Human Capital: Significant Challenges Confront U.S. Trade Agencies
Published: 2003-12-09T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Recent developments in global trade have created human capital challenges for U.S. trade agencies. At least 17 federal agencies, with the Office of the U.S. Trade Representative (USTR) as the lead, negotiate, monitor, or enforce trade agreements and laws. These agencies' strategies for effectively aligning their current and emerging needs in handling international trade functions and their human capital resources are critical to improving agency performance. GAO was asked to summarize its recent studies to illustrate important human capital challenges arising from current trade developments as U.S. trade agencies strive to negotiate, monitor, and enforce existing trade agreements and laws. For this testimony, GAO discussed the challenges that USTR, the Commerce Department, and the Bureau of Customs and Border Protection are facing in light of three recent developments in international trade: (1) the increased importance of security, (2) the ambitious U.S. negotiating agenda, and (3) the shifting global trade environment.
section_title: What GAO Found
paragraphs: The importance of international trade to the U.S. economy has grown in the last decade, as have the responsibilities of federal agencies involved in implementing international trade functions. For example, the September 11, 2001, terrorist attacks have heightened the need for increased focus on security within the global trade environment. In response, the Bureau of Customs and Border Protection has implemented new programs to improve the security of the global supply chain. These new programs require greater attention to human capital strategies to ensure that they achieve their goals of facilitating trade while preventing terrorist acts. In addition, the administration has continued to pursue multilateral negotiations within the World Trade Organization and with the Free Trade Area of the Americas countries as well as a series of new, bilateral and subregional trade negotiations. The increase in the number of initiatives has strained available human capital, leading to a USTR request for additional staff. Finally, the shifting global trade environment has complicated efforts to monitor and enforce trade agreements. For example, the United States has become the most frequent defendant in World Trade Organization trade dispute proceedings. Furthermore, as the U.S. economy has shifted toward services and high-tech industries, the industry advisory committees that provide trade advice to the U.S. government have required structural realignment to reflect these changes. Also, China's growing influence in international trade has resulted in new challenges to its trading partners. These changing global forces require U.S. trade agencies to continuously ensure that their human capital strategies closely link to the nation's strategic trade functions.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the implications of recent trade  developments on the human capital strategies of major U.S. trade agencies  that negotiate, monitor, and enforce trade agreements and laws.  International trade is an increasingly important part of the U.S. and world  economy: In 2001, world exports represented about one quarter of the  world’s gross domestic product (GDP), partly as a result of the succession  of trade agreements that have reduced trade barriers. However, this  dynamic trade environment and the growing number of trade agreements  have also resulted in a significant burden on U.S. trade agencies—and  their human capital—as they strive to monitor and enforce existing trade  agreements and laws while simultaneously negotiating a number of new  agreements.
As we have reported in numerous studies and testimonies before this  Subcommittee and other congressional Committees, effective alignment  between the current and emerging needs and U.S. federal agencies’ human  capital strategies is critical to improved agency performance. For this  testimony, you asked us to summarize some of our recent studies to  illustrate important human capital challenges confronting trade agencies  that have arisen from recent trade developments. Specifically, today I will  focus on the human capital challenges that trade agencies face in light of  three recent trade developments:  the increased importance of security, the ambitious negotiating agenda of the United States at the current  time, and the shifting global trade environment.
While numerous agencies have trade responsibilities, we are focusing  today on the Office of the U.S. Trade Representative (USTR) and the U.S.  Department of Commerce because of their key roles and responsibilities  for implementing trade functions, that is, negotiating, monitoring, and  enforcing trade agreements and laws. In addition, we also discuss the  Department of Homeland Security’s Bureau of Customs and Border  Protection (CBP), because it has primary responsibility for ensuring the  security of trade in the post-9/11 environment. In performing this work, we  have drawn on a number of our recent reports, some of which directly  addressed human capital issues, and have also interviewed officials from  relevant trade agencies.
subsections: section_title: Background
paragraphs: U.S. exports as a share of U.S. gross domestic product have grown  significantly, increasing from less than 6 percent in 1970 to a peak of more  than 11 percent in 1997, as shown in figure 1. The rise in U.S. imports was  even greater, increasing from about 5 percent in 1970 to nearly 15 percent  of GDP in 2000, according to Commerce Department statistics. Although  the share of U.S. exports and imports has declined from those peak levels,  they still represent a substantial part of our GDP—at 9.3 percent, and 13.3  percent, respectively, in 2002. The U.S.’s principal trading partners include  Canada, Mexico, Japan, and China.
At least 17 federal agencies, led by USTR, are involved in developing and  implementing U.S. trade policy. USTR’s role includes developing and  coordinating U.S. international trade policy and leading or directing  negotiations with other countries on trade matters. It also has primary  statutory responsibility for monitoring and enforcing U.S. trade  agreements. The Department of Commerce has a relatively broad role with  respect to trade agreement activities, with three units in the International  Trade Administration performing the key trade functions: The Import  Administration helps enforce U.S. trade laws; Market Access and  Compliance is responsible for ensuring that other nations live up to their  trade agreements; and Trade Development focuses on advocacy for U.S.  companies, export promotion services, support for trade negotiations, and  market analysis. Trade functions at the CBP are primarily directed toward  enforcing U.S. import and export laws and facilitating legitimate trade as  well as collecting duties, fees, and other assessments (more than $23  billion in fiscal year 2002). Other agencies also play important roles, such  as the departments of Agriculture and State, which have relatively broad  roles with respect to trade agreement activities. The departments of the  Treasury and Labor have more specialized roles, such as advising on  financial services or labor and workers’ rights issues. Federal trade policy  development and monitoring and enforcement efforts are coordinated  through an interagency mechanism comprising several management- and  staff-level committees and subcommittees.
