traffic Control: Immature Software 
Acquisition Processes Increase FAA System Acquisition Risks (GAO/AIMD-
97-47, March 21, 1997; Air Traffic Control: Complete and Enforced 
Architecture Needed for FAA Systems Modernization (GAO/AIMD-97-30, 
February 3, 1997); and Air Traffic Control: Improved Cost Information 
Needed to Make Billion Dollar Modernization Investment Decisions (GAO/
AIMD-97-20, January 22, 1997).
---------------------------------------------------------------------------
    Until Customs corrects its ACE management and technical weaknesses, 
the federal government's troubled experience on other modernization 
efforts is a good indicator for ACE. In fact, although Customs does not 
collect data to know whether the first two ACE releases are already 
falling short of cost and performance expectations, the data it does 
collect on meeting milestones show that the first two releases have 
taken about 2 years longer than originally planned. This is precisely 
the type of unaffordable outcome that can be avoided by making the 
management and technical improvements we recommended.
    Fortunately, Customs fully recognizes the seriousness of the 
situation and has committed to correcting its ACE management and 
technical weaknesses. We are equally committed to working with Customs 
as it strives to do so and with the Congress as it oversees this 
important initiative.
    This concludes my statement. I would be glad to respond to any 
questions that you or other Members of the Subcommittee may have at 
this time.

                                

    Chairman Crane. Thank you, Mr. Hite. Before we get to 
questions, can somebody find out what is going on over there? I 
mean, are we in recess right now? I mean, the six bells. 
Breaking 20 minutes for lunch, I guess.
    All right, Mr. Simpson, would you clarify the proposed 
interrelationship between ACE and ITDS? And some trade industry 
members are concerned because they are uncertain of how ACE 
will interface with ITDS and, specifically, have you worked out 
these logistics and issues with Customs and have all 
differences been resolved?
    Mr. Simpson. Yes, Sir. The concept of the international 
trade data system is simply that it is a common mechanism for 
many components of the international trade community to 
communicate with many components of the Government. In simple 
terms, it is like one of these telephones that allows you to 
make a conference call and talk to several people 
simultaneously.
    ITDS will not have any effect on the businesses processes 
of the various agencies with which it communicates. It is 
simply a utility that allows the Federal Government to 
communicate with the public and the public to communicate with 
the Federal Government more efficiently.
    Now, to some extent, we face the problem of having to deal 
with legacy systems that are in place and will be affected by 
what we do because we need to use standard messages in order to 
make it convenient for the private sector to deal with the 
Government. In at least one case, the Customs Service had 
worked out standard messages for a pilot of its NCAP program. 
We have agreed that we will not disrupt that pilot, that we 
will accept exactly the messages that are currently being used 
by pilot participants, who happen to be the big three auto 
companies. We will accept exactly that message and we will 
grandfather them in. We will pay for software to translate what 
they send to us into the format that we need in order to have a 
standard message for the Government.
    So we are doing everything that we can to minimize the 
inflexibility of a new system by filling in, at our cost, the 
capability to translate different kinds of messages that come 
to us from the private sector into a standard format that many 
agencies of the Federal Government can use in common.
    Chairman Crane. Mr. Schindel, you showed in your graphs up 
there that that night differential portion of total overtime 
cost has jumped from $51,000 to $11.9 million between 1993 and 
1998. That is a 240 time increase, which is a little mind 
boggling to behold. Are you familiar with H.R. 3809, introduced 
in the 105th Congress? There is a provision in title II 
relating to overtime and premium pay for Customs officers to 
help reduce the differential costs for Customs and I am--let us 
see, these provisions are similar, also, to H.R. 2262. What is 
your assessment? I mean, are they sound ways of addressing the 
problem?
    Mr. Schindel. I have not had an opportunity to thoroughly 
analyze H.R. 3809, but if it is similar to H.R. 2262, I think 
it does go a long way to resolving the problem. COPRA actually 
did have some of the intended impact on regular overtime. It 
reduced regular overtime, I think, from 1993 to 1995 by about 
$7 million. But, because of the tremendous increase in night 
differential premium pay, because of some of those provisions 
that I outlined and that the bill addresses, the total premium 
pay and overtime did not go down, it went up. So it should have 
the intended impact of producing some savings.
    Chairman Crane. Mr. Rabkin, in your testimony, you said 
that Customs could do more to prevent drug-related employee 
corruption. And, specifically, what are the first things that 
Customs should do to combat this problem?
    Mr. Rabkin. We made a number of recommendations. Probably 
the two most important are, where there have been identified 
cases of employee corruption, where there have been 
convictions, Customs needs to analyze what went wrong with its 
systems that it has in place, its policies and procedures, to 
find out if there was anything it could have done differently 
to have prevented it and then go back and make those changes.
    Second, as part of its internal procedures, Customs is 
supposed to do reinvestigations of employees in critical 
positions routinely every three or 4 years. And, because of 
funding and other problems, it has fallen way behind. It has a 
large backlog. So another thing it can and it should do is to 
reduce that backlog by reinvestigating these employees to make 
sure that they still meet the integrity standards.
    Chairman Crane. Thank you. Mr. Hite, some believe that ACE 
is desperately needed and that building ACE should proceed 
while developing functionality is along the way. What is your 
assessment on that evaluation?
    Mr. Hite. My assessment would be that a modernized import 
system is definitely needed and that, before entering into the 
actual building of the software and the acquisition of hardware 
for that system, that Customs needs to do certain things to put 
itself in the position of being able to effectively do that. 
And building that management capacity is something that, in my 
correspondence with the Commissioner, I understand he intends 
to do during the fiscal year 2000 timeframe. So that when they 
do engage in building ACE, they are in a position to do so 
effectively.
    Chairman Crane. Thank you. Mr. Levin.
    Mr. Levin. Thanks. Well, Mr. Simpson, we are glad you are 
here and I think the development of an international trade data 
system, at a first glance, makes a lot of sense with the growth 
in international trade and all the various agencies and 
departments. You say, at the end of your testimony, that the 
full cost of development and deployment would be $268 million. 
So you are developing a model. Are you charging for the--do you 
contemplate charging for the system? I mean, how--just tell me, 
how does it work?
    Mr. Simpson. Let me give you a two-part answer. Let me 
answer the second part first. We have no plan to charge for 
access to the system. That does not preclude either Congress or 
the executive branch from considering some sort of user fee in 
the future. But we have no intention, at this point, of 
proposing a charge for accessing the system in the future.
    In terms of the cost, we have been very mindful of the 
points that GAO has made with respect to Customs' ACE system 
and the need to look at cost-benefit returns based on different 
options for deployment. So, instead of looking at deploying the 
international trade data system to all 330-some ports of entry 
in exactly the same way with the same capabilities, which is 
what the estimate that you referred to is based on, we are 
looking at the fact that the top 41 ports account for 80 
percent of the trade. And we are making some judgments about 
how we could deploy ITDS at the remaining ports in a way that 
would still assure that trade moves efficiently there, but 
would not be as costly to the Government. We believe we can 
significantly reduce the cost of deploying ITDS by looking at 
other options.
    Mr. Levin. All right. Well, keep in touch. I think there is 
a lot of interest. What its effect would be on ACE, I think you 
have to--you know, which comes first, where the resources are 
placed. But, also, how it would evolve over time. All of these 
things have interest to us.
    Mr. Schindel, let me just ask you a few questions because 
your testimony seemed to focus on the night differentials, but, 
as I understand your chart, overtime has grown anyway, right?
    Mr. Schindel. That is correct.
    Mr. Levin. And the issue that you focused on--and, again, 
forgetting the merits of it for just a second so we understand 
it--represents a small portion of the overtime.
    Mr. Schindel. That is correct, but the night differential, 
prior to COPRA, again, was $51,000 and, immediately after COPRA 
in 1995, went up to $8.9 million. The other overtime increases 
are likely a result of normal pay increases that also affected 
the overtime piece. So I think that that would have gone up in 
any event. But the dramatic increase was from the night 
differential prior to COPRA and then after COPRA. And that more 
than offset--there was some, as I mentioned, there was some 
overtime savings between 1993 and 1995 in straight overtime, 
but that was more than offset by that significant increase from 
$51,000 to $8.9 million in night differential.
    Mr. Levin. It represented, in the last fiscal year, in 
1998, the $11.9 million is added to the $125, right? I don't 
have the chart right in front of me, so----
    Mr. Schindel. Yes, correct.
    Mr. Levin. OK, it's $136. So it is about 8 percent, right, 
of the overall, overtime costs?
    Mr. Schindel. Correct.
    Mr. Levin. Do you have any notion--maybe it is a little too 
complicated--what the average pay is--I suppose you would have 
to go by grade--including overtime for people in the Customs 
Service?
    Mr. Schindel. No, Sir, I don't have that information.
    Mr. Levin. Do you have any idea of the average pay ranges?
    Mr. Schindel. I don't have that information. I could try to 
get that and provide it to you.
    Mr. Levin. Does anybody here know that?
    Mr. Rabkin. I think the $20,000 to $40,000 figure that was 
thrown around earlier is the range for the regular inspectors. 
And then there is a $25,000 cap on the amount of overtime that 
they can earn.
    Mr. Levin. So these are all GS employees?
    Mr. Rabkin. Yes, grades 5 through 11.
    Mr. Levin. OK. So, $20,000 to $40,000 is the average pay 
for, I take it, those, obviously, in certain ranges. They are 
not the top-level employees. They are the vast majority of the 
employees of the Custom Service?
    Mr. Rabkin. Well, these are the inspectors at the ports.
    Mr. Levin. So these are the vast majority of people related 
to the inspection at the ports?
    Mr. Rabkin. Yes.
    Mr. Levin. They are not the top management but the typical 
employee. Do you have any idea what the average overtime is? I 
know what the cap is, but do you have any guess?
    Mr. Rabkin. If I had to guess, I would guess it would be 
close to $25,000, but I don't know.
    Mr. Levin. So that would place people working in those 
capacities between $45,000 and $65,000 a year?
    Mr. Rabkin. It is probably the more senior people that work 
the overtime, that get to get it.
    Mr. Levin. Oh, so a lot of people don't work the overtime.
    Mr. Rabkin. Not all of it, as I understand it.
    Mr. Levin. Are those figures available?
    Mr. Rabkin. They should be from the Customs Service, yes.
    Mr. Levin. OK. Maybe we should look at them.
    [No information had been received at the time of printing.]
    Mr. Levin. My time is up, Mr. Chairman. I would hope--I 
guess there will be more testimony on this that we can take a 
look at this, at the issues that relate to pay. By the way, the 
increases in the night, in the differentials, do they include 
inflation increases and the like?
    Mr. Schindel. Yes, they would.
    Mr. Levin. They take it into account.
    Mr. Schindel. They are a percentage of basic pay, so if 
basic pay goes up, then they would go up, too.
    Mr. Levin. We took a look at this before. I think we ought 
to take a look at it again. I think it would be effective if we 
could look at the overall picture and try to take an objective 
look at what the dynamics are. I have no idea, for example, 
overtime. I assume the amount of overtime in the Customs 
Service is beyond the average for Federal employees?
    Mr. Schindel. I think that is probably correct.
    Mr. Levin. And, I take it, that is a reflection of some 
reality within the Customs Service? It has been going on a long 
time, I take it?
    Mr. Schindel. I think it is a reflection of, perhaps, where 
the additional staffing is needed or, because of the way the 
traffic flows, you know, that there are certain periods when 
flights come in or cargo that they have to be there.
    Mr. Levin. So it may be a reflection of the greater 
difficulty of planning shifts and of people planning for shifts 
within the Service, right?
    Mr. Rabkin. Yes, I think it varies by port, too. I think 
each port is unique and to look at the issue of whether 
overtime makes sense to the Custom Service, you have to take 
into consideration the conditions at the port at a given period 
of time, you know, over a couple-month period. Because the 
alternative, if you want to provide the same level of service, 
is hiring more people. And, at a certain point, it is 
beneficial to the Custom Service to pay the overtime. There is 
less of a learning curve; you don't have other people you are 
paying benefits to. There is a model you can develop to analyze 
that, but it has to be applied port by port.
    Mr. Levin. So just to complete this, there may be an impact 
on the employee in terms of their ability to plan their work 
week, which is a tradeoff for the Customs Service, relative to 
hiring more personnel. So it works, in other words, there is an 
impact on both the employer and the employee from this kind of 
a system.
    Mr. Rabkin. Correct.
    Mr. Levin. OK, thank you.
    Chairman Crane. Mr. Becerra.
    Mr. Becerra. Thank you, Mr. Chairman. Mr. Schindel, let me 
ask you a question with regard to the chart that we have here. 
Does the shift differential increase reflect increases above 
and beyond what might have been earned through regular overtime 
if shift differential pay had not been available or does it 
simply represent pay provided as a result of qualifying for the 
shift differential pay? I am referring to that green portion of 
each bar.
    Mr. Schindel. Right.
    Mr. Becerra. Does it represent what an employee would have 
earned above and beyond what overtime would have paid the 
employee?
    Mr. Schindel. Correct. That is the premium portion that is 
attributable to night differential.
    Mr. Becerra. The night differential, right. But, now, if 
you didn't provide someone with night differential, you would 
probably be paying them for night work, probably overtime?
    Mr. Schindel. That could be.
    Mr. Becerra. OK, now is that reflected in this chart? In 
other words, if we didn't have the night differential pay, 
would the red bar be larger than it is for either of those 
years?
    Mr. Schindel. I think, logically, you might be able to 
conclude that.
    Mr. Becerra. So, the red bar might be larger if you didn't 
have the night differential pay, which is reflected by the 
green portion of the bar?
    Mr. Schindel. That may be.
    Mr. Becerra. So the amount that is attributable to night 
differential in terms of increasing pay for Customs employees 
would look differently if you accounted for the intersection 
between what otherwise might be straight overtime pay versus 
what is, right now, under the way it is structured, considered 
night differential pay.
    Mr. Schindel. To some degree, but, then again, some of 
these shifts, these are their normal 8-hour shifts, but, 
because of the way the night differential is structured and the 
majority of shift rule, they get paid premium when, if that 
rule was not there, they would just get straight salary.
    Mr. Becerra. Obviously, if it is a straight, regular shift, 
8 or 9 hours, and it happens to hit the night-time hours, the 
majority hits the night-time hours of that workday. Under a 
system that had no night differential pay, they wouldn't get 
any overtime?
    Mr. Schindel. Right.
    Mr. Becerra. OK, got it. But there may be, mixed into the 
green portion of each bar, a portion that might have otherwise 
have gotten compensated through overtime pay.
    Mr. Schindel. Right.
    Mr. Becerra. Officer, do we know how many more employees 
Custom has in 1998 versus what it had, say, in 1993?
    Mr. Schindel. I don't have those figures myself, no.
    Mr. Becerra. What about the increase in workload that 
Customs--in its entirety, not by employee, but in its 
entirety--the increase in workload that the department saw in 
those 5 years? Do we have any way to assess how much more work 
they have?
    Mr. Schindel. I don't have that information, but certainly 
the trade, everyone knows, has exploded so there has been a 
tremendous increase in workload.
    Mr. Becerra. So would that lead you to assume that night-
time shifts and swing shifts have probably increased the number 
of people assuming those shifts?
    Mr. Schindel. I don't have that information, but it might 
be a safe assumption.
    Mr. Becerra. Chances are, then, with the implementation of 
COPRA and the increasing workloads, especially after some of 
these free trade agreements, we are probably seeing more people 
working with a larger workload and the need for more people to 
work the swing or night shifts, which helps them receive that 
extra compensation.
    Mr. Schindel. Right. Unless there were staffing increases 
to offset that.
    Mr. Becerra. Now, if you were to have straight staff 
increases to undo the need for overtime and some of the night 
differential issues to compensate employees better, would that 
save you money or cost you money?
    Mr. Schindel. That would have to be analyzed, I think. For 
instance, some of these shifts, like the one sample shift from 
12 noon to 8 p.m. is a regular shift I know at a couple of 
airports, like O'Hare, because that is the way their air 
traffic patterns work. So employees would be working that 
shift----
    Mr. Becerra. Does Customs set the shifts?
    Mr. Schindel. Yes.
    Mr. Becerra. So if Customs wanted, you could say, have 
someone start at 11 a.m. and run until 7 p.m., which would 
leave them at less than the majority of their time in a night 
differential shift?
    Mr. Schindel. That is correct.
    Mr. Becerra. So Customs does have some latitude about that?
    Mr. Schindel. I believe so, yes, Sir.
    Mr. Becerra. But, of course, we would have to find out if 
that would be logical for Customs to do.
    Mr. Schindel. Right.
    Mr. Becerra.Thank you. But, obviously, I think we need to--
--
    Mr. Schindel. And some of that may depend on the local 
union, too.
    Mr. Becerra. And we need to look into that to see exactly 
how that actually translates into real numbers. If I could ask 
Mr. Simpson a question regarding the ITDS. I know that there 
are some folks in the industries out there that would have to 
comply with ITDS and also with the new system we are trying to 
implement within--the ACE system we are trying to implement 
within Customs. They are concerned that if you don't quickly 
incorporate ITDS, you are going to have folks out there, like 
air couriers, who are going to have to both respond to 
reporting requirements under ACE and reporting requirements 
under ITDS and that is going to be pretty burdensome for them. 
What is your response to that?
    And then, second, what is the hold up in trying to 
incorporate ITDS?
    Mr. Simpson. Mr. Becerra, they would never have to respond 
both to ITDS and to ACE. ITDS would simply be a front end 
communication link that would provide to ACE whatever 
information the Custom Service says it wants. ITDS would never 
dictate information requirements. We are simply a service to 
our clients, who are Federal agencies.
    The reason that we are concerned about moving ITDS ahead as 
quickly as we can is that several Federal agencies are in the 
process of building new automated systems, such as the Customs 
Service, which is building ACE; Immigration, which is building 
SENTRI; FDA, the Food and Drug Administration, which is 
building OASIS II; Federal Highway, which is building its SAFER 
system. They are all expecting that the International Trade 
Data System will be there as the common front end for their new 
automated systems. If that expectation doesn't materialize 
fairly quickly, they are going to have to make tough decisions 
to invest in building communications links of their own, stand-
alone communications links.
    Now there are a couple of big downsides to that. One is 
that it is much more costly for the Federal Government to have 
to build separate stand-alone front ends. The other downside is 
that it still leaves the trade community with the need to 
communicate separately with multiple Federal agencies. They 
will be able to communicate electronically, rather than on 
paper forms, as they have in the past, but it is still multiple 
reporting. So, from our point of view, it is important for us 
to move forward quickly enough that we can convince Federal 
agencies that they will not need to invest in their own 
communications links with the public, that we will be there to 
do it for them. But that is all we are doing for them. We are 
not trying to alter what they do with the information or the 
way they discharge their responsibilities.
    Mr. Becerra. And, Mr. Hite, I think you make the point in 
your report that Customs has moved forward with its program, 
the ACE system, without fully reviewing it and seeing if it 
will actually be efficient and do everything Customs is hoping 
that it will do. What happens if, in fact, they move forward 
with ACE and it doesn't meet their needs and we still don't 
have the intersection or the proper working relationship with 
the ITDS?
    Mr. Hite. Yes, Sir, that is precisely why we recommended as 
one of the actions that Customs needed to take was to resolve 
this issue of its interrelationship with ITDS and to ensure 
that it will be interoperable with and not duplicative of ITDS. 
I mean, the two have to merge. They can't proceed in isolation 
from one another. We became aware of ITDS during the course of 
our review of ACE and we began raising this question to try to 
get this issue resolved.
    Mr. Becerra. Have you seen anything to better satisfy you 
that Customs will move quickly enough to respond to your 
concerns or at least to merge ACE and ITDS?
    Mr. Hite. Yes, I have seen, through my discussions, 
progress in the merger of the two. The Commissioner, in a 
letter to me dated April 1, indicated that ACE will not 
duplicate ITDS functionality and that ITDS will be the front 
end interface.
    Mr. Becerra. Thank you, Mr. Chairman.
    Chairman Crane. Folks, I want to express appreciation to 
you for your testimony thus far. Because we are going to start 
voting in about 2 minutes, we will stand in recess until 2 p.m.
    [Recess.]
    [Questions submitted by Chairman Crane, and Mr. Simpson's 
responses, are as follows:]

    Question 1. Some members of the trade industry believe that every 
dollar spent building the International Trade Data System (ITDS) is a 
dollar taken from the Customs Automated Commercial Environment (ACE). 
Given the scarcity of resources and the general consensus that ACE is 
urgently needed, please explain how the two programs interface, to what 
extent they are complementary, to what extent they compete for funds, 
and what criteria the Administration use to determine funding levels 
for ACE and ITDS in its FY 2000 budget?
    Response. How the two programs interface and are complementary--Any 
government automated system, such as ACE, that collects information 
from the public needs an interface with the public, or ``front end.'' 
The front end provides the conduit for information to flow back and 
forth between the public and a government agency, and it provides 
certain checks and edits to assist public filers in submitting 
information. ITDS is being designed as the front end for ACE and for 
several other federal agency automated systems. By having ITDS serve as 
a common front end for multiple agencies, the information reporting 
burden on the public can be reduced (by eliminating redundant 
reporting), and government can avoid the cost of building a separate 
front end for each agency's automated system. However, ITDS is only a 
front end. All of the new functionality (i.e., what is done with the 
information filed) that the trade community wants from a Customs 
automated system will be provided by ACE.
    Why the two systems are not competing for funds--By providing a 
front end for Customs' ACE system, ITDS performs a function that would 
otherwise have to be built into ACE and funded out of the budget for 
ACE. In other words, if ITDS is not built the cost of ACE will 
increase, as will the cost of other new automated systems being 
developed by other federal agencies. The budgets for each of those 
systems would need to be increased to cover the cost of building and 
operating front end functions that ITDS offers to perform in common for 
all of them. ITDS is not competing with ACE for funds, since ITDS 
relieves ACE of the need to pay for a separate front end. However, 
without ITDS the ACE project would be competing with other government 
automation projects for the additional funds that each of them would 
need to build separate front ends.
    Criteria used to determine funding levels for ACE and ITDS in the 
FY 2000 budget--Because of concerns about ACE management raised by the 
Congressional appropriations committees, which have resulted in 
significant restrictions being placed on use of FY 1999 ACE funds, the 
FY 2000 budget does not request funds for ACE. During FY 2000, Customs 
and Treasury will work together to identify a prime contractor for ACE 
so that system development can go forward in FY 2001 in a manner 
satisfactory to Congress. The FY 2000 budget request includes $5.4 
million for the ITDS. This amount is requested to enable the project 
team to stay in existence and to operate three limited pilots.

    Question 2. Will ITDS officials use data collected for enforcement 
purposes? What effect will ITDS have on the movement of imports and 
exports?
    Response. The ITDS has no enforcement authority, responsibility, or 
capability. It is simply a communications utility that will enable 
multiple government agencies, some of which do have enforcement and 
regulatory responsibilities, to collect information more efficiently 
and cheaply. The information collected will be distributed to each 
government agency with a need for it, and those agencies with border 
enforcement or regulatory responsibilities--including Customs, INS, 
FDA, and USDA--will determine what action to recommend. The 
recommendations will be consolidated by ITDS and forwarded through 
Customs' information systems to a Customs inspector at the port of 
entry.
    The availability of better, more timely information is expected to 
enable agencies to be more effective in carrying out their enforcement 
and regulatory responsibilities. This has raised concern that shipments 
will be stopped more frequently for inspection, imposing additional 
burdens on the trade and on Customs. Obviously, neither the trade nor 
Customs would want to ignore a request from, for example, FDA or USDA 
that their officers be allowed to inspect a shipment for reasons 
related to food safety. However, it is not necessarily the case that 
better enforcement will mean additional inspections. The expectation is 
that greater enforcement effectiveness will result from improved 
targeting of inspections as a result of having better, more timely 
information, not necessarily from an increase in the number of 
inspections.
    Finally, the great majority of shipments detained by Customs are 
held because of missing documents, not because they have actually been 
targeted as likely violations of law. By providing importers with a 
fully electronic means for dealing with multiple agencies, and by 
providing on-line help, including checks and edits on messages sent, 
ITDS is expected to reduce significantly delays attributable to missing 
documents and missing or incorrect data.

    Question 3. In your testimony you stated that ITDS will serve a 
custodian of records for the information it collects. Does that mean, 
for example, that ITDS will be the custodian of Customs records it 
collects rather than Customs?
    Response. In the current environment there are both multiple 
reporting requirements and multiple systems of records. ITDS seeks to 
consolidate both, and ITDS will be the official system of records for 
import and export transaction. However, although agencies will not be 
permitted to impose reporting requirements on the public outside the 
ITDS, they will be allowed to maintain duplicate, unofficial systems of 
records if they so choose. It is hoped that the economy offered by a 
single records system will persuade agencies not to choose to maintain 
duplicate systems of records.

                                

    Chairman Crane. The Committee will reconvene.
    Now I would like to invite our next panel, Mr. Kurt Zimmer, 
vice president of GartnerGroup; Ronald Schoof, customs and 
export regulation administrator, with Caterpillar; Peter 
Powell, chief executive officer of C.H. Powell Co., in 
Massachusetts.
    I think George Weiss is with you. Right, Mr. Powell?
    Mr. Powell. No, Sir.
    Chairman Crane. Oh.
    Mr. Weiss. I am just sitting in the audience.
    Chairman Crane. I thought you were with one of the 
witnesses that was coming on board. OK.
    Richard Salamone, manager, customs and international 
regulatory compliance; and Jane B. O'Dell, vice president, 
international trade and customs compliance, Limited 
Distribution Services.
    If you will all please take seats and please try and keep 
your oral presentations to 5 minutes or less. Any printed 
statements will be made a part of the permanent record. With 
that, we will proceed with Mr. Zimmer.

  STATEMENT OF J. KURT ZIMMER, VICE PRESIDENT, GARTNERGROUP, 
                     STAMFORD, CONNECTICUT

    Mr. Zimmer. Thank you, Mr. Chairman. First, let me say a 
few words about my organization. I represent GartnerGroup. 
Gartner is the world's leading provider of research analysis on 
the IT industry. We serve over 11,000 client organizations 
worldwide.
    Our reputation is premised on objectivity, in-depth 
analysis of the IT industry, and a very deep knowledge of that 
industry. We have a very clear understanding of best practices, 
and more importantly, most importantly, how to put those best 
practices into context. This is never about perfect world 
scenarios. It is always about the real world.
    The IT organization in Customs has faced a very difficult 
scenario over the years, declining real IT spending, increased 
delivery requirements, and increased external scrutiny. That 
would be a challenge for any organization that we would 
represent or have seen in the industry today.
    I have a number of goals today. One is to present pragmatic 
real-world opinions, ones that can be substantiated based on my 
experience, my organization's experience and knowledge, ones 
that are based on industry best practices, which I think are 
very important.
    Another goal is to put into context the challenges facing 
Customs, because they are very real and very pertinent to 
today's discussion. I also want to establish that much really 
has been accomplished by Customs to date. They are very 
successful in terms of IT, as much as we would like to think 
differently at times.
    GartnerGroup and myself have served Customs for 
approximately 4 years. I have been the key resource over that 
period. I have worked with Customs on a wide variety of 
initiatives. I won't go through those in detail, but they range 
from direct assistance to then Acting Commissioner Sam Banks, 
to ACE, to multiple technology initiatives, reviews of many 
programs. We have been with Customs in-depth for that period of 
time.
    We have worked extensively with all aspects of Customs and 
all levels of Customs. We work with Treasury, GAO, OMB, and the 
trade in conjunction with these activities. The bottom line is 
we know IT and we know Customs. We know the environment they 
are in.
    A few of the historical realities. Our approach is very 
pragmatic. Pragmatism is required in this situation. We find 
their organizations are not driven from academic and best case 
scenarios. They are really required to do what is best given a 
moving target. There is a real world that organizations have to 
deal with.
    Customs' IT has faced a unique set of realities or 
constraints. Funding is on the decline. Funding is insufficient 
for even their core requirements, IT requirements. Additional 
and continuous funding is unpredictable, at best. Legislative 
mandates do not ensure funding. There is insufficient technical 
infrastructure, which is a fun issue in and of itself. The core 
trade system, ACS, is in fact aging and is of considerable 
concern. They are continuously responding to external 
criticism, which causes the organization to thrash quite a bit. 
Simply put, the demands exceed, far exceed the ability to 
Customs IT to optimally address. So what do they do? They 
address them as best as they can, as any organization would.
    Our observations. Customs has performed admirably, in our 
view, given those circumstances. They have done a very good 
job. No organization is perfect. Customs is far from it. But 
they have done an excellent job, given the scenario that they 
are in. They have made mistakes. They will continue to make 
mistakes. However, in its current reality, we have been quite 
impressed with what they have been able to accomplish.
    Instead of focusing on what they have done wrong, I would 
like to spend just a couple of minutes focusing on what they 
have done right, and what they have done well. Their program to 
remediate Y2K was outstanding by anybody's standards, not only 
the Government. They were well ahead of most of private 
industry. They did an outstanding job. To me, this proves a 
number of things. One of which is that they can manage large, 
complex projects. We have been told they can't. They in fact 
can, if given the resources and the capability to do that.
    ACE. Initial implementations have received excellent 
response. The cost estimates, while large, have proven to be 
fairly accurate with KPMG and others looking over their 
shoulder. In our view, amazing progress has been made with 
virtually no predictable direct funding. It is amazing to us 
that they have been asked to do 20-year projections without 
knowing what they are going to be able to spend, and when they 
are going to be able to spend it. It is difficult to do that 
for 1 year, let alone 20 years. Customs has done what it's had 
to. It has made the best progress possible under what I would 
consider almost impossible conditions.
    ACS, a system you have heard about, and other core systems, 
are immense by anybody's standards in the industry. They 
maintain one of the largest data bases on the planet. Their 
systems have to keep pace with the growing trade requirements. 
They demonstrate a very impressive ability to maintain these 
systems in the face of their current reality and constraints.
    One quick note on ACS. It is aging. But the IT organization 
deserves some credit for maintaining it and keeping it going, 
which is required for the Government.
    In terms of enterprise IT architecture, they have done an 
excellent effort. They are well ahead of many private sector 
firms. They are beginning to be viewed as a best practice 
within the Government. Their investment management process is 
coming on-line, and is showing some excellent results.
    In terms of their application development process, which 
you heard about, CMM, they do have a process, it's just not 
CMM. It is extensive. They have tried to follow it. There is no 
perfect model, even CMM. A good model does not ensure success. 
They have been criticized for not having a model, but they do 
have a model and are using it.
    It is important to understand that software has been 
successfully written for 20 years in the absence of this model, 
and will continue to be delivered. It helps, it's not the 
answer.
    In general, process improvements are not free. These 
improvements come with repetition and rigor. Repetition takes 
time, and rigor takes resources. Customs has neither, yet it 
has accomplished a tremendous amount under these difficult 
circumstances.
    Our opinions are about reality. They have been asked to do 
much more with less. They have the resources. They are doing a 
good job. They have so many things on their plate right now 
that it is virtually impossible to take them all on: Y2K, ACE, 
CMM, infrastructure updates. Yet they have made incredible 
progress against these tremendous conditions, and they will 
continue to do so. They face very limiting conditions. Yes, 
they pass our reasonability tests over and over. They listen to 
advice, and they act. They respond professionally. When put 
into the real world context, they have accomplished much. They 
deserve to be supported in accomplishing even more.
    Thank you. That concludes my remarks. Thank you.
    [The prepared statement follows:]

Statement of J. Kurt Zimmer, Vice President GartnerGroup, 
Stamford, Connecticut

    My organization and I have had the unique opportunity to assist the 
U.S. Customs Service (Customs) over the course of the last four years. 
During this time, I have worked closely with virtually all of the key 
staff within both the information technology (IT) organization and the 
core business areas. My tenure with Customs has afforded me the chance 
to gain clear insight into its IT challenges, opportunities and 
successes. This tenure, in conjunction with my organization's respected 
capabilities in the IT arena, allows me to present you with as 
independent and objective a view as possible into the realities of the 
Customs IT history and current situation.
    Thank you for the opportunity to present this testimony. It 
presents the collective opinion of myself and others within my 
organization, GartnerGroup.

                                Overview

    The U.S. Customs Office of Information and Technology (Customs IT) 
organization has faced a difficult scenario over the years, a decline 
in real spending coupled with significantly increased requirements 
across a broad spectrum of areas. This, coupled with increased scrutiny 
both internally and externally, has forced the IT organization to 
operate in an environment which would be a challenge for any 
organization, public or private sector.
    My goal today is to present the committee with a pragmatic, real-
world set of opinions on the Customs IT situation, opinions which can 
be substantiated based on unparalleled industry experience and 
knowledge, coupled with a clear understanding of industry best 
practices. I am not here to spout platitudes but to fairly put into 
context the challenges facing the Customs IT organization and establish 
that it has, in fact, accomplished significant achievements, even in 
the face of obstacles that most organizations never encounter.

