The Northern Mariana Islands are a group of 14 islands in the western Pacific Ocean, lying just north of Guam, 5,500 miles from the U.S. mainland. After World War II, the U.S. Congress approved the Trusteeship Agreement that made the United States responsible to the United Nations for the administration of the islands. Later, the Northern Mariana Islands sought self-government and permanent ties to the United States. In 1976, after almost 30 years as a trust territory, the District of the Mariana Islands entered into a Covenant with the United States establishing the island territory’s status as a self-governing commonwealth in political union with the United States. The Covenant grants the CNMI the right of self- governance over internal affairs and grants the United States complete responsibility and authority for matters relating to foreign affairs and defense affecting the CNMI. The Covenant initially made many federal laws applicable to the CNMI, including laws that provide federal services and financial assistance programs. The Covenant preserved the CNMI’s exemption from certain federal laws that had previously been inapplicable to the Trust Territory of the Pacific Islands, including federal immigration laws with certain limited exceptions and certain federal minimum wage provisions. However, under the terms of the Covenant, the federal government has the right to apply federal law in these exempted areas without the consent of the CNMI government, and it enacted the recent federal immigration legislation under this authority. Between 1980 and 1995, the CNMI’s employment grew by about 12.7 percent annually, largely because of its rapidly expanding garment and tourist sectors. Both the garment and tourist industries contributed directly to the economy by generating employment and bringing revenue from outside the CNMI via exports. In 1995, these two industries accounted for about 80 percent of all employment. In addition, a 1999 study found that garment manufacturing and tourism accounted for about 85 percent of CNMI’s total economic activity and 96 percent of its exports. (See app. III for more detailed information regarding the CNMI’s economy). However, several recent developments in international trade have caused the CNMI’s garment industry to decline dramatically. In January 2005, in accordance with World Trade Organization agreements, the United States eliminated quotas on textile and apparel imports from other textile-producing countries, exposing CNMI’s apparel industry to greater competition. Subsequently, the value of CNMI textile exports to the United States dropped from $1.1 billion in 1998 to $317 million in 2007 (see fig. 1), and the number of licensed CNMI apparel manufacturers decreased rapidly, from 34 firms in 1999 to 6 firms as of July 2008. In addition, the CNMI economy has been negatively affected by recent external events’ impact on the tourism industry. For example, tourism in the CNMI experienced a sharp decline in the late 1990s as a result of the Asian financial crisis. In 2003, according to CNMI officials, tourism slowed for several months in reaction to the SARS epidemic, which originated in Asia, and the war in Iraq. Total visitor arrivals to the CNMI dropped from a peak of 736,117 in 1996 to 389,354 in 2007, a decline of nearly 47 percent (see fig. 2). The declines of the garment and tourism industries have taken a toll on the overall economy. The overall fiscal condition of the CNMI’s government steadily weakened— government net assets of $40.6 million at the end of 2001 fell to a negative $38 million balance by the end of 2005. The median household income in the CNMI fell from $22,898 in 2000 to $17,138 in 2004, and the per capita income in the CNMI decreased from $9,151 in 2000 to $6,178 in 2004. The unemployment rate in the CNMI rose from 3.8 percent in 2000 to 8.3 percent in 2005. The percentage of people below the poverty level in the CNMI rose from 46 percent in 1999 to 53.5 percent in 2004. Furthermore, the CNMI continues to have lower income and higher unemployment and poverty rates than the mainland United States. In 2004, median household income was 61 percent lower in the CNMI than in the United States ($17,138 versus $44,389) and per capita income was 74 percent lower in the CNMI than in the United States ($6,178 versus $23,848). In 2005, the unemployment rate in the CNMI was 8.3 percent versus 5.1 percent in the United States. In 2004, 53.5 percent of people in the CNMI were below the poverty level compared with 12.7 percent in the United States. Another factor affecting changing economic conditions in the CNMI is the Department of Defense’s plan to move 8,000 U.S. Marines and their estimated 9,000 military dependents from Okinawa to nearby Guam over the next several years, possibly bringing new business and tourism opportunities for the CNMI. The Department of Defense also plans to move other Navy, Air Force, and Army units to Guam as part of a major realignment. The total military buildup on Guam is estimated to cost over $13 billion and increase Guam’s current population by an estimated 25,000 active duty military personnel and dependents. The CNMI has used its authority over its own immigration policy to bring in foreign workers under temporary renewable work permits and to allow the entry of foreign business owners and their families. Largely because of the influx of these foreign workers and entrepreneurs, the population of the CNMI grew rapidly, increasing from about 16,800 in 1980 to 69,200 in 2000. In 2005, the population of the CNMI was 65,914, including 33,150 (50 percent) U.S. citizens, 7,847 (12 percent) permanent non-U.S. citizens, and 24,917 (38 percent) temporary non-U.S. citizens. As the garment and tourist industries in the CNMI expanded over this same period, the CNMI economy became dependent on foreign labor. For example, in 1995, two- thirds of the working population were temporary residents, including about 93 percent of workers in the garment industry and slightly over 72 percent in the tourism industry. In contrast, in the same year, U.S. citizens and permanent residents held about 96 percent of jobs in the public sector. As a result, the CNMI economy developed a two-tiered wage structure, with U.S. citizens and permanent residents earning 3.5 times more than temporary residents in 1995. In 2005, according to a household survey of the CNMI, 46 percent of temporary residents in the labor force worked in manufacturing, compared with 6 percent of U.S. citizens and permanent residents, and less than 0.5 percent of temporary CNMI residents worked in public administration, compared with 21 percent of U.S. citizens and permanent residents (see fig. 3). The number and proportion of noncitizens in the CNMI labor force has decreased in recent years (see fig. 4). Noncitizen workers in the CNMI are predominantly Chinese or Filipino. Until 2007, the CNMI’s workforce was subject to a minimum wage set by the CNMI government. At the beginning of 2007, the CNMI’s minimum wage was $3.05 per hour, substantially lower than the U.S. federal minimum wage of $5.15 per hour but higher than wages for comparable positions in China, the Philippines, Vietnam, and other Asian countries. In 2007, Congress enacted a law applying the U.S. minimum wage to the CNMI, gradually increasing the CNMI minimum wage until it meets federal minimum wage requirements. According to the law, the CNMI minimum wage was to increase to $4.05 per hour as of May 26, 2007. Until passage of the recent U.S. legislation, the CNMI retained legislative authority over most aspects of immigration, regulating entry to the CNMI through a permit system. CNMI immigration law includes the following provisions for foreign workers, tourists, and foreign investors. CNMI immigration law is in effect until the start of the transition period under the federal legislation; however, federal restrictions on the total number of foreign workers in the CNMI apply immediately. Foreign workers. CNMI immigration and labor rules provide for, among other things, a worker entry permit for noncitizens entering the CNMI. CNMI employers do not currently have the option to petition for permanent immigrant status of workers under CNMI law. The recent federal legislation prohibits the CNMI government from allowing an increase in the total number of foreign workers in the CNMI between the legislation’s enactment and the effective date of the transition period. Tourists. According to the CNMI government, tourists from certain countries may enter the CNMI as part of its entry permit waiver program. The program allows eligible participants to enter for tourism or business for up to 90 days without a visitor entry permit. Noncitizens who are ineligible for a waiver, including citizens of China, Russia, and Korea, may apply for a visitor entry permit, which is valid for a single entry for up to 30 days. Foreign investors. The CNMI offers a perpetual foreign investor entry permit, valid for an indefinite period of time, to individuals who maintain certain levels of investment in the CNMI, among other requirements. In addition, the CNMI offers long-term business entry permits (valid for 2 years at a time) with specified investment requirements. The CNMI also offers a retiree foreign investor entry permit requiring a minimum investment in residential property by an applicant 55 years or older. Under U.S. immigration law, noncitizens may apply for entry into the United States as nonimmigrants or as immigrants intending to reside permanently. The nonimmigrant categories for temporary admission include workers who meet certain requirements, visitors for business or pleasure, and treaty investors, among others. The immigrant categories include permanent immigrant investor visas, as well as various employment-based categories for admission to the United States as lawful permanent residents permitted to work in the United States. Foreign workers. U.S. immigration law includes several types of visas for nonimmigrant workers and their families (H visas and certain other visas) and sets caps for two types of H visas (H visa caps). In particular, there are limits on the number of H nonimmigrant work visas that can be issued in each fiscal year. In addition to nonimmigrant visas, federal law provides for permanent employer-sponsored immigrant visas for individuals seeking to reside permanently in the United States. (For additional information on these and other visas available to workers, see app. V.) Tourists. Under federal law, visitors may come to the United States for business on a B-1 visa, for pleasure on a B-2 visa, or for business or pleasure on a combined B-1–B-2 visa. Visitors with B visas are normally admitted for a minimum of 6 months and a maximum of 1 year. Citizens of the 27 countries included in the U.S. Visa Waiver Program may stay for up to 90 days for business or pleasure in the United States without obtaining a nonimmigrant visa. In addition, federal law allows nationals of nine additional countries to visit Guam in B status for up to 15 days without obtaining a visa under the Guam Visa Waiver Program. Foreign investors. The INA allows foreign investors to enter the United States as nonimmigrants under treaty investor status with an E-2 visa. Currently, federal law allows E admission for up to a 2-year period of initial stay and allows the investor to apply for renewal. Treaty investors must invest a substantial amount of capital in a bona fide enterprise in the United States, must be seeking entry solely to develop and direct the enterprise, and must intend to depart the United States when their treaty investor status ends. Treaty investors must be nationals of a country with which the United States has a treaty of friendship, commerce, or navigation and must be entering the United States pursuant to the provisions of the treaty. The INA also allows foreign investors to seek permanent immigrant visas (EB-5) for employment-creation purposes. The recent legislation applies provisions of federal immigration law to the CNMI 1 year after enactment subject to a transition period that begins on June 1, 2009, and ends on December 31, 2014, with a transitional provision for foreign workers that may be extended beyond 2014. The Secretary of Homeland Security has sole discretion to delay the start of the transition period for up to 180 days, in consultation with other federal agencies and the CNMI Governor. The stated intent of the recent legislation is to ensure that effective border control procedures are implemented and observed and that national security and homeland security issues are properly addressed. The recent legislation also states that, to the greatest extent possible, potential adverse economic and fiscal effects of phasing out the CNMI’s foreign worker program should be minimized in order to maximize the CNMI’s potential for future economic growth. In March 2008, we described the key provisions of this legislation. Figure 5 shows the legislation’s key provisions related to foreign workers, tourists, and foreign investors. During the transition period, the Secretary of Homeland Security, in consultation with the Secretaries of the Interior, Labor, and State, and the Attorney General, has the responsibility to establish, administer, and enforce a transition program to regulate immigration in the CNMI. Implementation decisions by DHS will determine the extent to which CNMI local laws and authority will be affected. Each agency must issue regulations and implement agreements with the other agencies to identify and assign their respective duties for timely implementation of the transition program. The agreements must address procedures to ensure that CNMI employers have access to adequate labor and that tourists, students, retirees, and other visitors have access to the CNMI without unnecessary obstacles. Following are descriptions of the recent legislation’s key provisions related to foreign workers, tourists, and foreign investors. Foreign workers. The recent legislation allows federal agencies to preserve access to foreign workers in the CNMI during the transition period and any extensions of the CNMI-only permit program, but limits access to foreign workers afterward to those generally available under U.S. immigration law. Key provisions regarding foreign workers in the CNMI include the following: During the transition period and any extensions of the CNMI-only permit program, employers of workers not otherwise eligible for admission under federal law can apply for temporary CNMI-only nonimmigrant work permits. During this period, the Secretary of Homeland Security has the authority to determine the number, terms, and conditions of these permits, which must be reduced to zero by the end of the transition period and any extensions of the CNMI-only work permit program. This program may be extended indefinitely by the U.S. Secretary of Labor for up to 5 years at a time. During the initial transition period, employers in the