The number of authorized full-time staff at USTR, Commerce’s Import  Administration, and Commerce’s Market Access and Compliance division  has increased in recent years (see fig. 2). However, actual staff levels are  still in the process of catching up with authorized levels in Commerce and  USTR offices. USTR has requested additional staff resources for 2004.
As of January 23, 2003, the CBP had 3,269 positions dedicated to  performing trade-specific functions: 2,263 specialists, auditors, and  attorneys and 1,006 associated positions carry out trade activities such as  auditing trade compliance; processing entry documents; collecting duties,  taxes, and fees; assessing and collecting fines and penalites for  noncompliance; and advising on tariff classification issues. CBP is  expected to maintain these staff levels, as the Homeland Security Act of  2002 stipulates that the Secretary of Homeland Security may not reduce  the staffing levels attributable to such functions on or after the effective  date of the act. In addition, more than 18,000 CBP inspectors perform  trade and nontrade functions depending on the nature of their assignment.  For example, inspectors may screen and inspect cargo for illegal  transshipment of textiles, counterfeit cigarettes, illegal drugs, and other  contraband; and enforce compliance with U.S. trade and immigration laws.
section_title: The Increased Importance of Security Has Significant Implications for Human Capital Strategies and Trade Functions
paragraphs: After September 11, 2001, combating terrorism became the priority  mission for the U.S. Customs Service and remained so when the Customs  Service was transferred to the Department of Homeland Security and  incorporated into CBP. While it is too soon to tell how the increased  importance of security will affect the implementation of CBP’s trade- related activities in the long run, some short-term shifts in human capital  from trade to nontrade functions have occurred. As part of its focus on  terrorism, CBP has implemented new programs to screen high-risk  containers for weapons of mass destruction at overseas ports and to  improve security in the private sector’s global supply chain. CBP has made  progress in getting these programs up and running but has not devised  systematic human capital plans to meet long-term staffing needs for both  programs. The increased importance of security requires human capital  strategies that link with the goals of combating terrorism and facilitating  trade to establish accountability and ensure effective performance.
subsections: section_title: Combating Terrorism Becomes a Priority, Shifting Human Capital from Trade Activities
paragraphs: The historical mission of the U.S. Customs Service has been to collect  customs revenues and ensure compliance with trade laws, but this mission  has shifted over time. For example, in the 1970s Customs expanded its  functions to include the interdiction of narcotics entering the United  States. Since September 11, 2001, combating terrorism has become  Customs’ priority mission, culminating in the creation of CBP on March 1,  2003. On that date, the U.S. Customs Service was transferred from the  Department of the Treasury to the Department of Homeland Security as  part of the Homeland Security Act of 2002. Figure 3 illustrates the range of  trade and nontrade activities that CBP performs.
While two of the nine key mission-related offices within CBP are primarily  dedicated to trade, most offices and most of CBP’s more than 40,000  employees perform a range of activities that support both trade and  nontrade goals. Moreover, about a fifth of the 3,269 CBP positions  dedicated to performing trade activities are located in the trade-specific  offices, but most are located in offices that support both goals. Within this  kind of organization, activities performed by persons in the offices that  support both goals could shift from trade to nontrade activities when  security threat levels are higher without actually seeing a reduction in the  number of staff dedicated to trade. Moreover, the activities of the 18,000  plus CBP inspectors who perform trade and nontrade functions could shift  to focus on combating terrorism when security concerns are heightened.
Several examples illustrate the types of shifts from trade to security  activities that have occurred.
After September 11, 2001, CBP temporarily detailed approximately 380  inspectors to international airports around the country to strengthen  security measures—reducing the number of inspectors available to  work on trade activities.
During the first 2 quarters of fiscal year 2002, CBP audits on export  compliance were not conducted so that 150 inspectors could be  temporarily redeployed to land ports along the northern border to  strengthen security measures.
During fiscal year 2002, the Compliance Measurement program, which  determines compliance with U.S. trade laws, regulations, and  agreements, was temporarily discontinued for 11 months because  import specialists and inspectors were redirected to border security  activities. Due to the limited compliance sampling, CBP was unable to  calculate an overall trade compliance rate for fiscal year 2002.  Moreover, compliance measurement helps ensure the quality of trade  data, and unreliable trade data increase the risk that critical threats will  not be identified.
In fiscal year 2003, 3 of 14 scheduled textile production verifications  were canceled when the national security alert level increased, so that  the verification teams could remain at their ports and field offices to  focus on security-related activities. The textile production verification  teams, comprised of CBP import specialists and special agents,  examine the production facilities in nations where there is potential for  illegal transshipment of textiles.