                   The GartnerGroup Industry Position

    GartnerGroup is the world's leading provider of information and 
analysis on the IT industry. We advise over 11,000 client organizations 
worldwide. These clients represent most major organizations, both 
private and public sector, in this country and around the world. You 
would be hard-pressed to find an IT professional who does not recognize 
our name and the knowledge, experience, independence and objectiveness 
for which that name stands.
    Our reputation is premised on our ability to present the business 
and IT communities with impartial, accurate information and 
recommendations with respect to the direction, use and value of IT. Not 
only do we provide industry with a clear picture of IT directions, but 
we also have a deep understanding of the best practices that drive 
excellence. Our view into our vast client base allows us to accurately 
present a picture of what is happening in the IT arena and to put it in 
context.
    I personally have 18 years of experience in IT, the last four with 
GartnerGroup. Prior to GartnerGroup, I served as the chief distributed 
technical architect at DuPont (E.I. duPont de Nemours Company). I have 
extensive experience in enterprise architecture and a wide variety of 
other IT disciplines. I have provided senior-level consulting services 
to a number of the largest companies in the United States and around 
the world, and have served other Federal clients as well (GSA, DISA, 
U.S. Navy).

                 The GartnerGroup Experience in Customs

    As I mentioned, GartnerGroup (specifically, the GartnerConsulting 
organization) has served Customs for just over four years. I have been 
the key resource over that period. We have provided a wide variety of 
advisory (research), measurement and consultative services. However, I 
will focus primarily on the consultative side, as it is the most 
relevant to the current situation.
    The following represents a synopsis of the activities that we have 
executed on behalf of Customs. These are listed to provide the 
Committee with a general understanding of the depth and breadth of our 
experience with Customs. These will not be presented in detail; 
however, we can provide further clarification and content upon request.
     Assessment of the CDC2000 Architecture
     Development of a High-Level ACE Business Case
     Assistance in the Establishment of an Initial ACE 
Application Architecture
     Assessment of CTP/TAP Technical Architectures
     Assistance in the Development of a Business Plan for ACE
     Review and Assessment of the Electronic Data Warehouse 
(EDW) Effort
     CIO Selection and Transitional Support
     Direct and Continuous Consultation with the Acting 
Commissioner on IT Issues
     Independent Assessment of the Y2K Effort
     Assessment of ACS Viability
     Development of an TISAF-Compliant Enterprise Architecture
     Assessment of Targeting Systems, including CABINET/WANTS 
and the Pilot Land Border Targeting System
     Review and Recommendations around Organizational 
Realignment
     Assessment and Scoring of Customs Strategic Plan
     IV&V of EDS and CTP Architectural Efforts
     Development of an Improved Investment Management Process 
(IMP).
    In executing these efforts, GartnerConsulting worked extensively 
with the Customs IT organization (technicians, developers, planners and 
management) at all levels. We also worked with the ``business'' side of 
Customs, from the Acting Commissioner down to those in the field. 
During the course of our ACE efforts, we also spent time with the Trade 
community. Additionally, our activity at times required us to interact 
extensively with other Federal bodies such as Treasury, GAO and OMB. In 
short, we have worked with Customs in the broadest possible context 
over a continuous time line and against the backdrop of our objectivity 
and experience across the entire IT industry. As such, we trust that 
our comments will be viewed as material and expert.

          The Historical Realities of the Customs IT Situation

    GartnerConsulting approaches any situation from the perspective of 
pragmatism. Real-world organizations are rarely driven from highly 
academic or best-case scenarios, but are usually trying to do what is 
best given a moving and uncertain target. Customs is not different in 
this regard. Our analysis and recommendations are almost always done in 
the context of incremental realism. The bottom line is: Given a 
specific set of circumstances or requirements, how does an organization 
make real improvement given its current environment? It is almost never 
about reaching the IT nirvana that some would suggest Customs attempt 
to reach.
    Over the years, we have come to gain a deep appreciation for the 
realities of the Customs IT situation. These realities are critical, 
for they establish the context that bounds our analysis, comments and 
recommendations. We believe that the following realities are key:
     Customs IT funding in real terms has been and continues to 
be on the decline.
     The current Customs IT funding level is insufficient to 
meet core IT requirements, let alone enough to make significant 
organizational, process and functional capability improvements.
     Additional and continuous funding is unpredictable at best 
and subject to the influence of many outside forces. Some sources of 
funding have very specific restrictions and cannot always be optimally 
allocated.
     Legislative mandates do not ensure a funding stream to 
complete.
     Customs IT technical infrastructure is insufficient to 
meet the demands of current initiatives. This alone is a huge 
investment challenge, ACE not withstanding.
     The core Trade system (ACS) is in fact aging and is of 
increasing concern. This is not conjecture or posturing. Those who 
would suggest this clearly do not understand the facts and are placing 
in jeopardy the ability of Customs to provide continuity of operations 
to the Trade community.
     Customs IT has needed to respond continuously to 
criticism, much of it we believe unwarranted or overstated, from a 
variety of sources and of changing form as issues are addressed. We 
have never encountered an organization that spends as much time as 
Customs responding to these types of actions. It is debilitating at 
best and clearly diffuses the ability of the organization to maintain 
focus.
    The above minimally define the realities and constraints facing 
Customs IT. They are critical because they establish a scenario that 
cannot resolve itself without immediate intervention or acceptance of 
degraded service levels and overall capability. In extremely simple 
terms, the demands on Customs (Y2K remediation, ACE development, 
maintaining a stable ACS, suggested process improvements, enterprise 
architecture completion and all normal day-to-day activities) far 
exceed the ability of Customs--or for that matter any organization with 
which I have worked--to optimally address. This speaks volumes in terms 
of evaluating Customs' actions and capabilities against this backdrop 
and not against one of unrealistic expectations.

                       Observations and Opinions

    I would start by categorically stating that Customs IT has 
performed admirably in the face of the noted realities. No organization 
is perfect; most are far from it. We base an assessment of an 
organization's character and capability not only on what it has 
accomplished but also on the circumstances facing the organization in 
trying to accomplish its mission. Let me be clear. Customs IT has made 
mistakes and has many opportunities for improvement. But when placed in 
the context of its current situation, we are very impressed by what 
Customs has and continues to accomplish.
    Instead of focusing on what Customs could do to improve (enough has 
already been pointed out by other bodies), I would like to take some 
time to point out what Customs does well. This is not based on 
conjecture but on the GartnerConsulting view into the IT industry as a 
whole and on the extensive real-world experience which our consultants 
bring to the table. This is also based on in-depth efforts that we have 
performed on behalf of Customs.

Initiatiaves

    Y2K--The Customs Y2K program is outstanding. The program has 
received excellent reviews internally. The combination of a well-run 
program office, dedicated staff and continuous review was key. When 
others would have you believe that Customs suffers from weak project 
management and planning, remember that this Y2K effort was clearly one 
of the best executed in the Federal or private sector. Customs can 
manage large, complex projects.
    ACE--In many respects ACE has demonstrated success. There have been 
strong positive responses to early NCAP releases. Earlier project cost 
estimates and benefits are proving to be reasonably accurate based on a 
new and complete analysis done by an outside party. What is important 
to remember is that ACE has received virtually no significant direct 
funding. Over the years, Customs has been asked to provide many 
different estimates--estimates that are supposed to be accurate. 
However, at the same time it has never had the benefit of a reliable 
and continuous funding mechanism to use as a planning assumption. It is 
remarkable that Customs has made the progress it has given the 
circumstances. Again, consider the backdrop--no funding, a legislative 
mandate, aging existing system, no infrastructure and heavy oversight 
requiring best practices. Customs did what it had to do under the 
circumstances; it made the best progress possible under impossible 
conditions.
    Existing Application Base including ACS--The existing base of 
Customs applications supports a wide array of functions: trade, 
enforcement, administrative and financial. The systems are immense by 
any measure. Customs supports one of the largest databases anywhere. 
The amount of funding required to maintain and operate these systems is 
very low. These systems must support the fairly rapid growth in Trade 
and the associated areas. We continue to be very impressed with the 
ability of Customs to maintain continuity of operations in the face of 
growth, declining budget and overall system age. While we have not done 
an in-depth analysis of the overall capability, we believe that the 
Customs staff has done an outstanding job in this area. Again, this 
speaks to the ability of Customs to plan, manage and execute 
significant efforts in the face of trying circumstances.
    Specifically with respect to ACS, it should be noted again that it 
is increasingly difficult to maintain the integrity and continuity of 
the system. This is due to the historical lack of documentation, 
application complexity, volume growth, physical characteristics of the 
technology in use and other issues. While many would focus on the 
challenge Customs has had in keeping ACS functioning, we feel that 
given the situation, Customs should be viewed in a very positive light. 
It has managed to maintain operations in the face of an almost worst-
case scenario. It has used limited resources very effectively.
    Enterprise IT Architecture--After a slow start four years ago, 
Customs has responded with one of the most thorough efforts we have 
seen to date. The effort is especially laudable given the fact that the 
conceptual model upon which Customs was directed to base its approach 
had never actually been built out and tended to reflect too academic a 
view of the requirement. The Customs approach and deliverables are now 
beginning to be viewed by a broad cut of its peers as a best practice.
    ATS--Targeting has always been a key component of the Customs 
approach. While not a large initiative by ACE standards, the effort 
around targeting continues to show astounding success. Not only has 
Customs developed a leading-edge targeting delivery system, but it has 
also directly attacked the challenge of a common approach to many 
different types of targeting.
    Cabinet/Wants--This targeting effort is singled out as an example 
of the positive and pragmatic way in which Customs has applied 
architecture and standards to its day-to-day approach. In short, this 
non-standard technical environment required an upgrade. Customs IT 
viewed this as an opportunity to evaluate the system not only in terms 
of the use of standard technology, but also in terms of a common 
approach to targeting. Customs IT took the time and has to date 
expended the effort to upgrade this capability technically, 
operationally and functionally. Most organizations would not have made 
this type of forward-looking investment, especially given the severe 
resource constraints. Even in the absence of all the formal planning, 
process and architectural artifacts demanded by some, Customs continues 
to demonstrate an ability to do the right things and to do them as 
effectively as possible.

Organization

    Reorganization--Based on new IT leadership vision and the proven 
success of the Y2K program office, Customs IT has executed a 
reorganization to ensure a proper balance of accountability and 
responsibility. This reorganization maximizes the use of a very limited 
resource--people. Over the four years that I have been associated with 
Customs there has been a notable shift toward the creation of an 
accountable IT organization. While subtle, this shift is very positive. 
When coupled with a number of simple core process improvements (IRB, 
architecture, project/program management), we would expect to see a 
structure capable of supporting the intent of recent oversight 
recommendations but in an effective and pragmatic manner.

Processes

    IMP--Customs has been refining its Investment Management Process 
(IMP) over the last few years. The most recent refinement fundamentally 
shifts the IMP from being an explicit, standalone process to one that 
over-arches a number of related processes--a best practice. While too 
detailed a discussion for this forum, the shift to pragmatic and 
layered roles in conjunction with focused informational requirements 
and decision criteria combine to establish a very fluid approach. 
Recent experience with the use of this new approach has been very 
successful. Our experience is that this approach will reap true 
benefits, and will rapidly become as good, if not better, than that of 
most organizations with which we work.
    Enterprise Architecture--While the core IT architecture is 
increasingly well established, the underlying architectural processes 
which support and interconnect the overall architecture with associated 
processes (such as IMP) are currently in development. Very shortly they 
are expected to duplicate the successes of the IMP. Clearly, 
architectural processes are key to the continued success of the IMP 
over the long term. What is evident is that Customs IT is open and 
moving to a very collaborative and accountable model. We have extensive 
experience in enterprise architecture and the associated processes. 
This experience leads us to believe that when institutionalized the 
planned Customs IT architectural process will be a best practice and 
pragmatic and usable as well. What is absolutely critical is that these 
processes are not ``paper'' processes, but are processes that virtually 
disappear into the background and become a part of everyday decision-
making and activity. From our experience, it is this type of approach 
that separates effective processes from ones that look good on paper 
but never become part of the culture.
    Application Development and Acquisition--Customs has made a 
significant investment in the development of a system-development life 
cycle (SDLC). The SDLC is a mechanism to help ensure that a rigorous 
process is used to develop new application functionality. The Customs 
SDLC is extensive, perhaps overly so, given the nature of the role of 
application development within the organization. However, the fact that 
is does have one in place is positive. What is somewhat perplexing is 
the requirement to now shift to a ``new'' model, CMM (SEI's Capability 
Maturity Model), and the fact that Customs is now being held to a new 
standard. In the end, all of these approaches are designed to help 
ensure success for application development and/or software acquisition. 
There is no perfect model or process, nor does the existence of a 
process ensure success. They are all frameworks that help traverse the 
complexity of the application development/acquisition life cycle. Given 
the fact that Customs IT fundamentally is not an application 
development organization, that it had an extensive SDLC is very 
positive.
    While CMM is an extremely thorough and excellent approach, it must 
be put into a context, which it has not to date. Customs does have a 
process; it just is not CMM. Customs has had significant successes in 
the absence of CMM, as has every organization that does application 
development. And as noted, CMM does not ensure success. CMM is, to a 
large extent, more appropriate for commercial organizations that 
develop applications as a core competency, and less appropriate for 
organizations like Customs, which on the whole develop very few new 
applications and do not have application development teams internally 
as a core competency. Customs should be applauded for its efforts 
around an SDLC and given recognition for its stated direction toward 
CMM compliance.
    General--It is important to note that many types of process 
improvement are not free. Implicit in the comments of the critics of 
Customs is the requirement that significant process frameworks can and 
must be established prior to moving forward. This is impractical. 
Improvement comes from repetition and rigor. Repetition takes time and 
rigor takes resources. Customs has been given neither the resources nor 
the ability to gain experience with a development process. These are 
the facts. Customs IT has done a reasonable job under the 
circumstances. It has done what it has had to do to make demonstrable 
progress.

                                Summary

    The reality of the Customs IT world is very basic--do much more 
with less. The GartnerConsulting basic analysis is that Customs has the 
resources to just deal with the day-to-day issues, at best. The reality 
is that Y2K, ACE, CMM compliance and technical infrastructure 
improvements all require resources in excess of what is available. 
Customs has done a very good job of balancing these issues. Not 
perfectly, but reasonably. Our experience tells us that Customs asks 
for advice and then listens. It has accomplished many very positive 
initiatives and on the whole is very successful. To be responsible, we 
all have to look at Customs IT and put its difficult history in 
perspective.
    As an external consultant, the easiest thing to do is to find 
fault; the hardest is to find a realistic and truly executable approach 
given some set of limiting circumstances. When put into this context 
many, if not most, of Customs IT decisions pass the reasonability test 
easily. Customs IT has shown what it can do when positively challenged 
and when given the ability to respond in a professional manner. We 
firmly believe that this ethic and capability to function under extreme 
circumstances is core to Customs culture. It is something to leverage, 
build upon and actively support, and not to replace.
    This concludes my remarks before the committee. Thank you for the 
opportunity to address you today.

                                

    Chairman Crane. Thank you.
    Mr. Schoof, do you live in Peoria?
    Mr. Schoof. I do.
    Chairman Crane. I taught down at Bradley for years. Three 
of our eight children were born there, yes, indeed.
    Mr. Schoof. Welcome back sometime.
    Chairman Crane. Of our eight, we had only one boy and he 
was born in Peoria, which proves it plays in Peoria. 
[Laughter.]
    Mr. Schoof. That's right. It still does, too.

   STATEMENT OF RONALD SCHOOF, CUSTOMS AND EXPORT REGULATION 
  ADMINISTRATOR, CATERPILLAR INC., PEORIA, ILLINOIS, AND VICE-
                 CHAIRMAN JOINT INDUSTRY GROUP

    Mr. Schoof. Thank you, Mr. Chairman, and Representative 
Levin. I am responsible for the customs and export compliance 
at Caterpillar in Peoria, and happy to be here again. I am also 
vice chairman of the Joint Industry Group (JIG), that is a 
coalition of 150 Fortune 500 companies, brokers, trade 
associations, and law firms actively involved in international 
trade, and one of the founding Members of the Coalition for 
Customs Automation Funding.
    I have been asked today to relate to you the position of 
the JIG regarding the President's proposed fiscal year 2000 
Treasury budget, and the needed funding for automation systems. 
Briefly stated, we find the President's Treasury budget on 
automation funding to be poorly crafted. We are disappointed in 
the Administration's inability to assume a leadership role in 
the development of a mission-critical Customs system.
    The proposed new tax, termed a user fee by the 
Administration, is illegal under the NAFTA agreement with 
Canada and Mexico. Furthermore, the President's budget proposes 
to fund automation at half the level that is needed. The tax 
would place an additional burden on industry, that already 
contributes $800 million a year to the merchandise processing 
fee.
    For this reason, it is now time for Congress to fill the 
leadership void by establishing adequate funding for Customs 
automation. In fact, it should be noted that it was the Ways 
and Means Committee leadership that approved the Customs Mod 
Act, which required among other things, an enhanced Customs 
automation system. While industry has fulfilled its side of the 
Mod Act at the cost of tremendous additional resources and 
expenditures, Customs Service has been unable to provide the 
most important component of its side of the agreement, 
automation.
    The current Customs ACS system is experiencing brownouts 
and delays and declining service with increased frequency. A 
major blackout or a crash of the system will have major effects 
on companies, the environment, and the economy. For 
Caterpillar, a 1-day shutdown of ACS will cause disruptions. A 
prolonged ACS blackout of more than a day could halt our 
production lines and cause serious delays in shipping needed 
replacement parts to our customers.
    The automotive industry will be forced to shut down 
production lines at a much earlier date than Caterpillar 
because of the high volume, just in time delivery procedures. 
Many of these shutdowns would occur within the first few hours 
of an ACS failure. Setting aside the environmental impact of 
thousands of vehicles frozen with engines running along our 
borders, imagine the impact to the U.S. economy and U.S. labor 
if production comes to a halt in our major U.S. manufacturing 
companies.
    Further adding to our concern is the low level of funding 
available for ACS maintenance. For fiscal year 1999, Customs 
has a deficit of $8.5 million for ACS life support. We urge the 
Committee to authorize the emergency funding in the amount of 
$8.5 million before the end of April. For fiscal year 2000 
budget, a similar shortfall of $32 million exists.
    The replacement system, ACE, which we have heard a lot 
about today, has been scrutinized for years. JIG members have 
taken an active role in the ACE planning since the passage of 
the Mod Act. Many members are currently participating in the 
various ACE prototype programs. Our organization has 
participated in the Customs Trade Support Network, TSNs, that 
have given industry an opportunity to ensure that each business 
sectors' automation needs are addressed. Overall, we have been 
very pleased with the Customs' approach to this point.
    International Trade Data Systems, ITDS. We support the 
Treasury Department's mission of reduced amount of data 
required by the Government prior to importation. JIG supports 
the concept of front-end interface to serve as a single data 
collection point between the Government and industry. However, 
as we have come to understand the design and enforcement 
natures of ITDS system, we have concerns with its true role in 
the clearance process.
    In conclusion, Mr. Chairman, the Administration has failed 
to develop an adequate method to fund ACE and support ACS. We 
turn to Congress to provide the solution. In order to develop 
ACE over a 4-year period, a funding level of at least $300 
million per year in each of the next 4 years is required. 
Because industry has and continues to contribute more than $800 
million a year in merchandise processing fee, we urge that a 
portion of these funds be appropriated to Customs for ACE 
development. In doing so, we recommend that Congress treat the 
Customs Service as though it was a business: conduct hearings, 
require deadlines to be met, hold Customs responsible for its 
management in the process.
    For its part, we pledge to continue to participate in the 
TSNs and insist upon regular updates and informative meetings 
with the Customs Service. Indeed, with all that industry has 
invested in the Mod Act to this point, ACE development will not 
proceed without industry scrutiny. Thank you.
    [The prepared statement follows:]

Statement of Ronald Schoof, Customs and Export Regulation 
Administrator, Caterpillar Inc., Peoria, Illinois, and Vice-Chairman, 
Joint Industry Group

                              Introduction

    Mr. Chairman and distinguished Members of the House Ways & Means 
Subcommittee on Trade. My name is Ronald Schoof and I am responsible 
for customs and export regulation administration with Caterpillar Inc., 
in Peoria, Illinois. I am also Vice-Chairman of the Joint Industry 
Group (JIG), a coalition of more than one hundred and fifty members 
representing Fortune 500 companies, brokers, importers, exporters, 
trade associations, and law firms actively involved in international 
trade. The Joint Industry Group enjoys a close and cooperative 
relationship with the U.S. Customs Service and frequently engages 
Customs on trade-related issues that affect the growth and strength of 
American imports and exports. The Joint Industry Group is also one of 
the founding members of the Coalition for Customs Automation Funding.
    I have been asked today to relate to you the position of the Joint 
Industry Group regarding the President's Proposed Fiscal Year 2000 
Treasury budget and needed funding for development of Treasury and 
Customs automated data processing systems.

                             Current Budget

    Briefly stated, we find the President's Treasury budget on 
automation funding to be very poorly crafted. The proposed new tax, 
termed a ``user fee'' by the Administration, is illegal under the NAFTA 
agreement with Canada and Mexico. It conflicts with the Treasury 
Department's own mission of reducing the amount of data required for 
imports under the International Trade Data System (ITDS). ITDS seeks to 
reduce the amount of data required, while the proposed budget taxes the 
amount of data sent. The two objectives are contradictory. The tax 
would place an additional burden on an industry that has already 
contributed $800 million a year for the last ten years in Merchandise 
Processing Fees (MPF). A portion of the MPF should have been used to 
build and implement Customs automated systems. Furthermore, the 
President's budget proposes to fund automation at a level that is less 
than half of what is genuinely needed. We are disappointed in the 
Administration's inability to assume a leadership role in the 
development of mission critical Customs systems.
    For this reason it is now time for Congress to fill that leadership 
void. In fact it should be noted that it was the Ways & Means Committee 
leadership that approved the Customs Modernization Act (Mod Act) that 
required, among other things, an enhanced Customs automated system.

                       Customs Modernization Act

    Passed in 1993, the Mod Act placed added compliance responsibility 
on industry. This included industry accepting the responsibility for 
classifying goods, exercising reasonable care, developing corporate 
account based systems, assigning merchandise value, determining the 
country of origin, and determining duties of imported products. As its 
part of the agreement, the Administration, through the Customs Service, 
was to provide methods to facilitate the process by enhancing 
automation systems to accommodate the new requirements. This added new 
meaning to the term ``trade facilitation.'' It was not a term that 
indicated a regress of Customs enforcement policies, rather it alluded 
to the Customs side of the agreement. While industry has fulfilled its 
side of the Mod Act, at a cost of tremendous additional resources and 
expenditures, the Customs Service has been unable to provide the most 
important component of its side of the agreement--automation. At this 
point, industry can only continue to hope that the Automated Commercial 
System will last long enough for Customs to develop its successor.

                 The Automated Commercial System (ACS)

    As JIG has testified previously, our membership continues to be 
concerned about the aging Automated Commercial System (ACS). It is 
almost 15 years old and is experiencing brownouts, delays, and 
declining service with increased frequency. A major blackout or 
``crash'' of the system will have devastating effects on companies, the 
environment, and the economy.
    For Caterpillar, the company I represent, a one-day shut down of 
ACS will cause disruptions. A prolonged ACS blackout of more than a day 
or two would halt our production lines and cause serious delays in 
shipping needed replacement parts to our customers. An inactive 
assembly line is a scenario that will face many of JIG's manufacturing 
company members. General Motors, DaimlerChrysler, and Ford Motor 
Company will be forced to shut down production lines at a much earlier 
date than Caterpillar because of their high volume just-in-time-
delivery procedures. In fact, miles of idling trucks strung across the 
Texas, California, New York, and Michigan borders is certain to occur 
during a major shut down of ACS. Setting aside the environmental impact 
of thousands of trucks frozen with engines running along our borders, 
imagine the impact to the U.S. economy and U.S. laborers if production 
comes to a halt in our major U.S. manufacturing companies.
    Further adding to industry concerns is the low level of funding 
available for ACS maintenance. In FY2000, a minimum of $99 million is 
necessary just to maintain ACS. The President's budget proposed $35 
million with an additional $32 million in base funds. This represents a 
deficit of $32 million. While this lack of funding is alarming, more 
alarming are the funds currently available for ACS maintenance. In 
FY1999 Customs has a deficit of $8.5 million for ACS life support. This 
means that funding for ACS will expire at the end of this month. We 
urge the Committee to authorize emergency funds in the amount of $8.5 
million before the end of April.

               The Automated Commercial Environment (ACE)

    The replacement system, the Automated Commercial Environment (ACE) 
has been scrutinized for years. JIG members have taken an active role 
in ACE development and funding since the passage of the Mod Act. Our 
organization has participated in the Customs Trade Support Networks 
(TSN's) that have given industry an opportunity to ensure that each 
sector's automation needs were addressed. Industry advised Customs to 
adopt a modular approach to the ACE design, and Customs has done so. We 
suggested that Customs outsource the construction of ACE to an 
information technology firm specializing in automated systems. Customs 
has concurred and is preparing a request for proposal with the help of 
a Federally Funded Research and Development Contractor (FFRDC). 
Overall, we have been pleased with the Customs approach to this point.

                 International Trade Data System (ITDS)

    The Joint Industry Group has been asked to comment on the Treasury 
Department's International Trade Data System (ITDS). JIG supports the 
concept of a front-end interface to serve as a single data collection 
point between government and industry. We support the Treasury 
Department's mission to reduce the amount of data required by the 
government prior to importation. However, as we have come to understand 
the design and enforcement nature of the Treasury ITDS system we are 
concerned with its true role in the clearance process. Therefore, at 
this point JIG cannot support the proposed ITDS system. We do agree 
that a front-end element is necessary for ACE, but the ITDS proposed to 
us today is not the solution.

                            Recommendations

    In proposing an unacceptable and insufficient budget, the 
Administration has failed to develop an adequate method to fund ACE or 
support ACS. We turn to Congress to provide the solution to the ACE and 
ACS funding issues. In order to develop ACE over a four year period, 
which is the time frame agreed upon by industry and Customs, a funding 
level of at least $300 million per year in each of the next four years 
is required. Because industry has contributed, and continues to 
contribute, more than $800 million per year in MPF, we urge that a 
portion of those funds be appropriated to Customs for ACE development.
    In doing so, we recommend that Congress treat the Customs Service 
as though it were a business. Conduct oversight hearings, require 
deadlines to be met, hold Customs responsible for its management of the 
process. For its part, JIG pledges to continue its participation in the 
TSN's to ensure that all industry sector's automation requirements are 
met. JIG will insist upon regular updates and informative meetings from 
the Customs Service. Indeed, with all that industry has invested in the 
Mod Act to this point, ACE development will not proceed without JIG's 
scrutiny.

                                

    Chairman Crane. Thank you, Mr. Schoof.
    Mr. Powell.

  STATEMENT OF PETER H. POWELL, SR., CHIEF EXECUTIVE OFFICER, 
    C.H. POWELL CO., PEABODY, MASSACHUSETTS, AND PRESIDENT, 
NATIONAL CUSTOMS BROKERS AND FORWARDERS ASSOCIATION OF AMERICA, 
                    INC., NEW YORK, NEW YORK

    Mr. Powell. Thank you, Mr. Chairman, Mr. Levin, 
Subcommittee Members. My name is Peter Powell of the C.H. 
Powell Company. I also serve as president of the National 
Customs Brokers and Forwarders Association of America.
    As you well know, Mr. Chairman, from our many years of 
working together, a customs broker acts on behalf of an 
importer in its obligations to the Customs Service, filing 
information, paying duties, and ensuring compliance with 
thelaws of the United States. We have long known that Customs 
automation is essential to these processes. While we heard 
``automate or perish'' long ago, brokers quickly understood the 
criticality of this tool, and worked in conjunction with 
Customs to develop ACS, the Automated Commercial System.
    Jointly, Customs and the broker community were responsible 
for its early development and then its evolution over almost 
two decades. Recently however, it has become clear to our 
community that ACS is in trouble. We, who are on the front 
lines, became aware of this first. The most obvious signs of 
ACS's inability to keep up with rapidly increasing volumes has 
been the brownouts and outages experienced in this past year. 
Yet ACS has other limitations caused by aging technology, 
coupled with expanding demands for better and more 
sophisticated performance.
    In many respects, ACS successor system, the Automated 
Commercial Environment, known as ACE, sounds like something 
different. In fact, it's merely modernization of what is 
frankly antiquated today. Yes, there needs to be new hardware 
and software. However, the Customs process itself remains 
functionally the same, albeit more efficient and improved to 
cope with workloads that increase at an alarming pace. ACE can 
increase productivity through faster processing of information. 
ACE increases flexibility by permitting resort to other tools 
for processing information such as the Internet, as an example. 
ACE improves interfaces with the private sector and with 104 
other Federal agencies. And, ACE helps implement those 
processes that this Committee has mandated through laws such as 
the Customs Modernization Act.
    We customs brokers can tell you that trade will come to a 
crashing halt if ACS collapses under the weight it must now 
bear. Unfortunately, we seem headed in that direction. This 
year's funding outlook is bleak. To maintain ACS on life 
support, Customs estimates that it will need $12 million this 
year. However, $8.5 million is unfunded. To continue life 
support in fiscal year 2000, the Administration proposes $35 
million, which we understand to be $32 million short.
    But stop for one moment. Even were Congress to find the 
money to fund ACE, whether over 4 or over 7 years, do we want 
our lifeline to international trade merely sustained on life 
support? I would venture that we need a robust, functioning 
automation system in the interim that can meet the demands of 
trade over the next 4 to 7 years.
    To put processing in limbo, without improving the present 
system to meet intervening contingencies is equally neglectful 
on all of our parts. How can we stand by and wait another 4 to 
7 years to enjoy benefits conceived by this Committee over 5 
years ago?
    As for ACE, the funding outlook is equally poor. Treasury 
continues to dole out funds sparingly, with $3.4 million in 
fiscal year 1999 funds, awaiting a cost-benefit analysis. This 
Committee has authorized some funds in a bill now being delayed 
in the Senate. However, the Administration has requested no 
funds, I repeat, zero funds for fiscal year 2000. And, it has 
proposed an untenable user fee concept, which we oppose, to 
permit a mere $150 million in fiscal year 2001.
    To adequately fund ACE, we project that Congress must 
appropriate at least $300 million each year for 4 years. 
Instead, we have only the Administration's proposal, which at 
best is misguided, and at worst, woefully inadequate.
    NCBFAA believes that ACE must be constructed forthwith. We 
acknowledge that a $1.2 to $1.4 billion price tag demands great 
caution and the necessary diligence on the part of those 
authorizing, appropriating, and overseeing the spending of 
these funds. NCBFAA in no way implies that the Congress should 
simply throw money at this problem. Congress must insist on 
meaningful oversight. Treasury must guarantee that it can meet 
your terms. Nonetheless, the days of armchair quarterbacking 
must draw to a close. We must reduce the demands on Customs 
planners and implementers so that they can realistically move 
forward, focus on achieving the result demanded by Congress, 
rather than merely constructing an elegant risk-adverse 
process.
    We have confidence that Customs, under your oversight, can 
produce a successful Automated Commercial Environment. NCBFAA 
urges you to support ACE with the necessary authorizations. Mr. 
Chairman, thank you.
    [The prepared statement follows:]

Statement of Peter H. Powell, Sr., Chief Executive Officer, C.H. Powell 
Co., Peabody, Massachusetts, and President, National Customs Brokers 
and Forwarders Association of America, Inc., New York, New York

    Mr. Chairman, my name is Peter H. Powell Sr., of the C. H. Powell 
Company, a logistics company whose services include customs brokerage. 
I am also President of the National Customs Brokers and Forwarders 
Association of America (NCBFAA).
    As you well know, Mr. Chairman, from our many years of working 
together, a customs broker acts on behalf of an importer in its 
obligations to the Customs Service: filing information, paying duties 
and ensuring compliance with the laws of the United States. This role 
has led to a very close relationship between a customs broker and a 
customs official, and between the NCBFAA and the U.S. Customs Service. 
We are ``force multipliers,'' handling 95% of all commercial entries. A 
professional, customs broker, by virtue of his acting as the link to 
Customs for hundreds of importers, greatly simplifies the task for 
Customs of handling, this year, 21 million entries and provides the 
best possible assurance that information is complete, accurate and 
timely.
    We have long known that Customs automation is essential to these 
processes. While we heard ``automate or perish'' long ago, brokers 
quickly understood the criticality of this tool and worked in harmony 
with Customs to develop ACS--the Automated Commercial System. Jointly, 
Customs and the broker community were responsible for its early 
development and then its evolution over almost two decades. Recently, 
however, it has become clear to our community that ACS is in trouble--
and we who are on the front lines became aware of this first. The most 
obvious sign of ACS' inability to keep up with rapidly increasing 
volumes (entries will double between 1994 and 2001 and nearly triple by 
2005) has been the brownouts and outages experienced in this past year. 
Yet, ACS has other limitations caused by aging technology coupled with 
expanding demands for better and more sophisticated performance. In 
many respects, ACS' successor system, the Automated Commercial 
Environment (ACE), sounds like something different. In fact, it's 
merely modernization of what is--frankly--antiquated. Yes, there needs 
to be new hardware and software; however, the customs process itself 
remains functionally the same, albeit more efficient and improved to 
cope with work loads that increase at an alarming pace. ACE can 
increase productivity through faster processing of information. ACE 
increases flexibility by permitting resort to other tools for 
processing information--such as the Internet, for example. ACE improves 
interfaces with the private sector and with 104 other federal agencies. 
And, ACE helps implement those processes that this committee has 
mandated through laws such as the Customs Modernization Act.
    Let's assess the cost of inaction. We customs brokers can tell you 
that trade will come to a crashing halt if ACS collapses under the 
weight it must now bear. This extends not only to imports but also to 
exports. This affects not just foreign, but American businesses. It 
involves domestic manufacturers dependent on imported parts or foreign 
markets. It will be catastrophic to American retailers, now reliant on 
``just-in-time-inventory,'' who will find their warehouses empty while 
their goods pile up at America's docks and airports.
    Unfortunately, we seem headed down that road. This year's funding 
outlook is bleak. To maintain ACS on ``life support,'' Customs 
estimates that it will need $12 Million this year--however $8.5 Million 
is unfunded. To continue life support in FY2000, the Administration 
proposes $35 Million, which we understand to be $32 Million short. But, 
stop for one moment. Even were Congress to find the money to fund ACE--
whether over 4 or over 7 years--do we want our lifeline to 
international trade merely sustained on life support? I would venture 
that we need a robust, functioning automation system in the interim 
that can meet the demands of trade over the next four to seven years. 
To put processing in limbo, without improving the present system to 
meet intervening contingencies, is equally neglectful on all our parts. 
NCBFAA has proposed EEEP--Enhanced Electronic Entry Processing--a means 
by which ACS can accommodate remote entry filing until ACE is on its 
feet. How can we stand by and wait another four to seven years to enjoy 
benefits conceived by this Committee over five years ago?
    As for ACE, the funding outlook is equally poor. Treasury continues 
to dole out funds sparingly, with $3.4 Million in FY99 funds awaiting a 
``Cost Benefit Analysis.'' This committee has authorized some funds in 
a bill now being delayed in the Senate; however, the Administration has 
requested no funds--I repeat, zero funds--for FY2000. And, it has 
proposed an untenable user fee concept, which we oppose, to permit a 
mere $150 Million in FY2001. To adequately fund ACE, we project that 
Congress must appropriate at least $300 Million over four years. 
Instead, we have only the Administration's proposal, which is, at best, 
misguided and, at worst, woefully inadequate.
    NCBFAA believes that ACE must be constructed forthwith. We 
acknowledge that a $1.2 to $1.4 billion price tag demands great caution 
and the necessary diligence on the part of those authorizing, 
appropriating and overseeing the spending of these funds. NCBFAA in no 
way implies that the Congress should simply throw money at this 
problem. In fact, we too have our reservations. That is why we intend 
to participate at every level, over every issue coming before Customs' 
Trade Support Network (TSN). We believe that the fielding of ACE must 
be, to a great degree, evolutionary and collaborative. Just as we 
worked with Customs to field a system, ACS, that has proven 
monumentally successful over 15 years, we intend to insist on that same 
level of partnership now. After all, our livelihood is at stake. So too 
must Congress insist on meaningful oversight and Treasury guarantee 
that it can meet your terms.
    Nonetheless, the days of armchair quarterbacking must draw to a 
close. We must reduce the demands on Customs planners and implementers 
so that they can realistically move forward, focussed on achieving the 
result demanded by Congress rather than merely constructing an elegant, 
risk adverse process. We have confidence that Customs, under your 
oversight, can produce a successful Automated Commercial Environment. 
NCBFAA, urges you to support ACE with the necessary authorizations.
    Thank you, Mr. Chairman.