CNMI and Guam can petition for foreign workers under the federal nonimmigrant H visa process, without limitation by the established numerical caps, for two types of H visas. This exemption from the visa caps expires when the transition period ends in 2014. During and after the transition period, CNMI employers can petition for nonimmigrant worker visas generally available under U.S. law. However, after the transition period ends, no nonimmigrant visas will be available for workers in continuous, rather than temporary, low-skill positions (see app. V). During and after the transition period, CNMI employers can also petition for employment-based permanent immigration status for workers under the same procedures as other U.S. employers. Fees for the CNMI-only work permit will be determined by DHS regulations and are not currently available. The current fees for other U.S. worker permits range higher than the CNMI’s current permit fees for foreign workers (see app. IV). Tourists. The recent legislation establishes a joint visa waiver program by adding the CNMI to an existing Guam visa waiver program. Under the joint visa waiver program, visitors from designated countries who travel for business or pleasure to the CNMI are exempt from the standard federal visa documentation requirements. The Secretary of Homeland Security will determine which countries are included in the CNMI-Guam visa waiver program. Citizens of countries that do not qualify for entry under the joint CNMI and Guam visa waiver program or other U.S. visa waiver programs may apply for U.S. visitor visas valid for entry to any part of the United States, which generally require in-person applications and higher fees than the CNMI currently assesses (see app. IV). Foreign investors. The recent legislation eliminates the CNMI’s perpetual foreign investor, retiree investor, and long-term business entry permit programs; instead, it allows these and other business travelers to apply to visit the CNMI under a visitor visa or other categories in federal immigration law. The following provisions also apply: Current CNMI foreign investors who meet certain requirements can convert from a CNMI investor to a federal nonimmigrant treaty investor during the transition period. DHS will determine to whom this “grandfathered” status applies and how long it is valid. New foreign investors can apply for U.S. nonimmigrant treaty investor status. New foreign investors also can petition for U.S. permanent immigration status that is currently unavailable in the CNMI. Decisions that DHS and DOL make in implementing the CNMI-only work permit program will largely determine the legislation’s potential impact on the availability of foreign workers and, as a result, on the CNMI labor market and economy. In particular, the interaction of DHS and DOL decisions about, respectively, the number of permits to allocate annually and whether and when to extend the permit program will significantly affect employers’ access to foreign workers. However, federal agencies may have difficulty in obtaining data on the CNMI labor market on which to base their decisions. Further, the agencies have not yet identified an interagency process to coordinate such decisions. Given foreign workers’ prominence in key CNMI industries, any substantial and rapid decline in the availability of CNMI-only work permits for foreign workers would have a negative effect on the CNMI economy. However, federal agencies may make more modest reductions in CNMI-only permits, resulting in minimal impact on the economy. At the same time, continuing declines in the garment industry, challenges to the tourism industry, and the scheduled increases in the minimum wage may reduce demand for foreign workers, lessening any potential adverse impact of the legislation on the economy. Although the legislation and the CNMI government have stated goals of preparing CNMI residents to replace foreign workers, factors such as the limited number of available CNMI residents may impede these efforts’ effectiveness. In implementing the CNMI-only work permit program mandated by the legislation, DHS and DOL will make five key decisions that will affect employers’ access to foreign workers (see table 1). However, CNMI- specific labor market data, which the agencies will need to consider to minimize any adverse economic impact of their decisions, may be difficult to obtain. DHS decisions that will affect employers’ access to foreign workers include the number of permits to allocate each year, the distribution of the permits, the terms and conditions of the permit program, and the fee for the permit. To minimize any adverse effects of its decisions, DHS may consider information on the CNMI labor market. However, DHS may have difficulty in obtaining relevant data—such as data on the wages, occupations, and employment status of CNMI residents and foreign workers—because the federal sources generally used to generate such data for the United States, including the Current Population Survey and the Current Employment Statistics program, do not cover the CNMI. Number of permits. Under the legislation, DHS will determine the rate at which it decreases the yearly allocation of CNMI-only work permits for foreign workers, provided that zero permits are valid or available at the end of the transition period. As shown in the examples of alternative DHS approaches in figure 6, based on December 2007 LIIDS data, the number of CNMI-only work permits available in each year of the initial transition period depends on DHS’s strategy for reducing CNMI-only permits to zero. For example, if DHS uses a linear strategy of reducing the permits to zero, the number of permits would decline by about half by the midpoint of the initial transition period. In contrast, DHS can apply strategies that reduce the number of permits modestly or even minimally by the midpoint of the initial transition period. Distribution of permits. DHS decisions regarding the CNMI-only work permits’ distribution will also affect employers’ access to workers, particularly if the demand for the permits exceeds the supply. Following are four examples of distribution methods available to DHS: 1. DHS could decide to distribute the permits through a lottery. Currently DHS distributes some visas, including H-1B visas, by random assignment for valid applications submitted during set periods of time. 2. DHS might decide to distribute the permits among certain industries based on some measure of those industries’ importance to the CNMI economy. However, because of the CNMI’s changing economic environment, DHS may have difficulty in projecting some industries’ likely long-term importance. In addition, if DHS decides to distribute permits based on industry data current at the time, permits might then be unavailable to businesses in any industries that subsequently developed. 3. DHS could distribute the permits in a way similar to the current CNMI system, which distributes foreign worker permits through a combination of permits reserved for priority businesses and a lottery. 4. DHS could use a market-based approach of permit trading, predetermining the number of permits to be allocated annually but allowing employers to trade permits depending on their need for foreign workers. Terms and conditions of the permit program. The terms and conditions that DHS sets for the CNMI-only work permit program will affect employers’ access to foreign workers. For example, any requirements regarding workers’ skill levels or qualifications could limit the pool of available workers. A DHS decision to retain or end the current CNMI requirement that employers hire a certain percentage of local residents would also affect employers’ access to foreign workers. In addition, if DHS chooses not to make employers responsible for foreign workers’ medical costs, as current CNMI law requires, foreign workers will become relatively more affordable. In addition, decisions regarding the length of time that permits are valid could affect the ability of employers to effectively use them. Permit fee. The fee that DHS sets for the CNMI-only work permit may affect employers’ access to foreign workers. Although the legislation requires that DHS charge employers an annual supplemental fee of $150 per permit to fund CNMI vocational education, it is not yet known how the total permit fee will compare with the annual $250 fee that employers currently pay for CNMI foreign worker permits. However, if DHS sets a higher fee for the CNMI-only permit than the current CNMI foreign worker permit fee, this would increase employers’ costs and reduce employers’ ability or incentive to hire foreign workers instead of resident workers. DOL’s decision whether to extend the CNMI-only work permit program, based on the unemployment rates of foreign workers and U.S. citizens, as well as other CNMI-specific data, will affect the availability of foreign workers. However, like DHS, DOL may encounter difficulty in obtaining up-to-date information about the CNMI labor market because the federal sources generally used to generate these data do not cover the CNMI. Extension of the permit program. A decision by the Secretary of Labor to extend the CNMI-only work permit program past 2014 would maintain access to the permits for up to 5 years at a time. According to the legislation, the Secretary could issue the extension as early as desired within the transition period and up to 180 days before the end of the transition period or any extensions of the CNMI-only permit program. DOL’s decision is to be based on the needs of legitimate businesses in the CNMI, as well as, among other information, the unemployment rate of U.S. citizen workers in the CNMI and the number of unemployed foreign workers in the CNMI. Alternately, the Secretary may decide not to extend the program, thus ending access to the CNMI-only work permit after 2014. Representatives of the Hotel Association of the Northern Mariana Islands and the Saipan Chamber of Commerce said they preferred that any extension of the CNMI-only work permit program be announced as early as possible in the transition period or any extension of the CNMI-only permit program to provide businesses the maximum time for planning. Additionally, while other nonimmigrant and immigrant visas generally available under U.S. law would continue to be available, we previously reported that after the end of the transition period and after any extensions of the CNMI-only work permit program, the legislation limits CNMI employers’ access to foreign workers, particularly low-skill workers in continuous, nontemporary jobs. Although the legislation contains provisions other than the CNMI-only work permit program that will affect foreign workers—including exemptions from H visa caps for nonimmigrant workers, the option to apply for nonimmigrant worker visas generally available under U.S. law, and the option to apply for employment-based permanent immigration status generally available under U.S. law—these provisions will likely affect a relatively small number of CNMI foreign workers (see app. V). As a result, our following analysis focuses on foreign workers with CNMI-only work permits. The interaction of DHS and DOL decisions regarding the CNMI-only work permit program could have a significant impact on employers’ access to permits for foreign workers. However, the agencies have not yet identified a process for coordinating these decisions. The rate and timing with which DHS lowers the available number of permits and the timing of any DOL extensions of the program will jointly determine the permits’ availability. To illustrate a range of possible rates of reduction, figure 7 shows nine examples of alternate interactions of DHS and DOL decisions. A. B. C. D. E. F. G. H. I. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Figures show numbers of CNMI-only work permits, based on the assumptions that the transition period begins on June 1, 2009, and the number of permits never increases. Our analysis does not address the length of the permits’ validity. For the number of foreign workers before and at the beginning of the transition period, we relied on CNMI LIIDS data showing 19, 706K foreign worker permits active as of December 1, 2007; commenting on a draft of this report, the CNMI government stated that the number of 706K permits as of June 0, 200, was 1,942. In this analysis, foreign workers shown after the beginning of the transition period on June 1, 2009, are those with CNMI-only work permits; this analysis does not include any foreign workers allowed to remain in the CNMI without a CNMI-only work permit. The legislation specifies that foreign workers legally present in the CNMI as of the transition program effective date, but who do not obtain U.S. immigration status, may continue residing and working in the CNMI for a limited time—2 years after the effective date of the transition program or when the CNMI-issued permit expires, whichever is earlier. Although DOL may extend the program for 5 years or less at a time, our analysis assumes a 5-year duration for any extensions occurring after the transition period. Our analysis also assumes that if the program is extended after the end of the initial transition period, the timing for frequency of extensions will begin in January 2015. The figures extend through 202 to show the year in which CNMI-only work permits approach zero for the majority of the joint decisions. As shown in figure 7(A) and 7(B), if DHS lowers the annual allocation of CNMI-only permits by the same number each year (a linear decline) and DOL extends the program every 2 years, the number of permits will decline less rapidly than if DOL extends the program every 4.5 years. Alternatively, as figure 7(G) shows, if DHS decides not to substantially decrease the number of CNMI-only permits until the last month of the 5- year period and DOL extends the program every 2 years, the number of permits will never rapidly decline, and by 2028 will not have substantially declined. In contrast, as shown in figure 7(I), if DHS decides not to substantially decrease the number of CNMI-only permits until the last month and DOL does not extend the program, the number of CNMI-only permits will fall to zero in 2014. The legislation requires DHS and DOL to coordinate their implementation of the legislation, including the CNMI-only work permit program, with one another and with other relevant agencies. However, the agencies have not yet identified the interagency process that they will use. The rate at which the availability of CNMI-only work permits for foreign workers declines as a result of DHS’s and DOL’s joint decisions will partly determine the legislation’s impact on the CNMI labor market and therefore on the CNMI’s economy. Because of foreign workers’ prominence in the CNMI labor market, any substantial and rapid reduction in the numbers of CNMI-only permits for foreign workers would have a negative effect on the size of the CNMI economy. However, federal