While the Homeland Security Act stipulates that the Secretary of the  Department of Homeland Security may not reduce the staffing levels  attributable to specific trade-related activities, our examination found that  measuring inputs such as the number of staff assigned to trade-related  positions does not adequately capture possible shifts away from trade  activities—as the number of people assigned to trade-related positions  may remain the same, but the focus of their work may shift to nontrade  duties. In addition, those positions that were not included in the  legislation, such as inspectors, but conduct trade and nontrade activities,  may increasingly shift their focus away from trade and concentrate on  homeland security activities. Measuring changes in CBP’s outputs and  outcomes will be important in assessing how the increased emphasis on  combating terrorism and Customs’ transfer to the Department of  Homeland Security have affected trade activities and whether human  capital strategies need to be readjusted accordingly.
section_title: New CBP Antiterrorism Programs Paid Little Attention to Human Capital Planning
paragraphs: Responding to heightened concern about national security since 9/11, CBP  assumed the lead role in improving ocean container security and reducing  the vulnerabilities associated with the overseas supply chain. In November  2001, CBP initiated the Customs-Trade Partnership Against Terrorism  program, where companies agree to voluntarily improve the security of  their supply chains in return for reducing the likelihood that their  containers will be inspected for weapons of mass destruction. In January  2002, CBP also initiated the Container Security Initiative whereby CBP  officials are placed at strategic foreign seaports to screen cargo manifest  data for ocean containers to identify those that may hold weapons of mass  destruction. We reported in July 2003 that CBP had not taken adequate  steps to incorporate human capital planning, develop performance  measures, or plan strategically- - factors crucial to the programs’ long-term  success and accountability.
Initially, 10 officials were assigned to roll out the Customs-Trade  Partnership Against Terrorism. Under the program, companies enter into  partnership agreements with CBP and agree to self-assess their supply  chain security practices and document it in a security profile. These 10  officials provide guidance to companies on how to prepare their security  profiles as well as review the completed security profiles and prepare  feedback letters. As of May 2003, more than 3,300 agreements had been  signed, 1,837 security profiles reviewed, and 1,105 feedback letters  prepared. However, early on CBP realized that it did not have a cadre of  staff with the skills necessary to conduct site visits to observe supply  chain practices and make substantive recommendations for improving  security. In October 2002, CBP began the process of developing a new  position, called “supply chain specialists,” to review company security  profiles, visit companies to validate information contained in the security  profiles, and develop action plans that identify supply chain vulnerabilities  and the corrective steps companies need to take. CBP was authorized to  hire more than 150 supply chain specialists and expected to hire 40 supply  chain specialists in fiscal year 2003. As of October 2003, CBP has visited  more than 130 companies to verify their supply chain security practices.  While CBP officials acknowledged the importance of human capital  planning, they said they had not been able to devote resources to  developing a human capital plan that outlines how the program will  increase its staff 15-fold and implement program elements that require  specialized training.
The Container Security Initiative seeks to deploy 120-150 inspectors,  intelligence research analysts, and agents to 30 overseas ports by the end  of fiscal year 2004. CBP eventually plans to expand to 40 to 45 ports.  Deploying four-to-five person CSI teams to foreign ports will be a  complex, multiyear task. CBP seeks candidates with specialized skills  needed to review cargo manifest data and identify suspicious containers  for inspection as well as diplomatic and language skills to interact with  their foreign counterparts. While CBP officials told us that they did not  experience significant difficulties in finding qualified staff to fill their  short-term human capital needs from among the pool of existing CBP  employees, CBP had only 12 ports up and running under the Container  Security Initiative at that time (May 2003). In addition, the teams were on  120-day temporary duty assignments; however, CBP plans to create 2- to 3- year assignments to replace the 120-day temporary duty assignments. In  spite of the potential challenges CBP could face, CSI officials had not  devised a systematic human capital plan.
To help ensure that the Container Security Initiative and the Customs- Trade Partnership Against Terrorism achieve their objectives as they  transition from smaller start-up programs to larger programs with an  increasingly greater share of the Department of Homeland Security’s  budget, we recommended in July 2003 that CBP develop human capital  plans that clearly describe how these programs will recruit, train, and  retain staff to meet their growing demands as they expand to other  countries and implement new program elements. Human capital plans are  particularly important given the unique operating environments and  personnel requirements of the two programs. According to CBP officials,  the professional and personal relationships that supply chain specialists  and the Container Security Initiative teams build with their clients over  time will be critical to the long-term success of both programs. For  example, the success of the Customs-Trade Partnership Against Terrorism  will depend, in large part, on the supply chain specialists’ ability to  persuade companies to voluntarily adopt their recommendations.  Similarly, a key benefit of the Container Security Initiative is the ability of  CBP officials to work with foreign counterparts to obtain sensitive  information that enhances their targeting of high-risk containers at foreign  ports. If CBP fails to establish these good working relationships, the added  value of screening manifest data at foreign ports could be called into  question.
