Trade Issues in the 109th Congress: Policy Challenges and Opportunities
Released: 2006-02-22T00:00:00

Placing Trade Issues In Context

A number of economic factors influence U.S. trade policy: domestic economic conditions;growing trade deficits; the impact of trade (exports and imports) on various states, regions, andindustries; the importance of trade to the U.S. economy; and the geographical distribution of U.S.exports and imports; among other factors. It is also influenced by political factors, such as the roleand concerns of Congress in trade policy, the role and agenda of the President, and the differentperspectives that the two branches bring to the trade debate and foreign policy considerations. Thesefactors influence the climate in which the issues emerge and are debated by the Congress.

Economic Factors

Domestic economic conditions can influence the trade policy agenda. Poor economicgrowth or recession that is coupled with escalating unemployment often causes policymakers todirect their attention to trade. For example, the structural adjustments that the steel industry hadbeen experiencing led to presidential measures to restrict steel imports in 2002. (1)

Rapidly growing U.S. trade deficits also generate interest in foreign trade and reassessmentsof trade policies. Economists assert that trade deficits are themselves not the results of trade policybut are the products of broader economic conditions. Nevertheless, large trade deficits have causedthe Congress, in many cases, to give priority to trade on its agenda especially when U.S. tradedeficits with one or more trading partners are increasing rapidly. Large deficits are often perceivedas an indication that the trade relationship is unbalanced or unfair. Table 1 below shows U.S. tradein goods and services from 1996-2005.

Table 1. U.S. Trade in Goods and Services,1996-2005

(Billions of Dollars)

Source: U.S. Department of Commerce. Bureau of the Census.

In 2005, the U.S. trade deficit in goods and services hit a record $725.8 billion, a 17.5%increase over the previous record of $617.6 billion in 2004. During the 10-year (1996-2005) period, the U.S. trade deficit increased over 600%, from $102.9 billion to $725.8 billion. Most economistsattribute the deficits, especially the broader current account deficits, to macroeconomic factors,including relative real economic growth rates of the United States and its major trading partners, realexchange rates, and savings and investment balances in the United States and other countries. (2) Trade policy and trade policytools have little effect on trade balances, especially in the long run. However, they affect thecomposition of trade. But trade deficits, by definition, translate into more U.S. firms and workersbeing hit by import competition thereby increasing the pressure for protection.

Related to U.S. trade deficits is the value of the U.S. dollar in terms of other majorcurrencies. Over time, the U.S. dollar has fluctuated in value. Recently, the dollar has beenappreciating against major currencies despite record-breaking U.S. current account deficits. (3) A stronger dollar makes U.S.domestic goods more expensive compared to imports exacerbating U.S. trade imbalances. Whileconsumers benefit from lower import prices, import-sensitive manufacturers must make adjustmentsto match the competition. These adjustments might include using labor-saving technology and/ormoving some production offshore and may lead to protectionist trade policy actions.

Along with the growing U.S. trade deficits and the value of the U.S. dollar, the increasing importance of foreign trade in the U.S. economy plays a role in setting the congressional tradeagenda. It creates more "winners" and "losers" from trade, thus, increasing the potential salience ofthe trade issues. In 1960, the ratio of exports plus imports of goods and services to U.S. grossdomestic product (GDP), a measure of openness, was 9.5%. By 2005, the ratio increased to26.6%. (4) As the UnitedStates has become more integrated with the rest of the world economy, a larger range of economicactivities is affected by trade and raises policy issues. For example, advances in telecommunicationstechnology now allow some services to be imported or "outsourced" from India and other countriescreating competition for some U.S. domestic providers. However, these same advances also lowercosts to consumers of those services.

The geographical distribution of U.S. trade has shifted. In particular, the role of advanceddeveloped countries has declined while the role of less developed countries has expanded. In 1990,63.9% of U.S. exports went to the industrialized countries while 35.1% went to developingcountries. By 2005, the share of U.S. exports accounted for by developing countries had increasedto 47.0%. Similarly, in 1990 58.8% of U.S. imports came from industrialized countries and 40.9%from developing countries. In 2005, 54.9% of U.S. imports came from developing countries. (5) The rise of the newlyindustrializing economies of East Asia (Hong Kong, Singapore, South Korea, Taiwan) and theemergence of Mexico as a significant U.S. trading partner account for part of this surge; however,much of the increase in developing countries' share of U.S. trade derives from China. Between1990-2005, China's share of U.S. imports grew from 3.1% to 14.6% and its share of U.S. exportsrose from 1.2% to 4.7%. Shifts in trade patterns have coincided with rising concerns about theability of U.S. workers to compete with countries with low wages and the impact of globalizationon U.S. employment, wages, and living standards.

The relative share of the United States in world trade has declined over the years. U.S.exports accounted for 15.7% of world exports in 1960 (when Japan and Europe were still recoveringfrom the devastation of World War II) and 9.0% in 2004. The decline can be attributed to, amongother things, the emergence in the international trading system China and other developing countries,as they have opened up their economies to the rest of the world. It can also be attributed to theemergence market economies in the former communist states in Central and Eastern Europe and theformer Soviet Union. (6)

Political Factors

Congressional concerns and responsibilities in U.S. trade and trade policy are extensive. The Constitution assigns trade responsibility to the Congress. Article I, Section 8, states in part thatthe Congress shall have the authority "to lay and collect taxes, duties, imposts and excises... [and]regulate commerce with foreign nations, and among the several states..." For most of U.S. historythis responsibility largely meant setting tariffs on imports into the United States.

