UNITED STATES TRADE REPRESENTATIVE (USTR) TRADE POLICY STAFF COMMITTEE PUBLIC HEARINGS RE: U.S. CENTRAL AMERICAN Free Trade Agreement

Transcription

1 UNITED STATES TRADE REPRESENTATIVE (USTR) TRADE POLICY STAFF COMMITTEE PUBLIC HEARINGS RE: U.S. CENTRAL AMERICAN Free Trade Agreement PANELISTS: TUESDAY NOVEMBER, F STREET, N.W. WASHINGTON, D.C :00 A.M CARMEN SURO-BREDIE, CHAIR, USTR DAN FANTOZZI, USTR SHARON SYDOW, USTR BUD CLATANOFF, USTR CATHY SAUCEDA, CUSTOMS CARMEN SANMIGUEL, TREASURY JANET HEINZEN, COMMERCE MARK SIEGELMAN, COMMERCE DAN LEAHY, USITC BRENDA FREEMAN, AGRICULTURE BARBARA BOWIE-WHITMAN, STATE CHARLOTTE ROE, STATE BETSY WHITE, LABOR

2 A-G-E-N-D-A Opening Statement by Chair... Regina Vargo, Assistant U.S. Trade Representative for the Americas... Panel Introduction... Witnesses: LUNCH James Fendell... Brenda A. Jacobs... Jack Roney... Victoria Schantz... Peter Vitaliano, Ph.D.... Juan Guilermo Gutierrez... Michael P. Daniels... Jerry Cook... Steve Lamar... Mitchell J. Cooper... 0 Lauren Perez... Maureen R. Smith... Francis S. Urbany... Marcos Orellano... Maria Corte... Cherrene Horazuk... William Hernandez... 0 Susan Saudek... Kathy Hoyt... Vincent McElhinny... Melinda St. Louis... 0 Jeffrey S. Vogt... Maddi Azprioz... Thea Lee... 0 Taleigh Smith... Patricia Forner... 0 P-R-O-C-E-E-D-I-N-G-S

3 0 0 (:0 a.m.) CHAIRPERSON SURO-BREDIE: This hearing will come to order. This hearing is being conducted by the Trade Policy Staff Committee, an interagency body chaired by the Office of the U.S. Trade Representative. In addition to USTR today there are representatives from the Departments of Agriculture, Commerce, Labor, State, and Treasury, including the U.S. Customs Service and the U.S. International Trade Commission. Many members of the USTR working on this negotiation will be present. The subject of this hearing is the proposed negotiation of a pretrade area with five Central American countries. The TPSC is seeking public comment to assist the United States Trade Representative in amplifying and clarifying negotiating objectives for the proposed agreement and to provide advice on how specific bids and services and other matters should be treated under the proposed agreement. In addition to the testimony we will hear today interested persons including persons who

4 0 0 participate in the hearing may send written comments until noon, December, 00. Written comments may include rebuttal points, demonstrating errors of fact or analysis not pointed out in the hearing. Under Section 0 of the Bipartisan Trade Promotion Authority Act of 00, TPA Act, for agreements that will be approved and implemented through TPA procedures, the president must provide Congress with at least 0 days written notice of his intent to enter into negotiations and must identify the specific objectives for the negotiation. Before and after the submission of this notice the president must consult with appropriate congressional committees and the Congressional oversight group regarding the negotiations under the Trade Act of as amended. The president must afford interested persons an opportunity to present their views regarding any matter relevant to any proposed agreement, designate an agency or interagency committee to hold a public hearing regarding any proposed agreement, and seek the advice of the U.S. International Trade Commission regarding the probable economic effects on U.S.

5 0 0 industries and consumers of the removal of tariffs and nontariff barriers on imports pursuant to any proposed agreement. On October st after consulting with relevant congressional committees and the Congressional Oversight Group, the USRA notified the Congress that the president intends to initiate Free Trade Agreement negotiations with five member countries of the Central American Economic Integration System, Costa Rica, El Salvador, Honduras, Guatemala, and Nicaragua, hereinafter referred to as Central America, and identified specific objectives for the negotiations. In addition, the USTR has requested the ITC's probable economic effects advice and the ITC intends to revive this advice on December, 00. To assist the administration as it continues to develop its negotiating objectives for the proposed agreement, the chairman of the TPSC has invited written comments and oral testimony of interested persons at a public hearing. The rest of my statement, which you can access on the table, describes the general categories