                                

    Chairman Crane. Thank you, Mr. Powell.
    Mr. Salamone.

    STATEMENT OF RICHARD J. SALAMONE, MANAGER, CUSTOMS AND 
INTERNATIONAL REGULATORY COMPLIANCE, BASF CORP., MT. OLIVE, NEW 
  JERSEY, AND CHAIRMAN, AMERICAN ASSOCIATION OF EXPORTERS AND 
                 IMPORTERS, NEW YORK, NEW YORK

    Mr. Salamone. Thank you, Mr. Chairman, Mr. Levin, and other 
members of the Trade Subcommittee. I am Richard Salamone, 
manager of customs and international regulatory compliance for 
BASF Corporation, one of the largest chemical companies in the 
United States. I am currently chairman of the American 
Association of Exporters and Importers. AAEI is a national 
organization of approximately 1,000 firms involved in every 
facet of international trade. AAEI is the largest membership 
organization devoted to observing Customs' policies and 
practices.
    As you know, the funding of the redesign of Customs' 
computer systems has emerged as a critical and time-sensitive 
problem. We are here before you today to express our concern on 
this matter. AAEI urges Congress to support the U.S. Customs 
Service in its vital effort to keep pace with the exponential 
growth in international commerce by rolling out its next 
generation automation system, known as the Automated Commercial 
Environment, or ACE. Time is of the essence, as Customs' 
existing 15-year-old Automated Commercial System, known as ACS, 
is operating at nearly 95 percent capacity. It is on the verge 
of collapse, threatening to gravely disrupt trade at our 
borders, which will ultimately inflict severe blows to the 
national economy.
    In today's global marketplace, U.S. manufacturers rely 
heavily on component parts and materials from all over the 
world. U.S. competitiveness has been significantly enhanced in 
recent years by utilization of just-in-time inventory supply 
chains. Even short-term ACS failures will break a multitude of 
just-in-time links, preventing essential raw materials and 
parts from reaching U.S. manufacturing plants. The failure of 
these raw materials and parts to reach the manufacturing site 
on a timely basis can lead to halts in production, the shutting 
down of entire production lines, and the idling of numerous 
workers.
    Following on Mr. Schoof 's remarks, I know also that in our 
industry, in the chemical industry, disruptions in delivery can 
translate into disruptions in the manufacturing process. Not 
only will imports be impeded, but exports will also be affected 
as many of them are manufactured in the United States from 
imported raw materials.
    The Administration proposes an inadequate $150 million for 
ACE funding for fiscal year 2001, which is to be derived from 
an insupportable user fee, which we strongly oppose. The 
Administration has requested zero funds for fiscal year 2000. 
At the proposed level of funding, full implementation of ACE 
will take at least eight to 10 years, well beyond the limited 
life expectancy of ACS. We believe funding of at least $300 
million per year over 4 years is much more in line with an 
optimal implementation, and is likely to lower the total cost 
of the project. Successful rollout of ACE is vital to our 
Nation's management of a 10 percent annual growth in 
international commerce.
    Without ACE, Customs will be unable to meet legislative 
mandates for informed compliance and for improved financial 
controls over the more than $20 billion in duties it collects 
annually. The trade community, Customs, and the national 
economy will all gain from Customs having a modern software and 
hardware system that will adapt to future technology 
developments.
    AAEI supports Customs Commissioner Kelly's decision to 
retain private sector contractors experienced in Government 
systems, as well as to consult with the Internal Revenue 
Service in its design and development of future ACE 
functionalities. Independent contractors not only have 
extensive experience in large Government systems, but they 
understand the methodologies of private sector systems, which 
ultimately have to interface with their Government 
counterparts. Also, these contractors have previously served 
large Fortune 1000 companies that have similarly undergone 
conversion from mainframe-centered computer systems to 
distributed systems, usually under urgent conditions dictated 
by the restricted budgets and tight time constraints of private 
industry.
    AAEI is dismayed by the President's proposed budget for 
Customs automation, calling for the imposition of a new user 
fee to fund ACE. AAEI believes that the cost of ACE, as well as 
the cost of maintaining Customs' existing ACS should be borne 
by general Treasury. Customs has said it needs a predictable 
and reliable source of funding for its systems. We 
wholeheartedly agree. We do not agree that an increase in the 
merchandise processing fee will provide either the given 
unpredictable shifts in trade and questionable legality of a 
user fee. Any user fee paid by importers to finance a computer 
system used by exporters and by Customs for non-commercial 
purposes would be inherently discriminatory and vulnerable to a 
challenge in the World Trade Organization. Also, if the United 
States implements a user fee for computerization of clearance 
functions for imports, we can expect other countries very 
quickly to do the same, imposing additional costs and 
competitive burdens on U.S. exports.
    We also hope that Customs and Treasury can come quickly to 
agreement on the appropriate role for the International Trade 
Data System, or ITDS. There is merit in the concept of ITDS, as 
it is a single trade data collection and distribution point for 
all agencies requiring such data, and it is the location of the 
Government-wide trade data warehouse. ITDS should result both 
in reduced data demands on the private sector at a much higher 
quality and quantity of data for analysis. ITDS should be 
limited to a neutral transparent technical role, and should not 
include functions assigned to its constituent agencies. While 
Customs could regularly query ITDS's stored data regarding 
trade patterns, Customs, not ITDS, should be making judgments 
regarding entry or enforcement policies.
    In summation, ACE development can be delayed no further. 
The current ACS is on the verge of collapse, threatening to 
paralyze international commerce and ultimately wreak havoc on 
our national economy. An increase in user fees to pay for ACE 
and/or ITDS will inevitably face concerted legal challenge for 
more trading partners. AAEI believes that if Customs continues 
in the direction of which it is now headed, with continued 
support from the trade community and adequate Government 
appropriations, a successful ACE system can be realized without 
serious disruptions to the U.S. economy.
    Thank you for the opportunity to present our views today.
    [The prepared statement follows:]

Statement of Richard J. Salamone, Manager, Customs and International 
Regulatory Compliance, BASF Corp., Mt. Olive, New Jersery and Chairman, 
AAEI; American Association of Exporters and Importers New York, New 
York

                      Introduction and Background

    Good Afternoon, Chairman Crane and members of the Trade 
Subcommittee. I am Richard Salamone, Manager, Customs and International 
Regulatory Compliance, BASF Corp. I am testifying today in my role as 
Chairman of the American Association of Exporters and Importers (AAEI).
    AAEI is a national organization of approximately 1000 firms 
involved in every facet of international trade. AAEI is the largest 
association concentrating on policies and practices of the U.S. Customs 
Service. Our members are active in importing and exporting a broad 
range of products including, chemicals, machinery, electronics, 
textiles and apparel, footwear, foodstuffs, household consumer goods, 
toys and automobiles. AAEI members are also involved in the industries 
which serve the trade community such as customs brokers, freight 
forwarders, banks, attorneys, accountants and insurance carriers. AAEI 
is a member of the Coalition for Customs Automation Funding.
    We are pleased to have this opportunity to address agency budget 
authorizations and other issues concerning the U.S. Customs Service. 
The management and oversight of Customs commercial operations are of 
great concern to AAEI, as our members interact with the agency on a 
daily basis. AAEI and Customs have always dealt with each other in a 
direct, honest, usually harmonious, and always mutually respectful, 
manner. Due to this long-standing relationship, AAEI does not hesitate 
to point out problems to or ask questions of Customs. We believe both 
sides, as well as the public, greatly benefit from this exchange and we 
are pleased to say that, through discussion, many specific problems are 
resolved.
    As you know, the funding of the redesign of Customs computer 
systems has emerged as a critical and time-sensitive problem. We are 
here before you today to express our concerns on this matter.
    AAEI urges Congress to support the U.S. Customs Services design and 
implementation of its next-generation automation system, known as the 
Automated Commercial Environment (ACE). Time is of the essence as 
Customs 15 year-old Automated Commercial System (ACS) is on the verge 
of collapse. Even short ``brownouts'' of ACS (which already are 
beginning to occur) are threatening to disrupt trade and, ultimately, 
inflict severe blows to the national economy.
    In order to avert the looming Customs automation disaster, we 
believe the following steps must be taken:

Emergency ACS Funding

    It is critical that emergency funds be immediately appropriated for 
the maintenance and preservation of the fragile ACS. This 15 year-old 
system, is currently operating on average at 90 to 95 percent of its 
capacity. Several recent ``brownouts,'' temporarily halting the flow of 
trade, are warnings that larger failures are likely unless its 
maintenance is made the highest priority.
    In todays global marketplace, U.S. manufacturers rely heavily on 
component parts and materials from all over the world. U.S. 
competitiveness has been significantly enhanced in recent years by 
utilization of just-in-time inventory supply chains. Even short-term 
ACS failures will break a multitude of just-in-time links, preventing 
essential raw materials and parts from reaching U.S. manufacturing 
assembly plants. The failure of even one essential part to reach the 
manufacturing site on a timely basis will cause the shutting down of 
entire production lines, halts in production and the idling of numerous 
workers.
    ACS is also linked to the Census Bureaus Automated Export System 
(AES), which is the vehicle in which U.S. exporters are required to 
file export documentation. Thus, ACS failures will delay exports as 
well.
    A protracted failing of ACS, necessitating the manual entry and 
review of data, would impede the flow of trade, thereby paralyzing 
operations of major segments of U.S. industry including the 
manufacturing, retail and transportation sectors, all of which depend 
on the timely delivery of imported supplies. The disastrous impact on 
the U.S. economy if production lines go down and distribution channels 
are stalled will directly translate into sales and job losses, 
decreased exports and a diminishing tax base.

Government Funding for Customs Automation Now

    The Presidents $163 million FY2000 funding request for ACE 
is inadequate. If this level of funding in continued, full 
implementation of ACE will take at least eight to ten years. 
Since it is unlikely that ACS can last that long, recurring 
day-to-day failures in ACS will almost certainly result in 
implementation delays in the new system as resources are 
diverted to ACS to ensure the day-to-day availability of basic 
functions. Such compromises will delay even further the value 
and productivity that we expect from ACE. Funding at least $300 
million per annum over four years is much more in line with an 
optimal implementation and is likely to lower the total cost of 
the project.
    There is no dispute as to whether Customs needs a new, 
reliable system. The trade community, Customs and the national 
economy will all gain from Customs having modern software and 
hardware that will adapt to future technology developments. The 
successful development of ACE is essential to Customs 
management of a 10 percent annual growth in international 
commerce. Without ACE, Customs will be unable to meet 
legislative mandates for informed compliance and for improved 
financial controls over the approximately $20 billion in duties 
it collects annually. Also, requirements articulated by the 
trade and Customs field personnel as part of the trade process 
reengineering effort are reliant on the timely availability of 
ACE.
    It is crucial that Customs obtain government funding now to 
develop and implement ACE over a four-year period and under 
appropriate Congressional oversight as well as industry 
consultation. Customs should provide Congress with an ACE 
target architectural implementation plan as well as supporting 
information as requested by Congressional appropriations 
committees. Outreach programs, as required by the 1993 Customs 
Mod Act, would be a useful vehicle to maintain meaningful 
business participation. These programs should be focused on 
narrow design and implementation issues, both technical and 
substantive, rather than on general overviews. The private 
sector recognizes that its role must necessarily be limited, 
but, for example, it is essential that Customs be made aware 
when technology choices in the private sector are diverging 
from Customs own plans and preferences. Recently, for example, 
the private sector has been moving away from older message 
protocols such as EDIFACT to the more flexible XML protocols. 
Customs had been planning to require EDIFACT exclusively for 
data transmission.
    Ensuring Customs Project Management Competence--Customs has 
been taking numerous steps to ensure that it can see to the 
design and development of the system it needs and to reassure 
the private sector. AAEI supports Customs Commissioner Kellys 
decision to retain private sector contractors experienced in 
government systems as well as consult with the Internal Revenue 
Service in its design and development of future ACE 
functionality. Recently, Mr. Kelly told members of the House 
Appropriations Subcommittee on Treasury, Postal Service, and 
General Government that his agency is contracting outside firms 
with proven track records in project management support and the 
Carnegie Mellon University Systems Engineering Institutes 
Capability Maturity Model (CMM) level 3 expertise to guide 
enterprise improvement in software development and acquisition 
and to serve as a resource for ACE project management support.
    Customs is developing a directive that will require all 
software contractors that do business with the agency be 
certified at least at the CMM level 2. Additionally, Customs 
not only recently reorganized its Office of Information 
Technology to provide for improved accountability and program 
control, but it engaged a contractor to update and improve the 
ACE cost-benefit analysis. Sometime this month, Customs plans 
to implement a plan for ensuring that software development and 
acquisition processes comply with CMM level 2 by December 2000. 
Mr. Kelly noted that this will improve software development and 
acquisition controls prior to any further substantial 
investment in ACE.
    Customs also hired a Chief Information Officer (CIO) with 
extensive experience in enterprise architecture and major 
systems acquisition. The CIO is currently consulting with the 
IRS and its main contractor to evaluate the applicability of 
its method for Customs. He has impressed us with his 
understanding of this complex situation.
    Outsourcing ACE Design and Development--Given the severe 
time constraints imposed by the doubtful reliability of ACS, we 
encourage Customs to outsource as much of the system design and 
development as possible to private entities experienced in 
developing large systems. AAEI supports Customs outsourcing of 
its systems development. Independent contractors not only have 
extensive experience in large government systems, but they 
understand the methodologies of private sector systems which 
ultimately have to interface with their government 
counterparts. Also, these contractors also are working with 
Fortune 1000 companies that have or are now undergoing similar 
conversion from mainframe-centered computer systems to 
distributed systems--usually under urgent conditions dictated 
by the restricted budgets and tight time constraints of private 
industry.
    Using Commercially Existing Software--We hope that in its 
design of ACE Customs will choose commercially available and 
proven software wherever possible. The private sector has 
generally concluded that custom software takes longer to 
implement, is expensive to maintain, does not permit integrated 
data analysis, and is hostage to the long-term availability of 
its authors. The use of ``off-the-shelf'' or at least 
customized software for parts of the new system will speed 
implementation and reliability.
    We also hope that Customs and Treasury can come quickly to 
agreement on the appropriate role for the International Trade 
Data System (ITDS). There is merit in the concept of ITDS as 
(i) a single trade data collection and distribution point for 
all agencies requiring such data and (ii) the location of a 
government-wide trade data warehouse. ITDS should result both 
in reduced data demands on the private sector and a much higher 
quality and quantity of data for analysis.
    Treasury already has made significant progress in the 
design and implementation of ITDS and its work should not be 
repeated in the design of another system. At the same time, 
ITDS should be limited to a neutral, transparent technical role 
and should not include functions assigned to its constituent 
agencies. While Customs could regularly query ITDSs stored data 
regarding trade patterns, Customs, not ITDS, should be making 
judgments regarding entry or enforcement policies.
    What we certainly cannot afford is the development of 
redundant functionality by any two agencies. Even worse would 
be delay caused by disagreement over development jurisdiction. 
In the example of ITDS, if ITDS is superior both in concept and 
in stage of development to the comparable elements of ACE, ITDS 
and the ACE project should be integrated immediately. If it is 
not, it should be modified or abandoned. The analysis of ITDS 
also should include consideration of how it will be supported 
over the next decade if it remains a standalone product within 
Treasury.
    For ACE, ITDS, and trade-related software under development 
in other agencies, there is neither time nor money for anything 
less than a ``best of breed'' analysis.

Continued Opposition to User Fees

    AAEI believes that the cost of ACE as well as the cost of 
maintaining Customs existing Automated Commercial System (ACS) should 
be borne by the general treasury. AAEI is dismayed that the Presidents 
proposed FY2000 budget for Customs automation still calls for the 
imposition of a new user fee to fund ACE.
    Customs' computer costs are not generated by a service provided to 
importers. The cost of computer systems are as much a core cost of an 
agencys existence as is office space, employee salaries, pens and 
paper. These core costs should be borne by the nation as a whole as the 
price of having that agency. Also, in addition to clearing commercial 
import shipments, Customs computer system is used for many other 
purposes including drug enforcement, export shipments, health and 
safety regulations, and processing of data of other federal agencies. 
Importers cannot fairly be asked to finance these uses.
    Customs has said that it needs a ``predictable and reliable'' 
source of funding for its systems. We wholeheartedly agree. We do not 
agree that an increase in the MPF will provide either given the 
unpredictable shifts in trade and the questionable legality of use of a 
user fee. User fees that are not assessed equally on all parties who 
benefit from or are required to use the service to be financed by the 
fee have met disfavor in the courts. It would be truly unfortunate if 
Customs were to rely on the user fee to finance its computer system 
only to have the fee later found illegal and subject to refund.
    Any user fee paid by importers to finance a computer system used by 
exporters and by Customs for non-commercial purposes would be 
inherently discriminatory and vulnerable to challenge in the World 
Trade Organization. Also, if the United States implements a user fee 
for the computerization of clearance functions for imports, we can 
expect other countries very quickly to do the same, imposing additional 
costs and competitive burdens on U.S. exports.
    AAEI requests a bipartisan review be conducted by an unbiased 
government agency, such as the ITC or USTR to assess the compatibility 
of the proposed new automation MPF with the rules of the World Trade 
Organization. We also ask Congress to join AAEI in its efforts to 
obtain from Customs, OMB and/or Treasury any analysis or review they 
have already conducted with regard to WTO compatibility.

                               Conclusion

    In its February 1999 reports, Customs Service Modernization--
Serious Management and Technical Weaknesses Must be Corrected, and 
Ineffectual Software Development Processes Increase Customs System 
Development Risks, the General Accounting Office indicated that Customs 
agreed with its recommendations and stated that it is committed to 
remedying the problems highlighted in the reports. As underscored by 
the Commissioners recent Congressional testimony, the agency has wasted 
no time in implementing new strategies to get ACE up-an-running.
    AAEI commends Customs on its success in achieving Y2k compliance 
with respect to its current system. The GAO recently testified before 
the House Ways and Means Committee on the effectiveness of Customs Y2k 
management and reporting controls. Customs overall success was 
attributed to its year 2000 program management structures and 
processes. Customs was also praised for its Y2k testing with the 
private sector.
    ACE development can be delayed no further. The current ACS is on 
the verge of collapse, threatening to paralyze international commerce 
and ultimately, wreak havoc on our national economy. An increase in 
user fees to pay for ACE and/or ITDS will inevitably face concerted 
legal challenges. AAEI has launched a grass roots campaign among its 
1000 company members to educate their respective representatives on the 
exigent circumstances that we, as a nation, are now confronting and the 
need for prompt action.
    AAEI believes that if Customs continues in the direction in which 
it is now headed, with continued support from the trade community and 
adequate government appropriations, a successful ACE system can be 
realized without serious disruptions to the U.S. economy.

                                

    Chairman Crane. Thank you, Mr. Salamone.
    Our final witness, Ms. O'Dell.

  STATEMENT OF JANE B. O'DELL, VICE PRESIDENT, INTERNATIONAL 
TRADE AND CUSTOMS COMPLIANCE, THE LIMITED, REYNOLDSBURG, OHIO, 
ON BEHALF OF THE COALITION FOR CUSTOMS AUTOMATION FUNDING, AND 
   INTERNATIONAL MASS RETAIL ASSOCIATION, ARLINGTON, VIRGINIA

    Ms. O'Dell. Thank you, Mr. Chairman, Members of the 
Subcommittee. My name is Jane O'Dell. I am vice president of 
international trade and customs compliance for The Limited. I 
am appearing today on behalf of the Coalition for Customs 
Automation Funding, which is an industry coalition made up of 
manufacturers, retailers, importers, exporters, carriers, air 
couriers, forwarders, and trade associations, all of whom have 
significant interests in the operations of the Customs Service, 
and range in size from Fortune 500 companies down to sole 
proprietorships with a handful of employees.
    I am also representing the International Mass Retail 
Association, which is the trade association that represents the 
fastest growing segment in the retail industry, discount 
department stores, home centers, catalog showrooms, warehouse 
clubs, and even category-dominant specialty retailers like The 
Limited.
    You recognize the name through a number of our known family 
of fashion brands, Express, Lerner New York, Lane Bryant, 
Structure, Limited and Limited Too, Galyans, Victoria's Secret, 
and Bath and Body Works, are all members of The Limited family. 
We currently comprise over 5,000 stores in the United States 
and in the United Kingdom, and over 142,000 associates in the 
United States.
    Because we depend on a global sourcing base for both our 
U.S. supply and our supply in the U.K., you could say that we 
see U.S. Customs both coming and going. That gives us a unique 
perspective on their operations. I am also particularly 
interested in U.S. Customs. I began my career as an import 
specialist in the early 1970's, before there was such a thing 
as automation of Customs processes. I am also a licensed 
Customs broker, so I have worked with them in that capacity. I 
have worked also for importing companies as I am now.
    I was fortunate enough to be appointed to two terms by the 
Secretary of the Treasury on the committee that advises the 
Secretary on the commercial operations of U.S. Customs. In that 
capacity, had an opportunity to learn a lot more about the 
strategic interests of the Customs Service, as well as the way 
it has a direct impact on the business community. We want to 
see them do their job well, and we want them to have the tools 
to be able to do that.
    Before the current automated commercial system, ACS was 
designed in the 1980's, Customs did its work by hand. I vividly 
remember drawing red lines on salmon-colored pieces of paper. 
That was the standard that was used to pick up data which would 
subsequently be keyed into a computer by someone else. In that 
process, the number of clerical errors that were made and the 
amount of judgment that had to be brought to the process on 
limited information certainly affected the ability of Customs 
to do its job both as an enforcement agency, and as a revenue-
collecting agency. The automation of that process has made a 
huge difference, both to the efficiency of the service and to 
their effectiveness.
    In the past 15 years, U.S. businesses have also planned 
around the capabilities of an automated Customs Service. We are 
now more or less dependent on it. Every time it crashes or 
slows down, someone somewhere along the supply chain pays a 
price. For carriers, warehouses and docks become congested and 
over-crowded. If they cannot keep their employees fully 
occupied, then they are forced to work them over-time and the 
economic impact ends up resonating through the entire economy.
    For manufacturers, waiting for components, as you have 
heard from some of my colleagues here today, you may have an 
entire production line closed down, and the accompanying 
economic effects. For importers like The Limited, the price is 
not having the merchandise that someone expects us to have at 
the appropriate time. Timing is very important to us. We need 
to have a mix of merchandise that changes constantly. We target 
holidays with special products so we need to have a supply 
chain that is both efficient and is predictable, that can move 
thousands of items to thousands of stores, from hundreds of 
global locations, in a series of orchestrated transportation 
moves.
    I will give you an example. I don't suppose that this week 
there are very many people buying baskets with egg-shaped soaps 
and little terry cloth Easter bunnies in them. Bath and Body 
Works combines lotions, soaps, and personal care products that 
are made in the United States with imported novelty items in 
imported baskets as gift sets. The components are all scheduled 
to arrive at an assembler in the United States just in time for 
assembly, and then for store delivery. In order to accomplish 
this, we need to have the Customs Service operating and 
predictable.
    Now there are those who may ask whether it is Congress' 
business to ensure that there is an efficient supply chain. I 
think the answer to that is yes. As you have also heard, this 
is one of the foundations of the U.S. economy at this point. 
Manufactures rely on it. Retailers rely on it. The entire 
support sector relies on it. Unfortunately, the President's 
budget for the year 2000 does not recognize the need for this 
funding to build an automated commercial system that ensures a 
steady supply of merchandise back and forth across our borders.
    You have also heard it said that this is something that 
should be paid for by the import community, to which we respond 
we have paid for it. The merchandise processing fee that was 
levied on importers was levied as a means of funding the 
operations of the Customs Service, and the processing of 
international trade is their fundamental reason for being 
there. We ask Congress to live up to the agreement that we made 
in accepting this and the Modernization Act, and fund the 
Automated Commercial Environment.
    [The prepared statement follows:]

Statement of Jane B. O'Dell, Vice President, International Trade and 
Customs Compliance, The Limited, Reynoldsburg, Ohio, on behalf of the 
Coalition for Customs Automation Funding, and International Mass Retail 
Association, Arlington, Virginia

    My name is Jane O'Dell. I am Vice President of International Trade 
& Customs Compliance for The Limited and I'm appearing today on behalf 
of the Coalition for Customs Automation Funding; an inter-industry 
coalition representing trade associations, Fortune 500 companies, 
customs brokers, manufacturers, retailers, importers, exporters, 
forwarders, air couriers, and transportation companies all with 
significant interests in Customs automation.
    I am also representing the International Mass Retail Association, 
the trade association that represents the fastest growing retailers in 
the world, including discount department stores, home centers, 
catalogue showrooms, dollar stores, warehouse clubs, deep discount 
drugstores, off-price stores and category dominant specialty retailers 
like The Limited.
    The Limited, Inc., through Express, Lerner New York, Lane Bryant, 
Limited Stores, Structure, Limited Too, Galyan's and its interest in 
Victoria's Secret and Bath and Body Works, is a leading branded 
retailer with over 5,000 stores (including stores in England) and 
142,000 associates. Like many in our industry we rely on a global 
sourcing base, and both import into and export from the United States. 
You could say we see U.S. Customs coming, and going.
    My interest in how Customs does its work comes from many years in 
the industry, in a variety of roles. In the early 70's I was a U.S. 
Customs Import Specialist. I am a licensed customs broker. I have 
worked as a customs expert for brokerage firms, importers, consultants 
and retailers. I was also appointed by the Secretary of the Treasury to 
two consecutive terms on the Treasury Advisory Committee on the 
Operations of the U.S. Customs Service, completing the second term in 
1998. While I am certainly concerned with Customs' ability to process 
international transactions, I am also concerned with their strategic 
goals, and what they need to do their job well.
    Before the current automated commercial system, ACS, was designed 
in the 80's, Customs did its work by hand. Automation has made it 
possible for the Service to introduce efficiencies into its revenue 
collection process, into its enforcement process, and handle explosive 
increases in trade with a steady work force. Incidentally, it has made 
the supply chain more effective and predictable. You have heard from 
other witnesses today that ACS is now out of date, subject to 
slowdowns, brownouts and crashes.
    In the past 15 years, U.S. business has planned around the 
capabilities of ACS, and each time it crashes or slows down someone, 
somewhere in the supply chain pays a price. For carriers, their 
warehouses and docks become congested and they cannot keep employees 
fully occupied. For manufacturers waiting for components, a production 
line may close. For importers like The Limited, the price is not having 
merchandise that someone expects us to have at our stores.
    For some of our fashion merchandise stores, it's also very 
important that we have a mix of merchandise that changes constantly. We 
target holidays with special products. We continuously change the 
merchandise in our stores. To keep a steady schedule, we need a supply 
chain that's efficient; that can move thousands of items to thousands 
of stores from hundreds of global locations in a series of orchestrated 
transportation moves designed to have all the coordinated fashion 
elements arrive more or less simulaneously. If we don't achieve this, 
we lose sales to our many competitors.
    I'll give you an example. I don't suppose many people are buying 
baskets with egg-shaped soap, and terry cloth bunnies this week. Bath & 
Body Works combines lotions, soaps, and personal care products made 
domestically with imported novelty items in imported baskets as gift 
sets. The components are scheduled to arrive at an assembler in the 
U.S., just-in-time for assembly and store delivery for holidays. Losing 
16 hours on the delivery of the baskets costs the workers their time 
(they aren't paid when there is no work), and the economic impact of 
our inability to bring a product to market will be felt by the 
division, but may also affect the corporation, the suppliers (both 
international and domestic). On Monday bunnies went to markdown.
    We rely on U.S. Customs to perform its work in a way that does not 
inhibit legitimate commerce. The efficiency of the Customs Service also 
reflects their ability to collect revenues efficiently, to identify 
contraband with sophisticated tools, and to meet the obligations of our 
international trading relationships, which are often targetted at non-
tariff barriers to trade.
    Now some might think it's humorous that I appear here today to talk 
to you about efficiency in the global supply chain. Some might even ask 
whether Congress should work to achieve an efficient global supply 
chain. There are those who believe it's in the larger domestic interest 
for the process at the nation's ports to be inefficient. For the 
reasons stated above, that is not true.
    Indeed, the President's fiscal year 2000 budget appears to take 
this view. It appropriates no money for the development of a new 
customs automation system, even though virtually every senior official 
at Customs and Treasury knows ACS is on the brink of catastrophic 
failure. Instead, it proposes a new, WTO and NAFTA illegal user fee, 
which would make the trade community responsible for paying for 
upgrading Customs' automated systems. If it happens in business, we 
consider it normal operating expense. It's paid out of our revenues. A 
comparable scenario: when we sell that holiday basket, and the buyer 
comes to the cash register, we tell them it's another quarter, because 
we need to work on our computer.
    Now, let me be clear on where the Coalition for Customs Automation 
Funding stands on the Administration's user fee proposal. Many of the 
coalition's members need efficiency at the ports, but we all share one 
common viewpoint: the process of collecting revenues and regulating 
commerce at the nation's borders is an essential government function. 
If we had no duties, quotas, dumping statutes we wouldn't need a 
Customs Service to process commercial entries. It's these essential 
government functions that impose a corresponding responsibility upon 
the government itself--a responsibility that somehow the Administration 
failed to recognize in its FY2000 budget.
    That responsibility is to ensure that regulation at the ports--a 
necessity to protect domestic industry--doesn't become so inefficient 
that it harms the very industry it's there to protect.
    As you have heard from many here today, if ACS fails, many U.S. 
industries and workers will be harmed. The question here is whether the 
system has to completely break down before the Administration will 
recognize its responsibility or Congress will appropriate the money?
    Government should pay for the creation of a new computer system for 
the Customs Service out of general revenues. Is the business community 
willing to foot the $1.2 billion it will take to build the Automated 
Commercial Environment? The simple answer is that we already have paid 
for this system, several times over. Importers pay $20 billion each 
year in duties and an additional $800 million annually in merchandise 
processing fees designed to cover the cost of processing entries at the 
nation's ports. That adds up to $20.8 billion each and every year. It 
would take only about $300 million annually for the next four years to 
build the new Automated Commercial Environment. The cost of the system 
comes to about 1.4 percent of the revenues and merchandise fees 
collected from the trade community each year.
    There is no need for a new user fee.
    The Administration has spoken on this issue, it obviously does not 
believe that a revenue collection system is important enough to fund 
out of general revenues.
    It's up to Congress now. If Congress fails to appropriate the 
necessary funds, inefficiencies will escalate. I've tried to convey 
something of the impact here, but let me add one additional point. The 
United States frequently takes other countries to task for the 
failings, inefficiencies and unfairness of their customs regimes. 
Unless we give our Customs officers the tools they need, we're on the 
path to third world operating capability.
    I urge you not to let that happen.
    Almost seven years ago, this committee of Congress made a deal with 
U.S. businesses in the form of the Customs Modernization Act. We in the 
trade community took on the task of informed compliance, reasonable 
care, new recordkeeping requirements and penalties. In return we were 
promised a more transparent, efficient process for releasing goods and 
paying duties. And Customs has worked with us, to ensure all parties 
benefitted from the changes.
    The business community has expended enormous resources in 
reengineering our systems to ensure that we are able to meet our Mod 
Act responsibilities, so that Customs need not be a bottleneck in our 
supply chain. We've kept our end of the bargain.
    It's time for Congress to keep it's part of the deal. Fund customs 
automation now, in this fiscal budget.