With the enactment of the Reciprocal Trade Agreements Act (RTAA) of 1934, the Congressdelegated for limited periods of time the authority to the President to negotiate trade agreements toreduce tariffs reciprocally. It also delegated to the President the authority to reduce tariffs byproclamation within certain parameters. The RTAA was a congressional and executive branchreaction to the growing political burden on the Congress from tariff administration, to the politicalreality that it was easier for Congress to raise tariffs than lower tariffs given the political imperativeof constituent interests, and to the largely adverse economic results of the Smoot-Hawley Tariff Actof 1930. (7)

Over time, trade negotiations have become more complex as trade negotiations have movedbeyond tariffs to nontariff trade barriers, investment, labor, environment, and other issues. Theyhave moved from the bilateral frameworks under the original RTAA to the multilateral negotiationsunder the General Agreement on Tariffs and Trade (GATT) and its successor organization, theWorld Trade Organization (WTO). In 1974, the trade negotiating authority was granted in the formof expedited (or fast-track) congressional consideration (limited debate and no amendments) ofimplementing legislation for proposed agreements.

While delegating negotiating authority to the President, the Congress maintains much controlover trade policy. It does so by placing time limits on the authority, thus requiring the President toreturn to Congress to request its renewal. The Congress establishes negotiating objectives that mustbe adhered to in any agreement eligible to receive expedited (fast-track) treatment. The Congressrequires that the executive branch notify the Congress when it intends to enter trade agreementnegotiations and when it intends to sign trade agreements. It also requires the executive branch toconsult the Congress during the negotiations. The Congress most recently granted the authority in2002, initially until July 1, 2005, but was extended until July 1, 2007, as provided by law, upon thePresident's request and after the Congress did not pass a resolution disapproving the request.

An overall concern of Members of Congress is that the President remains mindful ofCongress's constitutional authority over trade. In addition, Members want to make sure theAdministration consults the Congress as its pursues negotiations in the bilateral and multilateral foraand conducts other aspects of U.S. trade policy. Members are also concerned that U.S. trade policynot unduly harm their constituents. Some want to make sure that the United States will preserve itsability to protect U.S. industries from dumped imports and other unfair foreign trade practices andthat foreign countries allow U.S. exports to compete fairly. Members also want to ensure the UnitedStates holds its trade partners accountable for adhering to trade agreement obligations.

Each presidential administration conducts trade policy based on its own priorities andstrategy. During the Bush Administration's first term, the United States pursued an activist tradeagenda. It took the lead with the European Union (EU) and other trade powers in launching a newround of multilateral negotiations in the WTO; pursued negotiations with individual countries andgroups of trade partners to establish bilateral and regional free trade agreements (FTAs); and usedother initiatives to forge closer economic ties that could lead to free trade agreements. The BushAdministration's priorities in its second term appear to include completing FTA negotiations;launching negotiations with other trading partners; completing of Doha Development Agenda(DDA) round of negotiations in the WTO; and ensuring U.S. trade partners' compliance with theirobligations under bilateral and multilateral agreements.

In order for U.S. trade policy to be implemented successfully, the legislative and executivebranches must work in tandem. As with many policy issues , conflicts on trade matters may arisebetween some Members of Congress and the Administration because of positions taken by theirrespective political parties. However, the Congress and the President bring different institutionalperspectives that can place the two branches in conflict over trade matters regardless of their partyaffiliation. In general, Members of Congress are most concerned for the interests of their respectiveconstituencies -- workers, firms, agriculture, and industries -- and the impact of trade on them. ThePresident, as national leader, must weigh the positions of various groups against other nationalobjectives (such as national security and foreign policy concerns and broad economic gains) inmaking trade policy.

Trade Issues

The 109th Congess has already faced some trade issues, and will likely confront more,requiring consideration and debate during the second session. How Congress addresses these issuescould have long-term implications for U.S. trade policy.

Trade Promotion Authority (TPA)

The President's trade promotion authority (TPA), that is, the authority to negotiate tradeagreements that receive expedited (set deadlines, limited debate, and no amendments) congressionalconsideration, will expire on July 1, 2007. The expiration date has become a virtual deadline forU.S. negotiations on multilateral, regional, and bilateral trade agreements that require congressionalapproval. The deadline constrains the presidential and congressional trade agendas, especiallyregarding trade negotiations. The TPA statute stipulates that agreements entered into by July 1,2007, would be eligible for expedited congressional consideration if all other conditions under theauthority are met. However, the statute also requires that the President notify the Congress of hisintention of entering into (signing) an agreement at least 90 calendar days prior to doing so. Therefore, any U.S. agreement would have to be concluded by April 2, 2007, in order to meet theTPA criteria. While the Congress could choose to renew the authority briefly, as was done in 1993to cover the completion of the Uruguay Round agreements, it is by no means certain that the 110thCongress would choose to do so. Also, congressional debate on the issue would likely be divisive,if the debate over the original extension of TPA in 2002 is an indicator.

The World Trade Organization

Since its founding in 1995, the WTO has embodied the international trade system. Itprovides the basic set of principles and rules by which its 149 members conduct trade amongthemselves and also provides a mechanism for those members to settle disputes over adherence tothe rules. The WTO is evolving: The membership is now negotiating expansion and revision of itsrules in the Doha Development Agenda (DDA) round, and countries are negotiating their entry intothe WTO as new members. For some Members of Congress and for some interest groups, the WTOis controversial. They view the organization's rules as impinging on U.S. sovereignty, especiallywhen WTO trading partners are able to challenge U.S. trade remedy laws for being contrary to WTOrules and principles. On the other hand, others assert that the WTO provides stability andpredictability to the international trading system by ensuring that member countries' trade regimesmeet basic standards and by providing a forum to encourage other countries to remove trade barriers.