section_title: Ambitious Set of Ongoing Negotiations Creates Demands for Additional Staff
paragraphs: In recent years, the United States has been pursuing a broad trade policy  agenda whose cumulative impact has tested the limits of the government’s  negotiating capacity. This agenda includes undertaking significant  negotiating efforts in multilateral, regional, and bilateral arenas. The  administration has characterized this effort as a strategy of “competitive  liberalization.” First, the United States is actively involved in the  challenging WTO round of negotiations launched in Doha, Qatar, in 2001.  Second, the United States is also a co-chair in ongoing negotiations to  create a Free Trade Area of the Americas. Finally, with the passage of  trade promotion authority in 2002, the United States has also launched a  series of bilateral and subregional free trade agreement negotiations. The  increase in the number of these negotiations at the same time that major  global and regional trade initiatives are under way has strained available  resources.
subsections: section_title: WTO Negotiations Had Ambitious Schedule for September 2003 Cancun Ministerial
paragraphs: The United States is committed to completing a new round of WTO  negotiations. In November 2001, the WTO, with strong backing from the  United States, launched a new set of multilateral negotiations at its  ministerial conference in Doha. As we reported in September 2002, the  ministerial conference laid out an ambitious agenda for a broad set of new  multilateral trade negotiations as described in the Doha Ministerial  Declaration. The Doha mandate calls for the continuation of negotiations  to liberalize trade in agriculture and services. In addition, it provides for  new talks on market access for nonagricultural products and negotiations  on trade and the environment, trade-related aspects of intellectual  property rights, and a number of other issues. The breadth of the  negotiations means that USTR will need to call on staff from a number of  trade agencies to assist USTR throughout the process. USTR has also  asked for additional staff to address the increased workload.
Despite recent problems, WTO negotiations are likely to continue to  command staff attention. Doha Round WTO negotiations are currently on  hold following a breakdown at the September 2003 Ministerial Meeting in  Cancun, Mexico, throwing the 2005 deadline for completion of the  negotiations in doubt. After the ministerial, WTO officials initially canceled  all special negotiating sessions and later called for a senior officials’  meeting by December 15, 2003. Despite these developments, however,  USTR officials do not anticipate any decrease in staff workload on WTO  issues because of the breadth of their ongoing WTO responsibilities and  their efforts to restart the negotiations.
section_title: Major U.S. Role in Final Phase of FTAA Talks Expands USTR’s Negotiations Workload
paragraphs: We reported in April 2003 that, as the co-chairman, with Brazil, of the  FTAA negotiations, USTR has faced a heavy expansion of its workload.  Demands on USTR resources increased significantly in fall 2003, when  USTR’s responsibilities as co-chair of the negotiations and host of the  ministerial intensified due to preparations for the November 2003 Miami  FTAA ministerial. The co-chair’s formal tasks include    coordinating with Brazil on a daily basis;    providing guidance and management coordination to the FTAA    providing guidance to the negotiating groups and committees; and    co-chairing key FTAA committees.
In terms of resources, the U.S. team negotiating the FTAA—though  perceived as highly capable—is small and stretched thin. Like past chairs,  USTR has dedicated some staff specifically to the co-chair function, while  other USTR staff work on advancing the U.S. position in the negotiations.  In addition, USTR made arrangements with other agencies for temporary  assistance. For example, Commerce provided a detailee who worked full  time in Miami beginning in July, and State provided both foreign service  officers and conference specialists to help host and conduct the  ministerial.
section_title: U.S. Pursuing Simultaneous Negotiations on Numerous FTAs
paragraphs: Bilateral negotiations are also applying pressure to trade agencies’ human  capital resources. In addition to the WTO and the FTAA negotiations,  USTR has notified Congress of its intent to pursue free trade agreements  (FTA) with a number of countries and has started negotiations toward this  end. The passage of trade promotion authority in 2002 gave U.S.  negotiators the opportunity to pursue trade agreements with other  countries under a streamlined approval process in Congress. The  administration sees FTAs—some with a single country (i.e., bilateral) and  others with groups of countries (i.e., subregional)—as opportunities to  promote the broader U.S. trade agenda by serving as models and breaking  new negotiating ground.
The United States is now negotiating four FTAs and intends to pursue  others soon. In late 2002, it began negotiating the Central American Free  Trade Agreement with Costa Rica, El Salvador, Guatemala, Honduras, and  Nicaragua; the Southern Africa Customs Union Free Trade Agreement  with South Africa, Botswana, Lesotho, Namibia, and Swaziland; and FTAs  with Morocco and Australia. In mid-2003, the administration also  announced that it plans to negotiate FTAs with the Dominican Republic  and Bahrain and in mid-November announced plans for an FTA with  Panama. Thailand and Sri Lanka are also being considered as FTA  partners. With the breakdown of WTO negotiations, the U.S. Trade  Representative has stated that the administration will focus on FTAs with  willing partners to continue making progress in trade liberalization.
USTR officials acknowledge that human capital impacts are associated  with conducting these FTAs. Each agreement involves a variety of  different subjects, and negotiations on most of these agreements are  complex. In particular, staffing constraints affect the timing of new  negotiations, because staff with regional responsibilities are limited by the  extent to which they can support additional negotiations. In addition,  completed FTAs will require additional work to monitor compliance with  the terms of the agreement.