agencies may make more modest reductions in CNMI-only permits, resulting in minimal effects on the economy. Projecting the economic impact of a reduction in foreign workers is complicated by the dependence of some CNMI resident workers’ productivity on the presence of foreign workers. For example, the employment of CNMI residents as tour guides may depend on the employment of foreign workers as hotel staff. Because some CNMI resident workers’ employment depends on foreign workers, the overall effect of the removal of foreign workers is difficult to project. To illustrate a range of possible impacts on the CNMI economy given varying rates of reduction in the number of CNMI-only work permits for foreign workers, we generated simulations, estimating the impact on the CNMI’s economy by an index representing total GDP. Figure 8 presents a subset of the results of these simulations—these are based on the scenarios shown in figure 7 (A), (D), and (G). Because these simulations do not allow for other changes in the CNMI over the coming years, they should not be considered as predictive of future GDP. Rather, these simulations are intended to illustrate a range of potential impacts on the CNMI’s GDP that could result from some of the joint U.S. agency decisions depicted in figure 7. As the scenarios in figure 8 show, a greater decline in permits for foreign workers leads to a larger drop in GDP, as well as a greater range of possible effects across the simulations. Scenario 1 shows that a steep decline in CNMI-only permits for foreign workers, from about 20,000 to about 1,000 by 2021—caused by a linear reduction in the number of CNMI-only work permits and a renewal of the permit program every 2 years—would lower the CNMI’s GDP to a range of about 21 percent to 73 percent of its current value by 2021. Scenario 2 shows that a less precipitous decline in CNMI-only permits for foreign workers, from about 20,000 to about 8,000 by 2021—caused by an increasing reduction in the number of CNMI-only work permits and a renewal of the permit program every 2 years (before the years with the steepest decline in foreign workers)—would lower the CNMI’s GDP to a range of about 64 percent to 85 percent of its current value by 2021. Scenario 3 shows that a much smaller decline in CNMI-only permits for foreign workers, from about 20,000 to about 17,000 by 2021—caused by a rapid reduction in the number of CNMI-only permits in the last month of the program and a renewal of the permit program every 2 years (before the month when the greatest reduction in permits occurs)—would lower the CNMI’s GDP to a range of about 98 percent to no less than about 92 percent of its current value by 2021. Figure 8 illustrates the simulated impact on GDP related to one possible DOL decision—renewing the CNMI-only permit program every 2 years— interacting with possible DHS decisions, as depicted in figure 7 (A), (D), and (G). Applying the GDP simulation methodology to the other scenarios in figure 7 would yield more rapid declines in GDP, corresponding to the more rapid declines in CNMI-only work permits for foreign workers related to DOL decisions not to extend the CNMI-only permit program or to extend it every 4.5 years. Ideally, the effect of the decline in the number of foreign workers on the CNMI GDP would be compared to a baseline of what would have happened to the CNMI economy without the legislation. However, because of a lack of data on the total production of the CNMI economy, we were unable to provide a numerical projection of future GDP. For example, the most recent estimate of CNMI GDP available was for 2002 and presented a range of almost $250 million, with a midpoint of $875 million. Although we are unable to present a numerical prediction, the following sections— which discuss a number of emerging factors affecting the CNMI economy that may decrease demand in the CNMI for foreign workers—provide a context for the GDP analysis. Although U.S. agencies’ implementation of the legislation may reduce the availability of foreign workers, continuing declines in the garment industry and challenges to the tourism industry may lower demand for these workers. Increases in the CNMI’s minimum wage may also lower demand for foreign workers, although the likely extent of this impact cannot be determined. Efforts to replace foreign workers with CNMI residents could, if successful, further mitigate any effects of the legislation’s provisions reducing the number of CNMI-only work permits; however, factors such as the limited number of available CNMI residents may impede these efforts’ effectiveness. Continuing challenges to industries that employ foreign workers may reduce future demand for foreign workers from their current numbers, lessening the impact of any agency decisions to reduce the number of foreign workers in implementing the legislation and allowing some reductions without adverse effect. The number of foreign workers in the CNMI has fallen in recent years prior to the legislation’s passage, owing in part to declines in the garment industry and challenges in the tourism industry. From 2000 to 2005, the number of noncitizen workers, many of whom are foreign workers, dropped from about 35,000 in 2000 to about 28,000 in 2005. Moreover, based on CNMI BMS data, more foreign workers have left the CNMI than have entered each year since 2005, indicating that their numbers have continued to fall. Declines in the garment industry and challenges to the tourism industry account for some of these reductions in foreign workers. Since the elimination of textile quotas, exports from the garment industry have fallen. The tourism sector also has faced challenges as visitor arrivals have declined from historic levels. Any further declines in these sectors would likely result in reduced demand for foreign workers, allowing for some future reductions in access to foreign workers without adverse effect from the legislation. However, in commenting on a draft of this report, the CNMI government stated that the MVA predicted that the number of visitors to the CNMI will increase in the coming years. Additionally, to the extent that the military buildup in Guam creates opportunities for CNMI employers, it may increase demand for foreign workers. Other factors may reduce demand for foreign workers indirectly. For example, reductions in the demand for workers in the garment and tourism sectors impact demand for workers, including other foreign workers, in other sectors in the economy. In addition, declines in the economy and household incomes may reduce demand for foreign workers in domestic positions, such as those in gardening and housekeeping, currently common in the CNMI. Finally, if the federal immigration legislation affects the tourism industry or the CNMI’s ability to attract foreign investors, it may also affect demand for foreign workers. The recent and continuing scheduled increases in the CNMI’s minimum wage are likely to further reduce the demand for foreign workers. The wage increases will affect foreign workers disproportionately; however, the magnitude of the wage increases’ impact on these workers cannot be determined. Based on the most recent LIIDS data, most jobs held by foreign workers pay $4.05 per hour—the CNMI minimum wage as of May 2008—or less. Table 2 presents, by industry, the percentage of foreign workers whose recent contracts show wages of no more than this amount. The scheduled minimum wage increases will affect the wages of almost all foreign workers in the CNMI and will continue to affect more workers as the wage increases each year. As figure 9 shows, based on December 2007 LIIDS data, almost 95 percent of foreign workers in the CNMI do not earn more than the $7.25 minimum wage scheduled for 2015. The minimum wage increase will likely affect U.S. citizen workers to a lesser degree. For example, those working in public administration— almost 33 percent of employed U.S. citizens in the CNMI based on the 2005 CNMI HIES—earn, on average, more than the current minimum wage of $4.05 in the CNMI. Our analysis of HIES survey data shows that the average wage for CNMI resident workers in 2004 was $8.60, whereas the average wage for temporary non-U.S. citizens was $4.40. According to current economic research, the minimum wage increases will decrease the number of foreign workers demanded by CNMI employers. The minimum wage increases may also have indirect effects resulting in firm closures, further reducing the demand for foreign workers. It is difficult to estimate the extent to which the minimum wage increases might decrease the number of foreign workers demanded by employers in the CNMI. However, the large number of CNMI foreign workers now earning no more than the current minimum wage makes it likely that the scheduled wage increases will have a negative effect on the number of foreign workers employed. The CNMI has begun efforts to prepare CNMI residents to replace foreign workers. If successful, these efforts could lessen any impact the legislation may have regarding access to foreign workers. In 2007, the Jobs Study Committee reporting to the CNMI Office of the Public Auditor found that some desirable jobs held by foreign workers could be filled by CNMI residents, and the CNMI has taken steps to help residents obtain these jobs. For example, the CNMI Workforce Investment Agency is developing a Web site to allow job seekers to quickly find potential openings. In addition, the Strategic Workforce Action Team, comprising government officials and local educators, has proposed to coordinate curricula and employment opportunities. Moreover, CNMI law has required CNMI employers to hire 20 percent of their employees from local residents; this percentage increased to 30 percent on January 1, 2008, under the new CNMI labor and immigration law. In addition, the recent federal legislation requires the U.S. government to provide funding for vocational education, as well as technical assistance to the CNMI. For example, the $150 fee charged to employers obtaining a CNMI-only work permit is to be used to fund ongoing vocational education curricula and program development by CNMI educational entities. Moreover, the legislation requires the Secretary of the Interior to provide technical assistance to the CNMI to promote economic growth; to assist employers in recruiting, training, and hiring U.S. citizens and, if necessary, lawful permanent residents in the CNMI; and to develop CNMI job skills as needed. The most recent LIIDS data from December 2007 suggest that about 20,000 foreign workers currently live in the CNMI. Although it is too early to assess the CNMI’s efforts to replace foreign workers with CNMI residents, several factors may impede these efforts’ effectiveness. According to the CNMI Office of the Public Auditor, only an estimated 400 high school and college graduates seek full-time employment in the CNMI each year. Moreover, according to CNMI government representatives, some CNMI residents are leaving the CNMI for opportunities in the United States. In addition, the attractiveness of Guam may increase if the military buildup leads to additional jobs. The number of nonworking residents who might accept a job is less than the total number of foreign workers. Specifically, there are approximately 2,600 unemployed U.S. citizens and permanent residents in the CNMI. Some foreign workers possess skills that are currently rare among residents, such as language skills. Additionally, some foreign workers’ ability to perform professional jobs may make it difficult to replace these workers with CNMI residents. According to representatives of the CNMI Chamber of Commerce and the Hotel Association of the Northern Mariana Islands, hiring CNMI residents is also difficult because some are reluctant to perform tasks currently completed by foreign workers. Any impact of the legislation on the CNMI’s tourism sector will depend largely on federal regulations specifying the countries to be included in the joint CNMI-Guam visa waiver program. For countries likely to be included in the joint visa waiver program because they currently are included in the Guam visa waiver program, such as Japan and South Korea, the impact is likely to be minimal. For countries that may not be part of the joint visa waiver program because they currently are not included in the Guam visa waiver program, possibly including China and Russia, applying for a visa from U.S. embassies or consulates will likely be more costly and more time-consuming than obtaining a visitor entry permit under CNMI immigration law. To the extent that tourists facing increased costs and time in obtaining a visa may choose destinations other than the CNMI, the legislation could have a negative impact on CNMI tourism. The likely impact on the CNMI of sharing the joint program with Guam is unclear. Changes in tourists’ access to the CNMI will depend on DHS’s decisions, in consultation with the Department of State, DOI, and the Governors of the CNMI and Guam, regarding the countries to be included in the CNMI- Guam visa waiver program. One stated intent of the recent legislation is to expand tourism and economic development in the CNMI, including aiding prospective tourists in gaining access to the CNMI’s tourist attractions, such as memorials, beaches, parks, and dive sites. The legislation establishes a joint visa waiver program by adding the CNMI to an existing Guam visa waiver program. The joint program exempts tourism and business visitors from certain countries who are traveling to the CNMI and Guam for up to 45 days from the standard U.S. visa documentation requirements. As shown in table 3, the legislation states that the CNMI- Guam visa waiver country list shall include any country from which the CNMI has received a significant economic benefit from the number of visitors for pleasure for the year prior to the enactment of the legislation, unless DHS determines that a country’s inclusion on the list would represent a threat to the welfare, safety, or security of the United States or its territories, and considering other factors. However, the legislation does not clearly define what constitutes a “significant economic benefit.” The Senate Committee on Energy and Natural Resources and the House Committee on Natural Resources encouraged DHS to consider benefits measured in terms of hotel occupancy, length of stay, and expenditures. Tourists who do not qualify for entry under the CNMI-Guam program may apply for U.S. visitor visas for business or pleasure, which require in- person applications and higher fees than the CNMI currently assesses. (See app. VIII for the countries currently included in the U.S., CNMI, and Guam waiver programs.) The application of federal immigration law may affect a small portion of the CNMI’s tourism market. Currently, approximately 80 percent of the tourists visiting the CNMI come from Japan (55 percent) and South Korea (25 percent), as shown in figure 10. Because Japan is included in the current