6 0 0 that we are seeking public comment on. In addition, USTR through the TPSC will send to the Federal Register notice of review providing the possible environment effects of the proposed agreement and the scope of the U.S. environmental review of the proposed agreement, and the impact of the proposed agreement on U.S. employment and labor markets. I would now like to introduce Regina Vargo, the Assistant U.S. Trade Representative for the Americas. Then I will ask our panel to introduce themselves. We will then move to hear testimony from the first witness. Thank you. MS. VARGO: Thank you, Carmen. I appreciate the opportunity to be here this morning and I thank you all for the interest that you're showing in these talks. I'm sorry I won't be able to stay for the hearings themselves this morning but I know we'll develop a complete record and that the panel here will have a good exchange with each of you. I did want to begin this mornings hearings, though by giving a broad overview to why we think pretrade agreement with Central America makes good sense, and to elaborate just a little bit more than

7 0 0 Carmen on where we are in the process. Basically I would like to suggest four reasons for why a Free Trade Agreement with Central America is a good idea. The first involves the way it will promote U.S. exports and create jobs. Our exports to these five countries already total $ billion in 00. Our NAFTA partners in Chile have or are negotiating Free Trade Agreements with Central America and we don't think U.S. companies should be put at a competitive disadvantage. The region also already benefits from the CBI arrangement. We imported $ billion in 00, about percent of which already entered duty free. A Free Trade Agreement with the region would make these benefits reciprocal. Also, eliminating Central America's tariffs and other barriers to U.S. trade such as unjustified SBS measures, inadequate protection of intellectual property rights, and limitations on service providers will generate U.S. exports creating more and higher paying U.S. jobs. Second reason a Central America FTA makes good sense is that it will advance their economic

8 0 0 development supporting democracy and economic reform. Economic growth through increased trade can contribute to the reduction of property and to job creation in the region. A Free Trade Agreement will promote and reinforce the economic reforms underway. An FTA stimulated economic growth will promote a deepening of democracy, rule of law, and sustainable development. Specific commitments in a Free Trade Agreement such as those dealing with transparency will add to the fight against corruption and support accountability in government, while other provisions will strengthen application of internationally recognized worker rights. Environmental concerns will also be addressed by the FTA itself and by the economic development it enables. Third, a Free Trade Agreement with Central America will promote regional integration and the free trade area of the Americas. A CAFTA will provide further impetus to ongoing efforts in Central America at regional integration both through an anticipated increase in intra-regional trade and investment, and by working as a group to undertake common commitments with the United States.

9 0 0 Through liberalized trade CAFTA will allow each country to develop its competitive advantage. And it will promote the free trade area of the Americas by standing as an example of the ability to overcome differences and a demonstration of the benefits of free trade and by creating a healthy concern among other countries which will not want their products to be at a competitive disadvantage in the United States. Finally, pursuing a Free Trade Agreement with Central America responds to a congressional mandate. That was Congress' direction as expressed in the Caribbean Basin Trade Partnership Act to initiate negotiations with beneficiary countries and conclude comprehensive, mutually advantageous trade agreements with them. With that by way of background, let me give you a short history of what we've done so far. As you know, on January President Bush announced that we would explore a U.S. Central America Free Trade Agreement in close cooperation with the Congress. Since February we have held seven workshops with Central American countries. Let me emphasize

10 0 0 0 these were not negotiations. They were informal information exchanges on topics, though, that we would like to see covered in a Free Trade Agreement such as market access, government procurement, SBS, services, intellectual property right, trade facilitation, electronic commerce, investment, environment, labor, and trade capacity building. Let me take a moment on that last point of trade capacity building as this is a horizontal thread in all of our discussions. With assistance from the Inter-American Development Bank, ASCCLA, and other donors, we have worked with the Centrals to help them develop national action plans to identify their assistance needs. Our approach with the Centrals on trade capacity building is comprehensive and we'll address three areas. () the preparation for negotiations; () implementation of the agreement; and () transition to free trade. We want to ensure that the Centrals build the capacity to take on the necessary obligations and to take full advantage of the benefits of an eventual agreement. By December th these countries will

11 0 0 indicate priority needs for the following 0 days and we'll plan to release their national strategies publicly. On August th, as Carmen indicated, we requested ITC analysis on probable economic effects including on sensitive agricultural products which we expect by year end. Ambassador Zelig met with the Congressional Oversight Committee on September th and on October st formally transmitted his notification to Congress of out intent to enter into negotiations with Central America. That's a document you should all have and it lays out our initial thoughts on negotiating objectives. As Carmen mentioned, that starts a 0-day clock that would enable us to initiate negotiations with Central America in January of 00. Although the TPSC and other consultations are mandated in TPA, much of this represents a codification of our existing practice, although we plan to intensify our consultations with both the public and the Congress. These consultations we expect to be continuous and not limited just to the objectives specified in the trade promotion authority.