During its first session, the 109th Congress had the opportunity to weigh in on the issue ofU.S. participation in the WTO as it does every five years under U.S. law. The Congress did not passa resolution that would have called for the withdrawal of the United States from the World TradeOrganization (WTO), thus agreeing to U.S. participation, at least for another five years. (8)

The Doha Development Agenda Negotiations. In November 2001, the United States and the other members of the WTO launched what has becomeknown as the Doha Development Agenda (DDA) round of negotiations. The failure early on to reachagreement on some basic ground rules, such as the modalities for negotiations on agriculture, madethe end of 2005 deadline unachievable. The negotiations have continued with an emphasis onagriculture, non-agriculture market access (NAMA), and services. Trade ministers from the 149members met in December 2005 in Hong Kong for the biannual ministerial meeting andrecommitted their countries to completing the round of negotiations by the end of 2006, keeping inmind the April 2007 deadline on trade promotion authority (TPA) within which the BushAdministration is operating. (9)

Although the Congress has no direct involvement in the negotiations, legislation establishingthe trade promotion authority (TPA) requires the executive branch to consult continually with theCongress during trade negotiations. The Congress could also conduct oversight hearings on theprogress of the negotiations. The DDA covers a broad range of issues that have been of particularinterest to Members, including agricultural subsidies and market access; trade remedy laws (such asantidumping laws); and intellectual property rights protection.

If and when agreements are completed in the WTO, implementing legislation would haveto be submitted to the Congress and would be subject to congressional approval. Under the tradepromotion authority, the Congress would consider the implementing legislation for the agreementson an expedited basis.

U.S. Compliance with WTO Decisions. TheWTO has ruled against the United States in several cases brought to the Dispute Settlement Body(DSB) against U.S. trade actions, most of which involve U.S. trade remedy laws. In some cases, theWTO has determined that U.S. implementation of its trade remedy laws does not comply with WTOrules. In some cases, compliance requires just a change in administrative regulation or practice. Insome other cases, the determination was that the U.S. law itself violated U.S. WTO obligations and requires an act of Congress for the United States to come into compliance. Compliance with WTOrulings has generated debate, especially when the program in question has broad congressionalsupport. On the one hand, the program may benefit critical constituencies and be politically popular. On the other hand, failure to comply subjects the U.S. to possible WTO-authorized sanctions andmight encourage noncompliance by trading partners in cases where they lose.

The 109th Congress passed legislation that addressed two outstanding adverse decisionsagainst the United States. In the first, the Congress repealed the so-called Byrd Amendment,the Continued Dumping and Subsidy Offset Act (CDSOA) of 2000 (Title X of P.L. 106-387 ). The law requires the Treasury Department to distribute revenues, collected from antidumping (AD)and countervailing duty (CVD) orders, to firms that had been successful petitioners in the AD andCVD cases. In 2002, the WTO had ruled against the United States in a challenge brought by 11WTO members. Of the 11, the EU, Canada, and Japan eventually imposed tariff sanctions,authorized by the WTO, against selected U.S. exports because the United States had failed to repealthe law by an established deadline. After much congressional debate, a provision to repeal the Byrdamendment was included in the conference report accompanying S. 1932 , the DeficitReduction Act of 2002. It passed the House on December 19, 2005, and the Senate on December21, 2005. (Because the House version did not include some language (language unrelated to therepeal), the House had to vote again on the Senate version, which it did on February 2, 2006.) However, under the provision the operation of the Byrd Amendment program continues untilSeptember 30, 2007. The EU, while acknowledging the repeal, has raised concerns about the delayof its effect. It is not clear whether U.S. trading partners will continue sanctions against U.S.exports. (10)

The same conference report also included the elimination of the U.S. "Step 2" cottonsubsidies programs that the WTO had ruled illegal in a March 2005 Appellate Body ruling. Theruling came as the result of a case filed by Brazil. It is not clear at this point whether thecongressional action addresses all aspects of the WTO ruling. (11)

Bilateral and Regional Trade Negotiations and Agreements

Following the consideration and approval by 109th Congress of two free trade agreements --the DR-CAFTA and the U.S.-Bahrain FTA -- during the first session, the Bush Administration willlikely ask for consideration of several new bilateral and regional free trade agreements during thesecond session. Any FTA would be subject to congressional passage of implementing legislation. Furthermore, under the law granting trade promotion authority, the executive branch must consultwith the Congress as trade agreement negotiations proceed. Members of Congress will likelymonitor negotiations, mindful of the potential economic impact FTAs may have on their constituentsand the United States as a whole.