Pursuing an ambitious set of negotiations on an international, regional,  and bilateral basis is having a cumulative impact on the human capital  capacity of agencies that conduct trade negotiations. Since USTR’s staff  size of 199 is relatively small—having been set up to coordinate policy  among and draw expertise from executive branch agencies—it relies on  the departments of State, Commerce, Agriculture, the Treasury, and others  to provide assistance and additional issue area expertise. However, USTR  officials told us that their staff are already responsible for supporting  multiple negotiations. Although these officials stated that USTR has taken  steps to work more efficiently with other agencies, they have nevertheless  requested additional resources, as shown in figure 2, in order to face the  anticipated negotiations workload. For example, a recent USTR budget  request noted that current staff would not be able to handle the  combination of WTO, FTAA, and FTA responsibilities required in the areas  of services and investment.
section_title: Shifting Global Forces Complicate Monitoring and Enforcement Efforts and Place Substantial Demands on Human Capital Resources
paragraphs: Shifting global forces have complicated trade agreement monitoring and  enforcement efforts, thus posing human capital challenges for U.S. trade  agencies. For example, we recently reported that the United States has  become the most frequent defendant in WTO trade dispute resolution  proceedings, particularly in the trade remedy area. As a result, U.S.  agencies have had to devote substantial staff resources to handle these  cases, and USTR has requested additional staff to address the upward  trend in dispute settlement cases. We also reported that the U.S. economy  has shifted toward services and high-technology industries, while the  industry committee structure that provides advice to U.S. trade agencies  has been heavily weighted toward the agriculture and manufacturing  sectors. Changing the committee structure to reflect the current economy  and keeping its membership current has required U.S. trade agencies to  devote staff resources to this effort. Finally, we reported that China’s rapid  expansion in the world economy presents U.S. trade agencies with  significant human capital challenges as they strive to monitor and enforce  compliance with trade agreements with China. Although the U.S.  government has taken steps to address some of these new challenges,  questions remain about the alignment of human capital with the rapidly  growing set of responsibilities we discussed in our reports. These three  examples demonstrate the kinds of shifts that occur in the trade arena and  indicate the impacts that these changes can have on human capital. In  each of these cases, the shifting global forces require the United States to  respond, and an effective response requires a clear link between the trade  agencies’ human capital strategies and the goals of the agencies in that  changing environment.
subsections: section_title: United States Is Most Frequent Defendant in WTO Dispute Settlement Activity, Requiring Substantial Human Capital Resources
paragraphs: Shifting global forces in the trade arena can be seen in recent trends in the  WTO, the principal organization that regulates international trade, as  members act to monitor and enforce trade agreements. For example, the  United States has become by far the most frequent defendant in WTO  dispute settlement cases. Many WTO disputes in recent years have  concerned its members’ use of trade remedy measures whereby members  impose duties or import restrictions after determining that a domestic  industry has been injured or threatened with injury by imports. As shown  in figure 4, the United States was a defendant in 30 of the 64 trade remedy  cases brought from 1995 through 2002, with more than half of those cases  filed since January 2000. The next most frequent defendants were  Argentina, which had six cases, and the European Union, a defendant in  five cases. On the other hand, the United States was less active than other  WTO members in filing trade remedy cases. As figure 4 shows, the  European Union was the most frequent complainant in the 64 trade  remedy cases, and six WTO members filed more complaints than the  United States did between 1995 and 2002.
U.S. officials stated that some WTO trade remedy rulings have been  extremely difficult to implement. For instance, some rulings have placed a  greater burden on domestic agencies to establish a clearer link between  increased imports and serious injury to domestic industry. As a result,  officials said they would now have to expend more resources in  conducting such investigations. In addition, U.S. officials said that the  rulings have required U.S. agencies to provide more detailed explanations  of their analyses and procedures for applying several methodologies used  in trade remedy investigations.
As a result of the increased WTO dispute settlement activity, U.S. trade  agencies have had to devote substantial staff resources to handle these  cases. According to Commerce officials, about one-half of the Import  Administration’s 36 attorneys are significantly engaged in handling WTO  litigation. They said Commerce has sufficient staff to handle the current  workload unless the number of dispute settlement cases increases.  According to USTR, the number of WTO cases its lawyers have handled  has increased dramatically—from 11 in 1995, to 53 in 1997, to 69 in 1999,  and to 91 in 2002. USTR expects this trend will continue, both because  more and more WTO members are making active use of the dispute  settlement system but also because there are more WTO members.  Although the number of USTR General Counsel staff attorneys has roughly  doubled since 1995 (with 13 new positions added in fiscal year 2001), the  lawyers that were added are more than fully occupied with the current  workload, USTR said. As a result, USTR has requested another monitoring  and enforcement attorney for fiscal year 2004 to handle the increasing  dispute settlement work.