                                

    Chairman Crane. Thank you, Ms. O'Dell.
    Are any of you in your processes of modernization in the 
automation area, apprehensive about the uncertainty of the ACE 
project impact on your automation plans?
    Ms. O'Dell. I can say something to that. We are actually in 
the process of developing our own supply chain architecture at 
this point. I think Mr. Schoof noted that, Customs has been 
very helpful in making available to the trade community the 
plans for the development of the Automated Commercial 
Environment. I was able to involve our technical people in the 
trade support network meetings where they discussed the actual 
structure of it. We fully intend, as ACE is developed, to 
remain in communication with Customs so that we can ensure that 
there is compatibility in processes.
    Chairman Crane. I gather, based upon your testimony and Mr. 
Salamone's before, that there may be none of you in favor of a 
user fee to cover the cost? Correct?
    Ms. O'Dell. Well, there is a user fee. We are currently 
paying it.
    Chairman Crane. I mean above and beyond.
    All right. Mr. Levin.
    Mr. Levin. Let me just ask a question, and why don't you 
submit your responses for the record because I am afraid we 
need to go ahead. Before I ask it, you make a very persuasive 
case. I hope you will accelerate your efforts to make it to all 
the powers that be around here. I think you have a long way to 
go. I doubt if it has been included in anybody's plans at this 
point, the Budget Committee, Appropriations Committee, Ways and 
Means Committee. What's left?
    Several of you have referred to emergency funding. I am 
sure that even further has been away from the consciousness of 
people. So again, I think you make a very, very strong case, 
but strong cases don't win by themselves. So I really urge you 
to re-triple your efforts.
    Then for the record, several of you have indicated you 
think that the user fee, whatever its other merits, would 
violate NAFTA, WTO, or both. So why don't you, if I might 
suggest it, Mr. Chairman, why don't you send us your thoughts 
on that for the record so we can consider the question of WTO 
or NAFTA consistency, which are important considerations.
    So good luck. I guess it's not appropriate for a Member to 
suggest how you lobby, so I won't. But I do suggest that there 
is a very low level of information, I think understandably, 
with all the other issues. Some of us are going to go soon to a 
briefing on Kosovo. So there are other things going on. Customs 
issues tend not to be at the top of the priority list for most, 
understandably so. I think you have your work cut out for you.
    Thank you, Mr. Chairman.
    Chairman Crane. Mr. Becerra.
    Mr. Becerra. Mr. Chairman, I think Mr. Levin put it best. I 
would love to see what you have to say about both of those 
questions that Mr. Levin has posed or commentary he made. It 
would be helpful for us to know why the industry shouldn't have 
to pay the fee. A billion dollars is quite a bit of money. We 
will have to figure out how we pay for that. So it would be 
very helpful, it would be instructive to have that in the 
record, that there are legitimate reasons why the industries 
don't believe that they should have to take on another fee.
    It also would be helpful if you could provide any other 
comment beyond your written testimony and oral testimony about 
some of the changes that Customs is trying to make. You know, 
there is still some question about whether this ACE system is 
really the way to go, if they will be able to merge well with 
the ITDS. Anything you can offer that will help us feel more 
comfortable going a particular direction--it is going to be an 
investment of money one way or the other--that would be 
instructive.
    So I will leave it at that. I thank everyone for being here 
and providing testimony.
    Chairman Crane. I again thank you all for your 
participation today and your input. We look forward to 
continuing to work with you.
    [The following information was subsequently received:]

  Coalition for Customs Automation Funding, Joint Industry 
        Group, and National Customs Brokers and Forwarders 
                               Association of America, Inc.
                                                     April 15, 1999
The Honorable Philip Crane
Chairman, House Ways & Means Committee,
Subcommittee on Trade
1104 Longworth House Office Building
Washington, DC 20515-6354

    Dear Congressman Crane:

    Thank you for the opportunity of the Coalition for Customs 
Automation Funding (CCAF) to testify before the House Ways & Means 
Committee, Subcommittee on Trade, regarding the President's proposed 
FY2000 budget and the US Customs Service automation funding level. At 
the Subcommittee's request, we are sending a legal opinion supported by 
the CCAF that supports the statement that the user fees proposed in the 
President's budget violate the North American Free Trade Agreement 
(NAFTA) with Mexico and Canada. We believe the proposed fee may also be 
a violation of the GATT.
    The President's budget for FY2000 states under the heading 
``Automation Modernization:''

          ``Contingent upon the enactment of authorizing legislation, 
        the Secretary shall charge a fee for the use of Customs 
        automated systems, and such fee shall be deposited as an 
        offsetting collection to this appropriation, to become 
        available on October 1, 2000 and remain available until 
        expended, for the purpose of modernizing Customs automated 
        commercial operations, and of which, $13,000,000 shall be for 
        an international trade data system: Provided further, That upon 
        enactment of such authorizing legislation, the amount 
        appropriated above from the General Fund shall be reduced by 
        $163,000,000: Provided further, That none of these funds shall 
        be obligated until 10 days after a spending plan for the funds 
        has been submitted to the Office of Management and Budget and 
        the Treasury Investment Review Board.''\1\
---------------------------------------------------------------------------
    \1\ Page 836 of The Budget For Fiscal Year 2000

    Furthermore, the Automation Modernization Fee was described as 
---------------------------------------------------------------------------
follows:

          ``The Administration proposes to establish a fee for the use 
        of Customs automated systems. The fee will be charged to users 
        of any Customs automated system based on the user's units of 
        data input. Proceeds of the fee will offset the costs of 
        modernizing Customs automated commercial operations and an 
        international trade data system, and will be available for 
        obligation after 2000. Legislation will be transmitted to allow 
        the Secretary to establish a fee for the use of Customs 
        automated systems.''\2\
---------------------------------------------------------------------------
    \2\ Page 836 of The Budget For Fiscal Year 2000

    NAFTA Article 310 (entitled ``Customs User Fees'') prohibits the 
adoption of any Custom user fees as follows:
    1. No Party may adopt any customs user fee of the type referred to 
in Annex 310.1 for originating goods.
    2. The Parties specified in Annex 310.1 may maintain existing such 
fees in accordance with that Annex.
    NAFTA Annex 310.1 (entitled ``Existing Customs User Fees'') states:

                           Section A--Mexico

    Mexico shall not increase its customs processing fee (``derechos de 
trimite aduanero'') on originating, goods, and shall eliminate such fee 
on originating goods by June 30, 1999.

                        Section B--United States

    1. The United States shall not increase its merchandise processing 
fee and shall eliminate such fee according to the schedule set out in 
Article 403 of the Canada--United States Free Trade Agreement on 
originating goods where those goods qualify to be marked as goods of 
Canada pursuant to Annex 311, without regard to whether the ,goods are 
marked.
    2. The United States shall not increase its merchandise processing 
fee and shall eliminate such fee by June 30, 1999, on originating goods 
where those goods qualify to be marked as goods of Mexico pursuant to 
Annex 311, without regards to whether the goods are marked.
    In summation, Article 310.1 states that the US is prohibited from 
assessing customs user fees on goods originating in Canada and Mexico. 
The CCAF sustains the position that the definition of ``customs user 
fees'' not limited to merchandise processing fees alone, but also 
includes any similar user fee.
    The proposed user fee may also place the US in violation of the 
GATT. GATT Article VIII.1 (a) limits fees and charges connected with 
importations to an amount that reflects the approximate cost of 
services rendered and further states that such fees and charges shall 
not be a taxation of imports for fiscal purposes:
    1.(a) All fees and charges of whatever character (other than import 
and export duties and other than taxes within the purview of Article 
III) imposed by contracting parties on or in connection with 
importation or exportation shall be limited in amount to the 
approximate cost of services rendered and shall not represent an 
indirect protection to domestic products of a taxation of imports or 
exports for fiscal purposes. . . .
    The CCAF maintains that the proposed user fee represents a tax on 
imports imposed for the sole purpose of generating revenue for the 
development of US Customs automated systems. As such, the fee is de 
facto a tax collected to offset the costs of modernizing the automated 
systems of the US Customs Service, i.e., a fiscal purpose. Furthermore, 
any fee assessed must be based on the ``cost of services rendered.'' 
From the CCAF perspective because the fee is based on the amount of 
data submitted, there is no relation to the ``cost or services 
rendered.''
    We urge the Subcommittee to reassess the validity of the 
President's proposed FY2000 budget for Customs automation 
modernization. Appropriated funds should be allocated so that the 
government can fulfill its obligations under the Customs Modernization 
and Informed Compliance Act (Mod Act) while complying with NAFTA, GATT, 
and other international agreements.
            Sincerely,

                                

            American Association of Exporters and Importers
                                   New York, New York 10036
                                                     April 19, 1999
The Honorable Philip M. Crane
U.S. House of Representatives
Washington, DC 20515

    Dear Mr. Chairman:

    The American Association of Exporters and Importers (AAEI) 
testified at the April 13 Trade Subcommittee hearing where Congressman 
Sander M. Levin requested that witnesses provide the Subcommittee with 
a legal analysis of the WTO and NAFTA compatibility of a user fee to 
fund Customs automation. AAEI believes it also would be appropriate to 
ask U.S. Customs, the Department of Treasury and OMB for the results of 
their internal analysis and review of the subject.
    In our discussions with Customs it was indicated that an internal 
analysis had been performed but was not available for review by the 
private sector. In AAEI's April 13 testimony, as well as our testimony 
presented last year, we suggested that a disinterested agency of 
government review the compatibility issue. Additionally, in both our 
1998 and 1999 testimony, we requested that Customs, Treasury and OMB 
make publicly available any such analysis already conducted.
    AAEI also understands that Canadian International Trade Minister 
Sergio Marchi has expressed Canada's objection to an automation user 
fee. In an April 1, 1999 letter Mr. Marchi stated ``In our view, the 
proposed user fee would be a customs user fee of the type that is 
prohibited by Article 310 of the NAFTA and therefore inconsistent with 
U.S. obligations under the NAFTA.'' Also, the Canadian Trucking 
Association has conducted a legal analysis which was presented to the 
Trade Subcommittee on April 13th. We understand the Canadians will 
address the issue at the NAFTA Ministerial meeting this week. Enclosed 
please find a portion of the U.S. NAFTA implementing legislation 
supporting this view.
    AAEI has not yet commissioned an analysis of the potential legal 
ramifications of the proposed user fee to fund ACE or ITDS. Current 
proposals lack sufficient detail to permit a precise review against WTO 
and NAFTA standards. Even the general proposals have been continuously 
modified, making it almost impossible to accurately ascertain whether 
the fees they propose would ultimately withstand the legal challenges 
they will inevitably face. To conduct a proper study, we would require 
specific information relative the proposals, including the following:
    1. An explanation of the ACE architectural plan including 
functionalities relating to costs of hardware, software, maintenance, 
roll-out, and timing.
    2. A cost breakdown ascribed to commercial entry processing, 
commercial enforcement, (AD/CVD duties, quotas, visas, etc.) drug 
enforcement, statistical data elements, and other agency requirements.
    3. A cost treatment and charging of export components. Will there 
be a separate fee?
    4. An explication of how the proposed fee would be structured to 
meet our obligations under NAFTA and the Israel Free Trade Agreement. 
We would need to know whether there would be free trade agreement 
offsets under ACE with explanations of the formulas proposed. 
Similarly, for ITDS, an explanation of how other countries would 
participate in software and cost recovery.
    5. If the proposal relies on a similar charging of IT costs to the 
public by other U.S. agencies or WTO member countries, we would need a 
list of how those agencies and countries treat these costs.
    6. An explanation of the degree to which importers, brokers, and 
carriers would have any oversight role in the design and maintenance 
and access to the system and the manner in which such a role would be 
exercised.
    7. The manner in which sunset provisions would be guaranteed.
    8. Demonstrated cost benefits analysis of ACE with payback 
schedules tied to sunset provisions.
    In essence, the conduct of a legal analysis of any user fee 
proposal requires a great deal more information than is currently 
available regarding both the automation plans themselves and how the 
fee would be applied. We fail to see how the Administration and/or 
Customs can advocate either a new user fee or an increase in the 
existing fee to fund automation without having first conducted a 
thorough analysis of the many issues such a fee would unquestionably 
raise. Surely, any proposal with this impact on the public must be 
backed with ample data to legally and logically support its purported 
viability.
    AAEI thanks you again for the opportunity to present our views. 
Feel free to contact me should you have any further questions.
            Sincerely,
                                        Richard J. Salamone

    [Attachment is being retained in the Committee files.]

                                

    With that, we will now have our final panel: Mr. Tobias, 
national president, National Treasury Employees Union; Carol 
Hallett, president and CEO, Air Transport Association; Susan 
Kohn Ross, chairperson, S.K. Ross and Associates; and James 
Rogers, chairman, International Committee, Air Courier 
Conference of America. If you will all be seated, we will 
proceed in the order that I introduced you. I will ask you 
again to please try and keep oral presentations to about 5 
minutes. Any printed statements will be made a part of the 
permanent record.
    With that, Mr. Tobias, you may proceed.

  STATEMENT OF ROBERT M. TOBIAS, NATIONAL PRESIDENT, NATIONAL 
                    TREASURY EMPLOYEES UNION

    Mr. Tobias. Chairman Crane, and Ranking Member Levin, and 
Mr. Becerra, thank you very much for providing NTEU with the 
opportunity to testify this afternoon on a Customs 
authorization bill.
    As you have already heard in great detail, the duties and 
responsibilities of the Customs Service have increased. The 
number of passengers and volume of trade has increased. As a 
result, the Customs Service needs additional technology and 
human resources to accomplish its mission. We have done more 
with less through creative new work processes, but we have 
reached the limit. Without more resources, we will inevitably 
be able to accomplish less. We need additional authorization, 
but more importantly, we need additional appropriations.
    The promise of an authorization must be supported by the 
reality of an appropriation in order for the Customs Service to 
do what I know it can do. In terms of expectations, it is 
important to keep in mind that the Customs inspectors and 
canine enforcement officers are journey level grade 9 
employees, who start at $33,000 a year. They may be promoted to 
the GS-11 level which starts at approximately $40,000 a year. 
So that is the salary that we are talking about for these 
folks.
     When the Customs Service fails to promote people to the 
GS-11 level because of a lack of funds, as it has for several 
years in San Diego and Calexico and other places along the 
southwest border, it is impossible to keep the best, which is 
what we all deserve.
    In addition, the inspectors and CEOs have a life controlled 
by their job. They work rotating shifts. They work in cold and 
heat. They regularly work weekends. They are at the call of 
Customs management's orders to work overtime. The staffing 
levels at most ports are not adequate to meet the needs of the 
ports, so situations occur daily that require inspectors to 
come into work on their days off, and to stay beyond their 
shift for overtime assignments. Most inspectors around the 
country do not have a full day off during the week. Frequently, 
they have to scramble to find a replacement or struggle to 
arrange childcare and juggle family commitments. Most Customs 
inspectors and CEOs work at least 16 hours of overtime each 
week. That means a 7-day work week or 16-hour days. This is not 
an odd occurrence. This is a way of life.
    Virginia Rodriguez, who you introduced earlier, Mr. 
Chairman, is a single mother of a toddler. She has been a 
Customs inspector in Brownsville, Texas, for 12 years. She 
recognizes the importance of providing an accurate picture of 
her life as a Customs inspector. That is why she came from 
Harlingen, Texas, to be with us today. In 1997, during a 
routine investigation of a bus traveling across the border, 
Inspector Rodriguez apprehended one of FBI's most wanted 
criminals. For her work, she has received Customs' performance 
awards throughout her career with the agency, and has been 
featured on the television program America's Most Wanted.
    But in spite of all of this accolade, Inspector Rodriguez 
finds it incredibly difficult to maintain her family life, care 
for her child, and maintain the work schedules required of 
inspectors in Brownsville. While she is assigned to a 40-hour 
work week, she regularly works 56 hours per week. Most 
inspectors in Brownsville work more overtime than she does. She 
usually works 8 hours a day and both her days off so that she 
can relieve her babysitter at the end of the shift and avoid 
being drafted for overtime.
    The threat of forced overtime is real for Virginia 
Rodriguez. Countless times she has been required to work 
overtime, forcing her to make last minute arrangements for her 
son. It has been almost 12 years since Inspector Rodriguez has 
spent a Thanksgiving Day or Christmas Day with her family. She 
is not alone in this effort. The same is true for most 
inspectors working around the country.
    Congress recognized that Customs employees must be paid for 
this overtime work. The original overtime payment formula was 
created in 1911, and then modified in 1993. Under the 1993 law, 
COPRA, an employee is paid only for the hours that that 
employee works. It was a change from the 1911 law. They are 
only paid for the hours that they work. Now in addition to 
overtime, Customs employees are eligible for premium pay for 
working at nights, holidays, and Sundays.
    There was an elaborate chart, as I understand it, that was 
presented this morning about when someone is entitled to time 
at 15 percent and time at 20 percent. This system was created 
to compensate the inspection personnel for living with 
unpredictability and constant irregularity.
    In addition to special pay adjustments, Federal employees 
with law enforcement officer status receive full retirement 
benefits after 20 years of Government service in law 
enforcement. Even Members of Congress have this benefit, but 
currently Customs inspectors and CEOs who carry weapons, who 
make arrests, and who seize more illegal drugs than any other 
Federal group, are denied this benefit. We have been trying to 
convince Congress to pass legislation to give Customs 
inspectors and CEOs 20-year retirement, recognize that they are 
indeed enforcement officials, but we haven't been successful. 
In the meantime, the current provisions of the Customs Officer 
Pay Reform Act must suffice as incentives for the sacrifices 
Customs inspectors make to the Customs Service. NTEU believes 
that changes to this pay system would be misguided and 
unnecessary. This difficult work situation could be made worse 
with a mandatory rotation policy.
    There was much discussion last year about collective 
bargaining between NTEU and the Customs Service. There is no 
evidence to show that the mission of interdicting drugs is 
impaired when the Customs Service lives up to the collective 
bargaining provisions it has negotiated. On the contrary, 
Customs and NTEU have an impressive working relationship. In 
1998, the Customs and NTEU received the John N. Sturdivant 
Partnership Award in recognition of their contributions to 
reinventing Government through labor-management cooperation. 
This year, the parties have been nominated for the Office of 
Personnel Management director's award for outstanding 
alternative dispute resolution programs, focusing on resolving 
employee workplace disputes. There is no need for statutory 
provisions that eliminate negotiated contractual rights or 
undermine the labor-management relationship.
    I applaud this Subcommittee for recognizing the 21st 
century needs of the Customs Service. I urge each of you to 
visit the Customs ports in your home districts, talk to the 
inspectors and CEOs there to fully comprehend what their 
regular work lives are like. Then you may understand why NTEU 
will support a Customs authorization bill, but will strongly 
oppose any legislation that would limit the pay or rights of 
the rank and file Customs officers.
    Thank you for the opportunity to be here today on behalf of 
the Customs Service employees to discuss these very important 
issues.
    [The prepared statement follows:]

Statement of Robert M. Tobias, National President, National Treasury 
Employees Union

    Chairman Crane, Ranking Member Levin and Members of the 
Subcommittee, my name is Robert M. Tobias, and I am the National 
President of the National Treasury Employees Union (NTEU). On behalf of 
more than 155,000 federal employees represented by NTEU, almost 13,000 
of whom work for the United States Customs Service, I would like to 
thank you for this opportunity to present our Union's views on an 
authorization bill for the Customs Service.
    The Customs Service is a front line enforcement agency. Its mission 
is to ensure the public's compliance with hundreds of import laws and 
regulations while stemming the flow of illegal drugs and contraband 
into the United States. It has been nearly a decade since Congress has 
passed a Customs authorization bill. Over the last ten years, 
legitimate U.S. imports have grown at double digit rates, illegal 
narcotics smugglers have begun to exploit new and sophisticated methods 
of moving drugs into the country, and Customs employees have been 
tasked with combating international money-laundering and arms 
smuggling.
    In addition, Customs is the first line of defense against the 
illegal importation of merchandise manufactured with forced child labor 
as well as weapons of mass destruction used in terrorist threats. The 
Agency is also tasked with combating crimes in cyberspace. This type of 
crime most certainly was not envisioned back in 1789 when the Customs 
Service began as the collector of imports and duties on products 
entering the United States. Yet the Agency must keep pace with the 
criminal element that will stop at nothing to exploit children, launder 
money and violate intellectual property rights over the Internet. For 
Customs, the technology and expertise needed to combat cybercrime is as 
essential as the high tech equipment needed for processing legitimate 
cargo and passengers at the hundreds of ports of entry around the 
United States.
    In FY 1999, Customs estimates it will process over 470 million 
land, sea and air passengers. Over 130 million carriers will enter our 
ports in 1999 and over $850 billion worth of merchandise will be 
processed at the borders. Notwithstanding the Customs Service's 
relatively static workforce and increasing workload over the past five 
years, this Agency continues to seize more narcotics than all other 
federal agencies combined. While we expect to keep the drug seizures 
high throughout 1999 and into the new century, additional resources, 
personnel and technology are necessary for this effort. The goal is to 
win the war on drugs without placing an undue burden on trade.

                             FY 2000 Budget

    The Administration has requested a funding level of $1.93 billion, 
and 17,389 FTEs for fiscal year 2000. While this figure is $95.5 
million more than the budget for Fiscal Year 1999, over $312 million of 
this amount would be derived from a proposed increase to the passenger 
processing fee. This increase in passenger processing fees would have 
to be enacted by July of this year in order to provide adequate funding 
for essential Customs programs, including long term commitments to the 
Automated Commercial Environment and new more aggressive enforcement 
efforts. Many think this will be difficult, if not impossible, and that 
Customs' funding for FY 2000 is in jeopardy of falling far short of its 
needs.
    While NTEU supports increased authorization of funds for the 
Customs Service, no increase in funds will actually be available to 
Customs without increased appropriations. The discretionary spending 
caps in the House and Senate Budget Resolutions, which have recently 
passed, will make increased appropriations extremely difficult, if not 
impossible, to achieve.

                          Inspection Personnel

    Customs Inspectors and Canine Enforcement Officers (CEOs) at land, 
sea and air ports present the first line of defense to the illegal 
importation of drugs and contraband across our borders. They are 
literally on the front lines. They work in career ladder positions that 
begin at the GS-5 level--approximately $20,000 per year. Only after two 
years will an Inspector reach the journeyman level of his or her career 
from which there is no guaranteed promotion. This journeyman level (GS-
9) begins at $30,000 annually and is the highest grade level most 
Customs Inspectors and CEOs will attain. This level means that at the 
very height of an Inspector's career, and even after twenty-five years 
of dedication to the Customs Service, he or she will make a maximum 
base salary of about $40,000 per year. In many areas around the 
country, including San Diego, California, promotions to the GS-11 level 
have not occurred in several years. This refusal to promote qualified 
and deserving Inspectors to the GS-11 level has contributed to a low 
morale in the Inspector ranks in San Diego and Calexico and many other 
ports around the country. If Congress wants Customs to keep its most 
experienced and skilled Customs Inspectors, it should demand that more 
GS-11 upgrades be given.

                       Shifts and Irregular Hours

    Not many people recognize the concessions Inspectors and Canine 
Enforcement Officers make for the Customs Service. Their lives are 
controlled by their jobs. First, they rarely work regular 9 a.m. to 5 
p.m. schedules and, unlike hundreds of thousands of their fellow 
federal government employees, Customs inspection personnel have little 
control over the schedules they work in any given two week period.
    Cargo shipments and passengers cross our borders at all times of 
the day and night, and Customs Inspectors must be there to process 
them. It has been noted over and over again that drug smugglers rarely 
work from 9-5. Well, neither do the hard-working men and women of the 
Customs Service. Most Customs Inspectors and CEOs around the country 
are expected to work at a minimum three different shift schedules. A 
shift one week may be as ordinary as 8 a.m. to 4 p.m., but the next 
week it may be as disruptive to the body clock and family life as 5:15 
a.m. to 1:15 p.m. or even 3 a.m. to 11 a.m.
    John Wilda is a Customs Inspector in High Gate Springs, Vermont. He 
has worked for the Customs Service for over twenty-five years. He has a 
wife and two children. In order to attend his son's evening sports 
events and coach his son's baseball teams, for years, Inspector Wilda 
worked what is commonly known as a ``quick turn'' schedule, one in 
which he had less than eight hours off between his assigned eight hour 
shifts. His day began at the port at 8 a.m. and ended at 4 p.m. He 
drove home, coached his son's team, spent the evening hours with his 
family and just as they settled in for the night, he had to return to 
the port for the midnight to 8 a.m. shift.
    According to Patrick McGannon, a Customs inspector in Laredo, 
Texas, the changing times and workdays leave little time for family 
life. It is a luxury to be at home at the same time as your children 
and spouse. Often it takes hours at home to unwind from an intense and 
exhausting day working on the border. Inspectors regularly sacrifice 
attendance at school events and teacher conferences, and they rarely 
have an opportunity to oversee daily or nightly activities at home. The 
Inspectors in Laredo combat the extreme cold in winter and intense heat 
in the summer, while they battle sleep problems from working one week 
on the midnight shift and the next on the early morning shift. Many 
people can handle a few weeks of this shift work, but could never 
survive a career of this lifestyle.
    In addition to rotating shifts, Inspectors and CEOs have rotating 
weekends. They basically work a seven-day workweek, and their two days 
off can fall anywhere within those seven days. The majority of 
inspection personnel work both days of the weekend as their regular 
shift. Each individual will learn about his or her shift schedule and 
days off about ten days in advance of working the schedule. Most 
official holidays will fall within their regular workweeks. There is 
never a guarantee that a holiday or weekend will be spent with family 
or friends.

                                Overtime

    In addition to the unpredictability their work schedules, 
Inspectors and Canine Enforcement Officers are usually at the call of 
Customs management for orders to work overtime. The staffing levels at 
most ports are not adequate to meet the needs of the port, so 
situations occur daily that require Inspectors to come in to work on 
their days off and to stay beyond their shift for overtime assignments. 
Most Inspectors around the country do not have a full day off during 
the week. Frequently, they must scramble to find a replacement or 
struggle to arrange child care and juggle family commitments. Most 
Customs Inspectors and CEOs work at least 16 hours of overtime each 
week. That can mean a seven-day work week or sixteen hour days. This is 
not an odd occurrence; this is a way of life. There are grave 
consequences for refusing to come in for overtime, including 
termination.
    Virginia Rodriguez, single mother of a toddler, has been a Customs 
Inspector in Brownsville, Texas for almost twelve years. She recognizes 
the importance of providing an accurate picture of her life as a 
Customs Inspector and she has come from Harlingen, Texas to be with us 
today. In 1997, during a routine investigation of a bus traveling 
across the border, Inspector Rodriguez apprehended one of the FBI's 
``most wanted'' criminals. For her exemplary work, she has received 
Customs performance awards throughout her career with the Agency and 
has been featured on the television program ``America's Most Wanted.'' 
The criminal she caught was a fugitive charged with perpetrating the 
largest armored bank vault robbery in the United States.
    Inspector Rodriguez has told me how difficult it is to maintain her 
family life, care for her child and work the schedules required of 
Inspectors in Brownsville. While she is assigned to a 40-hour work 
week, she regularly works 56 hours per week. Most Inspectors in 
Brownsville work more overtime than she does. She usually works eight 
hours a day on both of her days off so that she can relieve her 
babysitter at the end of her shift and avoid being drafted for 
overtime. The threat of forced overtime is real for Virginia Rodriguez. 
Countless times she has been required to work overtime, forcing her to 
make last minute arrangements for her son. It has been almost twelve 
years since Inspector Rodriguez has spent a Thanksgiving Day or 
Christmas Day with her family. She is not alone in this effort. The 
same is true for most Inspectors working around the country.
    The Port of Blaine, Washington is open 24 hours every day. The 
Inspectors and CEOs stationed there must work 56 hours every week 
(minimum of 16 hours of overtime) to meet the regular needs of the 
port. Every six to nine weeks, they work a midnight or graveyard shift. 
For two weeks, every other month, they work the 4 p.m. to midnight 
shift. According to Greg Johnson, a Customs Inspector in Blaine, the 
job provides added pressure when he leaves his family alone in the 
evenings and at night. Inspector Johnson knows first hand that law 
enforcement officers must maintain a heightened state of awareness and 
be engaged in constant decision-making during their hours at work. 
Often when they return home after a shift, they have trouble leaving 
their work behind. This leads to increased frustration by spouses and 
children and contributes to the high divorce rate among law enforcement 
officers.

                                 COPRA

    In 1911, recognizing that the type of work performed by Customs 
inspection personnel was different from that of the typical federal 
employee, Congress passed an Act that paid Customs Inspectors for 
minimum periods of overtime rather than for hours of overtime that they 
actually worked. This law was referred to as the ``1911 Act.'' In 1993, 
determining that the 1911 Act left too much room for mismanagement and 
abuse of overtime, this Committee was instrumental in replacing the Act 
with the Customs Officer Pay and Reform Act (COPRA). COPRA was drafted 
to ensure that hours paid to Inspectors bore a more direct relationship 
to hours worked. Since 1994, COPRA has been the exclusive pay system 
for Customs officers performing inspection duties. While eliminating 
the rare instance when a Customs officer could earn 32 hours of pay for 
2 hours of overtime work, provisions of COPRA continued to recognize 
that Customs officers deserved pay incentives and enhanced compensation 
for their arduous shift work and irregular hours.
    The pay system for Customs inspection personnel is not unique in 
the federal government. Most federal employees who perform law 
enforcement duties are paid under pay systems tailored to specifically 
compensate them for their work. This is the case for inspection 
personnel and criminal investigators of the INS, DEA, FBI, Border 
Patrol, and National Park Service. INS Inspectors are paid for minimum 
periods of time regardless of their actual hours worked. The FBI, DEA 
and other federal law enforcement agencies pay employees premium pay on 
an annual basis to compensate them for working irregular, unscheduled 
overtime duty. Sometimes this can amount to an additional 25% increase 
in their rate of pay although the officer may not work even one hour of 
overtime or at night during any given week. Other federal criminal 
investigators and Customs pilots receive 25% higher rate of pay 
annually. This pay incentive is known as availability pay and 
compensates these employees for being available to work outside their 
regular shifts. Like in the Customs Service, these pay schemes are 
necessary to attract and retain a high quality and professional 
workforce.
    Under COPRA, a Customs Inspector is paid overtime only when he or 
she works overtime hours as scheduled. The rare instance that an 
Inspector might receive a paycheck for overtime without having worked 
the hours occurs only when there is an administrative or judicial 
proceeding in which Customs is ordered to pay back pay for an overtime 
assignment unlawfully denied to an employee. This situation is not 
governed by COPRA. Rather the remedy complies with the Back Pay Act (5 
U.S.C. 5596) that governs situations for all federal employees who are 
the subjects of improper personnel actions. This specific remedy of 
back pay has been determined by many judges and arbitrators to be the 
adequate remedy for such violations of law by managers throughout the 
federal government. According to arbitrators and judges, without a back 
pay remedy, employers do not have incentive to comply with the 
applicable law, regulations or collective bargaining agreements that 
they enter into. Other remedies would be inconsistent with the remedies 
available to every other federal employee.
    Many Customs supervisors have difficulty managing the annual 
overtime earnings cap of $30,000. They regularly deny overtime to 
employees as they approach the cap. This situation can be addressed in 
many ways without denying employees their right to a legal remedy for 
an improper personnel action. First, the earnings cap could be 
eliminated or loosened to allow employees to exceed the cap by one 
assignment without penalizing the supervisor or employee.
    Secondly, overtime could be tracked better. Last year, Customs 
implemented a new data system called the Customs Overtime Scheduling 
System (COSS). COSS provides overtime earning information for 
individual Inspectors and CEOs. The system tracks schedules and 
assignment data, maintains projected and actual costs, pay cap, 
equalization, staffing, budgeting, time and attendance and billing 
information. The system better enables management to monitor the 
current $30,000 overtime earnings cap. Overtime disputes have 
dramatically decreased since COSS has been in place. Statutory changes 
are not appropriate to redress situations that the Agency can and is 
managing now.