12 0 0 Our hearing today represents our first major outreach to the public in order to get your views on this agreement, but there will be a number of other opportunities including the written comment by December nd, labor reports, and an environmental review process. I would like to highlight for you that we anticipate that the Federal Register Notice on the environmental review will come out probably before Thanksgiving. There will be the reports, of course, of our private sector advisory committees, and the ITC will be doing a report at the beginning and the end of this process. We're interested in hearing from all of the stakeholders now and throughout the course of the negotiations. By participating today you have given us early notice of your interest in these negotiations and we look forward to working with you on that over the course of the next year or so. Thank you very much. CHAIRPERSON SURO-BREDIE: Thank you, Regina. Could our panel introduce themselves starting with Mr. Dan Fantozzi.

13 0 0 MR. FANTOZZI: My name is Dan Fantozzi. I'm senior adviser for Central American Trade at USDR. MS. SAUCEDA: My name is Cathy Sauceda. I work with the Office of Field Operations in Trade Enforcement with the United States Customs Service. MS. SANMIGUEL: I'm Carmen Sanmiguel with the Department of Treasury. MS. HEINZEN: I'm Janet Heinzen with the Office of Textiles and Apparel at the U.S. Department of Commerce. CHAIRPERSON SURO-BREDIE: I'm Carmen Suro- Bredie. MS. VARGO: Regina Vargo. MS. FREEMAN: Brenda Freeman, U.S. Department of Agriculture. MS. BOWIE-WHITMAN: Barbara Bowie-Whitman, Department of State, Western Hemisphere Bureau. MR. LEAHY: Dan Leahy, U.S. International Trade Commission, Director of External Relations. CHAIRPERSON SURO-BREDIE: Thank you. Now we're hear from our first witness, Mr. James Fendell, former president of the American Chamber of Commerce, who will be testifying on behalf of the Chamber of

14 0 0 Commerce of the United States of America. Thank you, Mr. Fendell. Before you testify, if I could review the rules of testimony for the witnesses. Basically, with very few exceptions, if we have received your testimony in a timely fashion, we have read it and formulated questions. Please keep your testimony to five minutes. I will advise you when you are coming close to that time and will cut you off if you cannot respond to my watch. We have something like people testifying this morning so we are on a very tight time schedule. Then the panel will be asking questions of the witness. Thank you very much. MR. FENDELL: Thank you, Madam Chair and members of the panel. I am pleased to appear before this committee on behalf of the U.S. Chamber of Commerce. With over three million members of every size, sector, and region of the United states, the Chamber is the world's largest business federation. I am also pleased to represent the Association of American Chambers of Commerce in Latin America (AACCLA). AACCLA is a leading advocate of increased trade and investment between the United

15 0 0 States and Latin America. With over 0,000 member companies, AACCLA represents over 0 percent of all U.S. investment in Latin America. There are AmChams in each of the give countries in Central America, and their constituent base has actively worked to encourage passage of CBI legislation and, most recently, toward the successful passage of the TPA and the related items in the Trade Act of 00. Our member companies and their employees in the united States and in Central America will benefit directly from the proposed U.S.-Central America Free Trade Agreement. We are firmly committed to encouraging and supporting the negotiation and ratification of a comprehensive agreement between the united States and Central America as well as the subsequent FTAA. In the eight years since Mexico's adhesion to NAFTA came into force, trade between the United States and our second border has nearly tripled, with bilateral commerce reaching nearly $0 billion annually. Mexico overtook Japan to become the second most important trading partner to the United States

16 0 0 (after first border partner Canada), and Mexico's export earning today are triple those of Brazil. Recently, a number of noteworthy events have occurred that have important implications for U.S. trade with the nations of Latin America in general and Central America in particular. The restoration of Trade Promotion Authority as part of the Trade Act of 00 restores the United States' full participation in international trade negotiations and signals our intention to renew a strong leadership position on trade. Earlier this month, the United States, in partnership with Brazil, became co-chair of the final phase of the Free Trade Area of the Americas (FTAA) negotiations, which are scheduled to conclude by January 00. The FTAA will gather the countries of the Western Hemisphere into a cohesive trading block at a time when competitive pan-national trading blocks are forming, particularly in Europe and Asia. Even before the advent of economic difficulties now being experienced by several Latin American economies, there were signs of significantly different expectations as to the reach and depth of

17 0 0 the FTAA in the countries of the Southern Cone of South America. While recent events in Mercosur have clouded our crystal ball, it is highly probable that a number of the countries of that trading block will seek to impose their different trade objectives on the FTAA. The development of similar trading blocks with countries along the U.S. "third border" composed of Central America and the Caribbean is both a desirable and effective mechanism to further the free trade objectives of our country and an equally effective mechanism to facilitate the complex task of achieving and FTAA in the next three years. It is self evident that close trading partners are also natural partners in the war against terrorism. Our trade with Canada and Mexico enhances our Northern and Southwestern border protection. The proposed Central America-United States of America Free Trade Agreement will strengthen that protection, as will any strengthening of our ties with the nations of the Caribbean. The fundamental rationale for any Free Trade Agreement is increasing the flow of goods and services