WTO trade remedy rulings and the broader set of proceedings within the  WTO are an important component of the international set of obligations  and agreements to which the United States is a party. Our review found  that the United States has become a focus of complaints in trade remedy  cases, and U.S. agencies stated that some of the rulings on these cases  have important implications for the future, including potential workforce  implications. This situation requires trade agencies to maintain human  capital strategies that anticipate and respond quickly to any changes.  Doing so would allow them to allocate staff accordingly to keep the trade  functions current and relevant.
section_title: Changing Structure of the U.S. Economy Requires Trade Agencies to Modify the Industry Advisory Committee System
paragraphs: The changing structure of the U.S. economy has required a strategic  realignment of some trade functions. For example, the trade policy  advisory committee system performs an important function through  which private sector committee members are able to provide input to  trade agencies to help them negotiate, monitor, and enforce trade  agreements; however, our September 2002 report found that the structure  and composition of the trade advisory committee system had not been  fully updated to reflect changes in the U.S. economy and U.S. trade policy.
Although the U.S. economy had shifted toward services and high- technology industries since the 1970s, their representation on the trade  advisory committees had not kept pace with their growing importance to  U.S. output and trade. For example, certain manufacturing sectors, such as  electronics, had fewer members than their sizable trade would have  indicated. In other cases, U.S. negotiators reported that some key issues in  negotiations, such as investment, were not adequately covered within the  trade advisory committee system. In addition, committee rosters were  only about 50 percent of their authorized levels, and some large companies  did not participate, limiting the availability of advice for negotiators from  certain committees.
Our 2002 report also found that the resources USTR and the other trade  agencies devoted to managing the trade advisory committee system did  not match the tasks that needed to be accomplished to keep the system  running reliably and well. For example, USTR officials told us that the  current staffing levels in its responsible office—three positions with  multiple responsibilities—did not allow them time to proactively manage  committee operations. The head of the office said that simply restarting all  the lapsed committees and keeping the rest of the system operating were  occupying much of the time she could devote to the system. Commerce,  which co-administers many of the trade advisory committees, faced  similar challenges. As discussed in our September 2002 report, Commerce  officials said they had to focus their limited staff—an office of three  persons—on rechartering the committees and appointment processes,  which did not allow them to meet their responsibilities to attend all the  committee meetings.
We recommended that USTR work with Commerce and several other  agencies to update the trade advisory system to make it more relevant to  the U.S. economy and trade policy needs as well as to better match agency  resources to the tasks associated with managing the system. According to  recent information that agencies provided, their staff have planned and, in  some cases, already taken a number of actions in response to our 2002  recommendations that they expect will increase efficiencies and reduce  the workload. For example, Commerce and USTR have developed a plan  for restructuring the industry advisory committees that officials believe  better reflects the U.S. economy. Under the plan, some new committees  are to be established, while the overall number of committees is to be  reduced. The latter action is expected to reduce the administrative  workload for Commerce’s staff, enabling them to focus more on  substantive matters. The plan also calls for quarterly plenary meetings that  will be open to all trade advisors. According to Commerce officials,  bringing all advisors together at the same time will facilitate a higher level  of representation of U.S. trade negotiators at the meetings and that, as a  result, trade advisors will be better informed about ongoing negotiations.  In turn, the officials said, trade advisors should be better prepared to  deliberate on issues of interest to them and thus better able to provide  advice to U.S. trade negotiators.
In addition, the agencies revised their process for clearing proposed new  members, thus reducing the amount of time it takes for clearance.  Moreover, a secure Web site has been established that allows members to  review the texts of draft trade negotiating documents. In addition, the  Assistant U.S. Trade Representative for Public Liaison now holds a  monthly teleconference with the chairmen of all committees. During this  call, USTR provides feedback to committees on previously raised areas of  concern or recommendations, discusses USTR’s long-term negotiating  calendar to highlight upcoming issues, and is open to discussion of general  issues or concerns. According to Commerce and USTR officials, they have  taken these actions without increasing the size of their authorized staffs.  However, it was noted that Commerce staff, who did much of the  implementing work on this issue, sometimes put in long hours in  completing their tasks. In addition, in the case of Commerce, a position  that had been vacant was filled, thus increasing the actual number of staff.
While administering the trade advisory committee system is only one of  many functions that trade agencies perform, the system does provide an  important forum for candid discussion of trade negotiating topics with a  wide range of private sector experts. Our review found that the system has  not realized its potential, however, and that lack of administrative support  was one of the reasons for this situation. While the agencies have taken  actions to improve the trade advisory committee structure and its  management, these kinds of improvements illustrate how U.S. trade  agencies need to utilize human capital strategies that anticipate and  respond to shifts in global market forces. Such an effort would allow the  agencies to allocate staff accordingly to keep trade functions current and  relevant.
section_title: Growing Importance of China Creates Range of Human Capital Challenges for Trade Agencies
paragraphs: China’s rapid expansion in the world economy presents U.S. trade  agencies with significant human capital challenges as they strive to  monitor and enforce compliance with trade agreements. In 2002, China  was the United State’s fourth largest trading partner. The rapid growth of  China’s exports to the United States and the continuing role of the  government in China’s economy create a significant challenge for U.S.  agencies and the Congress to ensure that U.S. businesses are treated fairly.  Since China’s entry into the WTO on December 11, 2001, U.S. agencies  have taken significant actions to monitor and enforce an extensive and  complex set of WTO commitments. Among these actions are increasing  staff resources, establishing an interagency group to focus on China trade  issues, and considering organizational changes to better concentrate  analytical staff resources. However, early experiences with monitoring  China’s compliance with numerous and complex commitments and with  WTO and U.S. government mechanisms for enforcing commitments  illustrate just how difficult and resource intensive—particularly in terms  of human capital—this task will be.
subsections: section_title: Size and Scope of China’s Impact on U.S. Markets Are Considerable
paragraphs: U.S. trade with China has been characterized by a rapidly growing deficit,  with a significant impact on a number of industries in the United States. As  figure 5 shows, U.S. imports from China have grown rapidly since 1989,  while U.S. exports to China have also expanded, but at a much slower rate.  The growing trade deficit has been addressed at several congressional  hearings and may require greater attention from Commerce, USTR, and  other trade agencies.