The congressional debate on DR-CAFTA was highly contentious with differences fallingalong party lines principally over the degree to which the agreement protects labor rights in theDR-CAFTA partner countries. The Senate passed it 54-45 and the House passed the implementingbill 217-215 on June 30, and July 28, 2005, respectively. President Bush signed the legislation intolaw ( P.L. 109-53 ) on August 2, 2005. (12)

Legislation implementing the U.S.-Bahrain FTA was far less contentious and passed easily,in the House (327-95) on December 7, 2005, and in the Senate (unanimous consent) on December13, 2005. President Bush signed the bill into law on January 11, 2006 ( P.L. 109-169 ). The FTAwith Bahrain is part of a larger Bush Administration initiative to create a Middle East Free TradeArea (MEFTA) by 2013. The United States had already concluded an FTA with Morocco thatentered into force on January 1, 2006. The United States and Oman signed an FTA on January 19,2006, and the President is expected to send implementing legislation to Congress sometime in 2006. Negotiations with the United Arab Emirates (UAE) continue. (13)

On January 6, 2006, President Bush announced to Congress his intention to sign an FTA withPeru. The negotiations with Peru had been part of negotiations with Ecuador, Colombia, and Boliviaon a regional U.S.-Andean FTA, but the negotiations with Colombia and Ecuador have boggeddown, and Bolivia's continued participation is in doubt, following recent presidential elections. (14) The United States isconducting FTA negotiations with Panama, Thailand, and the members of the Southern AfricanCustoms Union (SACU). In addition, the United States and South Korea announced on February2, 2006, their intention to begin FTA negotiations.

Debates over implementing legislation on completed FTAs and oversight of negotiations onnew FTAs in the 109th Congress will likely generate critical policy questions. For example, someMembers of Congress have questioned the criteria that the Bush Administration uses to choose FTApartner countries. They have argued that many of the recently completed FTAs are with countrieswith relatively small economies that do not offer significant new commercial opportunities to U.S.exporters and investors. The Bush Administration has countered that these FTAs are stepping stonesin building regional free trade areas that will offer greater opportunities to the United States whileencouraging economic growth and development in those regions. The Administration also contendsthat FTAs assist the United States in defending its foreign policy and national security interests bystrengthening ties with countries that have cooperated with the United States on the war on terrorismand the wars in Afghanistan and Iraq.

Trade negotiations also raise concerns about the potential impact of pending agreements onthe U.S. economy as a whole and on specific sectors, particularly import-sensitive sectors such assome agricultural products and textiles. Economists have argued that FTAs can create new trade,boosting economic efficiency -- a positive contribution to the economy, but they can also divert tradefrom more efficient to less efficient producers by giving preferential treatment to the imports of thelatter, a negative contribution to the world economic welfare. Members of Congress must weigh thepolitical and economic gains of achieving increased access to foreign markets in exchange for greaterforeign access to U.S. markets.

Trade Enforcement/Trade Organization

During the first session and continuing into the second session of the 109th Congress,Members have expressed great concern regarding the lack of compliance by U.S. trading partnerswith bilateral agreements with the United States and multilateral agreements in the WTO. Whilemuch of this concern derives from trade problems with China, they are also fed by longstandingissues with other major trading partners including Canada, Japan, and the EU. On July 27, 2005, theHouse passed H.R. 3283 , the "United States Trade Rights Enforcement Act," largelya China-focused bill (discussed further in the section on U.S.-China economic relations). Other billshave been introduced that would, among other things, augment U.S. government trade enforcementresponsibilities and capabilities. Congressional leadership on trade policy in both political partieshave indicated that trade enforcement will be a priority for the remainder of the 109th Congress.

Issues Pertaining to U.S. Imports

The 109th Congress will probably confront a spate of issues that relate to access of importsto U.S. markets. The issues pertain to treatment of imports from current and former communistcountries and to tariff preferences the United States grants to certain developing countries.

Permanent Normal Trade Status. A number offormer communist and some nominally communist states remain subject to the so-calledJackson-Vanik amendment of the Trade Act of 1974, as amended. The amendment requires thatthe normal trade status (NTR, also called most-favored nation (MFN) status) of these countriesdepends on fulfilling specified freedom of emigration conditions and therefore must be renewedannually. A number of countries, including Russia, Kazakhstan, and Ukraine, that were part of theformer Soviet Union, and other communist states, such a Vietnam, are in this situation. Legislationmust be enacted for these countries to attain permanent normal trade status (PNTR).

All of these countries have conditional NTR under Jackson-Vanik (tariffs on their exportsto the United States are lower than would be the case if they did not have it); therefore, not havingPNTR has had no immediate, practical impact on their trade with the United States. However, allfour countries, as well as others, are seeking accession to the World Trade Organization (WTO). Under WTO rules, the United States would have to grant them unconditional MFN (or PNTR) upontheir accession. If it does not, then the United States would have to invoke the WTO provision of"non-applicability," that is, it would declare that the WTO rules and other obligations would notapply in its trade relations with the other country. Therefore, the United States would not benefitfrom their accession to the WTO.

The debate on whether to grant these countries PNTR will possibly include political, foreignpolicy, as well as foreign trade matters. For example, issues may arise over Russian President Putin'smoves to centralize political power in the Kremlin by eliminating direct elections for regionalgovernors and by putting political pressure on the domestic press and over his policies towardChechnya. The U.S. business community could raise concerns about the business climate in Russiain the wake of the arrest of Yukos Oil chairman Mikhail Khodorkovsky and the forced sale of Yukosassets. Concerns might also be raised regarding commitments in Ukraine and Vietnam towardseconomic reforms such as protection of intellectual property rights. (15)

Tariff Preferences. The United States grantsunilateral trade preferences to groups of developing countries to encourage economic developmentby extending duty free treatment to their exports of eligible products to the United States. The mostgeographically comprehensive program, the Generalized System of Preferences (GSP), is due toexpire on December 31, 2006. (16) The more geographically targeted Andean Trade Preferences Act(ATPA) also expires on that date. Legislation to reauthorize these programs may be introducedduring the 109th Congress, and Congress might consider issues regarding the duration of theauthorization, conditions of country and product eligibility, and the impact of these programs on theU.S. economy. The 109th Congress might also monitor the implementation of other trade preferenceprograms such as the Caribbean Basin Initiative (CBI) and the African Growth and Opportunity Act(AGOA) that provide more favorable preferences to those regions than is the case under GSP. (17) Some Members haveproposed extending additional trade preferences to other poor developing countries.