                              Premium Pay

    In addition to overtime, COPRA governs premium pay for Customs 
inspection personnel. Premium pay is a higher rate of pay for working 
at night, on holidays or on Sundays. For night pay purposes, when a 
majority of regularly scheduled work hours occurs between 3 p.m. and 12 
a.m., an officer receives an additional 15% of the basic pay rate added 
for the shift. When a majority of regularly scheduled work hours occurs 
between 11 p.m. and 8 a.m., an officer receives an additional 20% of 
the basic rate for the entire shift. When an officer's regularly 
scheduled work occurs between 7:30 p.m. and 3:30 a.m., he or she will 
receive 15% premium pay for the hours between 7:30 p.m. to 11:30 p.m. 
and 20% premium pay for hours between 11:30 p.m. and 3:30 a.m.. While 
this law requires an entire shift to be paid at the higher rate, if an 
Inspector works less than a majority of hours during the night, none of 
the evening hours are paid at the premium rate. For example, none of 
the hours in the shift 4 a.m. to noon are compensated as night pay.
    The current Customs system for night pay is meant to compensate the 
inspection personnel for living with unpredictability and constant 
irregularity in their work schedules. For most Inspectors, daily shifts 
change every two weeks. That means one week an Inspector may work the 
graveyard shift, and the next week he or she may be on from 5:15 a.m. 
to 1:15 p.m. The unpredictability of these changing work hours often 
wreaks havoc on family life. At airports, the Agency can order a blitz 
of certain flights and the Inspector is forced to change his or her 
shift within the odd hour shift. Incentive pay systems are not unique 
to the Customs Service and are in place for most law enforcement jobs 
where irregular hours and shifts exist.

                   Premium Pay While In Leave Status

    Federal criminal investigators receive their annual overtime pay 
rate while they are in a leave status. Likewise, Customs Inspectors 
receive night differentials if they take leave while assigned to a 
night shift. Other federal employees who regularly work at night are 
entitled to night pay differential while on leave and on holidays. All 
federal employees, including Customs Inspectors, are not compensated at 
a premium rate when they take leave on a Sunday they would normally 
work. The small incentive derived from receiving night differential 
while on leave is a form of compensation for the irregular and unusual 
hours Customs officers work all year. Their sacrifices are far greater 
than the slightly higher remuneration they receive while on leave.

                     Law Enforcement Officer Status

    In addition to special pay adjustments, federal employees with law 
enforcement officer status receive full retirement benefits after 20 
years of government service in law enforcement. Even Members of 
Congress have this benefit, but currently Customs Inspectors and CEOs, 
who carry guns, make arrests and seize more illegal drugs than any 
other federal group are denied this benefit. As in past years, NTEU 
will continue its efforts to enact legislation (H.R. 1228 and S. 718) 
to give Customs Inspectors and CEOs law enforcement officer status and 
end this disparity. But in the meantime, the current provisions of the 
Customs Officer Pay Reform Act must suffice as incentives for the 
sacrifices Customs Inspectors make to the Customs Service. NTEU 
believes that changes to this pay system are misguided and unnecessary.
    According to Inspector McGannon in Laredo, he nets an additional 
$3,500 in premium pay compensation annually. This is hardly adequate 
compensation for the disruptions this shift work causes. The extra 
money he earns is typically spent on the salaries of child care 
providers who assist with his children's schedules when he is not 
available. Inspector McGannon has hardly been overpaid during his ten 
years with the Customs Service. He should not be confronting an attack 
on his $39,000 salary while members of Congress, who earn more than 
three times his salary and benefit from a 20-year retirement system, 
debate raising their own pay this year.

                       Recruitment and Retention

    Factors including the uncertainty of irregular hours and the 
requirement to work overtime have contributed to a high turnover rate 
among the Customs inspection ranks. These turnover rates lead to 
increased training costs for the Agency. After being hired by Customs, 
many young Inspectors complete the training program, gain valuable on 
the job experience and move to positions with the Department of 
Justice, the Secret Service, the FBI or with state or local government, 
where they are guaranteed all the benefits of being a law enforcement 
officer.
    I recently testified before an Appropriations Subcommittee on the 
issue of Customs integrity where the subject of mandatory Customs 
Inspector rotation was discussed. NTEU has been clear that requiring 
rotation for any percent of the Customs employees will have a 
devastating impact on the mission of the Agency, as well as the lives 
of the Inspectors and their families. There is no empirical evidence to 
show that uprooting experienced Customs officers and moving them around 
the country will lead to a reduction in corruption. In any case, 
Customs has stated that there is no systemic corruption problem to 
address, so a rotation program would be an astoundingly expensive 
endeavor that would do more harm than good. Implementation of a 
mandatory rotation scheme would contribute to the difficulty Customs 
has in attracting new hires in their inspection ranks. I believe 
retention problems would be insurmountable in light of the relatively 
low salaries, constant shift work and dangerous nature of the job.

                         Collective Bargaining

    Evidence clearly demonstrates that the men and women of the Customs 
Service need better resources to better perform their mission. But, 
there is no evidence to show that the mission of interdicting drugs is 
impaired when the Customs Service lives up to the collective bargaining 
provisions it has negotiated. On the contrary, Customs and NTEU have an 
impressive working relationship. In 1998, the Customs and NTEU received 
the John N. Sturdivant Partnership Award in recognition of their 
contributions to reinventing government through labor-management 
cooperation. This year the parties have been nominated for the Office 
of Personnel Management Director's Award for Outstanding Alternative 
Dispute Resolution (ADR) programs focusing on resolving employee 
workplace disputes. A proposal allowing management to nullify bargained 
agreements will have a disastrous effect on employee morale and the 
current labor-management relationship.
    No federal agency, including the Customs Service, would enter into 
labor contracts that it believes interfere with its mission. There is 
nothing in the current contract that hinders the interdiction of drugs 
or contraband. In fact, we have worked closely with Customs on many 
special programs, including Operation Brass Ring, that have resulted in 
record amounts of drugs seized in short periods of time.
    Currently, Customs and NTEU have a process in place to work out 
differences between labor and management when they arise. After years 
of working together, the parties have agreed to what I believe is the 
most innovative collective bargaining agreement in the federal 
workforce. According to a provision in the contract, any party can 
reopen a negotiated article, at any time, if the party believes that 
the article is not working as intended. In addition, a provision in the 
contract allows Customs to take action prior to bargaining if emergency 
situations exist. The Federal Service Labor-Management Relations 
Statute (5 U.S.C. 7100 et seq.) allows Customs to take whatever actions 
may be necessary to carry out the agency mission during emergencies 
prior to bargaining with NTEU. There is no need for statutory 
provisions that eliminate negotiated contractual rights or undermine 
the entire labor-management relationship.
    I know that the more than 13,000 Customs employees represented by 
the NTEU are capable and committed to the Customs mission. They are 
proud of their part in keeping our neighborhoods safe from drugs and 
our economy safe from illegal trade. These men and women are deserving 
of more resources and technology to perform their jobs better and more 
efficiently. But, they do not deserve attacks on their pay and 
restrictions on their rights.
    I applaud this Subcommittee for recognizing the twenty-first 
century needs of the Customs Service. I urge each of you to visit the 
Customs ports in your home districts. Talk to the Inspectors and CEOs 
there to fully comprehend what their regular work lives are like. Then 
you may understand why NTEU will support a Customs authorization bill, 
but will strongly oppose any legislation that would limit the pay or 
rights of the rank and file men Customs officers.
    Thank you for the opportunity to be here today on behalf of the 
Customs Service employees to discuss these very important issues.

                                

    Chairman Crane. Thank you.
    Ms. Hallett.

 STATEMENT OF CAROL B. HALLETT, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, AIR TRANSPORT ASSOCIATION OF AMERICA

    Ms. Hallett. Thank you, Mr. Chairman, Mr. Levin, Mr. 
Becerra. It is a pleasure to be here with you today. I 
appreciate the opportunity to present the views of the Air 
Transport Association concerning the Administration's proposal 
to increase and create new user fee burdens upon the aviation 
industry.
    Traditionally, the aviation industry has supported user 
fees that are properly cost allocated and cost effective. Thus, 
your efforts to authorize the use of Customs user fees to 
provide pre-clearance services in the Caribbean and Canada and 
to establish a user fee advisory committee are greatly 
appreciated. Moreover, termination or reduction of pre-
clearance in Canada would have a devastating impact on U.S. 
tourism. We therefore urge you to authorize continued use of 
COPRA funds for service expansion, as well as enhancement.
    Unfortunately, the Administration's proposal to increase 
the Customs' user fee and create a new user fee for automated 
systems is simply a device to further tax the aviation 
industry. Let me explain. In 1997, Customs stated that the true 
cost of pre-clearing an airline passenger was approximately 
$3.25. Last month, Assistant Secretary Lubick testified that 
the cost was over $5.00. In so doing, he implicitly attempted 
to justify the Administration's request to increase the fee to 
around $6.40 per passenger. It is implausible that Customs' 
cost per passenger have doubled in only 18 months. We doubt 
there is adequate justification for these proposed user fee 
increases. They are tax increases masquerading as user fees.
    This proposed tax increase would have a substantial effect 
upon the traveling public. In 1998, 54 million international 
passengers paid Customs' user fees. By 2010, that number will 
double. Meanwhile, Customs simply has failed to make a 
convincing case that this ever-increasing revenue stream from 
airline passenger traffic will not meet its legitimate 
financial needs. Moreover, the Administration's proposal to 
remove existing exemptions from the Customs user fee in Canada, 
Mexico, and the Caribbean, does not advance our national 
commitment to law enforcement, but rather, it appears to be 
merely another tax imposed upon passengers as a direct 
consequence of NAFTA. Any financial shortfalls necessary to 
underwrite these inspections should be covered by removing the 
restrictions from the COPRA fee. In addition, we believe that 
all accumulated fees should be reserved for the benefit of air 
and sea passengers.
    International cargo and passengers encounter border 
crossings at air and seaports as well as land locations, all of 
which have one thing in common, a crossing of national 
boundaries. Every one of those crossings, especially for air 
cargo, results in increased transportation time, costs, as well 
as communication requirements.
    Our member airlines cannot support the Administration's 
proposal to introduce an enhancement fee for the Customs 
automated systems. Nevertheless, we continue to support the 
common goal of an improved information processing system. 
Automated manifest system for air is in its ninth year of 
operation. Yet it requires the burden of paper submittal. We 
have invested millions of dollars to support this automated 
infrastructure, yet we still experience significant daily 
operational costs. Thus, Customs' attempt to introduce yet 
another automated system is very disturbing, because they have 
so far failed to deliver a high quality, cost-savings 
automation program for imports.
    Carriers fear another wave of startup investments for the 
Automated Commercial Environment, while still bearing the costs 
of an incomplete AMS-Air. Air carriers want a fully paperless 
automated manifest process, but participation in ACE may 
seriously delay this goal. Future trade practices will be based 
on electronic commerce and the Internet. Unfortunately, the 
current ACE foundation has very little in common with those 
future practices or the Internet.
    While the current programs need upgrading and eventual 
replacement, the Administration's proposal for an automation 
fee is unwarranted. It is simply another tax on top of the $800 
million already paid annually in the merchandise processing 
fee. We believe that maintenance of Customs automation programs 
should be funded out of those fees.
    Mr. Chairman, it is unclear, particularly to us, what the 
benefit of any automation fee would be. Development costs have 
sky-rocketed, from an initial estimate of $600 million, to 
$1.48 billion. That was told to us by Customs very recently, 
but without an explanation. Its developmental track, quite 
frankly, in this particular area is suspect. With a host of 
unresolved questions and with a lack of clear detail regarding 
how a user fee would be implemented, it is impossible for us to 
agree to an automation enhancement user fee.
    Once again, Mr. Chairman, I want to express my appreciation 
to you, and particularly on behalf of all of our members, we do 
appreciate everything the Committee is doing, and to the 
Members of the Subcommittee, I hope that we will have an 
opportunity to respond to questions either verbally or in 
writing. Thank you very much.
    [The prepared statement follows:]

Statement of Carol B. Hallett, President and Chief Executive Officer, 
Air Transport Association of America

    Mr. Chairman and Members of the Subcommittee, I appreciate the 
opportunity to appear before you today to present the views of the Air 
Transport Association (ATA) concerning the Administration's proposal to 
increase the U.S. Customs Service User Fee and to create a new user fee 
for the use of Customs automated systems. I welcome the opportunity to 
return to this subcommittee, not as Commissioner of Customs in which 
role I appeared before you many times, but from the perspective of a 
Customs Service customer--the airline industry.
    ATA represents the major U.S. passenger and cargo air carriers in 
the United States. Our members transport approximately 95 percent of 
the passengers and goods transported by air on U.S. flag airlines. Last 
year, the U.S. airline industry safely and successfully carried over 
600 million passengers. The Federal Aviation Administration (FAA) 
predicts that that number will reach one billion passengers by 2010.

                            Committee Action

    I want to thank you Mr. Chairman for your continued efforts to 
authorize the use of Customs user fees to maintain critical equipment 
and positions required to provide preclearance services at critical 
foreign locations. I also want to extend our appreciation for the 
decision to include language in the Miscellaneous Trade bill to 
establish a user fee advisory committee to advise the Commissioner on 
issues such as the level of fees, proper application of funds to 
functions and activities, and the appropriateness of any proposed fee.
    Although we are still awaiting Senate action on the Miscellaneous 
Trade Bill which contains the Customs user fee and advisory committee 
language, we hope that you will work with your Senate colleagues to 
ensure passage as soon as possible. We are fast approaching the busiest 
season for air travel and it is critical for Customs to have the 
authority to expend fees for preclearance operations in both Canada and 
the Caribbean.
    Termination or reduction of preclearance operations in Canada would 
have a devastating impact on U.S. tourism, not to mention air carriers 
operating through the U.S. and utilizing this service both for Canadian 
originating traffic and for transit traffic originating in Europe and 
the Pacific Rim. We urge you to authorize continued use of COBRA funds 
for service expansion and enhancements in order to provide effective 
and seamless service to the travelling public.

                        Administration Proposal

    I would now like to address the Administration's proposal to 
increase the Customs User Fee and to create a new user fee for the use 
of Customs automated systems.
    In August, 1997, at a meeting between U.S. Customs Service staff, 
House Trade Subcommittee staff, and ATA, Customs stated that the true 
cost of preclearing an airline passenger was approximately $3.25. Last 
month, Assistant Secretary Lubick testified that the cost was over 
$5.00, implying adequate justification for the Administration's request 
to increase the fee to $6.40 per passenger. Mr. Chairman, doesn't it 
strike you as odd that in 18 months new found costs have almost doubled 
Customs' cost per passenger? With inflation so low, how could 
government be so inefficient as to result in its costs rising so much 
in excess of the CPI. In all candor, we think you should be 
particularly suspicious of the basis for these new found costs.
    We doubt there is adequate justification for these proposed ``user 
fee'' increases. They are tax increases masquerading as user fees. As 
you know, airlines and the traveling public already pay more than their 
fair share in taxes and fees.
    In 1998, 54 million international passengers paid the Customs user 
fees. FAA predicts that this number will likely double by 2010. With 
these dramatic increases in international air travel, revenues from the 
Customs user fee, and other taxes and fees will grow substantially. The 
question is, can Customs or Treasury efficiently use these fees at the 
rate they are currently collected, or, is the proposed fee increase 
just a tax increase?

                        Purpose of the User Fee

    Mr. Chairman, the collection of the Customs user fee on every 
international air passenger ticket has helped the Customs Service to 
make improvements in passenger processing over the years. However there 
are many restrictions on the use of the funds which need to be 
addressed. We suggest the establishment of a government/industry 
oversight committee, such as the one you have proposed, to assess the 
uses of these monies and to make recommendations for improvements. 
Through a useful government/industry dialogue, real gains can be made 
in Customs processing.
    Additionally, the COBRA fee, which funds a baseline of Customs 
airport staffing, is highly restricted in its use. We would propose and 
strongly support the removal of restrictions, however, the fees 
generated should continue to be segregated from the general fund and 
reserved specifically for air and sea passenger-related Customs 
inspection activity. The removal of restrictions on spending for 
staffing will allow Customs the flexibility it needs to respond to 
transportation industry needs, trends, growth, and changes. The use of 
these funds should be clearly limited to activities that benefit the 
overall provider of the funds--air and sea passengers. Therefore, 
unrelated activities or operations without a nexus to air and sea 
passenger inspection, should not have access to the funds.

                       Administration's NAFTA Tax

    The Administration has proposed once again to remove the existing 
exemptions from the Customs user fee for passengers originating in 
Canada, Mexico, and the Caribbean. This exemption exists to promote 
good will between North American nations and we appreciate Congress' 
recognition of their special status within North America. But to extend 
benefits through NAFTA, on the one hand, and then take them away, on 
the other, suggests that this proposal is just a NAFTA tax.
    Just as with NAFTA, Open Skies agreements dismantle barriers with 
countries like Canada to facilitate the flow of people across our 
shared borders. The adjacent islands of the Caribbean also deserve an 
exemption because of their unique status within the Americas. 
Preclearance operations utilize the highest levels of Customs 
processing efficiencies without sacrificing our national commitment to 
law enforcement. Imposing the Customs user fee on these passengers does 
not advance these efforts.
    Lastly, Customs user fees, collected from air passengers are being 
used for non-air passenger processing, such as land border overtime. 
These revenues are not used exclusively for the benefit of the persons 
paying the fee. Thus, industry participation through a user fee 
advisory committee would enhance the appropriate and efficient use of 
these resources.

                   Customs Automation Enhancement Fee

    We want to commend the on-going efforts of Customs to bring its 
procedures and processes into the 21st Century. International cargo and 
passengers encounter border crossings at air and sea ports, as well as 
land locations; all of which have one thing in common--a crossing of 
national boundaries.
    The result of crossing that imaginary line, specifically for air 
cargo, is an off-the-chart spike in increased transportation time, 
costs, and communication requirements. In like manner, the number of 
participants involved in the transaction increases significantly, 
creating the need to coordinate activities with numerous transportation 
partners and government agencies at both origin and destination with 
similar, if not identical, information.
    Unfortunately, after thorough review and consultation with our 
member airlines, we cannot support the Administration's proposal to 
introduce an automation enhancement fee for the Customs automated 
systems. Notwithstanding our opposition to the fee, we want to remain 
actively engaged with the Administration and Congress in identifying 
the right mechanisms to develop our common goals to improve the 
information processing system.
    It is important to recognize that there are other influences that 
inhibit further engagement by air carriers in Customs automation 
development, specifically the Automated Commercial Environment (ACE). 
It is our view that Customs' current Automated Commercial System (ACS) 
and the current path of ACE produces a magnification of existing 
problems inherited from a manual document process. Converting a 
document into an electronic data format does not take full advantage of 
automation and information technology development. No less can be said 
of the recent Automated Export System (AES) implementation; the system 
attempts to automate a flawed export document process. As a result, a 
multitude of problems has surfaced for Customs and the trade community.
    Furthermore, several problems intrinsic in the Automated Manifest 
System (AMS-Air) for imports have been carried over to AES. For 
example, the attempt to reconcile trade data with transportation data 
in AMS-Air has been consistently difficult, thereby increasing 
processing costs and delaying cargo movement. It remains an elusive 
goal after more than nine years of operation.
    Having said that, we have several areas of concern related to ACE 
and AES development that are made worse by continuing frustrations with 
Customs' current import system, AMS-Air. While we want to develop a 
fully paperless automated manifest process, industry-wide participation 
in ACE may be seriously delayed due to a number of contributing 
factors.
    Customs' support for AMS-Air has become a very important issue for 
our members. We have invested millions of dollars in AMS-Air and incur 
significant daily operational costs. Customs' attempt to introduce a 
new automated system at this time is very disturbing, more so since 
Customs has not yet delivered a high quality, cost saving automation 
program for imports. Quite logically, we fear another wave of start-up 
investment for ACE and AES, all the while still bearing the costs of an 
incomplete AMS-Air.
    AMS-Air is in its ninth year of operation with a steady growth to 
over 130 participants and 28 ports nationwide. However, serious flaws 
remain, some since the October 1989 start-up date. For example:
     After nine years of operation, paperless processing is 
available at only one of 28 ports nationwide;
     Only five freight forwarders nationwide participate in 
AMS-Air and at only three ports;
     AMS-Air is not fully endorsed by local Customs and USDA 
personnel. In fact, USDA refuses to participate at some ports, thereby 
preventing a truly paperless environment;
     Split manifest processing, a common event in air cargo, is 
bug ridden; and
     Programming enhancements and system corrections vital to 
air carrier operation and freight forwarder participation, such as 
Project 323 (in-bond enhancements) and others, are over seven years 
behind schedule.
    Again, we want to be clear--the ACS legacy systems are in the 
twilight of life expectancy, the export process is paper intensive, and 
it is in dire need of automation. However, the foundation of automation 
cannot be built on the premise that automating the existing manual 
process will address our mutual concerns. The ideal system fully re-
engineers the flow of data to minimize the cost to the trade and 
government while maximizing information for compliance, quality of 
statistics, and information enforcement.
    Nonetheless, the cornerstone of Customs' effort to maintain pace 
with the growth of international trade is eroded by the exceedingly 
long time it is taking to deliver on the promise of the Modernization 
Act. In fact, it is acknowledged by many in the trade that the Mod Act 
needs to be rewritten and ACE redesigned.
    Our concern is not that Customs is an unwilling partner in 
automation development, but is on a collision course with information 
technology development and its effect on trade practices. We believe 
that it is imperative that Customs become a part of the transportation 
process rather than creating a detour for international shipments 
caused by manifest and commodity data requirements of a closed 
proprietary system. The flow of legitimate goods is enhanced if Customs 
becomes a part of the transaction rather than attempting to manage it. 
The blueprint of future trade practices is based on electronic commerce 
and the Internet; however, the ACE foundation to date has very little 
in common.
    While we agree that current ACS programs need upgrading and 
eventual replacement, the Administration's proposal for an automation 
fee, is unwarranted and unacceptable, as traditional budget request 
procedures have not been followed. It is nothing more than a tax on top 
of the $800 million paid annually in Merchandise Processing Fees (MPF), 
a portion of which should be used to enhance and maintain Customs 
automation programs.
    Mr. Chairman, until Customs breaks-out development costs by trade 
functionality and internal Customs requirement, it is unclear what the 
industry is paying for. Moreover, the development costs have 
skyrocketed from an initial estimate of $600 million to $1.48 billion 
without a detailed explanation from Customs.
    These investments obviously require careful planning in the context 
of industry/government partnership and return on investment. With 
numerous outstanding questions and issues, and the lack of detail on 
how a user fee would be implemented, it is impossible for our air cargo 
carriers to agree to an automation enhancement user fee.
    Once again, Mr. Chairman, I want to express my appreciation, and 
that of ATA, to you and the members of the subcommittee for the 
opportunity to appear here today. Thank you.

                                

    Chairman Crane. Thank you.
    Ms. Ross.

   STATEMENT OF SUSAN KOHN ROSS, CHAIRPERSON, S.K. ROSS AND 
  ASSOCIATES, P.C., LOS ANGELES, CALIFORNIA, ON BEHALF OF THE 
            BORDER TRADE ALLIANCE, PHOENIX, ARIZONA

    Ms. Ross. Thank you, Mr. Chairman, Mr. Levin, Mr. Becerra. 
I am here today on behalf of the Border Trade Alliance. Our 
focus is folks that live and do cross border business with 
Canada and with Mexico. For us, the reliability of the Customs 
computer is a key to the economic viability, both of the 
communities along the border, those on the north and south of 
those borders, as well as the folks in the international trade 
community as a whole. From our point of view, if Customs is 
unable to promptly and efficiently process legitimate trade in 
goods, it can only harm the currently robust U.S. economy.
    Folks cross the border every day for a variety of reasons. 
If Customs is unable to segregate the legitimate crossers from 
those with whom it needs to spend more time, it must have a 
reliable operating computer system. We fully support the 
efforts of the Customs Service to interdict drugs and other 
contraband. We think reliable and up-to-date computer equipment 
can only help Customs deal with those legitimate concerns, as 
well as the ever-growing quantity of vehicles and goods 
entering the United States. The key of course is how that 
should be paid for.
    We think that there is a distinction that should be drawn 
between funding for the existing ACS system and its 
replacement, whatever that replacement should be. I am here 
today to urge Congress to continue from appropriated funds to 
make sure that the ACS system continues in operation. We have 
already heard it is going to be another 5 to 7 years before we 
have got ACE. We have got to have something reliable in the 
meantime.
    The delays caused by the antiquated nature of ACS have gone 
from shipments being released in seconds to being released in 
minutes. Now it is often hours, and on occasion, it is even 
days. It simply cannot continue. You heard Ms. O'Dell talking 
about the requirements on the part of The Limited. Large 
companies are in perhaps a better position. If they are not 
able to get the imported goods, they at least have the 
financial wherewithal to seek replacement goods. The vast 
number of importers and exporters, for that matter, are small 
companies that simply don't have the financial viability to be 
able to do that. If they are not able to deliver on time, they 
simply lose their orders.
    I asked a port director at one of the ports recently what 
his folks had done to prepare for the potential possibility of 
ACS going down. His answer was that they had ordered red pens. 
Customs does not recall how to do paper entries. Frankly, I 
don't think there are too many of us in the trade that date 
back any more to when the computer was not around.
    The Border Trade Alliance is an early supporter of the 
Coalition for Customs Automation Funding. We agree that the 
funding which comes forth either for ACS or for whatever the 
replacement may be, should come from appropriated funds. We do 
not, however, wish to take a position on whether the ultimate 
replacement for ACS should be ACE or ITDS or something 
altogether different. We think that decision ought to be made 
by the experts at Customs, Treasury, Congress, and the 
Administration. I would, however, point out one obvious fact. 
That is, for every dollar that is spent on ITDS, it is not 
spent supporting the current system, the ACS system.
    Not only does Customs need a reliable long-term solution to 
the funding question, it also needs short-term reliable support 
to fund and operate the current system. The last figures that 
we saw from Customs are that there are 384,000 importers in 
their data base. Only about 100,000 of them import twice or 
more a year. If those 284,000 importers that only occasionally 
import are asked to pay an additional user fee, I don't think 
it is unrealistic to expect that they will try to take 
advantage of the computer to get their goods released and then 
file their follow-up entries manually on paper. If the 
condition is put on them that if you file one electronically, 
you have to file the other electronically, I would not be 
surprised to see them begin to go to paper all the way around.
    Of the 100,000 other importers, we are told by Customs that 
the top 1,000 importers account for 61 percent of the value of 
all imports. So if the other 99,000 importers that import twice 
or more a year are faced with an additional user fee, one has 
to ask how many of them would try to file what portion of their 
transactions manually with paper?
    There is another question that needs to be dealt with in 
all of this. That is, if we indeed begin to access an 
additional user fee, what are our colleagues in Canada or 
Mexico going to do by way of additional user fees on their 
part? We also have to ask what that does to the cost of goods, 
what that does to the American consumer, when all we are really 
going to end up doing is that cost is going to get passed 
through and drive up the cost of goods in the marketplace.
    There was a question asked earlier about NAFTA and GATT. I 
would refer the Committee to article 403 of NAFTA, which 
specifically says that there are to be no additional user fees 
imposed. In the GATT context, it is article VII (1)(b).
    I want, with the time that I have remaining, to just touch 
on a couple of other issues, because others have talked about 
the computer, and I don't want to repeat what they have said. 
The one issue I want to talk about quickly is unintended 
consequences, or what often gets referred to as unfunded 
mandates. I want to talk quickly about section 110, which 
admittedly is an immigration issue, but because we are talking 
about the land borders, at least from the BTA context, it is 
Customs that is being asked to enforce this law. It is being 
asked to enforce this with no additional funding. It doesn't 
have the manpower. It doesn't have the money. It doesn't have 
the equipment.
    There is also the Border Smog Reduction Act of 1998. It is 
an attempt to clean the air in San Diego. It requires the 
Customs Service to make a determination of whether a Mexican-
plated vehicle comes into the United States for specific 
purposes more than twice a month, and if so, to bar it from 
entry. Again, there was no funding allocated.
    The last thing I would like to do is refer the Committee, 
because I am out of time, to some comments in my written 
materials about a public-private partnership that was generated 
initially at the suggestion of the Customs Service, and ask the 
Committee to encourage the Customs Service to continue to be as 
innovative as it has been in the past.
    On that note, I will close with a continuing offer on the 
part of our members to serve as a resource for the Committee 
and for the Members. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Susan Kohn Ross, Chairperson, S.K. Ross and Associates, 
P.C., Los Angeles, California, on behalf of the Border Trade Alliance, 
Phoenix, Arizona