18 0 0 within the region. The evidence is clear that such agreements benefit American workers and companies at the same time that the concomitant increase in foreign direct investment and improved access to capital and advanced technology favorably and directly impact the economies of our trading partners and the well being of their populations. In the case of Central America, it is particularly important that an FTA stimulate local development. Decades of domestic strife have driven significant emigration, mostly into the United States and relatively well off Costa Rica. Improvements in the local economies of the region will help to stem the tide of often illegal immigration. While it is true that remittances from Central American workers in the U.S. back to their homelands are important inputs into local economies, such currency flows come at the expense of breaking up family units and do little to stimulate real economic growth in the region. Existing trade relationships with our third border neighbors are based on one-way concessions by the United States. Such concessions have been

19 important throughout the lifetime of the three phases of the Caribbean Basin Initiative, but by their very nature are arbitrary and can lapse, as evidenced by the havoc created by the expiration of the Andean Trade Preference Act a few months ago. The flow of money and access to capital needed to develop long lasting investments requires long term guarantees that are best achieved through international trade treaties. Furthermore, such 0 0 treaties guarantee U.S. companies better-regulated and more competitive access to our trading partners. In the case of Central America and during the period of the Caribbean Basin Initiatives, U.S. trade has benefitted far more than the naysayers had predicted, and even more than those who favored CBI had anticipated. In fact, Central America, under CBI, has been one of the fasted growing buyers of U.S. goods and services over the past decade. Trade is quite clearly a two way street, and the signing of a well balanced Free Trade Agreement with the five countries of Central America can do nothing but further stimulate U.S. exports to the region.

20 0 0 0 An FTA with Central America on the heels of a successful conclusion to the FTA negotiations with Chile will send a critical signal to our Southern neighbors. First, it will fulfill decades long promises by U.S. Presidents from John Kennedy onward, that Latin America is truly important to us. Further, it will prove in the most convincing of ways that the U.S. is fully committed to the Free Trade Area of the Americas and to helping our entire Hemisphere embrace free market reforms and the responsibilities that go with such reforms. I am pleased to represent both the Chamber of Commerce, as I said before, and AACCLA, and I will be more than happy to entertain any questions. Thank you, Madam Chair. CHAIRPERSON SURO-BREDIE: Thank you, Mr. Fendell. I guess I will ask the first question. When I was in Regina Vargo's job quite a while ago, I worked very closely with AACCLA and particularly with the Chamber of Commerce on the foundation of the FTAA and, of course, in the Chile negotiations. I wonder if you could spend a minute just in front of the panel on the types of arrangements that

21 0 0 you think the Chamber might undertake in the case of Central America. I know a number of studies were done in the past by AACCLA. What type of work would you envision the Chamber and AACCLA doing with regard to Central America? MR. FENDELL: To begin with we already have. Among other things we have held a series of seminars for the press. We believe that the accurate and complete dissemination of information about what a Free Trade Agreement is and the information about how a Free Trade Agreement benefits both trading partners. Further, we seek to demystify certain concepts. Among those concepts is that the U.S. is imposing its trade on the area. This is a classic kind of knee-jerk response and it is one that is often formatted by those who would prefer not to see a Free Trade Agreement come into play. By disseminating a series -- excuse me. By disseminating information through a series of off-therecord background training sessions with leading members of the press throughout Central America. We hope to establish an atmosphere in which, () we have increased our face time with the press so

22 0 0 that they can get to us easily, () to answer the classic questions of why is the U.S. doing this to us? The real answer is because we benefit from it, but more importantly the trade country, the trading partner benefits tremendously from it and we can prove that and we do in these seminars. We would propose to continue to do so with other opinion making groups throughout the area. Finally, our member companies which are obviously the leading American trade partners in the area are prepared to undertake one-on-one negotiations with local lawmakers and with their home company headquarters and, as bad as it might sound, their representatives here in Washington working with the lawmakers here in order to assure passage of the CAFTA. CHAIRPERSON SURO-BREDIE: Other questions from the panel? MR. FENDELL: Thank you very much. CHAIRPERSON SURO-BREDIE: Our next witness is Brenda Jacobs on behalf of the U.S. Association of Importers of Textile and Apparel. Welcome.