In 2002, imports from China totaled nearly $125 billion, accounting for  nearly 11 percent of total U.S. imports and making China the third largest  supplier of U.S. imports, after Canada and Mexico, respectively. The top  five U.S. imports from China are shown in table 2 (see the app.). China  was the seventh largest market for U.S. exports in 2002, and U.S. exports  totaled about $21 billion or 3.2 percent of total U.S. exports to the world  (see table 3 in the appendix).
section_title: Continuing Role of Chinese Government in the Economy Creates Challenges for Monitoring and Enforcement
paragraphs: China has made important progress during the past 25 years in opening its  market to foreign goods and services as well as foreign investment,  according to a USTR report. Economic and financial reforms have  introduced market forces into China, and privileges accorded state-owned  firms are gradually being removed. However, the transition from a state- controlled economy to a market-driven one is far from complete.  According to USTR, reforms have been particularly difficult in sectors that  traditionally relied upon substantial state subsidies as the central  government continues to protect noncompetitive or emerging sectors of  the economy from foreign competition. Moreover, USTR said, provincial  and lower-level governments have strongly resisted reforms that would  eliminate sheltered markets for local enterprises or reduce jobs and  revenues in their jurisdictions, inhibiting the central government’s ability  to implement trade reforms. During 2003, the Commerce Department  held more than 20 roundtable discussions with U.S. manufacturers, both  large and small, across the United States and heard similar complaints.  According to Commerce’s under secretary for the International Trade  Administration, no foreign country raised more attention as a source of  concern than China. Manufacturers complained about rampant piracy of  intellectual property, forced transfer of technology from firms launching  joint ventures in China, a broad range of trade barriers, and capital  markets that are largely insulated from free-market pressures.
Another issue concerns the Chinese government’s decade-long practice of  pegging the Chinese yuan to the dollar as a means, according to Chinese  officials, of fostering economic stability, the absence of which could hurt  its export industries and political stability. In order to maintain this fixed  exchange rate, the government has had to intervene in the foreign  exchange market and, according to Treasury officials, recently intervened  very heavily to prevent the yuan from appreciating against the dollar.  Considerable debate has occurred among experts and observers about  whether China’s intervention to maintain a lower-valued yuan is having a  negative effect on U.S. manufacturers. This issue has been the subject of  numerous congressional hearings with administration witnesses and was  also a topic of discussion between Presidents Bush and Hu Jintao at the  October 2003 Asia Pacific Economic Cooperation Economic Leaders’  Meeting and during the Secretary of the Treasury’s September 2003 trip to  China. Also in September, the Group of Seven finance ministers issued a  statement favoring more flexibility in exchange rates for large economies.  In an October 30, 2003, report to the Congress, the Treasury Department  concluded that no major trading partner of the United States was  manipulating the rate of exchange between its currency and the U.S. dollar  for the purposes of preventing effective balance of payments adjustments  or gaining unfair competitive advantage in international trade. However,  the report also found that China’s fixed exchange rate was not appropriate  for a major economy like China and should be changed. According to the  Treasury, the Chinese government has indicated it will move to a flexible  exchange rate regime but believes taking immediate action would harm its  banking system and overall economy.
The growing importance of the Chinese economy for the United States has  been a particular focus of attention from U.S. officials due to the  implications for U.S. firms and for compliance with trade agreements.  However, these issues require increasing attention from U.S. agency  personnel. Moreover, as in the case of the debate surrounding the Chinese  currency, these issues require appropriate expertise from U.S. trade and  economic agencies, and a resolution of these matters may ultimately  require a significant investment of time from these officials.
section_title: China’s Accession to the WTO Strains Agencies’ Monitoring Resources
paragraphs: As we reported in October 2002, China’s WTO commitments span eight  broad areas and require both general pledges and specific actions. We  identified nearly 700 individual commitments on how China is expected to  reform its trade regime, as well as commitments that liberalize market  access for more than 7,000 goods and nine broad service sectors in  industries important to the United States, such as automobiles and  information technology. Owing to the breadth and complexity of China’s  commitments, China’s accession to the WTO has led to increased  monitoring and enforcement responsibilities for the U.S. government.