    The Border Trade Alliance (BTA) was founded in 1986 and consists of 
individuals, entities and companies which live and do cross-border 
business with Canada and Mexico.
    Over the past decade, our agenda has consistently focused on trade 
facilitation, fast track authority, NAFTA implementation, trade 
expansion, border transportation and environmental infrastructure 
issues, and regional industrial and economic development.
    We are here today to testify regarding the automation efforts of 
the U.S. Customs Service. The reliability of the Customs' computer is a 
key to economic viability for all communities along the land borders--
both north and south and on both sides of each of those borders, as 
well as the international trade community as a whole. We are all too 
familiar with long lines of cars and trucks coming south at the 
Detroit-Windsor tunnel as well as long lines of cars and trucks coming 
north through Laredo, El Paso and Otay Mesa. If Customs is unable to 
promptly and efficiently process legitimate trade and goods, it can 
only harm the currently robust U.S. economy.
    At the land borders, some Mexicans and Canadians cross for the day 
to conduct legitimate business while others cross for pleasure. They 
also cross into the U.S. on holiday or to attend school. In all 
instances, it is important for U.S. Customs, and the Immigration and 
Naturalization Service with which it cross-trains and serves, to be 
able to segregate legitimate crossers from those with whom it needs to 
spend more time. It requires a fully operational computer system to do 
so.
    We fully support the efforts of the Customs Service to interdict 
drugs and other contraband. We think reliable and up-to-date computer 
equipment can only help Customs deal with those legitimate concerns as 
well as the ever-growing quantity of vehicles and goods entering the 
U.S.
    The question is how should that computer system be paid for? We 
think a distinction should be drawn between funding for the existing 
ACS system and its replacement, whether that replacement is ACE or 
something else. I am here today on behalf of the BTA to urge Congress 
to continue to adequately fund ACS while the question of its 
replacement is debated and decided.
    There is little question neither Customs nor the trade can afford 
to have the existing computer system crash or ``brown out.'' Brown-outs 
have already occurred on several occasions. Delays in the release of 
shipments have already exploded from seconds to minutes and now often 
to hours and, on occasion, even days. The impact of extended delays can 
be catastrophic. In the current just-in-time environment, many large 
companies have inventory on hand for one shift. Others have sufficient 
inventory for the equivalent of a half to a full day's production. 
Smaller companies have it more difficult. If they are not able to 
receive product in a timely fashion, they do not have the resources to 
obtain replacement goods. They simply lose their orders.
    When asked recently what the local port had done to prepare for the 
possibility of paper processing of entries, one Port Director responded 
by stating he had purchased red pens for his staff! Customs is simply 
not set up to timely process paperwork in a manual environment and 
neither is the trade.
    The BTA is a supporter of the Coalition for Customs Automation 
Funding. We agree with other Coalition members that funding for 
Customs' automation efforts should be accomplished from appropriated 
funds. Like many other members of the Coalition, the BTA also does not 
take a position on whether the ultimate replacement for ACS should be 
ACE or ITDS. That decision is one for the experts at Customs and 
Treasury to make in concert with the Administration and Congress. The 
only point we would make is the current system is in dire need of 
financial and technical support. Until a decision is made about the 
long-term replacement of ACS, we would point out the obvious--every 
dollar spent on ITDS is a dollar not used to keep ACS operating.
    Not only does Customs need a reliable long term solution to the 
funding question, it also needs short-term reliable support to fund and 
operate the current system. To that end, we are opposed to the 
Administration's proposal for an electronic user fee. The last figures 
we saw published by Customs state there are approximately 384,000 
importers in its database. Only about 100,000 import more than twice a 
year. If the 284,000 importers who only occasionally import were now 
asked to pay an additional user fee for electronic processing, we see a 
real possibility they would opt to obtain release of their goods 
electronically but file their follow-up entry summary in paper form.
    Customs has stated the top 1,000 importers account for 61% of all 
imports by value. What would happen if even a small portion of the 
99,000 other regular importers chose the same option and filed their 
entry summaries in paper form?
    Against a back-drop of the additional electronic user fee 
envisioned by the Administration, we question what steps either Canada 
or Mexico might take to retaliate for the fee increases imposed on 
their traders which serves to only drive up the cost of the goods they 
are selling? What about the impact on U.S. consumers? The retail sector 
still suffers the irritant of different personal exemption levels in 
the U.S., Canada and Mexico, a never-ending thorn in the side of 
particularly U.S.-Mexican relations. At a time when duty rates are 
dramatically falling but duty collections are rising just as 
dramatically, we question the wisdom of imposing any additional user 
fees on traders.
    In addition, both NAFTA and GATT have as one of their goals, the 
reduction and/or elimination of user fees as part of an overall process 
of streamlining import procedures. How does imposing an electronic user 
fee square with U.S. obligations under GATT Article VII (1)(b)? With 
think it is anathema and against the general purposes of all multi-
lateral trade agreements.
    There are some additional issues we take this opportunity to bring 
to the Committee's attention. These issues fall in the category of 
unintended consequences, otherwise known as unfunded mandates. One 
example is Section 110 which revised the Immigration and Naturalization 
Act to include entry and exit controls. We support its repeal through 
S.745 and H.R.1250. We think there are other ways currently in the law 
which allow the U.S. to manage and control its borders.
    It is true Section 110 is an immigration issue. However, at the 
land borders at least, it is both INS and Customs which will be called 
upon to enforce this law. Customs has received no additional funding 
for this effort. Where is it supposed to find the money and personnel 
to enforce this new requirement? While we have from time-to-time had 
our differences with Customs, we support their efforts and contend they 
do a remarkable job given the fact the agency has not been supported 
with either increased funding or personnel while increased funding and 
personnel for the Border Patrol and INS has been setting records. For 
this reason, we whole-heartedly support S.658 recently introduced by 
Senator Gramm of Texas and others.
    Another example of unintended consequences is the Border Smog 
Reduction Act of 1998. Its effect is currently limited to the San Diego 
area. It will be implemented on April 27, 1999 and is intended to allow 
San Diego to improve its air quality by limiting the entry of Mexican 
automobiles. Implementation requires a distinction to be drawn between 
Mexicans entering the U.S. to work or study from those just visiting. 
Many visitors will be allowed to take their Mexican cars into the U.S. 
However, workers and students will not. The way it is written, it would 
appear this law denies a Mexican the ability to bring his Mexican 
registered vehicle into the U.S. if that car even transports a U.S. 
citizen, green card holder, student, worker or even a visa holder.
    In order to properly implement this law, Customs personnel will be 
required to stop every Mexican automobile which does not meet U.S. 
federal emission standards. Since their inspectors are not experts in 
smog emission standards, Customs has stated for the first sixty (60) 
days, it will not impound vehicles or turn them back. However, 
thereafter Mexican plated vehicles will be subject to being impounded 
or refused entry.
    We are also concerned about the cost to Mexicans as the fee is 
$20.00 per year plus a tax based on 2.6% of the car's value. A car 
worth $20,000 would pay an annual fee of $540.00, a real disincentive 
to visit the U.S. and shop! These costs are in addition to registering 
the vehicle in Mexico.
    Especially in light of the fact that the winds in San Diego 
generally blow south so the pollution caused by these vehicles 
generally flows back into Mexico, we contend a better way to address 
pollution concerns at the Southwest border is to shorten wait times.
    The San Diego Dialog recently published figures which make clear a 
large contributor to pollution in the area is wait times. The latest 
figures available are through January 1999. For San Ysidro on January 
5, the average length of the line was 85 vehicles, the wait time was 
approximately 27 minutes. The average length of the line increased to 
180 vehicles and 47 minutes by January 30th. On weekends, the situation 
worsened. The numbers span from 100 vehicles and 14 minutes to 180 
vehicles at 52 minutes.
    At Otay Mesa on weekdays the queue ran from 75 vehicles and 26 
minutes to 165 vehicles and 61 minutes average waiting time. On 
weekends, the numbers rose from 55 cars and 20 minutes to 180 cars and 
61 minutes.
    For San Ysidro, wait times greater than 20 minutes varied. In 
November 1998 it was 41% of the time, in December 1998 it was 36% and 
in January it was 14%. The average wait time of 30 minutes was 10% of 
the time in November, 18% in December and 6% in January. At Otay Mesa, 
the 20 minute wait time in November was 26% of the time, 41% in 
December and 6% in January. A 30 minute wait time occurred 6% of the 
time in November, 2% in December and not at all in January 1999.
    Similar figures undoubtedly exist for other crossing points. It is 
for this reason we support Senator Gramm's bill. We have seen evidence 
of the increased speed with which cargo and commuters move as Customs 
and INS have been able to technologically keep up with the times. In 
July 1998, Customs implemented Operation Brass Ring. Despite the fact 
that more cargo and conveyances were examined, there were no 
appreciable delays nor did the trade complain for the simple reason 
Customs was able to use advanced technology to accomplish its 
interdiction mission with minimum interruption of the flow of goods.
    BTA also wants to take this opportunity to bring to the Committee's 
attention a public-private partnership with which it is proud to be 
involved. The U.S. Customs Service, Immigration and Naturalization 
Service, Department of State, Food & Drug Administration, Dept. of 
Agriculture (APHIS), Department of Transportation-Federal Highway 
Administration, Drug Enforcement Agency, and Environmental Protection 
Agency, as well as the Embassies of Canada and Mexico are participating 
with us in an effort to conduct long-term planning for the land border 
regions, north and south. Observing these efforts are the General 
Service Administration and the General Accounting Office. In this 
strategic planning effort, we are looking at a variety of issues 
revolving around how business is currently conducted at the border by 
these U.S. federal agencies, including a focus on innovative programs 
which have worked, if there are changes which should be made, and 
programs which are operating at one location which address specific 
problems present at another location. Our purpose in participating 
together is to see what can be done within the existing legal and 
regulatory framework to have the agencies join with the trade to 
envision the future and arrive at what is needed to address the ever-
exploding land border trade corridors.
    We are organized into four (4) public-private working groups: (1) 
Compliance and Interdiction--dealing with law enforcement concerns; (2) 
Infrastructure--addressing traditional brick and mortar concerns such 
as facilities but also quality of life concerns; (3) Environment; and 
(4) Trade and Travel Standards--looking at operational concerns. The 
fifth working group is focused on legislative issues and so is limited 
to private sector participation.
    Following we have included a summary of our legislative agenda 
presented for fiscal year 2000.

            A. Legislative Agenda Items for Fiscal Year 2000

    (1) U.S. Mexico Border Capital Improvement Initiative
     $75,000,000 in fiscal year 2000; $200,000,000 over four 
years to fund port-of-entry, non-transportation related infrastructure 
projects.
     Resurrects a program initiated by the Congress in the 
Treasury, Postal Service and General Government Subcommittee in 1987/
$350,000,000+ appropriated to-date.
    (2) Support Senator Phil Gramm's Authorization Legislation to 
Increase U.S. Customs Service Staffing and Fund Border-Related 
Inspection and Control Technologies
     Last year Senator Gramm introduced and had passed his bill 
to authorize an additional $347 million for U.S. Customs Service 
(S.1787). It was not approved in conference.
     Senator Gramm has reintroduced legislation this year. We 
are supporting his legislation.
    (3) FDA/U.S. Customs Service Coordination--Legislation of Senator 
Susan Collins of Maine
     Senator Collins intends to introduce legislation to 
enhance cooperation between FDA and Customs on several fronts. We are 
supporting her efforts.
    (4) Section 110
     BTA continues to strive for a reasonable solution to the 
Section 110 problem. Negotiations are ongoing. BTA supports the efforts 
of Senator Abraham, Representative LaFalce and other and the provisions 
of S.745 and H.R.1250
    (5) Off-Dock Non-Narcotic Examinations
     We are seeking a study of this proposal for off-site cargo 
examination approach through U.S. Customs.
    (6) Upgrade of U.S. Customs Service Cargo Release Computer Systems
     Border trade community is very concerned about failure of 
Customs to upgrade the current ACS system or to reach closure on the 
new ACE system for cargo release.
     BTA is supporting enhanced appropriated funding to ensure 
this problem is resolved immediately.
    (7) Agriculture Plant and Health Inspection Service (APHIS) Re-
Authorization Legislation
     BTA is supporting an agency-backed bill to re-authorize 
APHIS program in fiscal year 2000.
    (8) Environmental Border Initiatives, Fiscal Year 2000
     BTA is supporting (4) Legislative Initiatives for FY 
2000--action
    (a) EPA to establish environmental benchmarks from which to measure 
progress in achieving environmental mitigation goals on the Southwest 
border.
    (b) EPA to establish a Southwest Border Environmental Information 
Clearinghouse within the Southwest Center for Environmental Research 
and Policy to serve as a ``one-stop-shop'' for such information on 
programs, policies and funding sources along the border.
    (c) EPA to establish a Southwest Border Center on Environmental 
Technologies with Texas Regional Institute for Environmental Studies at 
Sam Houston State University in order to provide a tool to better 
identify and verify technologies for application on the border.
    (d) Department of Energy to carry out a multi-year Southwest Border 
Region Technology Deployment Initiative for hazardous waste along the 
border. We are seeking $2,600,000 in fiscal year 2000 to carry out the 
first year of this plan.
    (9) Southwest Border Region Partnership Act of 1999
     Freestanding bill to authorize formation of a Southwest 
Border Action Plan for economic development, infrastructure, education, 
health care and related matters to enhance community development along 
the Southwest Border.
     Authorizes formation of a Revolving Loan Fund to leverage 
private resources to fund community development and economic 
development projects along the border with a ``community-based'' 
approach.
    On behalf of the BTA, I close by thanking the Committee for the 
opportunity to participate at today's hearing and again express our 
willingness to serve as a resource for the Committee and its staff.

                                

    Chairman Crane. Thank you, Ms. Ross.
    Mr. Rogers.

     STATEMENT OF JAMES A. ROGERS, CHAIRMAN, INTERNATIONAL 
  COMMITTEE, AIR COURIER CONFERENCE OF AMERICA, FALLS CHURCH, 
                            VIRGINIA

    Mr. Rogers. Thank you, Mr. Chairman. It is a pleasure to 
appear before you today. I am the chairman of the International 
Committee of the Air Courier Conference of America. ACCA is the 
trade association representing the air express industry. Its 
members include large firms with global delivery networks such 
as DHL, FedEx, TNT and UPS, and small businesses with strong 
regional delivery networks. Together, our members employ 
approximately 510,000 American workers who move more than 25 
million packages each day, operate 1,200 aircraft, and earn 
revenues in excess of $50 billion.
    I would like to focus my comments on three of the issues 
being examined today by the Subcommittee: Customs automation 
programs and their funding, the International Trade Data 
Systems, and Customs user fees.
    Almost exactly a year ago, I testified before the Trade 
Subcommittee that Customs automation efforts had not adequately 
confronted the express industry and the rest of the trade 
community. Today I want to commend U.S. Customs for making 
impressive strides in the last 12 months. Most important in 
this regard, is Customs' resuscitation of the trade support 
network, through which it has actively consulted with the trade 
community on the development of its next generation automated 
system, ACE.
    ACCA believes that Customs is moving in the right direction 
with ACE. As the Subcommittee knows, the current Customs 
automation system is in desperate need of replacement. All the 
witnesses here have testified to that. ACCA is extremely 
concerned about the impact of future brownouts, and even 
blackouts, because the express industry more than any other 
mode of transportation, relies on automation. Without 
automation, thousands upon thousands of international shipments 
every day would fail to be processed in time to meet their 
express delivery deadlines, stranding those who rely on our 
industry for just-in-time parts, keep manufacturing lines in 
operation, computers, telecom, and other equipment they need to 
keep offices running, critical care pharmaceuticals, et cetera.
    In short, an interruption in Customs automation programs 
would devastate our ability to meet our express delivery 
deadlines, and would harm a significant portion of the U.S. 
economy. As a woeful illustration of this, you need only think 
back to the havoc wreaked through the U.S. economy by the UPS 
strike in 1997.
    ACCA is extremely concerned that the Administration's 
proposed user fees for automation fails to acknowledge the true 
cost of developing ACE or the fact that ACE must be developed 
over the next 4 years because the trade community and the U.S. 
economy simply cannot wait longer than that.
    The Administration's proposal also fails to acknowledge 
that the trading community pays roughly $800 million annually 
in merchandise processing fees that should be directed to U.S. 
Customs operations, including automation programs. ACCA 
understands Congress' past hesitation to appropriate moneys for 
Customs automation was fueled by their well-founded 
reservations about Customs' approach to these problems. 
However, as we have already testified, Customs has taken giant 
strides to rectify these problems.
    ACCA urges Congress to acknowledge this, as well as the 
critical importance of this issue to the U.S. economy by 
appropriating MPF money specifically for the development of ACE 
over the next 4 years.
    With respect to ITDS, ACCA supports the general objectives 
in theory underlying ITDS, but has numerous concerns about its 
practical implementation. ACCA is especially concerned with the 
apparent lack of coordination between Treasury's work on ITDS 
and Customs' development of its next generation automation 
systems. These systems seem to be being developed side-by-side 
rather than together. We may end up with two different systems.
    The cost of double reprogramming expense, because Customs 
and ITDS are unable to agree on a joint approach, would be 
ridiculous. ACCA urges the Trade Subcommittee to exercise its 
oversight authority to prevent the U.S. Government from 
imposing this needless cost on U.S. industry simply because of 
the Government's inability to work with itself.
    Turning now to the issue of user fees, our industry is in a 
unique situation because we pay for dedicated Customs resources 
at our facilities. In order to obtain inspectional services 
whenever needed at express facilities, we agreed years ago to 
pay reimbursables to Customs. These fees are supposed to cover 
the cost to Customs of providing inspectors when needed. 
However, in recent years, the cost of reimbursables has 
escalated well beyond what we envisioned, to the point that 
they have become a serious burden on the express industry. 
Customs is expanding even further the scope of services for 
which it is billing the express industry.
    It bears noting that when we first agreed to pay 
reimbursables years ago, Customs considered express facilities 
to be a special service, divorced from the mainstream of U.S. 
commerce, and to a great extent that was true. Today however, 
the express industry is an integral part of the U.S. economy. 
Its demise, as we have testified, would harm a wide swath of 
U.S. commerce.
    We believe that a resolution to this issue will probably 
require legislative action. ACCA expects to be approaching 
Members of this Committee soon to discuss ways to redress this 
situation.
    I want to thank the Subcommittee for holding this hearing 
on a subject of great importance to American business. Mr. 
Chairman, thank you again for the opportunity to comment on the 
operations of the U.S. Customs Service and their impact on the 
express industry.
    [The prepared statement follows:]

Statement of James A. Rogers, Chairman, International Committee, Air 
Courier Conference of America, Falls Church, Virginia

    Thank you, Mr. Chairman; it is a pleasure to appear before you 
today. My name is Jim Rogers, and I am the chairman of the 
International Committee of the Air Courier Conference of America 
(``ACCA''). Formerly, I was vice president, government relations, of 
United Parcel Service, one of ACCA's members. ACCA is the trade 
association representing the air express delivery industry; its members 
include large firms with global delivery networks, such as DHL 
Worldwide Express, Federal Express, TNT Skypack International Express 
and United Parcel Service, as well as smaller businesses with strong 
regional delivery networks, such as Global Mail, Midnite Express and 
Quick International. Together, our members employ approximately 510,000 
American workers. Worldwide, ACCA members have operations in over 200 
countries; move more than 25 million packages each day; employ more 
than 800,000 people; operate 1,200 aircraft; and earn revenues in 
excess of $50 billion.
    The express transportation industry specializes in time-sensitive, 
reliable transportation services for documents, packages and freight. 
We are a relatively new and rapidly expanding industry, having evolved 
during the past 25 years in response to the needs of global 
international commerce. Express delivery has grown increasingly 
important to businesses needing to use ``just-in-time'' manufacturing 
techniques and supply-chain logistics in order to remain 
internationally competitive. The express industry has revolutionized 
the way companies do business worldwide and has given a broad-based 
application to the just-in-time concept. Producers using supplies from 
overseas no longer need to maintain costly inventories, nor do business 
persons need to wait extended periods of time for important documents. 
In addition, consumers now have the option of receiving international 
shipments on an expedited basis. Increased reliance on express 
shipments has propelled the industry to average annual growth rates of 
20 percent for the past two decades.
    I am very pleased to be able to discuss issues regarding U.S. 
Customs today, because Customs administrations play a critical role in 
ensuring expeditious movement of goods across borders and consequently 
are critical to our industry's ability to deliver express international 
service. To give you a sense of the size of our industry in U.S. 
trade--and as a customer of U.S. Customs--the express industry accounts 
for roughly 25 percent of all Customs formal and informal entries. In 
addition, express operators enter more than 10 million other manifest 
entries on low-value shipments, plus millions of clearances on letters 
and documents. In short, American business is dependent upon our 
industry, and we are dependent upon an efficient and effective Customs 
Service.
    I would like to focus my comments on three of the issues being 
examined today by the Subcommittee: Customs' automation programs and 
the funding mechanisms for these efforts, the International Trade Data 
System (ITDS), and Customs' user fees.

   It is Essential to the U.S. Economy that Customs' Next-Generation 
             Automation Systems be Brought On-line Rapidly

    Almost exactly one year ago, I testified before the Trade 
Subcommittee that Customs' automation efforts had not adequately 
accommodated the needs of the express industry and the rest of the 
trade community. Today, I want to acknowledge that U.S. Customs has 
made impressive strides in the last 12 months, and ACCA commends 
Customs for this. Most important in this regard is Customs' 
resuscitation of the Trade Support Network, through which it has 
actively consulted with the express industry and other members of the 
trade community on the development of its next-generation automated 
system, the Automated Commercial Environment (ACE). While many 
important issues with respect to ACE remain to be decided, we are 
encouraged that Customs appears genuinely committed to working with the 
trade community to develop its next-generation automation system.
    ACCA believes that Customs is moving in the right direction with 
ACE. If Customs adheres to its current plans, ACE should provide the 
functionality and enhanced automated abilities--processing of data, 
remote entry filing, account-based systems, reconciliation, etc.--
mandated by the Customs Modernization Act. Customs also plans to 
incorporate into ACE features that will enable Customs to adjust and 
upgrade the system as technology developments warrant, rather than 
having to create entirely new automation programs every few years.
    As the Subcommittee knows, the current Customs automation system--
the Automated Commercial System, or ACS--is in desperate need of 
replacement. The system is rapidly nearing the end of its lifespan and 
is increasingly subject to brownouts. ACCA is extremely concerned about 
the impact of future brownouts and even blackouts because the express 
industry, more than any other mode of transportation, relies on 
automation. We have invested tens of millions of dollars in automated 
systems designed to expedite shipment and delivery of goods within an 
express timeframe. For our industry to survive and expand, automation 
is critical. Without automation, thousands upon thousands of shipments 
every day would fail to be processed in time to meet their express 
delivery deadlines, stranding thousands of individuals and small, 
medium and large businesses who rely on our industry to provide them 
with the parts and components they need on a just-in-time basis to keep 
their manufacturing lines in operation; the computers, 
telecommunications and other equipment they need to keep their offices 
running; the blueprints they need to keep their construction projects 
on schedule; the critical-care pharmaceutical and medical devices they 
need to provide urgent patient care; the wedding gown they need for 
their marriage ceremony; and, I would venture to say, the next-day 
documents and packages Congressional offices need to conduct their work 
every day.
    In short, an interruption in Customs' automation programs would 
devastate our ability to meet our express delivery deadlines and would 
harm a significant portion of the U.S. economy. As an illustration of 
this, you need only think back to the havoc wreaked throughout the U.S. 
economy by the UPS strike in 1997.

The Clinton Administration's Proposal for a User Fee to Fund Automation 
               Programs is Ill-conceived and Ill-advised

    ACCA is extremely concerned that the Clinton Administration budget 
fails to acknowledge the critical importance to the U.S. economy of 
maintaining and improving an automated Customs environment. The budget 
proposes a new user fee to pay for automation, with the expectation 
that this would generate $163 million in the next fiscal year. This 
proposal fails to acknowledge the true cost of developing ACE and also 
fails to acknowledge the fact that the trading community has been and 
continues to pay an enormous annual stipend in the form of the 
merchandise processing fee (MPF) that should be directed to U.S. 
Customs' operations, including automation programs.
    First, with respect to the true cost of ACE development: Customs 
estimates that the trade portion of ACE will cost roughly $1.2 billion 
dollars if the program is developed over four years. The 
Administration's proposal would therefore only provide approximately 
half of the money needed for the first year of development. The costs 
of ACE development will be far greater than $1.2 billion if the project 
is stretched over more than four years. Furthermore, given the imminent 
obsolescence of ACS, the trade community and the U.S. economy simply 
cannot wait more than four years for development of ACE.
    Second, with respect to the trade community's annual contributions 
to the U.S. Treasury: throughout the 1990s, U.S. importers have paid 
MPF on most imports into the United States. MPF revenues total about 
$800 million annually. When first imposed, the MPF was challenged as 
being illegal under the GATT; it was determined that the surcharge 
would be consistent with GATT requirements only if it was directly 
related to the costs of U.S. Customs' operations. Notwithstanding the 
subsequent U.S. modifications of the MPF to bring it into GATT 
compliance and the U.S. assertion that the purpose of the MPF is indeed 
to offset Customs' operating costs, the fact remains that MPF revenues 
have not been channeled to U.S. Customs. Instead, they have gone to the 
general revenue fund of the U.S. Treasury.
    The problem, therefore, is not that the money is not there for 
modernization of Customs' automation systems, it is that the 
Administration has refused to request and Congress has refused to 
appropriate MPF monies for this purpose. ACCA understands that 
Congress' past hesitation in this regard has been fueled by well-
founded reservations about Customs' automation efforts. However, as we 
have already testified, Customs has taken giant strides to rectify 
these problems. ACCA urges Congress to acknowledge this, as well as the 
critical importance of this issue to the U.S. economy, by appropriating 
MPF monies specifically for the development of ACE over the next four 
years.

 Development of the International Trade Data System must take place in 
             Coordination with Customs' Automation Programs

    With respect to the International Trade Data System (ITDS), ACCA 
supports the general objectives and theory underlying ITDS, i.e., 
elimination of redundancy in government reporting requirements related 
to trade, confusion in data requirements, and incompatible data 
exchange methods. However, we have numerous concerns about the 
practical implementation of such objectives--for example, with respect 
to potential delay in express operations and burden on the industry in 
collecting all the ITDS required data elements. We have held several 
meetings with the ITDS team to discuss these issues and plan to 
continue this process.
    ACCA is especially concerned with the apparent lack of coordination 
between Treasury's work on ITDS and Customs' development of its next-
generation automation systems. One noteworthy aspect of this applies to 
exports. The existing automation program for reporting exports--the 
Automated Export Reporting Program, or AERP--expires this December 31. 
Customs has announced that it will be replaced by the Automated Export 
Sytem, or AES. The trade community is now being asked to bear the costs 
of reprogramming commercial systems for AES, at considerable expense. 
At the same time, the ITDS team is informing the trade community that 
it could be required to re-program its systems once again to 
accommodate the ITDS-based export reporting program as early as 2002. 
Both U.S. Customs and ITDS officials privately acknowledge that this 
redundant re-programming would be a waste of private sector resources, 
yet they also indicate that, because Customs and ITDS are unable to 
agree on an appropriate joint approach, they fully expect that industry 
will face this double reprogramming expense. ACCA urges the Trade 
Subcommittee to exercise its oversight authority to prevent the U.S. 
government from imposing this needless cost on U.S. industry simply 
because of the government's inability to work with itself.

  The Cost of Reimbursables to the Express Industry Has Grown Out of 
               Balance and the System Needs to be Altered

    Turning now to the issue of user fees, our industry is in a unique 
situation because we pay for dedicated Customs resources at our 
facilities. In order to obtain inspectional services whenever needed at 
our hub and express consignment facilities, the express industry agreed 
12 years ago to pay ``reimbursables'' to Customs. These fees are 
supposed to cover the costs to Customs of providing inspectors when 
needed. However, in recent years the cost of reimbursables has 
escalated well beyond what we envisioned, to the point where 
reimbursables have become a serious burden on the express industry. In 
fact, the industry has grown so much in the past 12 years that today 
collections under the MPF from this industry would more than cover the 
cost of providing inspectional services when needed to the express 
operators. We should note, by the way, that the express industry's 
principal competitor, the U.S. Postal Service, pays no reimbursables. 
Rather, U.S. Customs pays the Postal Service for the privilege of being 
on-site at its international mail clearing facilities.
    Recently, Customs has expanded even further the scope of services 
for which it is billing the express industry. For example, the express 
industry fought for several years for a technical correction to the law 
that would permit Customs to provide additional inspection personnel at 
our facilities during daytime hours in response to the industry's 
request, and that provision was finally enacted in 1996 as part of 
Public Law 104-295. Now, however, Customs has deliberately 
misinterpreted the provision as allowing it to bill for all daytime 
services, whether requested or not. Clearly, it was never the intention 
of the industry or of Congress in enacting this provision to provide a 
windfall to Customs to bill for services which it routinely provided 
free of charge in the past and which it continues to provide free of 
charge to all other members of the transportation industry. 
Furthermore, Customs has indicated to us that it plans to expand its 
billing for export-related services, even though there is no legal 
authority for it to do so.
    Reimbursable charges cost the industry close to $20 million last 
year--and the bills are mounting rapidly. On top of that, the express 
industry generated almost $75 million in MPF in 1998. Since the MPF 
collected already exceeds the cost of services provided by Customs for 
express operations, reimbursables represents a hidden tax that is borne 
by the express industry and that is ultimately paid by U.S. importers.
    It bears noting that, when we first agreed to pay reimbursables 
years ago, Customs considered express facilities to be a special 
service divorced from the mainstream of U.S. commerce and, to a great 
extent, that was true. Today, however, the express industry is an 
integral part of the U.S. economy and its demise, as we have testified, 
would harm a wide swath of U.S. commerce. In addition, I should also 
note that the express industry has pioneered automation innovations for 
Customs that enable Customs to process express shipments far more 
efficiently than it can for any other mode of transportation, while 
retaining high rates of compliance.
    We believe that a resolution to this issue will probably require 
legislative action, and ACCA expects to be approaching members of the 
Ways and Means Committee soon to discuss ways to redress this 
situation.
    In closing, I want to thank the Subcommittee for holding this 
hearing on a subject of great importance to American business. Mr. 
Chairman, thank you again for this opportunity to comment on the 
operations of the U.S. Customs Service and their impact on the express 
industry.

                                

    Chairman Crane. Thank you, Jim.
    Mr. Tobias, what is the status of negotiations concerning 
the use in El Paso of that very successful drug interdiction 
approach called Pre-primary roving, which is used everywhere 
else in the Southwest?
    Mr. Tobias. The resolution of that is over a year old, Mr. 
Chairman. It is being used. It has been used.
    Chairman Crane. In El Paso?
    Mr. Tobias. Yes, Sir. It has been used for a year. Thre is 
a final agreement, in place right now. I just checked an hour 
ago. I called to make sure that I was correct on that. It has 
been in place for a year, over a year.
    Chairman Crane. Because we had a witness earlier who said 
that it's been going on for years.
    Mr. Tobias. Well, I think that witness spoke in error.
    Chairman Crane. Well that is encouraging. I am glad to hear 
that. OK.
    Carol, how will an increase in the passenger processing fee 
affect your industry?
    Ms. Hallett. Well, obviously the increase will be one more 
nail in the coffin of not only our industry, but industry in 
general. The continuous increase of user fees when we have not 
received an adequate explanation as to how the money is being 
spent, and particularly in the one instance that I gave you, 
where you have the Customs Service explaining that it only 
costs $3.25 per passenger to process a passenger, and then they 
want to increase it to $6.40, is an example of why business is 
going to have more and more trouble being able to provide the 
service that is expected of them when you have costs that are 
increasing rampantly.
    We really believe that because we have already been 
contributing along the years, as has everyone else in business 
through the merchandise processing fee, that that is the 
appropriate way in which to be able to establish ACE and to 
move it forward in a very quick fashion. Four years is a long 
time, but that nevertheless is the way it should be done.
    I certainly heard Mr. Levin today when he said we should be 
more aggressive on this. We have already been to the 
Appropriations Committee, Mr. Levin. We will continue to pursue 
this because we believe it is the right way to go.
    Chairman Crane. Finally, for any member, any or all members 
of the panel, do you believe from your daily experience with 
Customs that Customs can effectively plan and manage a program 
of the magnitude of ACE?
    Ms. Ross. Absolutely. We have seen them do it in all kinds 
of different circumstances. We have seen them respond to 
outside pressures and put all kinds of programs in place. 
Admittedly, this may not be the best of analogies, but 
Operation Brass Ring the response to the criticism that Customs 
was not doing enough to interdict drugs. In the span of, I 
think, a short a period of 4 to 6 weeks, we saw a very 
successful program put in place using high technology, using 
the same manpower, and interdicting more drugs.
    Chairman Crane. Has anybody else got a perspective?
    Ms. Hallett. Mr. Chairman, having served as the 
commissioner of Customs for almost 4 years, I would have to say 
that the Customs Service does a remarkable job. At the same 
time, I also feel that it needs to operate even more on a 
business-like fashion. I think that Commissioner Kelly's 
proposal to go outside with a private contractor may be on the 
right target.
    When Ed Kloss arrived at Customs Headquarters from the New 
York Region to take over it--the ACS and the ACE program, they 
were on the right track. But it's 9 years later, and where are 
we? If there is an indictment, it is the failure of ACE to 
succeed, that is what worries me. It is taking too long for 
something like this to be done. That isn't to say that one of 
the flaws has not been the lack of funding; but that decision 
comes directly from the Administration.
    I would like to just take 1 minute to say that one of the 
biggest problems Customs has is that they are part of the 
Treasury family. What happens is that Treasury, no matter which 
party is in the White House, dictates how much money Customs 
will be allocated. Believe me, Treasury and Cutoms and the 
other branches in Treasury are all in lockstep. But then you go 
over to Justice, where you have INS and DEA and the other 
agencies, they literally do not pay the same kind of attention 
to budget controls. So there is a disproportionate amount of 
adherence to the budget process on the Treasury/Customs side, 
that does not exist in some other agencies. It is to the 
disadvantage of the Customs Service in doing a dual role with 
much of the same functions as the INS, with fewer resources.
    Sorry. I had to get that off my chest, but I'll tell you, 
it is very important for Customs to be treated fairly and 
equally.
    Chairman Crane. Thank you.
    Mr. Levin.
    Mr. Levin. Mr. Chairman, this has been a long and excellent 
hearing. We appreciate your patience. Let me just then omit a 
question and just two quick reflections.
    Mr. Tobias, I think it would be good if I might suggest 
that if you and Mr. Kelly came in and would talk to as many 
members as would talk to you about labor-management relations. 
I think there are some, let me put it this way, gaps in 
information here about what is happening. There are some 
outstanding questions. But I think it would be helpful so that 
people don't kind of choose up sides. I think that would be 
useful. It won't resolve all issues. We will have to face some 
of them, but I think it would help.
    Mr. Tobias. I would be pleased to do that, Mr. Levin.
    Mr. Levin. Mr. Kelly talked about the general State of 
labor-management relations. You have responded to some 
questions. I think it would be a good idea if you would do 
that.
    Then let me just say to the three of you, everybody here 
has testified as to the critical needs for an adequate modern 
information system. I am afraid you are in a catch-22 situation 
conceivably. That is, how it is going to be paid for. Your kind 
of overview of the problem may be totally salient or totally 
accurate, but it may not be relevant in terms of appropriations 
this year, if I might say so.
    It is hard to know, I mean no one here has come and said 
that we don't need to fortify the information system, no one. I 
mean everybody said the opposite. Mr. Zimmer was as 
categorical. Of course I guess he is getting paid for it, but 
he was so categorical about the adequacy of what Customs is 
trying to do. Not the adequacy, but the effort.
    Now I mean how are we going to pay for this? We are going 
to get into the usual tug and pull, right? Appropriations, user 
fees? You don't like the exclusion of Mexico, Canada and the 
Caribbean, though they represent a substantial amount of our 
trade. The spirit of NAFTA is invoked, but we are still going 
to have to find the money somewhere.
    So I think the answer is for everybody to kind of dig in 
and keep in touch with each other and see how we are going to 
find the resources, because your concerns, your forebodings, if 
they were to occur, would have major ramifications through our 
trade system and through our economy. Right? Or they could. I 
think we all should be realistic. I mean there is no easy 
answer to this issue. To simply say a user fee is violative, 
we'll have to see, or is out of the question, Congress doesn't 
always abide by that.
    So I wish you good luck. I just again want to urge that 
these efforts be intensified because the wheel has to squeak 
here. Whether it picks up appropriations or a user fee, is the 
second question. But it won't pick up either unless there is a 
greater understanding, I think, of the urgency of this 
situation.
    Mr. Chairman, I think this has been really an excellent 
hearing with a lot of good testimony. I wish us well.
    Chairman Crane. Well, I share that view.
    Mr. Becerra, before we wrap up here, do you have any 
questions?
    Mr. Becerra. Yes, Mr. Chairman. I do.
    First, let me thank all the panelists for their testimony. 
Mr. Tobias, maybe I can ask you, and actually I think 
Congressman Levin, again, has done a good job of touching on 
some points where maybe it would be good to have individual 
follow-up as well. But what was the resolution in El Paso?
    Mr. Tobias. One of the real issues was whether or not there 
would be three people doing the pre-primary roving. That was 
sort of the sticking point. We wanted to have three people 
there for purposes of safety.
    Ultimately, we agreed to two, because El Paso is not 
staffed at the level which would really allow for three. So we 
finally agreed to two in order to have the pre-primary roving 
and also have people directed to all lanes.
    Mr. Becerra. How is that working so far?
    Mr. Tobias. Well, it's working. I mean it is working. You 
know, it's interesting, last year there was a great deal of 
discussion at this Committee about bad labor-management 
relations at a time when everyone at the same time cites 
Operation Brass Ring, for which we received an award, a 
national award for our ability to cooperate and collaborate.
    I think the record speaks for itself in terms of the 
success that we have had and the success that we are having 
now.
    Mr. Becerra. Actually, I think Commissioner Kelly actually 
testified that relations were in good standing. While he 
indicated that there were some wrinkles that had to be ironed 
out between Customs and its employees, he did say he believed 
that there were good working relationships between the two.
    Mr. Tobias. That is accurate. Nobody agrees with anybody 
else all of the time.
    Mr. Becerra. You're kidding.
    Mr. Tobias. But what is true is that we have created a 
relationship with the Customs Service which has really allowed 
us to focus on accomplishing the business of the Customs 
Service, while at the same time, including the efforts, and 
ideas of employees in the work place. That has really been the 
goal of the effort.
    Mr. Becerra. Let me ask you two questions. I would ask you 
to answer them as quickly as you can. First, is overtime 
optional for employees or is it if not mandated, close to a 
requirement in order to have the Customs Agency fulfill its 
obligations? Second, how common is it for an employee, an 
inspector, to experience changes in his or her work schedule, 
on these rotating shifts? Please answer as quickly as you can.
    Mr. Tobias. Well, overtime is really a mandatory part of 
the job. Most Customs inspectors and canine enforcement 
officers are working a minimum of 16-hours of overtime a week. 
Second, the shifts change depending on the port. They can 
change every week or every 2 weeks. But that is sort of the 
common change in shifts.
    Mr. Becerra. So it is pretty common for any employee, any 
inspector, to have a different work shift at any given month of 
the year?
    Mr. Tobias. For sure. At least in a month. More likely, 
every 2 weeks. In some places, every week.
    Mr. Becerra. Is there some accommodation made for people 
who have personal and family obligations?
    Mr. Tobias. Well, sometimes people can swap out of shifts 
if there is another person who is available to do the work. But 
what that means is that the person who is doing the work is 
doing a double shift to accommodate someone who is swapping.
    Mr. Becerra. Thank you for the responses.
    Let me ask a couple of questions with regard to the 
automation fee. Some of the panelists in the previous panel as 
well have mentioned that the merchandise processing fee should 
really be one of the fees that we resort to to try to pay for 
this automation.
    Let me just ask some questions and perhaps we can get some 
answers into the record later. I understand that this 
merchandise processing fee raises something over $800 million. 
What does it get spent on as far as you know, and what is it 
supposed to be spent on, as far as you know? I will check with 
Customs to find out how they respond to those two questions.
    Can you think of any other fees that are already imposed on 
the various industries that should be used to help pay for the 
automation that perhaps Customs hasn't told us about or 
identified? It would be nice to know what your sense would be 
if we don't go forward with automation because one, we don't go 
forward with the fee, and two, Congress and the Administration 
don't put it in a budget in an appropriations bill. What then? 
What do we do about the delays, the brownouts? What is the 
scenario?
    Finally, if I could perhaps ask for a response at this 
point for this final question. The INS last year, actually 
beginning January 15 of this year, increased its fees for 
people who were applying to naturalize. The fee went from $95 
to $225. The INS saying it needed to charge that to recoup the 
costs of the service, the user fee. That is what the use would 
cost. That is about 150 percent increase. It would be nice to 
hear what the industries say in response to that. On top of the 
merchandise processing fee and so forth, do you all believe 
that you are paying the full cost of the service being provided 
by Customs?
    Ms. Hallett. Mr. Becerra, let me just respond by saying 
that all agencies of the Government are by and large looking to 
increase fees, from the FAA to the Customs Service, to INS, 
across the board. This is part of the problem. I would refer 
back to my comment about the fact that Customs testified or 
told us 18 months ago that it only cost them $3.25 to process 
each passenger. Even though we have been paying $5, or I should 
say collecting $5 from our passengers, we have never asked for 
the difference between the $3.25 and the $5. Now they want to 
go to $6.40. We believe the Congress should at least receive an 
explanation as to how that money is being spent. That is an 
example of part of the problem.
    I would also say that we have been aggressively opposing 
the INS fees just as we are these Customs fees. But 
unfortunately, we are not always successful.
    Ms. Ross. If I could just add to that. Your question is 
very salient in terms of what is the money being spent on. It 
is very difficult to say ``yes'' or ``no'' in terms of whether 
we are paying for the whole thing, because nobody is--well, let 
me back up. The MPF was supposed to pay for Customs' commercial 
operation. There are some reporting requirements that 
apparently have never been met in terms of really tying the MPF 
expenditure to the cost of the operation.
    In the absence of those kinds of reports, well, you know, 
there are statistics, there are statistics, and there are 
damned lies. You can pretty much take the numbers and make them 
say whatever you want. So it would be very difficult to really 
be able to give you a straight answer to that without getting 
the necessary reports from Customs. But certainly at $800 
million a year, or thereabouts, and enumerable importers saying 
they are paying more in user fees than they are paying in 
duties, it is a pretty safe generality to say we are probably 
not only paying for it, but we have paid for it two or three 
times over.
    Mr. Becerra. Thank you. Thank you, Mr. Chairman.
    [The following information was subsequently received:]