U.S. and Guam visa waiver programs and will likely be included in the CNMI-Guam visa waiver program, the legislation is likely to have minimal impact on Japanese tourists visiting the CNMI. However, new screening requirements to be implemented for countries included in the U.S. Visa Waiver Program may pose some additional obstacles. South Korea is currently included in the Guam visa waiver program but is not included in the CNMI and U.S. waiver programs; however, the United States is considering extending visa waiver status to South Korea. If South Korea is included in the CNMI-Guam visa waiver program, which is likely given its current status, the legislation may have a slightly positive impact by removing the current CNMI entry permit requirement for South Korean tourists. A key DHS decision will be whether to include China and Russia in the joint visa waiver program, adding them to the existing Guam visa waiver program. Tourists from China and Russia account for a smaller proportion of the overall CNMI tourist arrivals—approximately 10 percent and less than 1 percent of CNMI tourist arrivals, respectively. However, according to representatives of the CNMI tourism sector, China and Russia are considered important markets because of their recent and potential future growth. For example, the Chinese market has grown by a factor greater than 15 in a decade, from 2,487 visitors in fiscal year 1997 to 41,024 visitors in fiscal year 2007. Furthermore, although small in number, the Russian market is becoming increasingly important because visitors from Russia tend to stay longer and spend more in the CNMI than do tourists from other countries. According to MVA data, Russian tourists stay an average of 9 nights, whereas tourists from Japan, South Korea, and China stay an average of 3 to 4 nights. In addition, according to CNMI tourism sector representatives, Russian tourists also tend to spend more on luxury items. For tourists from countries not included in the CNMI-Guam visa waiver program, the legislation will likely increase the costs and time associated with obtaining visitor visas. Table 4 compares the costs, requirements, and time related to obtaining a CNMI visitor entry permit with those related to obtaining a U.S. visitor visa. Implementation of the U.S. visa process for the CNMI is likely to add costs, inconvenience, and uncertainties for tourists. For example, if China is not included in the joint visa waiver program, visa fees could add close to 20 percent to tour package costs for Chinese tourists. In-person visa interviews will impose additional inconvenience and cost. However, most tourists from China will not likely have to travel great distances to apply for visas because the CNMI currently markets only to tourists in Chinese cities with U.S. embassies or consulates. CNMI tourist industry representatives also expressed concerns that some Russian tourists may need to travel long distances to U.S. embassies or consulates to apply for visas. While Russian tourists can apply for visas from U.S. consulates in the region, such as the U.S. consulate in Vladivostok in Far Eastern Russia, and do not need to travel to Moscow, others may need to travel long distances. In addition, the new visa requirements will add uncertainty to the application process. According to Department of State data, 24.5 percent of visitor visa applicants from China and 15.3 percent from Russia are refused entry after paying application fees and attending interviews. To the extent that tourists facing increased costs and time in obtaining a visa may choose destinations other than the CNMI, the legislation could have a negative effect on CNMI tourism. A CNMI tourism sector representative expressed concerns that added costs and inconvenience would deter tourists from visiting the CNMI and would make the CNMI less competitive with other Asian and Pacific destinations. Currently, because Guam requires U.S. visas and the CNMI does not, the CNMI has a competitive advantage over Guam in attracting Chinese tourists and has far more Chinese tourists than Guam. See table 5 for a summary of the likely impact on tourists from Japan, South Korea, China, and Russia. The CNMI may lose some competitive advantage to Guam for countries that are not currently on the Guam visa waiver list, such as China and Russia, given that the current absence of U.S. visitor visa requirements for the CNMI makes it easier for tourists from these countries to visit the CNMI than to visit Guam. However, the CNMI also may benefit from the joint visa waiver program with Guam. For example, the joint program will facilitate travel between Guam and the CNMI, and bundled tours of both islands may appeal to some tourists. The impact of the recent legislation on CNMI foreign investment will depend, in part, on DHS decisions regarding foreign investor entry permits. However, lack of data, such as data on overall foreign investment in the CNMI, makes it difficult to assess the likely impact of these decisions and may hamper DHS’s ability to make informed decisions. July 2008 data show that long-term business entry permits accounted for 90 percent of all active and valid long-term business and perpetual foreign investor entry permits. As a result, DHS’s decision whether to extend the grandfathered treaty investor status to these permit holders will determine the numbers and types of investors likely to be affected. Moreover, any impact on foreign investment in the CNMI will likely affect the labor market and tourism sector, and any impact on the labor market and tourism sector may also affect foreign investment. In implementing the legislation, DHS will make two key decisions that will affect foreign investors’ access to the CNMI. (See table 6.) First, DHS will determine which current CNMI foreign investors will receive the grandfathered CNMI-only U.S. treaty investor status during the transition period. In particular, DHS will determine whether the grandfathered status applies only to investors holding the CNMI perpetual foreign investor entry permit or also to investors holding the CNMI long-term business entry permit. Second, DHS will determine the validity period of the grandfathered treaty investor status and decide whether to extend it past the initial transition period. Although the status can be awarded only during the transition period, the recent legislation imposes no limit on the grandfathered status’ length of validity. If and when the grandfathered status expires, and for new CNMI foreign investors, DHS will adjudicate applications under the regular treaty investor status and under the other immigrant or nonimmigrant categories generally available under U.S. immigration law. A lack of key data makes it difficult to assess the likely impact of the recent legislation’s implementation on foreign investment in the CNMI and may limit DHS’s ability to make informed implementation decisions. Because the legislation may not affect all foreign investment in the CNMI, estimating the legislation’s impact requires data showing (1) current overall levels of foreign investment, (2) the amount of investment associated with each type of CNMI foreign investor entry permit, and (3) the extent to which investors’ decisions are affected by access to entry permits. However, these data are currently unavailable. Overall foreign investment. Neither the CNMI government nor the federal government has information on the overall level of foreign investment in the CNMI. As a result, baseline information needed to assess the likely impact of key agency decisions on foreign investment is lacking. Investment associated with foreign investor entry permits. The CNMI government lacks readily accessible and compiled data on the sizes and types of permit holders’ investments, which DHS needs to determine the relative importance of each type of entry permit and the likely impact of possible implementation decisions. Impact of access to entry permits. Data showing the extent to which foreign investors’ decisions are currently affected by their access to particular entry permits are not available. Although access to the CNMI through foreign investor entry permits may be a key factor for some investors, others may choose to invest regardless of their ability to obtain an entry permit. For example, some foreign investors may enter the CNMI under its permit waiver program or obtain regular-term business entry permits. In addition, foreign investors may invest without entering the CNMI. DHS’s decision about the foreign investor entry permit holders to be grandfathered will partly determine the extent of the legislation’s impact on foreign investment in the CNMI. According to available data, if DHS restricts the grandfathering of foreign investors to perpetual foreign investor entry permit holders, a small number of investors will qualify for grandfathering under the new legislation. However, if DHS extends the grandfathering provision to long-term business entry permit holders, many more investors will qualify. According to data from the CNMI Department of Commerce provided in the CNMI government’s comments on a draft of this report, long-term business entry permits accounted for 90 percent (506 of 562) of all long- term business and perpetual foreign investor entry permits active and valid in July 2008. The data show that 94 percent (448 of 478) of the businesses associated with these permits were for long-term business entry permits. In addition 56 perpetual foreign investor entry permits, associated with 30 businesses, were active and valid in July 2008. According to the CNMI government, approximately 18 percent of these long-term business and perpetual foreign investor permit holders were from countries that are not listed as a treaty nation with the United States. Depending upon the decisions of DHS, unless these permit holders are grandfathered under the legislation they would not qualify to obtain a nonimmigrant treaty investor visa. Any impact that the legislation’s implementation has on foreign investment may also affect the labor market and tourism. For example, if DHS’s decision about the grandfathering of foreign investor entry permits leads to a reduction in foreign investment, causing businesses to close, demand for foreign workers could fall. Also, available services could diminish, lessening the CNMI’s attractiveness to tourists. Likewise, any impact on the labor market or tourism sector will likely affect investment, including foreign investment, in the CNMI. For example, if DHS and DOL decisions about the CNMI-only work permit decrease employers’ access to foreign workers, investors may have less incentive to open or operate businesses in the CNMI. In addition, some foreign investors may be reluctant to commit to long-term business plans when future access to foreign workers is uncertain. Similarly, if excluding any countries from the CNMI-Guam visa waiver program causes tourism from those countries to drop, reduced demand for tourism-related products and services in the CNMI could lessen investors’ incentive to operate businesses that provide such products and services. Moreover, any reduction in access to foreign workers may negatively affect tourism and vice versa. For example, reduced access to foreign workers to perform tourism-related tasks, such as hotel housekeeping, could negatively affect tourism if CNMI residents were unwilling to take such jobs, according to CNMI tourism sector representatives. Likewise, reductions in tourism could cause businesses to close, reducing demand for foreign workers. The recent legislation applying U.S. immigration law to the CNMI provides federal agencies some flexibility in preserving the CNMI’s access to foreign workers, tourists, and foreign investors during the transition to the federal system. However, while the legislation states that it intends to minimize potential adverse economic and fiscal effects on the CNMI and to maximize its potential for future economic growth, the actual impact of the legislation on the CNMI’s labor market, tourism, and foreign investment will depend on decisions made by federal agencies in implementing the legislation. For example, federal decisions about how many foreign workers to admit under the CNMI-only work permit program and whether and when to extend the program will be important in determining the extent of the legislation’s impact on the CNMI labor market and economy. In addition, the impact of the legislation on any one of the sectors—labor market, tourism, and foreign investment—depends, in part, on changes in the other sectors. For example, changes in access to foreign workers could affect the viability of the tourism sector, which in turn could affect foreign investment. Given the serious challenges already facing the CNMI economy, it is critical that federal agencies implement the legislation in ways that minimize potential adverse effects to the CNMI economy and maximize the CNMI’s potential for economic and business growth, following the legislation’s stated intent. Because the interaction of key federal decisions involving different departments will have a significant impact on the CNMI economy, coordination of these decisions is critical and necessitates an established interagency process, which currently does not exist. In addition, developing strategies for obtaining critical data that are currently unavailable on the CNMI labor market and foreign investment is essential to federal agencies’ ability to make appropriate and effective decisions in implementing the legislation and fulfilling its goals. Because of the importance of key implementation decisions by different federal agencies and the interaction of those decisions, we recommend that the Secretary of Homeland Security lead other relevant federal agencies, including the Departments of the Interior, Labor, and State, in identifying the interagency process that will be used to collaborate with one another—and consult with the CNMI government, as required—to jointly implement the legislation. Because current data gaps limit federal agencies’ ability to make key implementation decisions to best meet the goals of the legislation, we recommend that the Secretary of Homeland Security and the Secretary of Labor take the following two actions: develop a strategy for obtaining critical data on the CNMI labor market that are not currently available on an ongoing basis, such as data on the wages, occupations, and employment status of CNMI residents and foreign workers; and develop a strategy for obtaining critical data on CNMI foreign investment, such as overall levels of foreign investment and the investment amounts associated with various types of foreign investor entry permits. We provided a draft of this report to officials in DHS, DOI, and DOL and in the CNMI government for review and comment. We received written comments on the draft report from DHS and DOI and from the CNMI government, which are reprinted in appendixes X, XI, and XII, respectively. We