23 0 0 MS. JACOBS: Good morning. USAITA is a very strong supporter of a Free Trade Agreement between the United States and the five countries of Central America. These countries are for USAITA members and others very important suppliers of apparel to the U.S. market. Central America ranks as one of the major sources of apparel imports for the U.S. market. As of August 00 data, and there's more data coming out today, they provided percent of the apparel imports into the United States. Honduras is the third largest supplier of apparel to the U.S. market accounting for about a little over six percent of the apparel imports. El Salvador is the th largest accounting for about. percent of total apparel imports. Guatemala is the th largest supplier, but none of these countries is a significant supplier of yarns, fabrics, or other nonapparel goods. In our view, if properly crafted the proposed FTA offers an important opportunity to promptly expand upon the very limited scope and limited success of the Caribbean Basin Trade

24 0 0 Partnership Act. Assuming that commercially sound terms are agreed upon, it also offers a classic win/win situation. The elimination of tariffs and non-tariff barriers to trade and other market liberalization measures among the participating countries can generate increased integration of operations among businesses within the United States and the participating countries of Central America increasing sales and jobs in each country. Focusing on the apparel issues alone, USAITA advocates the following negotiating objectives. First, the elimination of tariffs on all products including textiles and apparel on an expedited schedule. For apparel products and luggage already included within the scope of the CBTPA a continuation of that duty-free treatment without interruption. We also propose the use of a single rule of origin rather than specialized and complex textile and apparel rules and one which permits the use of inputs from other FTA partners. And we propose that you seek the elimination of the various import related fees and the establishment of streamlined paperless customs

25 0 0 entry procedures. Let me elaborate on some of these points. With respect to duties, the objective should be no staging of duty reductions. The duty should be set a zero reciprocally upon implementation. Tariff implementation is an essential element of any FTA, but in the case of apparel trade with Central America, the negotiation process has to recognize two essential facts. First, many of these products were already duty free under CBTPA. The maintenance and expansion of that business is dependent upon at minimum the continuation of the current duty free treatment without interruptions and without any temporary spikes in those duties. Second, we are facing in a little over two years the elimination of the international quota system under the agreement on textiles and clothing. That means that cost rather than availability of quota will be the primary factor driving sourcing decisions. The ability of these Central American countries to compete in this sector in a quota-free environment will be significantly enhanced by the availability of

26 0 0 duty-free access to the U.S. market. With respect to origin rules, the FTA should provide for the expansion of CBTPA benefits by covering more goods and incorporating more business friendly terms. The experience of our companies under CBTPA offers an essential lesson on how origin rules can make or break a program. Participation in CBTPA has been less than had been hoped for precisely because the rules are restricted. They preclude the use of yarns produced in the Caribbean or Central America or from Mexico or Canada, for that matter. Initial reaction to the terms of the more recently approved Andean Trade Promotion and Drug Eradication Act indicates that the ability to use Andean formed yarns is creating greater interest and taking advantage of that program because it provides more flexibility so that competitive products can be developed. Also, the fact is that we have to recognize that the Central American FTA is merely a precursor to the western hemisphere wide arrangement, the FTAA. Therefore, in putting together an origin rule we

27 0 0 should be striving for one that can be readily incorporated into the FTAA. USAITA member companies cannot successfully expand their business if each new trade agreement contains a different rule of origin. We also want to touch briefly on the labor issues because USAITA recognizes that labor rights have been an issue in the region. Yet, we are confident that enhanced trade opportunities under an FTA will help promote worker rights and quality working conditions. It will do so by expanding business and creating new jobs which will, in turn, give workers greater leverage. If, however, there are failures or deficiencies, the answer, in our view, should be a system that focuses on addressing the individual problem with a primary goal of remediation, not sanctions, that eliminate or destroy the benefits created under an FTA. USAITA thanks you for the opportunity to present our views on the FTA with Central America and we look forward to consulting closely with each of the agencies involved to ensure that the interest of the U.S. appeal importing community are fully reflected in

28 0 0 the final agreement. Thank you. CHAIRPERSON SURO-BREDIE: Thank you very much, Ms. Jacobs. Our first question will be asked by the representative of U.S. Customs. MS. SAUCEDA: Good morning. MS. JACOBS: Good morning. MS. SAUCEDA: The first question I have for you is what rule of origin would you suggest for apparel and how would it impact current USITA's member sourcing particularly with regard to NAFTA, CBTPA, AGOA, and the new Adean program? MS. JACOBS: We would use the Bro-Carden rule, the general rule of origin rather than a preferential rule. We have to recognize that none of the five countries we're talking about are making any of these fibers or yarns so if we do a NAFTA-type rule of origin, they would be dependent upon importing the yarns and fabrics from the United States which is not going to make them as attractive or else they would have to first invite investment for the creation of yarn and fabric production into those countries which would be difficult at this time.

29 0 0 Another alternative, as we have sort of alluded to here, is that if you are going to have an FTA with one set of countries and the United States has FTAs with other countries, at the very least we ought to be able to append what those other countries with whom the U.S. has an FTA are also able to produce. For example, we've got NAFTA. You could at least include Mexican and Canadian fabric in yarn production. A better rule would be using a nonpreferential Bro-Carden type rule. MS. SAUCEDA: Do you want to say anything about the sourcing? How would this impact your sourcing from other areas with regard to NAFTA and CBTPA? MS. JACOBS: You're talking about compared to Asia, for example? MS. SAUCEDA: Well, yes. MS. JACOBS: In fact, I think we seek two very different sets of sourcing that generally go on among our members. The western hemisphere, including the Central American countries, tend to supply a more basic product, less than a fashion oriented product.