Trade Remedy Laws. U.S. trade remedy lawsare designed to alleviate the adverse impact on U.S. industries from some imports. Countervailingduty (CVD) statutes are used to alleviate the impact of imports that benefit by foreign governmentsubsidies. Antidumping duty (AD) laws attempt to counter the effects of imports that are dumped(sold at less than fair value). The escape clause (also called "Section 201" for the provision of theTrade Act of 1974) authorizes measures to restrict imports that are sold fairly but at such rapid ratesas to cause or threaten to cause serious injury to domestic producers of like products.

There are also U.S. trade remedy laws (such as section 301 of the Trade Act of 1974)designed to address foreign barriers to U.S. exports and provisions to deal with the lack of foreignprotection of IPR (special 301). Some Members of Congress have questioned the effectiveness ofthese laws and/or the executive branch's effectiveness in implementing the laws. They haveproposed changes that would strengthen the protection of domestic producers. (18) Others have proposed thatU.S. CVD laws be amended to apply to non-market economies, such as China.

Major U.S. trading partners have challenged (in some cases successfully) the legality of U.S.trade remedy laws in the WTO. For example, the Byrd amendment (discussed under the WTOissues) and the U.S. 1916 Antidumping Act (which was been repealed by the 108th Congress) werechallenged successfully. They have also challenged how the United States has implemented its traderemedy laws, arguing that the procedures the United States uses to make determinations in AD andCVD cases do not conform to rules under WTO agreements. Many U.S. trading partners haveclaimed that U.S. trade remedy laws are protectionist and are seeking tighter rules on the use of traderemedy laws in the Doha Development Agenda round negotiations in the WTO; however, many inthe Congress have expressed opposition to trade agreements that would weaken U.S. trade remedylaws.

U.S. trade remedy laws could be the subject of oversight hearings and also legislation. Congress will probably closely monitor trade agreements that include changes in U.S. trade remedylaws.

Outsourcing. For many years, U.S. multi-nationalfirms have dis-aggregated their production processes to allow them to take advantage of lower laborcosts and other attributes in foreign countries. At first they would import some parts to be assembledas final products in the United States. This was followed by investment in whole productionfacilities abroad for re-export back to the United States or to third markets. Recent reports indicatethat U.S. multi-nationals are subcontracting or "outsourcing" the actual design of computer hardware,software, and other electronics products to offshore firms. (19) This trend may raiseimportant policy issues for the 109th Congress as Members consider the impact on constituent firmsand workers and well as the impact on the U.S. economy as a whole. (20) For example, should theU.S. government support programs to keep jobs in the United States by discouraging outsourcingby U.S. firms?

Export Controls/Foreign Policy Sanctions

Under the Export Administration Act (EAA), the Congress has delegated to the Presidentthe authority to control U.S. exports of so-called dual-use goods and technologies, for examplehigh-speed computers, that can be used for both military and civilian purposes. Among other things,the authority permits the President to establish a licensing mechanism to ensure that dual-use goodsand technologies are not exported to recipients who would use them to threaten U.S. nationalsecurity. The authority also allows restriction on exports that are in short supply.

The last EAA reauthorization expired in August 2001. The export control regime has beenmaintained under the International Emergency Economic Powers Act (IEEPA), which permits thePresident to control economic activities in response to a declared emergency. The Congress mightconsider legislation to reauthorize the EAA. In the past, the debate of export control authority hascentered around how restrictive U.S. controls should be. Many in the business community,especially those who export high technology goods and services, while understanding the need forcontrols, have argued that controls that are unnecessarily restrictive impeded their ability to competewith foreign firms in third markets, particularly when those firms do not face the same limits. Othersargue, on the other hand, export controls should be sufficiently effective to ensure that dual-usetechnology and goods not get into the hands of those who wish harm to the United States. (21)

The 108th Congress passed and the President signed the Burmese Freedom and DemocracyAct ( P.L.108-61 ) that imposed a series of sanctions against economic ties with the military regimein Burma (Myanmar). The act contains a provision (Section 3 (a) (1)) that imposes a ban onimports products made in Burma until the government takes steps to promote democracy and humanrights. The import ban was to be in effect for one year from the time of enactment (July 28, 2003)and renewable annually for up to three years from the date of enactment. The import ban has beenrenewed by Congress for each of the three years. However, Congress would have to take action toamend the provision to permit the import ban to continue beyond July 28, 2006.

Bilateral Economic Relationships

Five individual and regional trading partners dominate U.S. foreign trade and therefore havea significant impact on U.S. trade policy and the trade agendas of the Congress and the President:the European Union, Canada, Mexico, China and Japan. Together these trading partners accountedfor close to 70% of U.S. merchandise trade in 2006.

Table 2. U.S. Trade in Goods with Major Partners,2005

(Billions of Dollars)

Source: U.S. Department of Commerce data

In most cases, billions of dollars of trade flows between each partner without incident. Inaddition, the United States works closely with these trading partners in the WTO and othermultilateral institutions. However, trade disputes arise. Because of the size and importance of therelationships, these disputes raise concerns with the Congress and are often the subject of oversighthearings, if not legislation. Such has already been the case during the 109th Congress.