also received technical comments from DHS and DOI and from the CNMI government. We incorporated their comments as appropriate. DOL had no comments. In addition, we provided a draft to the Department of State for technical review, and State had no comments. DHS agreed with our findings and recommendations, and DOI generally agreed with our findings. The CNMI government raised concerns or issues about some aspects of our report methodology and analysis. DHS agreed with our findings and recommendations in its written comments. DHS agreed with the intent of our recommendation on interagency collaboration subject to the authority of the Secretary of the Interior regarding the Interagency Group on Insular Areas pursuant to Executive Order 13299 of May 8, 2003. While the Interagency Group on Insular Areas is one coordinating process available, we believe that DHS should lead other relevant agencies in identifying the most effective and sustainable process possible for coordinating implementation decisions. DHS provided new information noting that department officials, in collaboration with DOI officials, already have taken steps toward meeting the recommendation’s intent by sending an interagency delegation to the CNMI to consult with government officials and the private sector on implementing the law and addressing the related economic impact. DHS also agreed with the intent of our recommendation on developing strategies for obtaining critical data on the CNMI labor market and foreign investment and said that it planned to collaborate with DOL on these matters. DOI generally agreed with our findings in its written comments, saying that the report presents a realistic picture of the uncertainties faced by both the federal and CNMI governments and provides a good summary of the mandates of the law. DOI noted that it had already begun discussions with DHS, DOL, and the Departments of Justice and State to assist with development of the CNMI’s transition program. In addition, it noted that coordination among federal agencies must also consider the duties and responsibilities of the CNMI’s local government agencies. DOI identified two technical areas of the report in which it believed clarification was necessary. First, it questioned the report’s finding that the CNMI’s exemptions from H visa caps under the legislation would not apply past the end of the transition period in 2014 and said it had concluded that the transition period end does not apply to the cap exemptions. The department said it would request that DHS coordinate with other federal agencies and obtain a final legal determination. Our interpretation of the law in this report is consistent with our March 2008 report and consistent with the interpretation of the law by officials of DHS, the agency responsible for implementing and administering the provisions of the transition period under the legislation. In addition, we note that the subsequent report of the Senate Committee on Energy and Natural Resources on H.R. 3079 states that the Committee intends that the H exemptions for the CNMI and Guam be extended along with any extension of the 5-year transition period. However, we are constrained in our analysis to the language in the bill as is, unless amended. Second, DOI commented that our current report should note that the law mandates that the CNMI produce and provide required information to DHS and DOL. We revised the report to indicate that the legislation requires the CNMI government to provide the Secretary of Homeland Security all immigration records or other information that the Secretary deems necessary to assist its implementation; however, the relevant provision does not specifically mention DOL. The CNMI government raised several concerns or issues about aspects of our report methodology and analysis, which we have summarized in four areas. First, the CNMI government commented that the GDP simulation methodology used in the report is inadequate. It also contended that the report’s assessment of future demand for foreign workers in the CNMI is faulty and ignores recent evidence of economic recovery. We disagree. We believe our methodology is a sound approach for analyzing and illustrating the potential impact of federal implementation decisions on the CNMI economy. We explained our GDP simulation methodology in appendix VI of the draft report. We further explain our methodological choices, assumptions, and limitations in our response to the CNMI government’s letter (see app. XII). However, in response to the CNMI government’s comments, we clarified the report to further describe our methodology and analysis. We also incorporated updated data provided by the CNMI government in the report as appropriate. Second, the CNMI government stated that this report should not be published in its present form because its discussion of possible consequences to the CNMI economy could itself harm the CNMI. We believe it is essential to report the key decisions facing federal agencies and to illustrate a range of potential impacts those decisions could have on the CNMI economy. Fully informed and coordinated federal agencies will be best capable of making decisions that minimize any potential adverse consequences for the CNMI economy. Third, the CNMI government inaccurately stated that the report predicts a substantial decline in the CNMI economy as a result of the legislation, misstating our message that the impact of the legislation on the CNMI economy will depend on various federal decisions. Our report’s GDP simulations illustrate a range of possible outcomes of federal decisions regarding the CNMI-only work permit program, ranging from minimal to substantial impact on the economy. The actual extent of the legislation’s impact on the CNMI economy will depend on the key federal decisions related to foreign workers, tourists, and foreign investors identified in our report, as well as other factors in the economy. In addition, our report clearly states that the GDP simulations should not be considered predictive of future GDP. Fourth, the CNMI government provided alternative data to that in the draft report related to foreign investor entry permits, and we have incorporated the new data in the report. Appendix XII provides our more detailed evaluation of the CNMI government’s letter. We are sending copies of this report to interested congressional committees. We also will provide copies of this report to the U.S. Secretaries of Homeland Security, the Interior, Labor, and State, and to the Governor of the CNMI. We will make copies available to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix XIII. This report examines the factors that will affect the impact of recent legislation applying U.S. immigration law to the Commonwealth of the Northern Mariana Islands (CNMI) on the CNMI economy, in particular the CNMI’s (1) labor market, including foreign workers; (2) tourism sector; and (3) foreign investment. In preparing this report, we relied on our March 2008 review of relevant immigration and labor laws of the CNMI, current U.S. immigration law, and the recent legislation. For that report and the current report, to examine U.S. immigration law, we reviewed the U.S. Immigration and Nationality Act (INA) and related regulations. To examine the relationship between the CNMI and the United States, we reviewed the CNMI-U.S. Covenant and the law applying U.S. minimum wage to the CNMI. We did not review the extent to which CNMI or U.S. laws were properly enforced or implemented. We also reviewed the recent legislation, including H.R. 3079, passed by the House of Representatives, and S. 2739, passed by the House and Senate and signed into law as P.L. 110-229. In addition, we reviewed the House Committee on Natural Resources Report for H.R. 3079 and the Senate Committee on Energy and Natural Resources Report for H.R. 3079. We interviewed officials from the U.S. Departments of Homeland Security (DHS), the Interior (DOI), and Labor (DOL). We also reviewed analyses of the legislation and related studies by GAO, the Congressional Budget Office, and the Congressional Research Service. We conducted a site visit in the CNMI in September 2007 and interviewed officials in the CNMI Office of the Governor, CNMI Department of Immigration, CNMI Department of Labor, Marianas Visitors Authority (MVA), CNMI Department of Commerce, CNMI Department of Finance, CNMI Workforce Investment Agency, CNMI Public School System, and other CNMI agencies. We conducted additional interviews with CNMI officials in Washington, D.C. We also interviewed representatives of the CNMI private sector and foreign workers. Additionally, to describe the CNMI’s political and economic conditions, we consulted data from U.S. government sources, such as the Department of Commerce and the Census Bureau. Labor market. For information on the current numbers and wages of foreign workers, we mainly relied on data from the Labor and Immigration Identification and Documentation System (LIIDS) on foreign workers with 706K permits, provided by the CNMI government. We used the LIIDS data to determine the number of foreign workers directly affected by the minimum wage increases. However, we did not assess the overall impact of the minimum wage increases on the CNMI economy, including the impact on the living standards in the CNMI, as our scope was limited to the possible effects of the minimum wage increases on the demand for foreign workers. When possible, we determined that average values from this data set were consistent with other sources, such as the 2005 CNMI Household, Income, and Expenditures Survey (HIES). However, although we used the most recent data available from the LIIDS system, from December 31, 2007, the CNMI government informed us that some of the data may not be current owing to administrative backlogs; therefore, these data do not reflect the extent to which current wages comply with recent changes in the minimum wage laws in particular cases. In addition, we did not receive some data requested from the CNMI government, including data from LIIDS on permit holders apart from 706K foreign workers, such as workers with temporary work authorization (706P) and holders of the CNMI government employee entry permit (706B). As a result, our analysis covers 706K foreign workers, which represent the large majority of CNMI foreign workers according to data on entries to the CNMI contained in the Border Management System (BMS). For other information on the foreign worker population, and for comparison with CNMI residents and other workers, we mainly relied on the most recent household survey conducted in CNMI, the 2005 CNMI HIES. We identified foreign workers in the HIES survey by those who identified their status as “not a U.S. citizen, temporary resident.” However, in addition to foreign workers, survey respondents who identified themselves as temporary non-U.S. citizens may include other groups, such as holders of CNMI foreign investor permits. To determine the reliability of the survey data, we obtained written responses to questions regarding the survey methods. To compare wages earned by U.S. citizens and noncitizens in the CNMI, we used tax return data provided by the CNMI Department of Finance. Because a limitation of this data source was that we could not distinguish between noncitizens who were permanent and temporary residents, we did not use it to obtain information about temporary residents. In general, we determined that available data on CNMI foreign workers were adequate and sufficiently reliable for the purposes of our review. = FWF - (t+1)* FWF, where t is the number of periods since the beginning of the reduction (beginning with zero), FWF is the number of CNMI-only permits at the beginning of the period, and months is the number of months in the period until permits should be equal to zero. In the case of the first period (May 31, 2009, to December 31, 2014), there were 67 months; in the case of the other periods, there were 60 months (5 years). Using this function, higher values of b cause the decline to be larger at the end of the period. When b is equal to 1, the function is linear. The “last month” function had an exponential decline of .1 percent per month, with the remaining decline occurring in the last month of the period. CNMI-only permit program for up to 5 years at a time, we modeled illustrative extensions at 2 years, 4.5 years, and never. Based on the intersection of DHS and DOL decisions, the date at which the permits would have to be zero could change, resulting in a new rate of reductions in permits available. This analysis assumed that the number of permits would not increase, and it did not incorporate the possible effect of an increase of fees on the number of permits sought by employers. To examine the possible range of effects from a reduction in foreign workers, we calculated the effect on GDP under a range of assumptions (see app. VI). Specifically, we varied the assumptions regarding the ability of CNMI resident workers to substitute for foreign workers and the effect of a reduction in labor on total production. Tourism. To assess the importance of each tourist market and the trends in tourist arrivals, we analyzed visitor arrival data from 1997 through 2007 from the MVA. MVA data are generated from scanned customs forms and do not identify visitors by CNMI entry permit type (including the 703A tourist entry permit). We determined that MVA data were sufficiently reliable for our purposes. We did not receive sufficient BMS data from the CNMI government on visitors to allow us to analyze the size of each tourist market and related trends. We interviewed MVA representatives, who explained to us the process they use to collect the data. We also compared the aggregate visitor numbers to the ones from BMS, and the two are generally consistent. MVA also provided us with information on the cost of tour packages from Japan, Korea, and the People’s Republic of China. In addition, we reviewed visa interview wait times reported by the U.S. Department of State. We previously found that these data are not sufficiently reliable to determine the number of posts with 30 or more days of wait time. However, we report these data to illustrate the ranges of possible wait times. Foreign investment. We analyzed foreign investor entry permit data from the CNMI Department of Commerce. The department provided data tables on foreign investor and business entry permits issued, based on administrative information maintained by department staff. Although the data were limited to entry permits issued, did not give any information on the value of investment other than category of permit issued, and did not reflect whether entry permit holders were present in the CNMI, we determined that they were sufficiently reliable for the purposes of our review. We did not receive some data requested from the CNMI government, including data from LIIDS on foreign investors. This information would have included the