30 0 0 0 They tend to compete with one another right now for that business. That could change, though, in a quota-free world when you have short lead times and the ability to develop a more sophisticated product that will enable them to better compete with Asian suppliers in the future. MS. SAUCEDA: Just one additional question. The rule of origin for preference for these provisions permitted foreign inputs. What impact would you expect that to have on investment in Central America? MS. JACOBS: Foreign input such as yarns and fabrics? That would obviously make it very much more attractive to do business in these countries because obviously many of the less expensive fabrics and yarns can be sourced outside of the western hemisphere and then utilized to produce finished garments in those countries. That would clearly be very attractive, especially at duty-free access to the U.S. market. MS. SAUCEDA: Thank you very much. Those are all the questions for Customs. CHAIRPERSON SURO-BREDIE: The next question is by the U.S. Department of Commerce. MS. HEINZEN: How would you expect a greater

31 0 0 flexibility in the rules of origin to encourage increased U.S. textile product experts to Central America? MS. JACOBS: Well, I think it would allow if, for example, we had a more flexible rule like a Bro-Carden rule that would allow U.S. mills to mix different yarns so that they could use specialized yarns that's aren't necessarily made in the United States without concern that they were then not qualifying to participate in these benefits, then our U.S. mills could produce a more competitive product that responds more quickly. For example, to fashion changes. I think a more flexible rule that was based on Bro-Carden would allow both U.S. mills and even U.S. yarn producers who may be able to blend more interesting combinations in order to create qualifying goods would create better opportunities for both to compete well. We would also see, perhaps, what's happened in Mexico where many U.S. yarn and fabric producers invested in Mexico in order to expand their business rather than relying solely on the mills they have here getting closer to the customer and expanding their

32 0 0 operations that way and using that as a base perhaps to sell into other markets as well. MS. HEINZEN: What percent of your members import apparel from the Central American countries? MS. JACOBS: Virtually every one of them does. Many of our members balance what they do. They have some fashion goods that they have longer lead times that they import from Asia. They also have their basic goods for which they have just in time inventories for which Central Americans and other western hemisphere countries are absolutely essential. MS. HEINZEN: I'm sorry. Most of your members import from Central America? MS. JACOBS: Absolutely, yes. MS. HEINZEN: If more favorable conditions exist for textile products to be imported into the U.S. due to the Central America FTA, do you envision imports from this region increasing into the U.S.? MS. JACOBS: Yes, we do. We can imagine that there would be a greater interest in trying to train these producers to make more fashion-oriented goods in order to avoid the longer lead times that are involved in Asian supplies.

33 0 0 MS. HEINZEN: In your statement you comment that the elimination of tariffs and non-tariffs barriers to trade between the U.S. and Central America will result in increasing sales and jobs in each country. On what do you base this assessment? MS. JACOBS: Just our own experience of the ability to integrate operations so that we can work with U.S. mills to create a product that can then be produced in the western hemisphere. Keeping it all within the western hemisphere you shorten lead times. When you have to rely upon, for example, Korean or Chinese or Taiwanese fabric, then you have a longer lead time until those goods get produced and can get shipped even over here to be produced into a garment in a Central American country. MS. HEINZEN: Thank you. CHAIRPERSON SURO-BREDIE: Are there any other questions? Representative of ITC. MR. LEAHY: Actually, I don't have a question. I have an invitation. You have mentioned several times the quota-free world that your members will be faced with in a few short years. The Commission has been asked to take a look

34 0 0 into that world, so I invite you and actually anyone else in the audience who would like to share their views with the commission to do so when the time becomes appropriate. MS. JACOBS: I can assure you, Dan, that our members are very interested in it. We are very much aware of the deadline to notify of our interest in testifying. You will hear from us. Thank you. CHAIRPERSON SURO-BREDIE: Thank you very much. Our next witness is Mr. Jack Roney, Director of Economics and Policy Analysis, The American Sugar Alliance. The panel will be joined by USTR representative Sharon Sydow. Sharon just recently changed her name so we're used to calling her something else. Mr. Roney, the floor is yours. MR. RONEY: Thank you for the opportunity to testify on behalf of the U.S. Sugar Industry. I'm Jack Roney, Director of Economics and Policy Analysis for the American Sugar Alliance. The ASA is the national coalition of growers, processors, and refiners of sugar beets, sugar cane, and corn for