The European Union. The economic relationshipbetween the United States and the European Union (EU) is the largest in the world. The modernU.S.-European economic relationship has evolved since World War II, broadening as thesix-member European Community expanded into the present 25-member European Union. The tieshave also become more complex and interdependent, covering a growing number and type of tradeand financial activities.

In 2005, $495.1 billion flowed between the United States and the EU in merchandise trade. The EU as a unit is the largest merchandise trading partner of the United States. In 2005, the EUaccounted for $186.3 billion of total U.S. exports (or 20.6%) and for $282.6 billion of total U.S.imports (or 18.5%) for a U.S. trade deficit of $122.4 billion.

U.S.-EU disputes have become increasingly complex. The issues in question are no longerjust border trade issues (tariffs and other customs regulations) but also differences over competitionpolicy and government regulations, disputes that impinge on the sovereign right of nations to runtheir economies in their national interests.

Several issues in the relationship are simmering and could erupt into full blown disputes inthe next two years. The European Union is a party to the case in the WTO over the failure of theUnited States to comply with the adverse WTO ruling on the Byrd amendment. The EU will haveto decide whether the U.S. Congress's repeal the Byrd amendment (discussed earlier) is adequate orto maintain tariff sanctions on U.S. exports.

Another perennial issue has been over alleged government subsidies for Boeing and AirbusIndustrie by their home governments. The United States had threatened to take the EU to the WTOover what it claims are WTO-illegal subsidies by the EU governments of a new large commercialairliner by Airbus Industrie. The EU counterclaims that the U.S. company Boeing, the only otherproducer of large commercial airliners, is subsidized by the U.S. government through defense andspace contracts and through other assistance. Having failed to work out their differences in bilateraldiscussions, the two parties independently filed complaints with the WTO in March 2005. TheWTO created two panels, one to study U.S. charges of illegal subsidies to Airbus, and the secondto study EU charges against Boeing. The cases are to be argued this year, but final decisions are notexpected until sometime in 2007.

Another issue, thought to have been resolved, has re-emerged. In October 2004, theCongress repealed the Foreign Sales Corporation (FSC)-Extraterritorial Income (ETI), a programthat provided an export tax subsidy for certain firms. The repeal was in response to a WTO rulingthat the program conflicted with WTO rules on subsidies. Before the repeal, the EU had imposedtariff sanctions on selected U.S. exports because the United States had failed to repeal the programbefore a set deadline but lifted the sanctions after the Congress passed the repeal. Subsequently, theEU challenged certain provisions of the new law that allowed for a phase-out of the subsidies, andthe WTO upheld the challenge. The United States filed an appeal, and on February 13, 2006, theWTO Appellate Body ruled against the United States. (22) The EU has threatened to reimpose the tariff-sanctions. (23)

On February 7, 2006, the WTO Dispute Settlement Body issued a preliminary decision thatruled in favor of the United States and other countries that challenged the EU ban on imports ofbio-engineered food products. A final decision is expected later in the year.

Canada. Canada is the largest single-country U.S.trading partner. It is the largest market for U.S. exports and largest source of U.S. imports. The twocountries are also closely tied by stocks of foreign direct investment in each other's economies, withmany industries and sectors interlinked across the border. The tight relationship was institutionalizedon January 1, 1989, when the U.S.-Canada FTA went to effect. The FTA was superceded whenNAFTA entered into force on January 1, 1994.

Agricultural trade is among the most potent disputes in U.S.-Canada trade given theimportance of the sector to both economies and has drawn a great deal of congressional attention. Two issues in particular are long-running and very divisive.

The first pertains to the shipment of Canadian cattle into the United States. In 2003, theUnited States banned all Canadian beef imports because of the discovery of a case of "mad cow"disease. Subsequently, the Bush Administration allowed some types of beef products to be importedbut has still maintained tight restrictions on most beef imports, including live cattle. U.S. andCanadian agriculture officials had been discussing ways to establish procedures to reopen the U.S.border to live Canadian beef. (Trade in processed or packaged beef has already resumed.) OnJanuary 5, 2005, the U.S. Department of Agriculture issued a rule to go into effect on March 7, 2005that would permit additional beef imports from Canada including live cattle younger than 30 months. U.S. cattlemen opposed the rule, and the Ranchers Cattlemen Action Legal Fund brought a casewhich led to a ruling by the a U.S. District Court judge suspending the implementation of the rule. In addition, on March 3, 2005 the Senate passed a joint resolution to block the implementation ofthe rule. (24) However,U.S. meat-packers supported the rule and sought its implementation. On July 18, 2005, the UnitedStates began to import live cattle from Canada.

A second issue concerns imports of softwood lumber from Canada. U.S. lumber producersclaim that low stumpage fees that provincial governments charge for lumber harvested from publiclands and other practices constitute illegal government subsidies to the Canadian lumber industry. After a five-year U.S.-Canadian lumber agreement that imposed tariffs on Canadian softwoodlumber expired in 2001, the U.S. lumber industry filed a series of countervailing duty andantidumping cases alleging the threat of material injury. The Department of Commerce and the U.S.International Trade Commission determined that injury and/or threats of injury existed fromdumping and subsidies. Canada has challenged the actions in the NAFTA dispute settlementmechanism and the dispute settlement mechanism in the WTO. Canada is awaiting a WTO paneldecision on obtaining compensation from the United States on measures the WTO determined to be illegal. (25) Canada hasprevailed in NAFTA dispute settlement proceedings, upholding Canadian claims that U.S. actionsviolate U.S. laws. However, the United States has prevailed in WTO proceedings, with a DisputeSettlement Body ruling that U.S. actions are congruent with WTO rules.