current numbers of foreign investors holding each type of entry permit and would have allowed us to compare numbers of entry permit holders with CNMI Department of Commerce data. Without LIIDS data on foreign investors, we were unable to verify whether the holders of foreign investor entry permits issued were present in the CNMI, nor did we know the total number of holders of perpetual foreign investor permits. However, in its comments on a draft of this report, the CNMI government said that our analysis of data on permits issued conflicted with CNMI Department of Commerce data. The CNMI government provided the number of active and valid long-term business and perpetual foreign investor entry permits, as well as the numbers of businesses associated with these permits, as of July 8, 2008, based on the CNMI Department of Commerce’s manual review of its files. These data were not previously provided to us. The new data do not include information on issued entry permits and do not include complete information on country of origin and other characteristics. The information provided on the numbers of long-term business and perpetual foreign investor entry permit holders is generally consistent with the data on permits issued; therefore, we have replaced the information in the draft report with the new data provided. In addition, some data on CNMI foreign investment, including overall levels of foreign investment, are not collected by either the CNMI or the federal government. In general, to establish the reliability of the data that we used for reporting trends and statistics for the CNMI labor market, tourism, and foreign investment, we systematically obtained information about the way in which data were collected and tabulated. When possible, we checked for consistency across data sources. While the data provided by the CNMI government had some limitations, and we did not receive all data requested, we determined that the available data were adequate and sufficiently reliable for the purposes of our review. The scope of our study does not include foreign workers whose documentation is not current or valid or those working in any underground economy. In addition, we did not review federal agencies’ expected costs or operational needs in implementing the legislation. We conducted this performance audit from June 2007 to August 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Aliens in continuous and immediate transit through the United States Aliens in transit to the United Nations Headquarters District Foreign government officials, attendants, servants, and personal employees, and spouses and children in transit Visa Waiver Program—temporary visitors for business to Guam Visa Waiver Program—temporary visitors for business Visa Waiver Program—temporary visitors for business to Guam Visa Waiver Program—temporary visitors for business Visa Waiver Program—temporary visitors for pleasure to Guam Visa Waiver Program—temporary visitors for pleasure Temporary workers with “specialty occupation” During the 1990s the economy of the CNMI relied largely on the garment and tourist sectors for most of its employment, exports, and production. The CNMI’s unique trading relationship with the United States during this time period, its appeal as a tourist destination, and its proximity to tourists and inexpensive foreign labor from Asia helped the CNMI build a prosperous economy based on its garment and tourist sectors. Specifically, as long as certain conditions were met, garments manufactured in the CNMI could be sold to buyers in the United States without incurring import tariffs, and there were no quotas on imports of garments to the United States from the CNMI. In addition, these garments could bear labels identifying them as having been made in the United States. These features gave garment manufacturers in the CNMI greater access to the U.S. market and, therefore, an advantage over garment manufacturers from neighboring countries. In addition, the CNMI’s local authority over immigration and the minimum wage, as well as other factors, meant that CNMI industry had access to a large supply of inexpensive foreign labor. Fueled by a rapidly growing tourism and garment industry, the CNMI had one of the fastest growing economies in the world since 1978 and had an employment growth rate of 12.7 percent annually between 1980 and 1995, which was eight times that of the U.S growth rate over that period. The number of visitors to the CNMI rose from 100,000 in 1980 to almost 700,000 in 1995. Both the garment and tourist industries contributed directly to the economy by generating employment and bringing revenue from outside the CNMI via exports. In 1995, these two industries accounted for about 80 percent of all employment. In addition, a 1999 study found that garment manufacturing and tourism accounted for about 85 percent of CNMI’s total economic activity and 96 percent of its exports. In 1999, the garment industry directly employed about 16,000 workers, including 13,500 foreign workers and 2,500 local residents. The tourist industry directly employed about 9,600 workers in 1995, including 6,900 foreign workers and 2,700 local residents. However, several recent developments in international trade have caused the CNMI’s garment industry to decline dramatically. In January 2005, in accordance with World Trade Organization agreements, the United States eliminated quotas on textile and apparel imports from other textile- producing countries, leaving CNMI’s apparel industry to operate under stiffer competition, especially from low-wage countries such as China. With its trade advantage lessened, the CNMI’s garment industry has shrunk. The value of CNMI textile exports to the United States decreased from $1.1 billion in 1998 to $317 million in 2007. As a result, the number of employees working in the garment industry has fallen from 21,000 garment workers in 2001 to 14,000 in 2006. According to CNMI government officials, the number of garment workers has fallen to 1,751 as of July 2008. In addition, there were 34 licensed CNMI apparel manufacturers in 1999; however, as of July 2008, only 6 firms remained in operation. In addition to the garment industry, the CNMI economy depends heavily on the tourism industry, which has also been negatively affected in recent years by various external events. For example, due to the CNMI’s proximity to Asia, Asian economic trends have a direct impact on the CNMI’s economy. For example, tourism in the CNMI experienced a sharp decline in the late 1990s due to the Asian financial crisis and due to the cancellation of Korean Air service to the CNMI following an airplane crash on Guam in August 1997 (see fig. 11). In addition, the tourism industry in the CNMI faltered again with the September 11, 2001, terrorist attacks on the United States. In 2003, according to CNMI officials, tourism slowed in reaction to the SARS epidemic, which originated in Asia, and the war in Iraq. Tourism in the CNMI is also subject to changes in airline practices. For example, Japan Airlines withdrew its direct flights between Tokyo and Saipan in October 2005, raising concerns because roughly 30 percent of all tourists and 40 percent of Japanese tourists arrive in the CNMI on Japan Airlines’ flights, according to CNMI and DOI officials. A mitigating factor is Northwest Airlines’ new daily nonstop flights between Osaka and Saipan, which are expected to replace about 40 percent of the seats lost from Japan Airlines’ action. In addition, according to press reports, Northwest Airlines recently announced that it will double its direct flights between Saipan and Tokyo starting in July 2008, which is expected to bring an additional 60,000 Japanese tourists to the CNMI. Furthermore, the CNMI government noted in its comments on a draft of this report that Asiana Airlines has also recently increased service capacity to the CNMI. Total visitor arrivals to the CNMI dropped from a peak of 736,117 in 1996 to 389,345 in 2007, a decline of nearly 47 percent (see fig. 11). The number of visitors from Japan—which accounts for the highest percentage of visitors—decreased 23 percent from 2005 to 2006 and 26 percent from 2006 to 2007. At the same time, the CNMI has experienced an influx of Chinese tourists in recent years, with the potential to re-energize the industry. The Chinese share of the CNMI’s visitors increased significantly from 0.4 percent in 1997 to 10 percent in 2007. CNMI officials are optimistic that the number of Chinese visitors will continue to increase in the future, especially on the island of Tinian, which already has gambling and hotel facilities owned and operated by Chinese interests from Hong Kong. According to business groups, the CNMI retains certain advantages in attracting foreign investment compared with nearby competitors, as well as the United States. The CNMI’s relationship with the United States provides the CNMI with political stability and the protections afforded to businesses under the U.S. federal court system. In addition, the CNMI’s tax structure has enabled the CNMI to maintain low individual and corporate income tax rates. For example, residents of the CNMI pay no federal income tax on income derived from sources in the CNMI. In addition, corporations organized in the CNMI are generally treated as foreign corporations for U.S. tax purposes and do not pay federal tax on income earned in the CNMI, but they are generally subject to federal tax on any income earned in the United States. Finally, the tropical climate and natural beauty of the CNMI, as well as its close proximity to major Asian markets, also create unique investment opportunities, particularly for tourism. However, the CNMI government has identified addressing infrastructure challenges as key to attracting new foreign investment. These challenges include unstable electrical, water, and sewage services, which make it more difficult to attract new investors. At the same time that the CNMI economy has declined owing to the collapse of the garment industry and reductions in tourism, the CNMI has made efforts to attract future foreign investors. The CNMI has announced successful efforts to attract large foreign investors such as Kumho- Asiana—investing in the LaoLao Golf Resort Development project—and the Marianas Resort Development Co.—developing a Tinian casino and hotel. According to press reports, in early May 2008, Kumho-Asiana executives and local CNMI officials held the groundbreaking ceremony for the resort. The $68.8 million LaoLao Golf Resort Development project is the largest construction project on the island since 1997. In addition, the CNMI government also has considered policy changes to help attract new investors. For example, the government has explored revising strict land lease laws that limit private leases to 55 years and ownership restrictions that limit ownership of land to persons of Northern Marianas descent. The CNMI also has tried to attract retirees from Asia. The overall fiscal condition of the CNMI’s government steadily weakened from fiscal year 2001 through fiscal year 2007. Fees collected by the government from the garment industry have declined from $36 million in 2001 to $13 million in 2007. As a result of this deterioration of the garment industry and other downward economic trends, as shown in table 7, the CNMI’s governmental funds balance has declined, dropping from a reported positive $17.2 million at the end of fiscal year 2001 to a negative $153.2 million at the end of fiscal year 2007. In addition to the CNMI-only work permits, the recent legislation contains other provisions that will affect foreign workers, including exemptions from H visa caps for nonimmigrant workers, the option to apply for nonimmigrant worker visas generally available under U.S. law, and the option to apply for employment-based permanent immigration status generally available under U.S. law. However, these provisions will likely affect a relatively small number of CNMI foreign workers. U.S. immigration law includes several types of visas for nonimmigrant workers and their families and sets caps for two of these types of visas. In particular, the H-1 category includes highly skilled workers coming to the United States temporarily to perform in specialty occupations. H-1B visa holders may be admitted for an initial period of 3 years that can be renewed for a total of 6 years, and they can work in employment of varied duration, depending on the terms of the visa. The H-2 category includes H- 2A visas for foreign workers providing temporary or seasonal agricultural labor services, as well as H-2B visas for other temporary workers who can perform short-term service or labor in a job for which unemployed U.S. workers cannot be found. Both H-1B and H-2B visas are capped—only 65,000 H-1B visa holders and 66,000 H-2B first-time visa holders may be issued visas in each fiscal year. Other nonimmigrant visas available for foreign workers include, among others, L visas for intracompany transfers; O visas for individuals of extraordinary ability or achievement; P visas for artists, athletes, and entertainers; and R visas for religious workers. In addition to nonimmigrant visas, the INA contains permanent employer-sponsored immigrant visas for individuals seeking to reside permanently in the United States. Although access to foreign workers in the CNMI will be available through exemptions from the usual caps on H nonimmigrant worker visas during the initial transition period, in addition to the CNMI-only work permit program, few CNMI foreign workers are likely to meet the requirements for these visas. During the initial transition period, DHS will review and adjudicate applications for H nonimmigrant work visas, uncapped under the legislation. The exemption from the caps is an advantage to the CNMI, as the demand for the H-1B and H-2B visas has exceeded the capped supply in recent years. For example, in 2008 DHS received approximately 160,000 petitions for the 65,000 H-1B visas available. After the initial transition period ends in 2014, the H caps will apply. However, few foreign workers currently in the CNMI are likely to qualify for the uncapped H nonimmigrant visas due to education and skill requirements and to restrictions regarding the type of jobs to which H visas apply. First, few foreign workers in the CNMI are likely to qualify for the H-1B visa. H1-B visas are designed to give U.S. employers the opportunity to hire foreign professionals if a U.S. citizen or resident is not available. Based on a 2005 household survey of CNMI residents, about 20 percent of foreign workers have a college degree or higher, which is generally required for the H-1B. However, the H1-B visa may be applicable to workers who hold positions that are difficult to fill with CNMI residents. For example, some workers holding professional positions, such as accountants, may meet the H-1B requirement. Nor are current CNMI foreign workers likely to qualify for H-2B visas despite the exemptions