                                       Board Trade Alliance
                                                     April 19, 1999
The Honorable Philip Crane
Chairman, House Ways & Means Committee
Subcommittee on Trade
1104 Longworth House Office Building
Washington, DC. 20515-6354

    Re: FY 2000 Budget

    Dear Congressman Crane:

    Thank you again for the opportunity accorded the Border Trade 
Alliance (BTA) to testify at the April 13th hearing before the 
Subcommittee on Trade regarding the President's FY 2000 budget and the 
proposed electronic processing fee.
    As you know, the President's budget includes a provision 
authorizing the imposition of a fee on users of the Customs computer 
system ostensibly to offset the costs of modernizing that system. We 
see several problems with this approach and appreciate the opportunity 
to further articulate those concerns.
    First, the proposed electronic processing fee is clearly in 
violation of the North American Free Trade Agreement (NAFTA). NAFTA 
Article 403 states:
    1. Neither Party shall introduce customs user fees with respect to 
goods originating in the territory of the other Party.
    That the electronic processing fee is a user fee is supported by 
the language of the budget proposal itself which characterizes the 
method in which the fee will be charged as one based upon usage.
    Whether looking at NAFTA Article 403 or Annex 310.1, whether 
calling the fee a merchandise processing fee or an electronic 
processing fee, the result is the same. It is a user fee. The clear 
language of the NAFTA agreement bars the imposition by the U.S. of an 
electronic processing fee (or any other user fee) on goods which 
originate in Canada or Mexico. A similar prohibition applies to U.S. 
goods being imported into either Mexico or Canada.
    The same result likely arises in regard to the obligations of the 
United States under GATT. Article VIII.1. provides:
    (a) All fees and charges of whatever character (other than import 
and export duties and other than taxes within the purview of Article 
III) imposed by contracting parties on or in connection with 
importation or exportation shall not represent an indirect protection 
to domestic products or a taxation of imports or exports for fiscal 
purposes.
    (b) The contracting parties recognize the need for reducing the 
number and diversity of fees and charges referred to in subparagraph 
(a).
    Also of interest are the provisions of Article VIII.4.:
    The provisions of this Article shall extend to fees, charges, 
formalities and requirements imposed by governmental authorities in 
connection with importation and exportation, including those relating 
to:
    . . .
    (e) statistical services;
    (f) documents, documentation and certification;
    (g) analysis and inspection . . .
    The Customs computer has many users. For example, one source for 
balance of trade calculations is the Customs database. Hence, its use 
could be argued to provide statistical services as defined in Article 
VIII.4.(e). Likewise, a major purpose of the Customs computer is to 
certify the accuracy of information used for the purpose of releasing 
goods and paying duty. A fee for such purposes might well fall within 
the prohibitions of Article VIII.4.(f) or (g). It is also obvious that 
the purpose of the electronic processing fee is fiscal in nature. It is 
part of a budget proposal and is characterized as a means to raise 
money to pay for modernizing Customs' computer and is assessed based 
upon usage. As such it would appear to be a tax prohibited by GATT 
Article VIII.1.
    In addition, the electronic processing fee as proposed is to be 
assessed on all non-government users of the Customs computer. As such, 
it would be seem the fee is to be assessed against importers as well as 
exporters. The President's budget does not specify the amount at which 
the fee is to be set. We raise this lack of detail because of the 
debacle surrounding the harbor maintenance tax which you may recall was 
ruled unconstitutional as a tax on exports. United States vs. United 
States Shoe Corp., 118 S.Ct. 1290 (1998). We see the likelihood of a 
similar result with the electronic processing fee.
    Our concern arises by analogy to the merchandise processing fee 
(mpf) situation. GATT found the mpf to be acceptable only because the 
U.S. successfully argued the amount of the mpf was related to the costs 
it sought to recover--Customs commercial operations. 19 U.S.C. Sec.  
58c(4) (in addressing assessment of the mpf fee) provides:
    At the close of each fiscal year, the Secretary of the Treasury 
shall submit a report to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives . . . 
regarding how the fees imposed under subsection (a) . . . should be 
adjusted in order that the balance of the Customs User Fee Account 
approximates a zero balance. . . . The recommendations shall, as 
precisely as possible, propose fees which reflect the actual costs to 
the United States Government for the commercial services provided by 
the United States Customs Service.
    The best information we have is that no such reports have been 
submitted nor has the requisite opportunity for public comment 
occurred. In other words, in the absence of a similar reporting 
requirement (and its enforcement), how is the U.S. going to be able to 
establish the amount of the electronic processing fee which the 
Secretary of Treasury has yet to set is, in fact, a reasonable one 
under the circumstances? The way in which the budget proposal is framed 
imposes no such requirement. Further, the President's proposed budget 
places no limitations on this user fee other than to state $13,000,000 
is to allotted to the ITDS system and $150,000,000 is to be reimbursed 
to the General Fund. In other words, a total of $163,000,000 must be 
raised by this user fee regardless of whether than sum bears any 
rational relationship to the costs associated with non-government use 
of the system.
    Can an electronic processing user fee be established which is able 
to raise such a sum of money and be GATT compliant if imposed on 
imports alone? Probably not as GATT requires us to treat our imports 
and exports similarly. If assessed on imports and exports, is the user 
fee violative of the U.S. Constitution as a tax on exports? Probably so 
for the reasons articulated by the Supreme Court in the U.S. Shoe, 
supra, decision.
    In round numbers, over the last three (3) years, Customs has 
collected $2,486,000,000 in merchandise processing fees (1996--
$751,000,000; 1997--$831,000,000; and 1998--$904,000,000). Because the 
reporting requirement of 19 U.S.C. Sec.  58c(4) has not been met, we do 
not know how those monies have been expended. We do not know if those 
sums approximate the cost of Customs commercial operations as they have 
been taken into the general fund rather than allocated as statutorily 
mandated.
    There are special Customs fees currently imposed on a variety of 
users including commercial vessels, trucks, rail cars, private aircraft 
and vessels, passengers, mail, customs broker permits, and barge and 
bulk carriers. There are a plethora of additional user fees imposed on 
such industries as beef, pork, honey, cotton, pecans, potato, and 
mushroom importers. These user fees are, of course, in addition to the 
mpf which is currently set at 0.21% ad valorem, with a minimum of 
$21.00 and a maximum of $485.00.
    In addition, the harbor maintenance tax continues to be assessed on 
all imports. 26 U.S.C. Sec. 4461(b) sets this tax at 0.125% ad valorem. 
Since neither a minimum nor a maximum is imposed, A $1.3 billion 
surplus has arisen. In reaching its decision in the U.S. Shoe case, 
supra, one point made by each court in turn was the tax is collected 
but not spent in proportion to where it is collected. It also continues 
to be collected while the account has a huge surplus. In other words, 
the tax bears no rational relationship to the costs on which it is 
intended to be spent, nor does it fairly compensate the government for 
the expenditures it incurs in keeping the nation's harbors and 
waterways modernized. What is to prevent the electronic processing fee 
from a similar fate?
    The final question posed was if not ACE, then what? It is clear a 
more modern computer system is needed if Customs is to meet the ever 
growing demands of international trade. We do not have an opinion as to 
whether ACE is the answer, whether it should be ITDS in a revised 
fashion or whether some other system is more appropriate. We think that 
decision is better made by the experts in Customs and Treasury in 
consultation with Congress and the Administration. We can say we are 
intrigued by the idea behind ITDS--that there is one place where all 
the necessary data is inputted and that the required data elements are 
reduced. However, our understanding is ITDS does not reduce the data 
elements but rather increases them. Further, ITDS does not duplicate 
the function of the Customs computer--the release of goods. ITDS would 
appear to simply funnel certain required information to Customs while 
serving as a data input central point for all the government agencies 
which chose to tie into it. With that idea in mind and because of the 
impending demise of ACS, we again urge that as much appropriated 
funding as possible be quickly dispatched to allow Customs to continue 
to support the functionality of ACS while the decision regarding its 
replacement is considered, decided and funded.
    As a last comment, we would like to take this opportunity to amend 
our written testimony to include the Federal Highway Administration, 
Dept. of Transportation as one of the government agencies participating 
in the Strategic Planning Working Group mentioned at the end of that 
testimony. Please excuse the inadvertent omission.
    If we can provide any further information, please feel free to 
contact us. I can be reached at: S.K. Ross & Assoc., P.C., 5777 W. 
Century Blvd., Suite 520, Los Angeles, CA 90045-5659; 310-410-4414; Fax 
310-410-1017; [email protected]
    Your continuing courtesies and cooperation are appreciated.
            Very truly yours,
                                            Susan Kohn Ross
                                    Chair, Ports of Entry Committee
                                         Member, Board of Directors

                                

    Chairman Crane. Well again, let me express appreciation to 
all of you folks for your participation. We look forward to a 
continuing working relationship with you. With that, the 
Committee stands adjourned.
    [Whereupon, at 3:34 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]

Statement of the American Iron and Steel Institute

    The American Iron and Steel Institute (AISI) submits this testimony 
on behalf of its U.S. member companies who together account for 
approximately two-thirds of the raw steel produced annually in the 
United States.
    AISI has maintained a strong working partnership with the U.S. 
Customs Service since the mid-1960s. AISI's Customs Liaison Subgroup is 
an especially active unit of our U.S. producers' Trade Committee. We 
meet regularly with headquarters and field personnel in Customs' 
Offices of Strategic Trade and Field Operations. We also conduct an 
ongoing series of seminars for Customs personnel to help officials of 
the U.S. Customs Service better understand how to properly identify and 
classify steel mill products. In addition, we provide a network of 
technical and commercial experts to help answer questions from Customs 
on an as-needed basis. As a result of these activities, AISI has a 
thorough understanding of Customs' responsibilities and capabilities in 
the enforcement, classification, processing and facilitation of steel 
trade. In this regard, we offer the following comments on budget-
related Customs issues for FY 2000 and 2001.

    Automated Commercial Environment (ACE) Modernization at Customs

    There is an urgent need to fund and implement Customs' computer and 
software capabilities, through the proposed new ACE system, now. The 
weaknesses and inadequacies of the current Automated Commercial System 
(ACS) have been well documented. Virtually everyone agrees that the ACS 
is headed toward near-term failure, possibly within a year or less. 
AISI therefore strongly supports the immediate and rapid funding and 
development of a comprehensive, flexible and durable ACE, through the 
general appropriations process. At the same time, we remain opposed to 
the enactment of various special fees as a means of funding ACE.
    Failure to develop and implement ACE in a timely manner could 
invite a trade disaster for the United States. Failure of the ACS would 
probably not cause U.S. imports to slow. Rather, the most likely result 
of any massive failure of Customs' current computer capability would be 
to prompt political pressure from importers that could instead result 
in a relaxation of Customs' vigilance, thus opening the floodgates to 
imports without any ability to allow proper enforcement to ensure that 
these imports comply fully with United States' and Customs' rules, 
regulations and laws.
    It is not in the interest of the U.S. economy or U.S. industry to 
allow the ACS to fail, because the resulting flood of imports would 
almost certainly include a significant amount of unfairly traded and 
even fraudulent product that would cause substantial harm to U.S. 
producer and consumer interests alike. Moreover, any benefit to U.S. 
importers from such a breakdown in Customs' computer capability would 
be short-lived, while the injury to competing manufacturers in the 
United States would be long term.

            Steel Import Monitoring and Notification System

    Calendar years 1997 and 1998 were the two highest steel import 
years on record but, in 1998, the United States imported a record 41.5 
million net tons (NT), exceeding the previous record tonnage of 1997 by 
over 10 million NT--or 33 percent. What occurred in the U.S. steel 
market in 1998 was a supply-driven crisis caused by unprecedented 
levels of unfairly traded imports. In 1998, the U.S. steel trade 
deficit was a whopping $11.7 billion--or nearly 7 percent of the total 
record U.S. trade deficit last year. In 1998, the 8 months April-
November were the 8 highest individual monthly totals for steel imports 
in U.S. history. With our docks and warehouses full to the brim with 
imports and with U.S. steel inventories at all-time levels, this record 
surge of steel imports was a cause of serious injury to U.S. steel 
companies and employees, including layoffs, short work weeks, severe 
price depression, production cuts and lost orders.
    Unfortunately, America's steel trade crisis is not over. We believe 
it's important to put the numbers into proper context. What we've seen 
is just a couple of months of lower imports overall since November and 
a modest, halting improvement in market conditions in some steel 
product lines. Meanwhile, expectations are that, when first quarter 
1999 financial results are released, the vast majority of U.S. steel 
companies will report either losses or sharply reduced profits compared 
to first quarter 1998. In addition, in certain product lines such as 
plate and special quality bar, both orders and prices remain extremely 
depressed. Accordingly, it is very premature to claim that this crisis 
is over. It is not over because:
    1. severe economic difficulties abroad continue, and there remains 
enormous excess capacity offshore;
    2. steel inventories in the United States remain at record levels;
    3. the large, open U.S. market continues to be especially 
vulnerable;
    4. America's steel companies and employees continue to suffer 
injury;
    5. steel producers have not recovered from the serious injury 
caused by record imports in 1998;
    6. imports of products that are temporarily down are down because 
of trade cases;
    7. fair pricing in these products has not been restored;
    8. concern is growing about import source and product switching;
    9. imports of other products not subject to investigation are 
increasing; and
    10. imports overall, even at an annual 25-30 million NT rate, are 
still very high and imports from many countries remain at historically 
high levels.
    On the subject of import source and product switching, it is 
important to stress, first of all, that the imported steel share of the 
U.S. market remains well above levels in recent years, even though 
import volumes have declined since November 1998. Looked at on a 
monthly basis, while the import market share has come down since its 
peak in November 1998--primarily due to trade cases--it also remains 
well above levels in recent years. In fact, aside from the current 
crisis period, the January 1999 import share of 27.8 percent was higher 
than all but 2 months going back all the way to 1994.
    In addition, imports of many products from many countries continue 
to increase. For example:
     imports of hot rolled flat products are continuing to 
surge from China, Indonesia and other countries not covered by unfair 
trade cases;
     imports of cold rolled sheet from Brazil have increased 
sharply after cases were filed against hot rolled sheet in September 
1998;
     imports of hot-dipped galvanized steel products have 
increased in recent months;
     imports of rail steel products have surged significantly 
since November 1998; and
     imports of tin mill products have also surged 
significantly since the end of 1998.
    It is therefore clear that (1) America's steel import problem is 
not limited to a single product or 2 or 3 offshore suppliers and (2) 
there must be more forceful action to address the ongoing steel trade 
crisis in the United States.
    On behalf of our U.S. member companies, AISI supports an effective, 
global solution to the steel trade crisis in the United States. As a 
part of any such solution, it is imperative that the United States 
government and U.S. steel industry have access to the most up-to-date 
information possible on potentially disruptive and unfairly traded 
steel imports. Therefore, AISI continues to support strongly 
legislation to develop and implement a U.S. steel import monitoring and 
notification system capable of providing as near as possible ``real-
time'' data on steel imports.
    An effective steel import monitoring and notification system would 
require that an electronic notice of importation accompany each import 
entry. Steel import notices would be accumulated, updated and published 
weekly in summary form on an Internet web site. Such data would provide 
the information needed for the U.S. government and steel industry to 
assess the steel import situation in near-real-time. This would enable 
U.S. policy makers to anticipate trade problems before they become 
crises and enable U.S. steel producers to respond as early as possible 
to potential disruptive and unfair trade.
    America's NAFTA partners Canada and Mexico already employ steel 
import monitoring and notification programs that provide, as close as 
possible, real-time data. The U.S. system that is being proposed would 
be modeled on the Canadian system. In Canada, the steel import 
monitoring and permit system is administered outside of Customs, and 
does not appear to present a burden to Canada's Customs Service. 
Canadian Customs does, however, have a modern automated computer system 
in place. We therefore recommend including a steel import monitoring 
and notification program in the development of ACE, to ensure both 
compatibility and efficiency.
    Most importantly, the proposed U.S. steel import monitoring and 
notification system would not constitute a nontariff barrier to trade. 
Under the automatic notification system that is being proposed, (1) 
steel import notice applications could not be refused, (2) any nominal 
fee would not be an economic burden and (3) import entries would not be 
delayed. Again, Canada presents a good example. In Canada, record steel 
imports occurred in 1998 in spite of that country's steel import 
monitoring and permit program.
    Based on the experience in Canada, a similar U.S. steel import 
monitoring and notification system should not pose either a budgetary 
or a human resource burden on the U.S. Customs Service. It is important 
to AISI and our U.S. members that Customs resources not be diverted 
from current enforcement efforts. As in Canada, we believe that a small 
fee for each steel import notice application could substantially fund a 
similar system in the United States. If, however, the nominal fee 
imposed on steel import notice applications were to prove inadequate to 
cover all necessary resources to implement and maintain this program, 
both within and outside of Customs, we would support additional funding 
through general appropriations.
    The U.S. members of the American Iron and Steel Institute are 
grateful for this opportunity to express our views on budget 
authorizations for the U.S. Customs Service and other customs issues.

                                

Statement of the American Textile Manufacturers Institute

    This statement is submitted by the American Textile Manufacturers 
Institute (ATMI), the national association of the domestic textile mill 
products industry, in response to the Subcommittee on Trade's March 29, 
1999 advisory inviting comments on U.S. Customs Service budget 
authorizations for FY 2000 and 2001.
    It would be difficult to understate the importance of the Customs 
Service, the oldest federal agency, to the United States' national well 
being. The Customs Service is the second largest producer of revenue 
for the federal government (after the Internal Revenue Service) and 
guards our borders against the entry of dangerous, illegal and smuggled 
goods, while insuring that a bewildering array of laws and regulations 
is adhered to. With over 200 ports-of-entry to administer, nearly 20 
million import entries to process annually, representing a value of 
over $900 billion, and $18 billion in duties to collect, Customs' task 
is a daunting one.
    As the volume of imports has soared during the last few years, 
Customs' ability to efficiently process that value has diminished. This 
is acknowledged by Customs. Furthermore, as the volume of imports 
continues to grow, the problem will only get worse and will assume 
crisis proportions in the not too distant future. The reason for this 
is well-known: the Customs computer system used to process and record 
import entries is hopelessly antiquated and simply unequal to the task. 
To address the problem, Customs proposes to retire its current system 
and the architecture on which it runs, the Automated Commercial System 
(ACS), and replace it with a new system, the Automated Commercial 
Environment (ACE.) While everyone concerned agrees that this is a 
necessary step forward, there is not agreement on how its cost, 
estimated to be over $1 billion, should be funded.
    Numerous press reports indicate that the ``trade community,'' i.e. 
importers, their agents, brokers and forwarders are reluctant to fund 
the changeover to the ACE through an additional assessment on imports. 
They believe that ACE should be funded out of the overall federal 
budget, i.e. largely by taxpayers, and the argument used to advance 
this point of view is that ACE will be good for the overall economy and 
therefore everyone should pay for it. This is wrong-headed thinking 
which ignores the incontrovertible fact that the primary beneficiaries 
of ACE will not be factory workers or farmers or teachers or 
stockbrokers; the primary beneficiaries will be a . . . importers. 
(This includes textile mills which import certain of their raw 
materials and machinery not made in the United States.) Users should 
pay for it. Drivers pay for highway construction and maintenance 
through gasoline taxes and tolls; airlines pay for the use of airports 
through landing fees; ships pay for the use of port facilities. These 
are user fees; the concept behind them is quite simple: if you use it 
and benefit from it, you pay for it.
    The argument is also advanced that the operations of the Customs 
Service are already funded by the duties collected. While it is true 
that the Customs Service collects more in duties than it spends (its 
budget), the fact is that these revenues go into the general fund and 
have since 1789. Customs' operations must be funded by congressional 
appropriation. It is also a fact that the duties collected by the 
Customs Service during 1998 represented two percent of the value of 
merchandise imports, the lowest rate in history and hardly an undue 
burden on those who paid them. Under the Uruguay Round Agreement and 
other, preferential trade agreements entered into by the United States 
during the past several years, the volume of U.S. imports has expanded 
greatly while the tariffs paid on them have been reduced sharply. Both 
phenomena have proven richly rewarding to importers, so it does not 
seem unreasonable to require importers to pay a miniscule fee to 
continue to enjoy these benefits.
    It is hard to understand the resistance from most importers about 
funding the conversion to ACE. If ACE is not funded and the present, 
outmoded, inefficient ACS is not able to handle future import volumes 
even ``crashes,'' as many fear it will, who will suffer the greatest 
economic harm? The question is, of course, rhetorical.

                                

Statement of M. Brian Maher, Chairman, and Steward B. Hauser, 
President; the Coalition for Customs Modernization, New York, New York

    The Coalition for Customs Modernization was created in July 1998 by 
New York and New Jersey industry leaders to raise regional and national 
awareness of the critical possibility of a computer breakdown and the 
need for immediate funding for a new system to replace the current 
system. A collapse of this system would affect every segment of the 
U.S. economy and jeopardize drug interdiction efforts throughout the 
country as well as the flow of goods and raw materials in and out of 
the country.
    Presently the Automated Commercial System (ACS) Customs computer 
system is over 14 years old and requires continued funding to maintain 
its current operation. In the past 14 years international trade has 
grown exponentially and ACS is handling over 95 per cent of all Customs 
transactions and is operating at well beyond its design capacity. As a 
result, the system is subject to failures such as happened last 
September 14 costing the Government a $60 million delay in revenue 
collections. Again, on October 1, the system failed and blocked the 
flow of $2.2 billion worth of goods into the national economy. It is 
evident that a new and larger system is an absolute must and that the 
current system, ACS, must be funded until the new system Automated 
Commercial Environment (ACE) is in place.
    The above financial impact was the result of just a few hours 
delay. Should there be a system breakdown of a catastrophic nature, the 
effect on the nation's industrial base would be even more devastating. 
Almost every industry in this country relies either directly or 
indirectly on the importing of raw or finished materials or the export 
of the products it produces. Every segment of the nation's economy 
would be affected by a Customs computer failure. The most immediate 
effects would be on the nation's air and seaports. Passengers would be 
substantially delayed at airports awaiting Customs clearance. Likewise 
air cargo shipments, by nature high value and very time sensitive, 
would also be substantially delayed at the airports. Within a week of a 
computer failure, ocean cargo necessary to our daily lives and long-
term production would sit on vessels and even cargo on those vessels 
able to divert to Canada or Mexico would fare no better as border 
crossings would not be able to function. The nation's ports would be 
clogged with export/import cargo with resultant rail and highway 
congestion beyond belief. Ships arriving from foreign ports would be 
unable to neither unload their import cargoes nor would they be able to 
load their export cargo thus delaying shipping worldwide. To avoid the 
dire consequences of a Customs computer failure, funding must be 
provided immediately.
    Equally important, a system breakdown will severely handicap 
crucial drug interdiction efforts. Significant progress has been made 
in this area; however, a system collapse may open the drug trafficking 
floodgates. Ultimately, a prolonged disruption of the system would 
affect the economic well-being, safety, and security of every man, 
woman and child in the country. To date the crucial national 
significance of this issue has not received the attention it warrants. 
The endless rhetoric on funding and technology should cease and in its 
place a unified public/private partnership should be formed to rapidly 
address the issue while there is still time to avert this impending 
crisis.
    The $1.2 billion funding to develop and implement the Automated 
Commercial Environment (ACE) must be appropriated immediately. Each 
year U.S. industry pays over $22 billion in duties to the United States 
Customs Service to be deposited in the United States Treasury. 
Importers have been paying user fees for over 10 years for technology 
improvements, yet these funds have not been disbursed for use by 
Customs in its operations. Because of the importance of international 
trade to the nation's economy, trade, security and public health and 
safety, averting a major Customs computer collapse by immediately 
funding a new computer system for Customs should be viewed as a 
critical national priority.
    Clearly, the Federal Government has an obligation to ensure that 
not only is there an adequate system to collect these funds, but also 
that an impending system breakdown, with catastrophic consequences to 
the national economy and drug interdiction efforts, be immediately 
averted.
    We respectfully request that you take immediate action to fund this 
critically important and necessary function of the Federal Government.

                                

Statement of James J. Havelka, KPMG LLP

    KPMG's Assessment of U.S. Customs Service efforts associated with 
Customs Modernization and Automated Commercial Environment (ACE) Cost 
Estimating

                               Background

    Chairman Crane and Members of the subcommittee, I am Jim Havelka, a 
principal in KPMG LLP's Public Services practice based in our 
Washington D.C. office. I am the firm's senior representative 
responsible for our efforts within the U.S. Customs Service. KPMG is 
providing this Statement of Record as testimony to the Committee on 
Ways And Means to be used while preparing fiscal year (FY) 2000 and 
2001 budget authorizations. KPMG LLP is one of the world's largest and 
most diversified professional firms, with more than 92,700 
professionals in 157 countries and annual revenues in excess of $10.4 
billion. KPMG's Public Services practice, where I am engaged, employs 
more than 2,300 people and operates in over 90 geographic locations 
throughout the United States. The Public Services line of business is 
dedicated to serving the diverse needs of federal, state, and local 
governments.
    Because of the extensive level of experience that KPMG has 
throughout the public services sector, the U.S. Customs Service has 
engaged our services under federal contract. We are tasked to provide 
advisory services to the Assistant Commissioner, Chief Information 
Officer (CIO) of U.S. Customs Service (Customs) and perform a number of 
Customs Modernization specific review tasks.
    Between November 17, 1998 and continuing through the date of this 
Statement of Record, we conducted an assessment of the approaches and 
methodologies used to develop Customs Modernization budget estimates. 
It is important to emphasize from the onset that KPMG conducted an 
independent review and not an audit. By its very nature, this review 
was intended to provide Customs with a ``snapshot'' look at the 
progress the Office of Information Technology (OIT) was making with 
respect to estimating costs associated with modernizing their automated 
systems.
    The scope of KPMG's efforts is limited to the following tasks:
    1. Conducting an assessment of the approaches and methodologies 
used by Customs in developing life cycle costs associated with Customs 
Modernization.
    2. Reviewing and providing comments on the Automated Commercial 
Environment (ACE) Budget Estimate, dated January 29, 1999, revised 
February 23, 1999.
    3. Reviewing and providing comments on the Automated Commercial 
Environment (ACE) Cost Benefit Analysis (CBA), dated March 12, 1999.
    Again, it is important to note that KPMG did not perform an audit 
of the estimates nor validate the values presented in the documents or 
the source data. In all tasks, KPMG was asked to provide an assessment 
as to the appropriateness, reasonableness, and soundness of Customs 
efforts. KPMG evaluated available artifacts and interviewed Customs and 
Contractor personnel associated with the development of Customs 
Modernization cost estimates. KPMG forwarded gaps and issues identified 
during our review to Customs. Customs, in turn, has closed, or is 
currently responding to these gaps and issues. Additionally, KPMG 
provided recommendations to Customs to assist them in developing a 
modernization roadmap.

                          Testimonial Details

    An outside contractor working in conjunction with Customs developed 
the ACE Budget Estimate. Although the Budget Estimate document is 
limited to the ACE program, it will become part of a larger series of 
documents that when completed, will form a roadmap for Customs 
Modernization. KPMG reviewed the document with the focus of identifying 
areas that contained inaccuracies, inappropriate methodologies, or 
where additional analysis might be necessary.
    KPMG also reviewed the ACE Budget Estimate document for its overall 
value to Customs moving forward with their modernization plans. This 
included reviewing recent General Accounting Office (GAO) reports and 
evaluating the effectiveness of the document to satisfy or resolve 
GAO's issues.