Mexico. Mexico is the second largestsingle-country export market for U.S. exports (having surpassed Japan) and the third largest sourceof U.S. imports. In 2005, the United States incurred a trade deficit of $50.1 billion with Mexico. Bilateral trade had increased rapidly even before the North American Free Trade Agreement(NAFTA) went into effect on January 1, 1994. Several disputes have disturbed what on the wholehas been a harmonious trade relationship. On January 1, 2002, the Mexican Congress enacted a 20%tax on soft drinks made with high-fructose syrup. The U.S. exports high-fructose corn syrup and softdrinks that contain such syrup. The tax was in retaliation over a disagreement on how muchMexican sugar should be allowed to enter the United States under NAFTA. The United Statesclaims that the tax violates Mexico's obligations in the WTO. A dispute resolution panel requestedby the United States determined that the tax violated WTO rules, and Mexico has appealed thedecision in 2005.

Another long-standing issue concerns the right of Mexican trucks to transport goodsthroughout the United States. Under NAFTA, Mexican trucks were to obtain that right in 2000, butthe Clinton Administration suspended that concession to Mexico alleging safety problems withMexican trucks. Mexico has been pressing the United States for full compliance with this provision. In June 2004, the U.S. Supreme Court ruled that Mexican trucks could operate in the United States. The two countries are now engaged in negotiations to resolve safety concerns. (26)

China. China's relationship with the United Statesis the most dynamic and contentious at this time. Bilateral trade has soared. Total U.S.-China tradehas increased from $5.0 billion in 1980 to $285.3 billion in 2005. The U.S. trade deficit of $201.6billion with China in 2005 is the largest U.S. bilateral trade deficit, far exceeding the second largestwith Japan at $82.5 billion deficit with Japan. China is the second largest source of U.S. imports andthe 11th largest export market. China has become the second largest (next to Japan) foreign holderof a U.S. Treasury securities, thus helping to finance the increasing U.S. national debt.

On November 10, 2005, the United States and China came to an agreement that restrictsChina's exports of wearing apparel and textiles to the United States. The agreement was in responseto surges in U.S. imports of textile and apparel after the multilateral quotas on these products expiredon January 1, 2005. The agreement was also in lieu U.S. unilateral safeguard actions on theseproducts from China which threatened more extensive restrictions. (27)

The huge trade deficit has generated concerns about the effects of rapidly growing importson U.S. import-sensitive industries and workers. Some interest groups representing labor and certainindustries, for example, have focused on China's exchange rate regime that pegs the yuan to a basketof currencies including U.S. dollar. U.S. critics of China's policy charge that China deliberatelyundervalues the yuan/dollar exchange rate to underprice its exports and place them at a unfaircompetitive advantage over U.S. producers. U.S. policymakers and affected industries have alsoraised concerns about the effectiveness of China's intellectual property rights (IPR) protection, alongwith other issues.

On July 27, 2005, the House passed (255-168) H.R. 3283 (English) that targetsChina's unfair trade practices by allowing U.S. countervailing duty orders to be applied to importsfrom non-market economies (including China), and increase monitoring China's compliance withWTO obligations and its commitments to the United States on intellectual property rights (IPR)protection, among other things. A companion bill, S. 1421 (Collins), was introducedin the Senate. A number of bills have been introduced that would target China's exchange ratepolicies. For example, the Senate is expected to vote during the second session of the 109th Congresson S. 295 (Schumer) that would impose 27.5% tariff surcharges on imports from China,if China does not revalue its currency to market levels. On November 16, 2005, the Senate hadagreed, per unanimous consent, to consider the bill no later than March 31, 2006. (28)

Japan. The U.S.-Japan economic relationshipis very strong and mutually advantageous. The two economies are highly integrated via trade ingoods and services -- they are large markets for each other's exports and important sources ofimports. More importantly, Japan and the United States are closely connected via capital flows. Japan is the largest foreign source of financing of the U.S. national debt. It will likely remain so forthe foreseeable future, as U.S. national debt mounts and the stock of U.S. domestic savings remainsinsufficient to finance it. Japan is also a significant source of foreign private portfolio and directinvestment in the United States, and the United States is the origin of much of the foreign investmentin Japan.

The United States has consistently run merchandise trade deficits with Japan. After decliningin 2003, the deficit has been rising, reaching $82.5 billion in 2005, the largest U.S. trade deficit withJapan. In 2005, the U.S. exports to Japan amounted to $55.4 billion and U.S. imports amounted to$138.1 billion.

In the 1980s and the 1990s, the U.S.-Japan economic relationship was often a source of sharpfriction due to widespread Japanese trade barriers and the growing competition posed by Japaneseindustries (in autos, for example). The tone has softened considerably. Nevertheless, bilateraltrade disputes do arise. Japan is a party to the complaint against the United States in the WTOregarding the Byrd Amendment, and Japan imposed tariff sanctions against selected U.S. exports. Japan first imposed the ban on imports of U.S. beef in December 2003 due to concerns over a caseof bovine spongiform encephalopathy (BSE), also know as "mad cow disease," in Washington State. Japan lifted the ban on imports of beef from cattle 20 months or younger on December 12, 2005,but reimposed it on January 20, 2006, when Japanese meat inspectors discovered prohibited spinalbone material in a shipment. Some Members of Congress raised concerns over the Japanese originalban and the reimposed ban, even proposing legislation to retaliate against Japanese imports if the banwere not lifted. (29)

The Wider Trade Debate

The range of trade issues that the 109th Congress will likely face is very broad and diverse. Each issue or set of issues bears its own implications as Members of Congress weigh the merits anddisadvantages. In most cases, the 109th Congress will be considering and debating each issueseparately. However, the cumulative effect of each debate may have wider implications for U.S.trade policy. As the 109th Congress addresses these issues, its decisions may define U.S. trade policyin the long term.