on these visa caps. H-2B visas are available for temporary workers who can perform short-term service or labor in a job for which unemployed U.S. workers cannot be found. H-2B visa holders may be admitted for an initial period of 1 year. No nonimmigrant visa categories are currently available for workers performing continuous, rather than temporary, work who do not meet the high-skill requirements of the H-1B visas. However, based on the 2005 CNMI HIES survey, about 70 percent of noncitizens employed in the CNMI entered in 2002 or earlier, indicating that many were employed on a nontemporary basis. H-2A visas are not capped and would be available for foreign workers providing temporary or seasonal agricultural labor both during and after the initial transition period. However, based on the most recent LIIDS estimate, there were only 555 foreign workers engaged in private farming, about 3 percent of total foreign workers with 706K visas. In addition, the exemptions from the H visa caps no longer apply after the initial transition period ending in 2014. Foreign workers applying for H nonimmigrant status are then subject to the numerical limitations set out in federal law, and as noted above, demand for the H-1B and H-2B visas has exceeded the capped supply in recent years. Moreover, current H visa fees range higher than the current CNMI fees for foreign workers, making them less desirable to employers. The current CNMI worker fee is $250 per year; existing U.S. fees for H visa petitions range from $107 to $773 per year (also see app. IV). The legislation neither requires nor prohibits DHS from establishing different fees for the uncapped CNMI and Guam H visas than for H visas in general, so it is not clear what the uncapped H visa fees will be. As with higher CNMI-only fees, increases in the cost of hiring foreign workers would translate into increased labor costs and reduced incentives for employers to use the H- visa program. For example, a fee difference of $500 per year would be equivalent to a wage increase of approximately $0.25 per hour. However, H visas may be more desirable to foreign workers because, unlike other nonimmigrant categories, H-1B and H-1C visa holders may seek to become lawful permanent residents of the United States at the end of the authorized nonimmigrant stay. In addition to H nonimmigrant worker visas, all INA nonimmigrant categories would be available to qualified foreign workers attempting to enter the CNMI during and after the transition period and after any extensions of the CNMI-only permit program. Some workers can apply for L visas for intracompany transfers, but these visas are available only to managers and executives, workers with specialized skills, and their spouses and children. Also, L visa holders must have spent at least 1 continuous year abroad with a qualifying organization prior to entering the United States. Other nonimmigrant visas available for foreign workers are for specialized work— such as O visas for individuals of extraordinary ability or achievement; P visas for artists, athletes, and entertainers; and R visas for religious workers—and thus, are not likely to apply to substantial numbers of CNMI workers. When federal immigration law becomes applicable to the CNMI on the transition program effective date, CNMI employers will be able to petition to bring workers to the CNMI as employment-based permanent immigrants under the same procedures as other U.S. employers. Each fiscal year, about 140,000 employment-based immigrant visas are available for workers to enter the United States on a permanent basis. Up to 28.6 percent of these visas may be available for skilled nontemporary and nonseasonal workers, for professionals with baccalaureate degrees, and for qualified workers capable of performing unskilled nontemporary and nonseasonal labor for which qualified workers are not available in the United States. For the unskilled laborers, up to 10,000 visas may be issued each fiscal year to qualified immigrants after DOL certifies that qualified workers are not available in the United States. The limited number of visas available for nontemporary and nonseasonal workers suggests few CNMI workers will be able to obtain them. The effect on the CNMI economy of a reduction in the availability of needed foreign workers is uncertain. Generally, the size of the effect is expected to be based on the degree to which any reduction in overall needed labor causes production to decrease and on the effect of a reduction in foreign workers on the productivity of resident workers. In order to illustrate a range of possible effects on production from a specific reduction of foreign workers, we generated simulations of production in the CNMI economy, measured as gross domestic product (GDP), under a range of assumptions regarding the effect of a reduction of labor on production and the ability of the CNMI resident workforce to substitute for the foreign workers in production. Because we were unable to obtain a recent estimate of the CNMI’s GDP, the simulations were conducted using 2007 as a base year, with an index value of 100. As noted in the above report section on the labor market, existing trends within the CNMI may affect the demand for foreign workers within the coming years. Therefore, because these simulations did not control for such potential changes in the CNMI over the next 12 years, they should not be considered predictive of future GDP. Rather, they are an attempt to illustrate a range of effects of the reduction in needed foreign workers, leaving all other factors constant. This analysis relies on the application of a combination of the commonly used Cobb-Douglas production and Constant Elasticity of Substitution functions to the CNMI economy.(1) Y = AKα(εFW−ρ+(1-ε)RW−ρ)−(1−α)/ρ where Y is output, K is capital, A is a constant, FW is the foreign workforce, and RW is the resident workforce. Using this function, total labor is not simply the sum of resident and foreign labor, but the weighted and exponential sum of ((εFW−ρ+(1-ε)RW−ρ)−1/ρ). Because this model raises the number of workers to a negative power, we could not use it to examine the case in which the number of foreign workers is equal to zero. The parameters that control both the substitutability and the factor shares of resident and foreign labor are ρ and ε. In addition, the elasticity of output with respect to “total labor” is given by (1−α). In the particular case in which ρ = -1 and ε = .5, foreign and resident workers are perfect substitutes and can be exchanged on a one-to-one basis. In this case, the production function approaches the Cobb-Douglass function, although with a different constant: (1a) Y = AKαL(1−α) where L = (FW+RW). However, by increasing the ρ parameter and allowing the ε parameter to change we can decrease the one-to-one substitutability of foreign and resident workers. To apply the equation (1), we created scenarios varying the elasticity of output with respect to total labor (1-α) and the substitution parameters ρ and δ. Specifically, we allowed both these parameters to change according to pre-determined probability distributions, which were generated through a review of economic literature and existing CNMI data. The rate of departure of foreign workers was chosen by assumption, to account for the various options of federal agencies. Then, with initial conditions of the foreign and resident workforce, we simulated the changes in the GDP of the CNMI based on the departures of foreign workers. We generated 10,000 random scenarios. The model was run to simulate scenarios through December 2021. Any analysis of this type must specify the initial values from which the trajectory stems. Because an exact estimate of GDP was not available we chose an arbitrary GDP “base” of 100. The initial foreign worker population was chosen to be 19,823 (based on the most recent LIIDS estimate from December 2007). Unfortunately, a similar estimate was not available for the resident worker population. However, based on the household survey done in 2005, resident employment was approximately 60 percent of the foreign worker population. If that ratio applied today, there would be approximately 11,500 employed residents, which we chose as the initial condition. The number of CNMI foreign worker permits that will be available in the future is currently unknown and is dependent on many different decisions. The Secretary of Labor will have the ability to extend the CNMI-only work permit program indefinitely. The Secretary of Homeland Security will have the ability to restrict the number of permits. Because of this uncertainty, we used three illustrative possible scenarios, beginning in June 2009, in order to present a range of possible reductions: 1. Linear decline with renewal every 2 years. Assumes that the rate of decline in the number of permits chosen by DHS is linear, and that the Secretary of Labor extends the CNMI-only permit program every 2 years. 2. Accelerating decline with renewal every 2 years. Assumes that the rate of decline in the number of permits chosen by DHS accelerates, and that the Secretary of Labor extends the CNMI-only permit program every 2 years. 3. Last month with renewal every 2 years. Assumes that the rate of decline in the number of permits is very slight, with a steep decline in the last month, and that the Secretary of Labor extends the CNMI-only permit program every 2 years. The economics of growth literature includes varying values of elasticity of output with respect to labor. In an analysis of the growth rates of East Asian nations, Alwyn Young refers to the “standard” assumption of about two-thirds. In a recent paper by Louis Kuijs of the World Bank and Tao Wang of the International Monetary Fund, the authors use an elasticity of .5 in a model explaining China’s economic growth over the past 25 years. Robert Hall assumes an elasticity of .7 for the United States. Based on this range, we assumed that the elasticity could be anywhere from .5 to .75, with a peak of probability at .625, and the simulations assumed a triangular distribution over that range. The greater the degree to which CNMI resident workers are substitutes for foreign workers in production, the less the effect of any restriction. While some simulations of the U. S. labor market assume perfect substitutability between immigrant and nonimmigrant labor, this is unlikely in the case of the CNMI. Given that the CNMI economy supports greater numbers of foreign workers than resident workers, the difference in the relative wages can be used to determine the elasticity of substitution. Foreign worker wages that are only slightly less than resident wages would indicate a high degree of substitutability in the CNMI market. However, in the CNMI, the average wages of foreign workers and resident workers are very different; data from the 2005 CNMI HIES—the most recent available—suggest that the average foreign worker had a wage of $4.40 in 2004, while the average resident had a wage of $8.60. By itself, this would suggest substantial nonsubstitutability in production, with an elasticity of .72 at the 2005 levels of foreign and resident workers (and a ρ equal to .39). However, the substitutability of the foreign and resident workers may also be a product of regulation. For example, under recent CNMI labor law, firms were required to maintain staffs of 20 percent resident workers; this requirement was increased to 30 percent as of January 2008. Moreover, many jobs, such as some in government, are closed to foreign workers. Some of the regulations regarding the labor market may not have analogues in federal immigration law. This might suggest that under the recent legislation there will be more substitutability between foreign and resident labor than the current levels of wages and number of workers indicates. We assumed that the foreign and resident labor force had some degree of substitutability but were not perfectly substitutable. Specifically, we allowed the substitution parameter, ρ, to take any value from .5 to -1 with equal probability, a uniform probability over that range. Similarly, the factor share, ε, was allowed to range from .35 to .65 with a uniform distribution. In order to estimate the extent to which CNMI foreign workers support dependent children, including U.S. citizens, we analyzed data on temporary non-U.S. citizens HIES does not provide data on the individual citizenship of children according to the citizenship status of their parents, but it provides information on the citizenship status of all children in the CNMI, as well as the citizenship status of the heads of households in which CNMI children reside. According to the 2005 survey, the total population of the CNMI is about 66,000, with over 40 percent, about 28,000 people, living in households headed by a temporary non-U.S. citizen. Households headed by a temporary non-U.S. citizen on average have a total of 3.19 people living in the households, including 1.28 children per household, compared to an average of 1.97 children for all CNMI households (see table 8). The 2005 HIES data include respondents who identified their status as “not a U.S. citizen, temporary resident.” In addition to foreign workers, survey respondents who identified themselves as temporary non-U.S. citizens may include other groups, such as holders of CNMI foreign investor permits. of these children are living in a household headed by a temporary non-U.S. citizen. Thus, one quarter of all children in the CNMI under the age of 18 are living in a household headed by a temporary non-U.S. citizen (see fig. 12). In addition, 92 percent of children living in the CNMI are U.S. citizens (see fig. 13). Therefore, there are between 3,217 and 4,728 children who are U.S. citizens living in households headed by a temporary non-U.S. citizen, or between 68 and 100 percent of all children living in households headed by a temporary non-U.S. citizen are themselves U.S. citizens. CNMI entry permit waiver programNo (limited for shipping) No (police clearance) CNMI entry permit waiver program countries, including the Republic of Korea, seeking admission into the U.S. Visa Waiver Program. The other countries were Bulgaria, Cyprus, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Malta, Poland, Romania, and Slovakia. In August 2007, Congress passed legislation that provides DHS with the authority to admit countries with refusal rates for business and tourism visas between and 10 percent under the Visa Waiver Program if the countries meet certain conditions and if DHS implements certain security measures. The Republic of Korea’s refusal rate in fiscal year 2007 was 4.4 percent. See GAO, Process for Admitting Additional Countries into the Visa Waiver Program, GAO-06-5R (Washington, D.C.: July 2, 2006) and GAO, Visa Waiver Program: Limitations with the Department of Homeland Security’s Plan to Verify Departure of Foreign Nationals, GAO-0-45T (Washington, D.C.: Feb. 2, 200). While Canada is not included