An illustration of the human capital difficulties involved in monitoring and  enforcing China’s commitments relates to U.S. government efforts to  establish an interagency group—the China WTO Compliance  Subcommittee—whose mandate is to monitor China and the extent to  which it is complying with its WTO commitments. Almost 40 officials,  representing 14 departments and executive offices, participate in this  subcommittee. The subcommittee was very active in 2002, meeting 11  times. In these meetings, officials evaluated and prioritized current  monitoring activities, reviewed the steps that China has taken to  implement its commitments, and decided on appropriate responses. Also,  the subcommittee held a public hearing on September 18, 2002, and USTR  issued its first annual report to Congress on China’s WTO compliance on  December 11, 2002, as required by law.
Still, it took some time for the subcommittee to get up to full speed. For  example, the various participants had to work out their respective roles  and responsibilities. USTR officials sought to delineate tasks related to  carrying out their monitoring action plan in China; Washington, D.C.; and  Geneva (the WTO’s headquarters), including expectations for information  gathering, reporting, and setting initial priorities. Finally, USTR officials  undertook several activities at the beginning of the year to educate  themselves on China’s WTO obligations. This was important, because  monitoring these obligations entailed new or expanded responsibilities for  officials in the field, and many of the Washington-based officials were  relatively new to their current jobs. For example, many of the USTR  officials who had actively participated in the U.S. negotiations with China  that resulted in those obligations changed jobs and/or left the government  soon after China became a WTO member in 2001.
section_title: U.S. Agencies Have Added Staff and Are Considering Further Organizational Changes
paragraphs: USTR, Commerce, and other agencies have requested and received  additional resources to carry out the added responsibilities arising from  China’s accession to the WTO. For example, full-time equivalent staff in  key units that are involved in China monitoring and enforcement activities  across four key agencies increased from about 28 to 53 from fiscal year  2000 to 2002, based on agency officials’ estimates (see table 1).
Commerce had the largest overall increase in staff devoted to China WTO  compliance during this period. Specifically, staffing levels in Commerce’s  Market Access and Compliance division increased from 7 to 22 between  fiscal years 2000 and 2002. Additionally, Commerce’s Import  Administration, which takes the lead on monitoring China’s commitments  concerning subsidies and unfair trade practices, also significantly  increased staff dedicated to China compliance activities during the same  time period. Commerce has also increased the number of staff involved in  the agency’s compliance efforts on the ground in China by creating a  Trade Facilitation Office within the U.S. embassy in Beijing. In addition,  the Department of Agriculture has increased the number of overseas staff  involved in the agency’s China WTO compliance activities.
A Commerce official told us that the Import Administration is thinking of  combining all of its China work under one deputy assistant secretary (the  current practice is to distribute the work among three deputy assistant  secretaries). Doing so might enhance the office’s expertise and provide a  better basis for assessing whether additional China expertise is needed.
section_title: Conclusions
paragraphs: As we have reported in numerous studies and testimonies before this  Subcommittee and others, effective alignment between federal agencies’  human capital approaches and their current and emerging strategic and  programmatic goals is critical to the ability of agencies to economically,  efficiently, and effectively perform their missions. The importance of such  a close alignment is demonstrated in the area of the U.S. government’s  trade activities, where heightened security concerns, an ambitious trade  negotiating agenda, and an array of global economic forces all have  implications for sound human capital management.
Our testimony has cited illustrations in these three areas based on our  recent work for Congress. In some areas, failure to sufficiently plan the  human capital approach, such as the CBP programs to secure the global  supply chain, show that the success of the programs is not assured in the  absence of human capital planning. In other cases, such as the U.S.’s  ambitious trade negotiating agenda, human capital resources may be a  constraint on the ability of the trade agencies to carry out their  negotiations at the multilateral, regional, bilateral, and subregional level.  Finally, the array of shifting global forces described in some of our recent  studies also demonstrates the implications for U.S. trade agency activities  and, in many cases, the agencies’ human capital activities. For example, in  the case of the rapid growth of China in the world economy and its WTO  accession agreement, the demand for specialized expertise and focus on  issues related to China’s economy have led to growth in personnel and  efforts to reorganize to meet these new monitoring and compliance  challenges.
As your Subcommittee has stressed in its guidance and hearings regarding  other parts of the federal government, agencies must constantly reevaluate  their human capital strategies to adapt and even anticipate major shifts in  their environment. We believe that a number of studies we have performed  for Congress in recent months are good illustrations—and further  evidence—of the validity of that approach.
Mr. Chairman and members of the Subcommittee, this concludes my  prepared statement. I will be pleased to answer any questions you or other  members of the Subcommittee may have at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further contacts regarding this testimony, please call Loren Yager at  (202) 512-4347 or Christine Broderick (415) 904-2240. Individuals making  key contributions to this testimony included Adam Cowles, Etana Finkler,  Kim Frankena, Wayne Ferris, Rona Mendelsohn, Anthony Moran, and  Richard Seldin.
section_title: Appendix: U.S. Imports from and Exports to China, 1989-2002
paragraphs: This appendix provides information on U.S. imports from and exports to  China during the past 14 years. Table 2 provides data on the top five U.S.  imports from China between 1989 and 2002. Together, imports of these  five commodities accounted for about 59 percent of total imports from  China in 2002, according to the Department of Commerce.
Table 3 provides figures on the top five U.S. exports to China between  1989 and 2002. Together, these five commodities accounted for about 42  percent of total U.S. exports to China in 2002.