Free Trade or Protectionism?

The history of U.S. trade policy since the 1930s is one of a movement toward tradeliberalization -- lowering of tariffs and other trade barriers -- and working in concert with other majortrading powers to create multilateral rules to promote freer trade. At the same time, U.S. tradepolicymakers have taken measures to restrict trade by crafting laws that make it easier for domesticU.S. industries to obtain relief from dumped and subsidized imports and from surges in fairly-tradedimports. While this debate over the direction of U.S. trade policy is sometimes framed as "free tradeor protectionism," the terms of the debate are more subtle -- more open trade or more restrictedtrade. The outcome of the trade issues before the 109th Congress will influence in which directionU.S. trade policy proceeds.

The Rise of Developing Countries

Developing countries have emerged as significant players in U.S. trade and world trade asa result of globalization. This trend presents the United States with challenges. For example, howshould the United States respond to the increasing competition from less expensive labor in thedeveloping countries? Should labor rights be included in trade agreements? These questions cutacross the debates on each of the U.S. FTAs with developing countries, the Doha DevelopmentAgenda negotiations in the WTO, discussions and congressional proposals on trade remedy laws,the issue of "outsourcing," and the anticipated surge in textile and wearing apparel imports, amongother issues. A broader question that might be considered is whether on balance the United Stateswill consider trade with developing countries as a "race to the bottom" or as a "win-win" propositionfor both sides.

Labor, Environment, and Trade

The issues of workers rights and environmental protection, become significant points ofdebate in congressional consideration of many trade matters. More precisely, the question is to whatextent should workers rights, environmental protection, and other concerns be part of tradeagreements or other trade policy initiatives. The Congress included workers rights andenvironmental policy as principal negotiating objectives in the legislation granting trade promotionauthority. Some Members of Congress have argued that trade agreements should ensure that tradepartners' treatment of workers rights meet internationally accepted core labor standards or otherwiseface trade sanctions. Others contend that trade agreements should only ensure that countriesadequately enforce their own trade laws. A similar division of thought exists regarding tradeagreements and environmental protection.

This underlying debate will likely emerge in congressional consideration of DR-CAFTA andother trade agreements involving developing country trading partners. It may also arise if and whenCongress considers renewal of the President's trade promotion authority and reviews U.S.participation in the WTO. The outcome of these debates might determine in which direction U.S.trade policy is moving on these issues.

Shaping the International Trade System

The trade issues that the 109th Congress faces and how the Congress deals with them couldhave an impact on the international trading system. The international system is becoming larger andmore complex. Lying at the foundation of the system is the WTO. Over the years, the rules theWTO (and its predecessor the GATT) administers have expanded from tariffs to such nontariffbarriers as government procurement practices, sanitary and phytosanitary measures, and IPRprotection. An objective of the Doha Development Agenda is to broaden the rules coverage evenmore. The 107th Congress helped set the agenda for the DDA round and U.S. negotiating positionsduring the round when it granted the President trade promotion authority and established negotiatingobjectives. The 109th Congress through oversight and the Administration's mandatory consultationscan continue to influence the agenda.

The WTO is also expanding its membership. As of February 2006, the WTO has 149members with 29 more countries at various stages of attaining membership or accession. Congressdoes not vote on whether a country can join the WTO. Through oversight it can influence the U.S.position on negotiating a country's entry. The Congress could have a more direct impact when itconsiders PNTR for those countries, such as Russia, Ukraine, and Vietnam, whose NTR status is stillconditioned under the Jackson-Vanik amendment.

Along with the WTO, the international trading system is populated by a web of regional andbilateral free trade areas based on FTAs. In some cases, these areas are interlinked, while in others,they are distinct. FTAs have become a significant and expanding part of the international tradingsystem.

International trade observers and policymakers are divided on whether the two tracks of theinternational trading system -- the multilateral (the WTO) and bilateral/regional (FTAs) -- aremutually reinforcing or in conflict. The Bush Administration firmly bases its trade policy strategyon the two prongs being reinforcing. Former USTR Zoellick has argued that the FTAs he negotiatedare "cutting edge agreements [that] carry an importance beyond the size of newly opened markets,because they set high, enforceable standards in newer areas of importance to America -- such asservices, intellectual property, transparency and anti-corruption and e-commerce." (30)

On the other hand, others contend that FTAs undermine the WTO and its principles becausethey promote discriminatory treatment in trade by limiting preferential treatment to the participantsin the FTA. Some critics have also asserted that bilateral and regional FTAs create a conglomerationof tariff-reduction schedules and rules of origin that are in conflict with one another and createconfusion in the trading system undermining trade efficiency. (31)

In between these two groups are policymakers and observers who assert that FTAs and theWTO are not necessarily incompatible, but oppose the emphasis that bilateral and regional FTAshave been given by the Bush Administration. They argue that the Administration needs to devotethe limited available staff and other resources to WTO negotiations where, they claim, it can promoteU.S. trade policy goals more effectively. (32)