Overall Observations

    Customs has performed a large amount of work in developing the 
modernization cost estimates. While some of the information may seem 
unorganized on the surface and not easily traceable, through 
information provided during the interviews, we were able to map the 
detailed components to the rolled-up modernization estimates. 
Assessments of the individual components of the Customs Modernization 
effort that were reviewed during our engagement are as follows:

ACE Application Software Development

    Customs, with the support of a Contractor, used reasonable 
methodologies in developing ACE software development budget estimates. 
Customs used three different estimating techniques to extrapolate 
historical data, averaging the results to establish a point estimate. 
Although there are some minor issues, the three methodologies 
demonstrated a comprehensive approach by using historical data gained 
from previous experience as well as accounting for areas of risk. While 
ACE is in its infancy and discrete functional requirements have not yet 
been fully defined, we feel Customs has taken appropriate steps in 
preparing the ACE software estimate.

Automated Commercial System (ACS) Software Maintenance

    Customs drew upon an experienced Contractor's estimate and 
incorporated historical data to develop the ACS Software Maintenance 
cost estimates. While there may be some areas where an apparent 
methodology could not be identified and only results were presented, 
the ACS estimates seem appropriate if the ACE program is fully 
developed. If ACE is not fully developed, additional costs may be 
incurred to keep ACS up to date with evolving Trade policies and 
procedures.

Infrastructure

    One of the major cost drivers Customs is planning for is 
Infrastructure. A majority of this cost area is equipment and 
telecommunications that are required for both sustaining ACS operations 
and preparing the operational environment for ACE. As an aggregated 
cost area, Customs appears to have fully examined the breadth of 
possible costs. However, due to the Infrastructure being ``shared`', 
Customs has had some difficulty in apportioning this cost across the 
different programs. While there are some elements of the infrastructure 
yet to be finalized, KPMG feels that Customs estimate, as an aggregate 
for the infrastructure is appropriate at this time.

ACE Cost-Benefit Analysis

    KPMG is currently reviewing the ACE Cost Benefit Analysis. Upon 
initial review, the document appears to follow a comprehensive 
approach, which addresses some of the previously mentioned minor 
issues.

Summary

    Customs has had some difficulty in identifying and developing an 
effective and complete presentation format capable of satisfying a 
diverse audience. Additionally, Customs does not appear to have 
adequate personnel resources to effectively plan and manage a program 
with the magnitude of ACE. However, it does appear Customs has the 
information building blocks necessary to prepare a comprehensive ACE 
budget estimate and begin to develop a modernization blueprint for 
Customs.
    KPMG feels that in whole, Customs approach to developing cost 
estimates are mostly sound and appropriate. The few exceptions should 
be considered minor and should be reevaluated as the modernization 
program matures. As an aggregate program, Customs seems to have applied 
reasonable methodologies to develop thorough modernization cost 
estimates.
    We appreciate the opportunity to provide this Statement of Record 
as testimony during the House Ways and Means Committee, Subcommittee on 
Trade hearings relative to budget authorization for Customs.

                                

Statement of Maritime Exchange for the Delaware River and Bay, Lewis, 
Delaware

    The Maritime Exchange for the Delaware River and Bay is a non-
profit trade association and represents the interests of approximately 
300 businesses which depend upon the economic health of the Delaware 
River port complex, which encompasses the states of Pennsylvania, New 
Jersey and Delaware. Established in 1872, the Exchange's mission is to 
promote and protect Delaware River port commerce.
    There are several vehicles we utilize to achieve that mission, 
foremost among which is our port-wide community information system. In 
its role as the ``electronic information hub,'' the Exchange operates a 
comprehensive automation system which tracks ships and barges and their 
cargoes. This data is provided to the Coast Guard, Immigration Service, 
USDA, and U.S. Customs. The Maritime Exchange developed its TRACS 
system, which is certified on the U.S. Customs Automated Commercial 
System (ACS) since 1989. Over 40 businesses throughout the tri-state 
port business community use TRACS to clear cargo electronically with 
Customs on a daily basis.
    The Maritime Exchanges port automation network is as integral a 
part of our port's infrastructure as are the cranes and warehouses. In 
total, nearly 200 companies operating at Delaware River ports depend on 
these systems to make day-to-day operational decisions and for long-
term strategic planning purposes. The availability of electronic 
information has become an increasingly important component of our port 
community's competitiveness.
    As a result, when any one of the components of this network is not 
functioning properly, it affects not only the performance of our entire 
system, but also the daily operation of our port.

                           Customs Automation

    The delays in Customs ability to process cargo manifests and entry 
data over the last several months have resulted in significant delays 
in processing the cargo itself. These delays in turn result in 
significant costs to our port customers--and to their customers as 
well. Particularly at Delaware River ports, where one of the key 
cargoes handled includes time-sensitive perishable fruit products, 
delays in data processing which keep handlers from moving the goods in 
a timely manner can indeed result in the complete loss of entire 
shipments. Someone must absorb that cost. Other costs associated with 
system-related delays include increased storage expenses, lost time 
spent in monitoring and communicating--and miscommunicating--status, 
backups at the terminal when cargo cannot be transferred to an inland 
carrier, and an inability to meet just in time inventory orders.
    According to one of our members, the issue can be very simply 
stated: in handling general cargoes, each hour is precious and each 
hour wasted in idle is costly. With perishables such as fruit, each 
minute is precious. Industry simply cannot afford these continual and 
ongoing delays.
    The Maritime Exchange has long supported federal agency automation 
initiatives. We worked hard in the early 1990s to support the passage 
of the Customs Modernization and Informed Compliance Act. Subsequent to 
its enactment, we have dedicated both financial and human resources to 
working with Customs and other government agencies to ensure the system 
meets its users' needs. We have also worked closely with the local 
offices of Customs, Coast Guard, Immigration, USDA, the Corps of 
Engineers and others to identify opportunities to streamline 
operations, promote safety, and facilitate commerce through technology.
    We don't believe that anyone at this point is arguing against 
enhancing the existing ACS. The question now facing us is how will the 
new system perform?
    Shortly after the passage of the Mod Act in late 1993, Customs 
determined that rather than expend resources improving ACS, a more 
efficient approach would be to completely redesign a system which would 
mirror processes, rather than simply automating forms. The Automated 
Commercial Environment (ACE) would be the means to accomplish this 
objective. The Maritime Exchange and many other Customs constituents 
not only approved of this decision but offered to help in the design 
and development processes. These organizations which came together as 
the ACE Trade Support Network (TSN), including the Maritime Exchange, 
have spent, and continue to spend, a great deal of time and energy on 
this project.
    In August of 1998 the ACE team presented a design and cost concept 
document for the new system to the TSN for review. Consistent with 
Customs ACS development philosophy, the ACE Team wanted to ensure its 
industry partners had the ability to comment on the design process and 
make suggestions for change if appropriate.
    This is, however, where the process fell apart. At that time, 
looking ahead to FY '99 budget appropriations, Customs needed industry 
to support the proposal. Time, of course, was of the essence. Yet 
industry was reluctant to provide and communicate that support until 
Customs answered two key questions: (1) What is the detail behind the 
cost estimate? and (2) Are all those individual steps necessary--and in 
that order--to accomplish our goal? It is our understanding Congress 
has asked the same or similar questions.
    Although Customs has been somewhat responsive to our inquiries, the 
members of the TSN have not yet received all the answers. However, 
given our past history with Customs, we are confident that they will be 
satisfactory.
    In the interim, however, we've watched the existing system degrade 
severely and the reality is we cannot afford to wait any longer. Our 
entire international trade industry is in jeopardy.
    Both individually and as a member of the newly-formed Coalition for 
Customs Automation Funding, the Maritime Exchange strongly supports the 
U.S. Customs ACE system and encourages its immediate and full funding, 
including dollars to keep the existing ACS operational. We do not mean 
to suggest that Customs should be given free reign over the 
appropriated dollars; on the contrary, we expect both the federal 
watchdogs and the private business community to be vigilant in their 
oversight of Customs' activities. Yet Customs must be allocated the 
necessary resources to provide service to its primary constituency--the 
importers, exporters and other cargo carriers and handlers who drive 
our global marketplace.
    The Maritime Exchange does not support the implementation of user 
fees to support these activities. The U.S. international trade 
community is already funding Customs activities through the payment of 
taxes, duties, and fees--including the merchandise processing fee, 
which has contributed approximately $800 million to the general 
treasury over the last 10 years. These funds should be used to fund 
this critically needed system.
    Business has further demonstrated its financial commitment by 
investing billions of dollars in the development of the systems, such 
as TRACS, that are used to communicate with the Customs system. By 
adding a new user fee to fund automation initiatives, the private 
business community would, in essence, be paying for both halves of a 
system--through three separate vehicles--that benefits every one of our 
nation's citizens. This is an unfair burden.

                    International Trade Data System

    Given that the Exchange has gone on record in support of ACE, which 
includes automation for certain Other Government Agency interfaces, 
such as USDA, INS, DOT and others, it may appear illogical to also 
support the ITDS. Yet we do.
    It is not necessarily ``the'' ITDS but ``an'' ITDS which would be 
of tremendous benefit to the port business communities throughout our 
country. It is the concept we wholeheartedly endorse.
    With an ITDS, the commercial maritime industry would have the 
opportunity to take advantage of technologies in a way that will 
provide demonstrable efficiencies in terms of our providing commercial 
trade data to the federal government and to our other partners in the 
transportation chain. As we have learned from our experience in 
building our own network, centralizing and unifying data processing and 
distribution--as ITDS seeks to do--significantly saves time and paper 
costs, reduces errors, and expedites the flow of information. 
Centralized databases also greatly reduce programming, communications, 
and technical support costs. And, the ITDS plan to utilize world-wide 
Internet standards as a communications option is undoubtedly the 
correct approach.
    In short, the current international trade environment demands new 
logic with regard to data exchange. The existing systems are antiquated 
and must be replaced. New systems which capitalize on technologies must 
be implemented.
    We are willing to support the existing ITDS as it has been 
proposed, subject to the following caveats:
     ITDS must to work with other agencies who may already be 
operating/developing systems to ensure the federal government avoids 
duplicative costs
     ITDS must ensure that all communications between industry 
and the government are in fact centralized and that there are options; 
multiple connectivity requirements, as may be necessary under the 
current plan, are inefficient and unnecessarily expensive.
     ITDS must provide options. Allowing only one file format 
type or one communications interface does not allow for the unique 
nature of the various industry business types.
     ITDS must involve industry during the development/
implementation process.

                                Summary

    The Maritime Exchange absolutely opposes the development of 
multiple, redundant federal agency automation systems.
    We believe the federal government must keep pace with its industry 
partners. Many agencies have no electronic interface with the private 
sector; and for those which do, the existing systems will not meet our 
business needs going into the next century.
    ACE works because Customs abilities and methodologies are proven; 
we have a system which, while perhaps not complete with regard to the 
automation of all Customs processes, has served us well since the early 
1980s. ACE will encompass the full array of data reporting requirements 
for Customs.
    ITDS works because the individual agency approach can only hamper 
our ability to make the best use of our resources. Not only does this 
government insufficiency devalue our own investments, it also greatly 
hampers our to ability service our customers. However, ITDS as proposed 
is not as comprehensive as it needs to be; the system will not meet the 
full international trade data reporting requirements.
    It is our view that the federal government must take the best 
components of ACE and ITDS and merge them into one comprehensive U.S. 
import/export data processing and distribution system.

                                

Statement of Karen Sager, President, National Association of 
Foreign-Trade Zones

    Mr. Chairman and Members of the Subcommittee: On behalf of the 
National Association of Foreign-Trade Zones, I thank you for the 
opportunity to present this statement for the record to the 
Subcommittee hearing on U.S. Customs Service issues. My name is Karen 
Sager. I am the President of the National Association of Foreign-Trade 
Zones.
    The NAFTZ is a nonprofit trade association representing over 700 
members, including grantees, operators, users and service providers of 
U.S. foreign-trade zones. Today there are more than 200 approved zone 
projects located in 50 states and Puerto Rico. The total value of 
merchandise received at foreign-trade zones annually is approximately 
one hundred eighty billion dollars. The total value of merchandise 
exported from foreign-trade zones is approximately seventeen billion 
dollars. Over 2,900 firms utilize foreign-trade zones and employment at 
facilities operating under FTZ status exceeds 367,000. The NAFTZ 
provides education and leadership in the use of the FTZ program to 
generate U.S.-based economic activity by enhancing global 
competitiveness.
    The growth in the number of zone projects throughout the United 
States and the increased use of those projects by U.S.-based companies 
is a strong indication of how important participation in the 
international marketplace has become to the U.S. economy. A key to the 
success of those endeavors is the ability to move merchandise quickly 
and cost effectively with a reasonable degree of predictability. 
Critical to that movement is the processing of merchandise by U.S. 
Customs.
    The Customs Modernization and Informed Compliance Act, commonly 
referred to as the ``Mod Act,'' was passed in November 1993 to give the 
U.S. Customs Service the tools that it needed to streamline and 
automate its commercial operations. There were two major elements to 
Customs' ``modernization'' efforts--the revision of the regulations 
themselves to eliminate obsolete or unnecessary procedures and 
requirements and the development and implementation of the systems 
needed to support the revised regulations that now govern the movement 
of merchandise across U.S. borders.
    Customs has made significant progress in rewriting and revising its 
regulations to incorporate the changes envisioned in the Mod Act. To 
their credit, Customs has involved the trade community in their efforts 
in order to develop regulations that address both the needs of Customs 
to ensure compliance and the needs of trade to be able to move their 
merchandise smoothly, efficiently and predictably. The trade community 
has responded with increased compliance and by developing their systems 
and procedures to address Customs requirements. It is now time for 
Customs to be given the resources to develop and implement their own 
systems to realize the full benefits envisioned in the Mod Act. 
Customs' current system, the Automated Commercial System (ACS) is a 15 
year old system that is now operating at 90%+ of its capacity. There 
have been several instances of system ``brownouts'' and failures that 
have impacted the movement of critically needed merchandise to U.S. 
based production facilities causing production slowdowns with a 
potential loss of employee earnings. It is only a matter of time before 
ACS experiences a prolonged shutdown with the potential for a severe 
negative impact on the U.S. economy.
    The U.S. Customs Service has been working with the trade community 
to develop a replacement system for ACS. Their efforts to date have 
come under a great deal of criticism principally for a lack of cost 
accountability and a lack of written plans for development, evaluation, 
implementation and ongoing monitoring for their proposal. While the 
NAFTZ agrees that these weaknesses must be addressed, the international 
trade community cannot afford to wait much longer for the unveiling of 
a ``perfect'' system. Customs' proposed system, the Automated 
Commercial Environment (ACE), in conjunction with the International 
Trade Data System (ITDS), successfully addresses many of the processes 
and procedures needed to implement the full benefits of the Mod Act. 
Rather than waste all the time, effort and resources expended to date 
by both Customs and the trade community on the development of ACE, the 
NAFTZ urges Congress to support the appropriation and release of the 
funding required to address the identified weaknesses in ACE so that a 
new Customs automation system can be developed and implemented within 
four years. Oversight by Congress, with continued input from the trade 
community, should be a condition of the appropriation and release of 
these funds.
    In the President's proposed FY2000 budget, there is a request for a 
new user fee to fund Customs' automation. The proposed user fee is in 
addition to the current merchandise processing fee (MPF) which was 
established to offset the cost of commercial operations. We object to 
this proposal for two reasons. First, the NAFTZ believes that given the 
amount of money paid to date in addition to the ongoing payments 
currently being paid by the importing community through the MPF this 
fund alone should be more than adequate to cover Customs' cost of 
automation. More importantly, the underlying basis of this proposed 
user fee shares the same problems inherent in the current merchandise 
processing fee assessment.
    The current MPF is assessed on an entry by entry basis. Simply put, 
if Customs processes more entries, more MPF is collected. Customs 
defines what constitutes an entry. Therefore, if Customs wants to 
collect more revenue, it can cause more entries to be processed. This 
becomes a disincentive to the implementation of modernization measures 
designed to increase productivity and maximize efficiency.
    In addition, the MPF as it currently exists lacks cost 
accountability. The MPF collected is directed to the General Fund 
rather than being dedicated to the cost of Customs commercial 
processing. Further, there is no cost-basis accounting system to ensure 
that there is a correlation between the actual cost of the service and 
the fee collected. This type of approach to assessing user fees is 
subject to challenge by members of the World Trade Organization (WTO). 
Under WTO guidelines, user fees assessed on international goods must be 
justified by the cost of the services provided for that fee. Since 
there is no cost accounting system in place, Customs is not only unable 
to justify any additional user fees, it cannot cost justify the fee 
that is currently being assessed on importers today.
    Within the foreign-trade zone program, we have experienced the 
effects of this type of user fee assessment first hand. The 
implementation of a weekly entry procedure for non-manufacturing zones, 
although deemed an operational success by Customs following a 3-year 
pilot, has been delayed for two years because it would result in the 
processing of fewer entries, thus potentially reducing the collection 
of MPF. The NAFTZ believes that reducing the frequency of entries 
processed for the same merchandise from one per shipment to one per 
week must provide Customs with opportunities to improve its operational 
efficiency thus decreasing its cost of operation. Because Customs has 
no cost accounting system in place for its commercial operations, it 
has not been able to assess the true financial impact of implementing a 
weekly entry procedure. Therefore, Customs has chosen to forego the 
potential operational efficiencies afforded by weekly entry simply 
because individual entries generate more MPF than a weekly entry. This 
basis for decision making appears to be contrary to the Customs 
environment envisioned when the Mod Act was passed in 1993. It also 
gives support to the argument that the MPF is not a user fee dictated 
by costs but rather a tax placed on imports which is contrary to WTO 
guidelines.
    In summary, the National Association of Foreign-Trade Zones (NAFTZ) 
urges Congress to appropriate adequate funding to allow the U.S. 
Customs Service to correct the weaknesses identified in the proposed 
Automated Commercial Environment (ACE) and to move forward with the 
final development and implementation of this new system in conjunction 
with ITDS. We believe that because automation is an integral part of 
Customs' commercial operations, the merchandise processing fee 
currently being collected from importers should be used for this 
funding. The NAFTZ also believes that the time has come for Congress to 
reexamine and restructure the basis for the assessment of the 
merchandise processing fee so that the MPF collected is not dependent 
upon the number of entries processed by Customs. Instead, it must be 
based on what Customs needs to effectively fulfill its dual missions of 
trade facilitation and enforcement within its commercial operations. 
Until this cost justification is in place, the user fees imposed on 
imports could be subject to challenge by our trading partners under WTO 
guidelines as a tax rather than a fee charged for a service provided.
    Thank you for the opportunity to comment on these important issues.

                                

Statement of the Science Applications International Corporation, 
Vienna, Virginia

                            1. Introduction

    Science Applications International Corporation (SAIC) was engaged 
by the United States Customs Service (USCS) to conduct a cost benefit/
cost effective analysis of trade management system alternatives. The 
system alternatives under consideration will satisfy legislative 
requirements and serve the trade by better accommodating the steadily 
growing volume of entries that cross the nation's borders. For several 
years SAIC has provided technical support and more recently financial 
and capital budgeting analysis to the Department of the Treasury and 
USCS. SAIC is pleased to submit this written testimony which summarizes 
the preliminary findings of the Automated Commercial Environment (ACE) 
cost benefit/cost effectiveness analysis conducted for USCS.
    SAIC is the nation's largest employee-owned research and 
engineering company, providing information technology and systems 
integration products and services to government and commercial 
customers. SAIC scientists and engineers work to solve complex 
technical problems in telecommunications, national security, health 
care, transportation, energy and the environment. With estimated annual 
revenues in excess of $4 billion, SAIC and its subsidiaries, including 
Telcordia Technologies, have more than 35,000 employees at offices in 
more than 150 cities worldwide. More information about SAIC can be 
found on the Internet at SAIC (www.saic.com). Information about 
Telcordia Technologies is available at Telcordia Technologies 
(www.telcordia.com).
    Questions and/or comments regarding this testimony may be directed 
to Mr. Peter W. Engel at 703-905-6205 or [email protected].

1.1 Background

    USCS modernization and automation initiatives began over fifteen 
years ago, and since then, the benefits of automation have been 
overwhelmingly demonstrated. While activity levels at ports of entry 
have increased threefold over that time period, automated systems have 
allowed the USCS to accommodate this growth while maintaining steady 
staffing levels. At the same time, USCS has maintained a high level of 
compliance and enforcement while providing quality service to the trade 
community. Over the course of the past decade, pressure on the USCS IT 
infrastructure has intensified. Increasing demands placed on the 
current Automated Commercial System (ACS) by USCS, other government 
agencies, and the trade community have necessitated improvements to 
system capacity and functionality. ACS is currently operating at over 
90% capacity causing serious delays that ripple through Customs and the 
trade community. However, as the volume of entries expands with a 
fairly static USCS workforce and a straining IT system, there will 
likely be some impact on enforcement and regulatory compliance. As a 
result the USCS is engaged in a vigorous initiative to identify the 
tool, or tools, that will optimize the Custom Service's ability to 
ensure a high level of compliance and enforcement while providing 
quality service to the trade community. The cost benefit/cost 
effectiveness analysis summarized in this testimony is one part of that 
USCS initiative.

1.2 Purpose

    There is little question that legislative requirements and growing 
trade volume necessitate a long-term IT solution supported by advanced 
business processes. This analysis evaluates the question of whether the 
ACE, or an enhanced ACS, is the most cost-effective long-term solution 
to meet those legislative and business process requirements.
    The financial analysis provides:
     A structured, analytical methodology with a solid 
framework for future financial analyses;
     A preliminary life-cycle cost estimate for developing the 
ACE System;
     A preliminary life-cycle cost estimate for developing a 
Base Case ACS;
     Information regarding the benefits and weaknesses of each 
I/T alternative; and
     Information regarding the effect of differing deployment 
schedules on cost and benefits.

                              2. Approach

2.1 General Assumptions

    The option of enhancing ACS to meet legislative requirements versus 
replacing it with a new system presents unique challenges. First, to 
comply with General Accounting Office (GAO) and U.S. Treasury system 
development guidelines, the full functionality of the ACS system must 
be documented and this may require 2 years to accomplish. This 
documentation period creates costs and delays and, for a period of 
time, may inhibit USCS's ability to reap benefits from further 
automation. Second, a reconfigured ACS would be expected to have some 
cost advantages over ACE to the extent that it could leverage off of an 
existing infrastructure (i.e., data center). Thus, the principal risk 
drivers in the analysis are when ACS would achieve legislative 
conformity and, ACS and ACE software programming costs.
    The ACS and ACE alternatives were assumed to have an operational 
system life cycle of no less than 15 years. For purposes of this 
analysis, a common number of years no less than 15 plus the development 
period are required to evaluate each alternative against the enhanced 
ACS base case. Therefore the period of analysis encompasses 22 years 
spanning fiscal years 2000 through 2021. It was further assumed that 
the reconfigured ACS and either of the ACE alternatives will encompass 
the functionality identified in legislative requirements and intent.
    Given these characteristics, a preliminary timing profile has been 
established for a reconfigured ACS that would process 100% of the 
transactions with full functionality 9 years following the 
reconfiguration initiation date. ACS must be reconfigured in order to 
meet legislative requirements and intent, as well as the reliability 
and functionality desired by both USCS and the trade community. By 
comparison, two alternative ACE deployment strategies were considered. 
The first ACE alternative deploys the technology in 4 years and 
provides a further 18 years of operational capability (4 Year ACE). The 
second ACE alternative extends the deployment schedule to 7 years and 
provides a further 15 years of operational capability (7 Year ACE).
    Based on these general assumptions, a reconfigured ACS would 
functionally operate similar to the ACE alternatives. The exception 
would be that ACS would retain some elements of a legacy system and, as 
such, may lack compatibility with advances being made in the trade 
community and with information technology advances in general.
    It is further assumed that software development estimates will 
contain relatively large risk levels given the magnitude of the 
project's scope, lifecycle and stage of requirements definition.
    This analysis and methodology relies upon Office of Management and 
Budget (OMB) Circular A-94 guidelines pertaining to the application of 
cost-effectiveness and cost-benefit analysis.

2.2 Methodology

    Two ACE alternatives were compared to an ACS system that has been 
enhanced to meet legislative requirements and intent. In doing so, 
alternative systems with identical functionality that comply with 
statute and regulation are assessed.
    In selecting the superior financial investment, a cost 
effectiveness analysis (CEA) rather than a cost-benefit analysis (CBA) 
is applied. A cost-effectiveness analysis asks, ``What is the least 
costly approach to attaining a given objective?'' Here the stated 
objective is full conformance with all legislative requirements and 
program goals. The cost-effectiveness analysis is typically employed 
when benefits are difficult to quantify and objectives are clearly 
defined by policy or legislative initiatives. It is also more likely to 
be employed when there are budget limitations in a public sector 
environment.
    A cost-benefit analysis asks a more broadly defined question: 
``Which project maximizes the difference between discounted benefits 
and costs?'' The cost-benefit analysis focuses more on broader resource 
allocation questions when benefits are clearly defined and measurable.
    Because all alternatives share a common legislative and business 
process objective, the comparative basis is one of cost effectiveness. 
However, differential benefits will accrue to that alternative which 
first achieves the objective. As a result, this study expands the scope 
of the cost-effectiveness analysis to identify benefit categories and 
calculate the marginal benefits of each ACE alternative relative to the 
reconfigured ACS Base Case. Therefore, for an ACE alternative to be 
financially attractive either of the ACE alternatives must demonstrate 
net benefits which exceed the net benefits of a reconfigured ACS. 
Because ACS is the Base Case, ACE costs and benefits are stated as 
negative or positive marginal values, relative to ACS Base Case.
    The CEA evaluates three costs categories: Infrastructure; Data 
Center; and 
Software Development. Infrastructure costs reflect equipment upgrades 
and telecommunication charges used at port and Customs Service Center 
locations throughout the nation. Data Center costs include mainframe 
upgrades, network management, UNIX upgrades, voice communications, 
database, server operations and system security expenditures made at 
the Newington Data Center located in Virginia.
    Software development costs typically carry greater estimation risk 
because code reuse rates and other variables are difficult to gauge, 
especially for a system in the functional requirements definition 
stage. As a result, for both ACE alternatives, three separate software 
estimation techniques are applied: A business complexity analysis; a 
parametric analysis; and a function point analysis. In the absence of 
an ACS software reconfiguration estimate the ACE 7-Year software 
estimate was applied as a proxy to the ACS system. Future analysis will 
refine the ACS software estimate.
    As part of the CEA, the sources of uncertainty surrounding input 
assumptions were evaluated. In particular, the study provided 
probability ranges for key input assumptions and probabilistic 
representations for key outputs, including life-cycle costs. These 
formed the basis for a risk analysis in which the underlying 
uncertainty in key inputs was assessed.

                        3. Preliminary Findings

    Preliminary results show common Data Center and infrastructure 
costs with both ACE alternatives (4-Year ACE and 7-Year ACE) and the 
ACS Base Case. This is true of most infrastructure costs associated 
with deploying hardware to ports of entry. The ACS Base Case is less 
costly in terms of data center applications but also requires some 
level of documentation and incurs downtime costs that are not present 
in ACE. Overall, preliminary estimates show ACS Base Case 
infrastructure costs to be somewhat less than either ACE alternative.
    Software development costs are more expensive with the 4-Year ACE 
alternative than the 7-Year option. This is, in part, attributable to 
the compressed schedule in which the effort must be accomplished. The 
7-Year software estimate was applied to the ACS Base Case as a proxy 
measure for the effort necessary to make the legacy system conform with 
legislation and achieve the same functionality inherent in the ACE 
alternatives.
    The preliminary analysis shows very strongly that results are 
sensitive to the timing of the investment and development decisions. If 
selected, an ACS redesign solution could delay achieving full 
functionality by as much as 2 years. This 2-year delay would result in 
significantly less revenue collection by USCS. Even though the ACS Base 
Case lifecycle costs are less, the revenue loss would diminish the cost 
advantage.
    The primary sources of uncertainty in this analysis are timing and 
software programming costs. If ACS documentation results in a two year 
implementation delay, full functionality would not be achieved for 
approximately 9 years. In contrast, ACE alternatives would achieve 
functionality within 4 or 7 years depending upon the alternative.
    It is important to note that the CEA is a financial decision tool, 
not a budget tool. As such, a common time horizon of 22 years is 
necessary to evaluate both ACE alternatives against the ACS Base Case. 
Once an alternative is selected, a budget can be formulated for the 
chosen alternative's development period and 15 year operational life.
    The figure below demonstrates that while ACE lifecycle costs exceed 
those of the ACS Base Case, the ACS documentation delay results in 
benefits accruing to both ACE alternatives. Preliminary results 
indicate that over the 22 year analytical timeframe, the 4-Year ACE 
alternative will cost $555 million more than the reconfigured ACS Base 
Case, and the 7-Year ACE alternative will cost $72 million more. During 
the same time period, the 4-Year ACE alternative will yield $567 
million more in benefits than the ACS Base Case, while the 7-Year ACE 
alternative will capture $286 million more in marginal benefits. When 
marginal costs are subtracted from marginal benefits, both ACE 
alternatives show a positive net present value relative to the 
reconfigured ACS Base Case. The 4-Year ACE alternative has a relative 
net benefit of $12 million and the 7-Year ACE alternative a comparative 
$214 million net benefit. Note these estimates are preliminary.
[GRAPHIC] [TIFF OMITTED] T6895.002

    In addition to the internal financial analysis, SAIC interviewed or 
reviewed written responses from approximately 35 members of the trade 
community and identified three principal themes:
    1. Customs is part of a larger logistics chain that is being 
modernized at each stage;
    2. The current ACS system should be replaced as soon as possible; 
and
    3. Trade community savings from a new system are difficult to 
quantify, but are expected to be significant.
    The first theme is that importers, brokers, manufacturers, 
carriers, and insurers view USCS as one part of the overall logistics 
chain and they want to modernize their systems to ensure that USCS is 
not an impediment to their business. Many companies are waiting for a 
new Customs system so they can complete this modernization, while other 
companies are in the midst of modernizing and need to know how they 
will link to Customs. The community believes that the way of conducting 
international trade has changed forever and Customs must become part of 
the modernized trade process.
    The second theme is that the current system must be replaced as 
soon as possible. The slowdowns and occasional system downtime have 
been enough to make system users aware of how bad things will be if the 
system fails completely. Therefore, the trade favors a system that 
achieves functionality sooner than later.
    Finally, the third theme is that the trade community is not able to 
provide specific estimates of savings because ACE has not been fully 
defined to allow them to make those estimates. Some functionality that 
has been articulated, such as remote location filing and periodic entry 
summary payment, has been enthusiastically endorsed. Those changes are 
enough for the trade to conclude that there will be significant savings 
when an alternate system is implemented.
    Thus on a preliminary basis, the analysis supports both ACE 
alternatives and recognizes that the growing ACS system capacity 
constraints will likely impede the trade community's ability to achieve 
logistic efficiencies and Customs ability to fully accomplish its 
mission.

                 4. General Accounting Office Comments

    The GAO recently provided feedback pertaining to a financial 
analysis conducted for USCS prior to SAIC involvement. SAIC, in 
conjunction with USCS, has and is responding to those suggestions. 
Namely, sources of risk and uncertainty along with range estimates are 
included in the financial analysis; a repeatable, sound methodology is 
established and executed; multiple alternatives are accessed; and more 
than one software estimation technique is applied. SAIC and Customs are 
currently conducting an incremental analysis to establish the financial 
feasibility of the first phase of functional design and development.

                               Conclusion

    Increasing trade volumes continue to place pressure on Customs 
staff and information technology (IT) resources. Over the past 14 
years, import trade activity has increased at an average annual rate of 
8.28%. ACS is currently operating at over 90% capacity causing serious 
delays that ripple through Customs and the trade community. 
Understandably, capacity problems and projections of continued growth 
in activity levels have caused serious concerns. In response to these 
concerns, Customs has been intensively investigating the feasibility of 
the ACE system through ongoing requirements analysis, cost estimation 
efforts, and system benefits assessments.
    Preliminary results indicate that both the 4-Year and 7-Year ACE 
alternatives show a positive net present value. The principal risk 
drivers in the analysis are when ACS would achieve legislative 
conformity and ACS and ACE software programming costs.
    Based upon interviews and survey responses, the trade community 
views Customs as a link in the overall logistics chain that must be 
modernized. While many companies are waiting for a new Customs system 
so they can complete their efforts, others are in the process of 
modernizing but need to know how they will link to a new Customs 
system. The interviews and responses also indicate that the current ACS 
system must be replaced as soon as possible given the effects downtimes 
and system slowdowns have upon commercial activities. The trade 
community also noted that while savings from a new system are difficult 
to quantify, they are expected to be significant.
    In conclusion, SAIC endorses applied, systematic decision making 
processes when evaluating information technology investments--
especially for mission critical systems of the magnitude and scope 
considered in the ACE cost benefit/cost effectiveness analysis. SAIC 
believes the U.S. Customs Service is applying a reasonable approach to 
evaluating system alternatives. SAIC is proud to support U.S. Customs 
in its information technology endeavors, and is grateful for the 
opportunity to submit this independent testimony.


```