35 0 0 sweeteners. The world sugar market is distorted by a vast array of government policies that encourage over production and dumped exports. As a result the socalled world market price for sugar is really a dump price that reflects barely half the world average cost of producing sugar. The ASA has long endorsed the goal of global free trade in sugar. American sugar and corn sweetener producers are efficient by world standards. We welcome the opportunity to compete in a genuine level playing field free of government intervention. Our market should not be open further, however, until foreign subsidies are eliminated. We strongly urge that the administration pursue reform of the myriad of trade distorting policies globally in the context of the ongoing moylateral negotiations of the WTO and not regionally in the proposed Central America FTA. A limited dismantling of trade barriers in the regional context would bring two dangers. One, those countries would become more vulnerable to continuing distortions in the rest of the world. Two,

36 0 0 the region would squander leverage to achieve meaningful reform in the global context. Opening our sugar market to the five Central American countries designated for FTA negotiations will result in major disruption of the U.S. sugar market, sharply reduced producer prices and income, a great loss of U.S. jobs, and major budgetary outlays for the U.S. Government. These costs would far outweigh any overall gains to the U.S. economy resulting from tariff elimination. In particular, history shows that consumers would not see any benefit from lower producer prices past along to them in the form of reduced retail prices for sugar or sugar-containing consumer products. All five of the countries covered by the proposed FTA negotiation, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua are significant producers and exporters of sugar. Guatemala is the world's seventh largest exporter exporting on average. million tons over the past three years. These countries already have a significant share, roughly 0 percent of the U.S. duty-free sugar imports.

37 0 0 In total these five countries produce over $ million tons of sugar per year and export nearly million tons of that. The great bulk of this export capability would be directed to the U.S. market if our tariffs on sugar and sugar-containing products were eliminated for these countries. To put this in perspective, we are importing only about. million tons of sugar per year from 0 countries already. In fact, Central American sugar exports to the U.S. alone could exceed their current total exports of about million tons for two reasons. First, the prospect of unlimited access to the U.S. market would likely encourage increased sugar production as it did in Mexico. Second, these countries could send us all their domestic production and substitute imported dump-market sugar for their own consumption. I should also note that the low U.S. market prices that were a result from increased Central American imports would harm the other countries that have shares of the U.S. sugar import quota. Virtually all these countries are developing countries. Many are poor and heavily dependent on

38 0 0 their shipments to the U.S. market. Shrinkage of the U.S. market at these countries' expense would no doubt lead them to demand equal treatment or compensation. Finally, we would point out that the proposed Free Trade Agreement with Central America is one of only several FTA's underway or contemplated involving major sugar producers. Chile, the free trade area of the Americas, Australia, and South Africa are others. Increasing market access on sugar for Central America would set a precedent for these other negotiations that would presage even greater disruption of the U.S. sugar market. The U.S. sugar industry believes that trade distorting government policies and pervasive dumping can be effectively addressed only in multilateral WTO negotiations. We have urged the administration to focus its efforts on comprehensive, sector-specific negotiations within that form. Attempts to deal with the problems plaguing the world's sugar industry and to eliminate tariffs on sugar within the various FTA negotiations would jeopardize this broader goal in our unworkable. In conclusion, rather than including sugar

39 0 0 in efforts for individual FTAs the sounder course of action is for our FTA partners to join with the U.S. in sector-specific WTO negotiations to attack aggressively and to eliminate the government policies that have so grossly distorted world trade in sugar. Thank you for your attention. CHAIRPERSON SURO-BREDIE: Thank you. The first question will be asked by the representative of the Department of Agriculture. MS. FREEMAN: Thank you for your testimony. The question I have is that you mentioned that subsidization is common among sugar producers, in Brazil, for example. Do you have any information on what type of domestic support or other programs that the Central American Free Trade Agreement countries provide their sugar sectors? MR. RONEY: Yes, Ms. Freeman. Thank you for asking that. We have been working with LMC International of Oxford, England, on a comprehensive study of the largest sugar producing and exporting countries. One of those is Guatemala and we do have some detailed information for you on Guatemala. Guatemala is the one we are focused on

40 0 0 0 because they produce alone more than the other four countries produce together. Their policies are fairly typical of that area. We are working with LMC to complete that study. We hope to have it completed within the next couple weeks. We look forward to providing that to the trade policy staff committee, to ITC, to USDA because we think that it will be a very helpful guideline to you in understanding and accessing the nature of foreign sugar policies. One of the things I just point out is that with the world sugar market one of the problems is that only a portion of government intervention in sugar fits into the three classic cones of domestic supports, market access, or tariffs and export subsidies. There are a host of what we would consider less transparent government interventions that play a major role in destroying the world sugar market. One of the advantages of the work that we're having done with LMC International is that they are looking not only at the transparent government interventions but the less transparent ones.