in the U.S. Visa Waiver Program, nationals of Canada may also, in most circumstances, qualify for visa-free travel to the United States, including Guam. , 2004, includes the Republic of Korea, Hong Kong, and Canada in the CNMI’s permit waiver program, but CNMI officials said that this order was no longer in effect. The officials said that the CNMI currently waives permit requirements only for visitors from countries included in the U.S. Visa Waiver Program. They could not identify any document specifically revoking the 2004 order, and an official said the CNMI planned to issue clarification to the policy in the near future. Indicates countries for which visa waiver participation for tourism or business differs among the United States, the CNMI, and Guam. Under U.S. visa waivers, visitors may enter for up to 90 days. Under CNMI entry permit waivers, the length of admission is also up to 90 days. Under Guam visa waivers, visitors may enter for up to 15 days, except that citizens from countries eligible for the U.S. Visa Waiver Program may enter for 90 days. This table does not include the Freely Associated States—the Federated States of Micronesia, Republic of the Marshall Islands, and Republic of Palau—whose citizens are permitted to work in the CNMI and elsewhere in the United States under the Compacts of Free Association. In order to provide information relevant to federal agencies assuming responsibility for immigration functions in the CNMI, we requested information from the CNMI government on its own expenditures on immigration-related activities for fiscal year 2007. The CNMI government reported that its Division of Immigration in the Office of the Attorney General had total expenditures of $2,379,529 for fiscal year 2007 (see table 9). The CNMI government also reported that the CNMI Department of Labor had expenditures of $2,246,953 in fiscal year 2007 (see table 10). In addition, CNMI officials provided us with the federal expenditures on CNMI Division of Immigration and CNMI Department of Labor activities related to immigration, which totaled $412,519 for fiscal year 2007 (see table 11). The following are GAO’s comments on DOI’s letter dated July 11, 2008. In addition to generally agreeing with our findings, DOI identified two technical areas of the report in which it believed clarification was necessary. on H visas is contained in subsection 6(b), the exemption could not be extended beyond 2014 without further legislation. In addition, we note that the subsequent report of the Senate Committee on Energy and Natural Resources on H.R. 3079 states that the Committee intends that the H exemptions for the CNMI and Guam be extended along with any extension of the 5-year transition period. However, we are constrained in our analysis to the language in the bill as is, unless amended. 2. DOI said it was important for the report to note that the law mandates that the CNMI produce and provide the required information to the Departments of Homeland Security and Labor. We have revised the report to clarify that the legislation requires the CNMI government to provide the Secretary of Homeland Security all immigration records or other information that the Secretary deems necessary to assist its implementation; however, the relevant provision does not specifically mention DOL. The following are GAO’s comments on the CNMI government’s letter dated July 9, 2008. the CNMI economy. The CNMI government raised several specific concerns: The CNMI government expressed concern that the report does not demonstrate how the CNMI economy would be affected in terms of production, employment, wages and salaries, personal income, population, labor force, and other factors. As the report notes, although we could have attempted to estimate other aspects of the effect of the reduction of foreign workers on the CNMI economy, such as the average earnings of CNMI residents, we selected total GDP, a measure of both production and national income, to measure the effect of reductions in foreign workers on the overall economy—and the basis of CNMI government tax revenue—rather than on any particular group. The CNMI government stated that the report provides no baseline against which impacts might be evaluated and does not take into account factors in the rest of the economy. However, the report accounts for factors including industry changes and minimum wage increases in the section following the GDP simulations. The CNMI government stated that the analysis is based on a simple model with no empirical underpinnings. We disagree. The simulation is based on the number of foreign workers relative to the number of CNMI resident workers, according to the 2005 Household, Income, and Expenditures Survey (HIES)—an empirical underpinning. As noted in the report, the production function we use in the GDP simulations has been used prominently in published, peer-reviewed economic studies to model contributions of different groups of workers in an economy. The CNMI government stated that the report did not demonstrate how the impact of the legislation would affect the likelihood or length of CNMI economic recovery. We agree. The scope of this report is limited to the factors that will affect the impact of the legislation’s implementation on the CNMI economy, and the likelihood or length of CNMI economic recovery is beyond the scope of our review. The CNMI government comments also inaccurately stated that the report predicts a substantial decline in the CNMI economy as a result of the legislation. As noted above, these scenarios are illustrative of a range of possible outcomes depending on the interaction of DHS and DOL decisions and do not predict or estimate the likelihood of each scenario. objected to the term “temporary” to describe foreign workers in the CNMI. Our use of the term “lawful permanent resident” is consistent with U.S. law, and we have not revised it. In addition, we used these terms in our March 2008 report, and the CNMI government expressed no concerns in its review of the report. While we generally use the term “foreign worker,” we are constrained by the terms used by cited data sources. For example, the CNMI’s 2005 HIES includes data on respondents who identified their status as “not a U.S. citizen, temporary resident.” We have clarified the terms where possible. 19. The CNMI government objected to the term “undocumented foreign workers,” saying that the CNMI has documentation on all of its foreign workers but has foreign workers whose documentation is not current (see letter page 11). We have revised the term to “foreign workers whose documentation is not current or valid.” 20. In its technical comments, the CNMI government suggested we add information to the report regarding the immediate relatives of foreign workers, tourists, and foreign investors in the CNMI. We requested information from the CNMI Office of the Governor on immediate relatives from the Labor and Immigration Identification and Documentation System (LIIDS) beginning in October 2007 but did not receive it. In addition, appendix VII includes information on dependents of temporary non-U.S. citizens in the CNMI based on 2005 HIES data. 21. In its technical comments, the CNMI government disagreed with several graphics based on data on issued foreign investor entry permits, previously provided by the CNMI Department of Commerce. The CNMI government provided alternative data that we have incorporated in the report. These include the number of active and valid long-term business and perpetual foreign investor entry permits, as well as the numbers of businesses associated with these permits, as of July 8, 2008, based on the CNMI Department of Commerce’s manual review of its files. However, the new data do not include information on issued entry permits and do not include complete information on permit holders’ countries of origin and other characteristics. As a result, we removed several graphics and related discussion that were included in the draft report. The CNMI government also said that the 2002 U.S. Economic Census, which the letter refers to as the 2002 CNMI Economic Census, provided a source of foreign investment data. While the 2002 Census includes information on CNMI businesses by owner citizenship status, we are not able to use the data in this report because they are incomplete. David Gootnick, (202) 512-3149 or gootnickd@gao.gov. Tom McCool, (202) 512-2642 or mccoolt@gao.gov. In addition to the contacts named above, Emil Friberg, Assistant Director, Mark Speight, Assistant General Counsel, Marissa Jones, Ashley Alley, Diana Blumenfeld, Benjamin Bolitzer, Ming Chen, Reid Lowe, and Eddie Uyekawa made key contributions to this report. Technical assistance was provided by Shirley Brothwell, Michael Hoffman, Michael Kendix, Rhiannon Patterson, Diahanna Post, Berel Spivack, and Seyda Wentworth. Defense Infrastructure: Planning Efforts for the Proposed Military Buildup on Guam Are in Their Initial Stages, with Many Challenges Yet to Be Addressed. GAO-08-722T. Washington, D.C.: May 1, 2008. Commonwealth of the Northern Mariana Islands: Pending Legislation Would Apply U.S. Immigration Law to the CNMI with a Transition Period. GAO-08-466. Washington, D.C.: March 28, 2008. Visa Waiver Program: Limitations with Department of Homeland Security’s Plan to Verify Departure of Foreign Nationals. GAO-08-458T. Washington, D.C.: February 28, 2008. Defense Infrastructure: Overseas Master Plans Are Improving, but DOD Needs to Provide Congress Additional Information about the Military Buildup on Guam. GAO-07-1015. Washington, D.C.: September 12, 2007. Commonwealth of the Northern Mariana Islands: Serious Economic, Fiscal, and Accountability Challenges. GAO-07-746T. Washington, D.C.: April 19, 2007. Commonwealth of the Northern Mariana Islands: Serious Economic, Fiscal, and Accountability Challenges. GAO-07-436T. Washington, D.C.: February 8, 2007. U.S. Insular Areas: Economic, Fiscal, and Financial Accountability Challenges. GAO-07-119. Washington, D.C.: December 12, 2006. Process for Admitting Additional Countries into the Visa Waiver Program. GAO-06-835R. Washington, D.C.: July 28, 2006. U.S. Insular Areas: Multiple Factors Affect Federal Health Care Funding. GAO-06-75. Washington, D.C.: October 14, 2005. Immigrant Investors: Small Number of Participants Attributed to Pending Regulations and Other Factors. GAO-05-256. Washington, D.C.: April 1, 2005. Compact of Free Association: Negotiations Should Address Aid Effectiveness and Accountability and Migrants’ Impact on U.S. Areas. GAO-02-270T. Washington, D.C.: December 6, 2001. Foreign Relations: Migration From Micronesian Nations Has Had Significant Impact on Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands. GAO-02-40. Washington, D.C.: October 5, 2001. Northern Mariana Islands: Procedures for Processing Aliens and Merchandise. GAO/GGD-00-97. Washington, D.C.: May 26, 2000. Northern Mariana Islands: Garment and Tourist Industries Play a Dominant Role in the Commonwealth’s Economy. GAO/RCED/GGD-00-79. Washington, D.C.: February 14, 2000.

Summary: The United States enacted legislation in May 2008 applying federal immigration law to the Commonwealth of the Northern Mariana Islands (CNMI) subject to a transition period. The CNMI is subject to most U.S. laws but has administered its own immigration system, including admitting foreign workers, tourists, and foreign investors. The Secretary of Homeland Security, in consultation with the Secretaries of the Interior, Labor, and State, and the Attorney General, has the responsibility to establish a transition program. GAO was asked to review how the legislation's implementation may affect the CNMI economy, in particular the CNMI's (1) labor market, including foreign workers; (2) tourism sector; and (3) foreign investment. This report is based on GAO's March 2008 report (GAO-08-466) and analysis of data on the CNMI's labor market, tourism sector, and foreign investment. The potential impact on the CNMI's labor market of the recent legislation applying U.S. immigration law will largely depend on decisions that the U.S. Departments of Homeland Security (DHS) and Labor (DOL) make in implementing a required permit program for foreign workers. The interaction of DHS and DOL decisions about, respectively, the number of permits to allocate annually and whether and when to extend the permit program past 2014 will significantly affect employers' access to foreign workers. However, federal agencies have not yet identified an interagency process to coordinate such decisions. Further, the agencies may have difficulty obtaining relevant data on the CNMI labor market. Given foreign workers' prominence in key CNMI industries, any substantial and rapid decline in permits for foreign workers would have a negative effect on the CNMI economy. However, federal agencies may reduce permits more modestly, resulting in minimal effects on the economy. At the same time, continuing declines in the garment industry, challenges to the tourism industry, and the scheduled increases in the minimum wage may reduce demand for foreign workers, lessening any potential adverse impact of the legislation on the economy. Although the legislation and the CNMI government have stated goals of preparing CNMI residents to replace foreign workers, factors such as the limited number of available CNMI residents may impede these efforts' effectiveness. Any impact of the recent legislation on the CNMI's tourism sector will depend largely on federal regulations specifying the countries to be included in a joint CNMI-Guam visa waiver program required by the legislation. For countries likely to be included in this program, such as Japan and South Korea, the impact is likely to be minimal. For countries that may not be part of the joint visa waiver program, possibly including China and Russia, applying for a visa from U.S. embassies or consulates will likely be more costly and more time-consuming than obtaining a visitor entry permit under CNMI immigration law. To the extent that any increase in the cost and time required to obtain a visa discourages tourists from visiting the CNMI, the legislation could negatively affect CNMI tourism. The recent legislation's impact on CNMI foreign investment will depend in part on DHS decisions regarding the application of U.S. nonimmigrant treaty investor status--"grandfathering"--for investors with CNMI foreign investor entry permits. However, lack of data on foreign investment in the CNMI makes it difficult to assess the likely impact of these decisions and may hamper DHS's ability to make informed decisions. Because long-term business entry permits account for a large proportion of CNMI foreign investor entry permits, more CNMI foreign investors will be grandfathered if DHS applies the status to these permit holders. Any impact on foreign investment in the CNMI will likely affect the labor market and tourism sector, and any impact on the labor market or tourism sector may also affect foreign investment.