41 0 0 I would note in their preliminary work on Guatemala that we found that the Guatemalan government does not intervene very directly in their sugar market. However, they allow the domestic industry to impose upon itself domestic marketing quotas. They control prices and exports. As a result, the domestic prices in Guatemala, as one would expect with any country that is producing sugar in significant quantities, is more than double the world dump market price so they maintain a price structure there well in excess of world dump market prices so that their industry can continue to survive. We'll have that study for, I think, within the next couple of weeks. CHAIRPERSON SURO-BREDIE: Our next question is by USDR. MS. SYDOW: Good morning. I think that your answer to the previous question is a good lead-in for the question I would like to ask, and that is is the trade between the five countries unrestricted and if it is not, what types of barriers exist -- trade barriers exist between the countries? MR. RONEY: The work that we have had done

42 0 0 so far, as I mentioned, focuses on Guatemala and it found that Guatemala has a 0 percent import tariff. Their bound and fixed rates in WTO are considerably higher. They have the potential of going up to 0 percent. Their base rate is percent. Final rate under the Uruguay Round Agreement on Agriculture would be 0 percent so they do have the potential for substantially higher tariffs. From what we understand the barriers are similar among the other countries in Central America but we are still looking into that. CHAIRPERSON SURO-BREDIE: Does anyone have further questions? Question by the Department of Agriculture. MS. FREEMAN: You in part alluded to this but I feel compelled to ask you this question. Do any of the five countries have the capability to expand sugar production beyond their current levels? MR. RONEY: We believe that they all do and that has been one of our fears. Our two major concerns is that as Mexico did that they may try to expand their production if they have this plumb of unlimited access to the U.S. market where we maintain

43 0 0 a price closer to the world average cost of producing sugar than to the world dump-market price. There's the potential for increased production. But an even great and more immediate concern is that unless we have rules of origin that are crafted very carefully, that these countries could substitute. They could potentially send into the U.S. all their domestic production totally about $ million tons and import for their own needs from the world dump market. The temptation to do that would be significant at current differentials where the world dump market prices are running only about six cents per pound and the U.S. price is about cents per pound. The temptation would be there to impart foreign sugar for their own needs and send us the domestic production. We would view that as an even more immediate threat than increased production in each of those countries. CHAIRPERSON SURO-BREDIE: Could I ask a question, Mr. Roney? How would the rules of origin help you if they were sending domestically produced goods?

44 0 0 MR. RONEY: What we have recommended in the Chile FTA, for example, is that the surplus producer definition that was crafted in the NAFTA agreement relative to Mexico should apply to any country that we do a Free Trade Agreement with and by having a surplus producer requisite. In other words, they could send to us exports not in excess of the differential between their production and their consumption, that that would prevent substitution. Is that point clear or should I -- CHAIRPERSON SURO-BREDIE: Arcane, but clear. Any more questions? If not, thank you very much. Our next witness is Victoria Schantz. Have I pronounced that right? MS. SCHANTZ: Yes. CHAIRPERSON SURO-BREDIE: National Milk Producers Federation. And Peter Vitaliano. DR. VITALIANO: Correct. CHAIRPERSON SURO-BREDIE: Dr. Peter Vitaliano also of the National Milk Producers Federation. Welcome. MS. SCHANTZ: Madam Chairman and members of the committee, good morning. My name is Victoria

45 0 0 Schantz. I'm responsible for coordinating trade policy for both the National Milk Producers Federation and the U.S. Dairy Export Council. I'm accompanied by Peter Vitaliano, Vice President of Economic Policy and Market Research for the National Milk Producers Federation. I appreciate the opportunity to present the views of NMPF and USDEC with respect to the proposed U.S. Central American Free Trade Agreement. Both constituencies I represent here today support a clearly negotiated Free Trade Agreement with Central America. We believe a U.S. Central American FTA makes economic sense for the United States as it would increase prosperity for these neighboring countries. Benefits to the U.S. Dairy industry are clear. Essential America is a net importer of dairy products. In 000 dairy imports the five Central American countries from other countries amounted to $. million. Dairy exports from the five countries to external destinations were just $. million that year. In the year 000 half of these imports were from North America, primarily the United States,

46 0 0 percent from Oceana, New Zealand, and Australia, and percent from the European Union. In the last three years U.S. exports of milk powders and cheese to Costa Rica, El Salvador, Guatemala, and Nicaragua grew steadily. We believe that even if an FTA brings a rise in dairy production, consumption will increase at a faster rate resulting in a clear benefit for the U.S. diary industry. The five Central American countries will not implement their final Uruguay Round tariff commitments until 00 at which time they will still retain relatively high tariffs for many diary products. The final Uruguay Round bound tariffs for most dairy products will range from 0 percent to over 00 percent. Eliminating tariffs on Central American imports of dairy products from the United States may stimulate some additional U.S. dairy exports of certain cheeses, dry and condensed milk products, and perhaps a few other products. The removal of current trade barriers through the bilateral Free Trade Agreement would allow U.S. dairy exports to overcome the natural advantages

47 0 0 of export subsidies for European products and low-cost production for New Zealand and Australian exports. Similarly, providing duty-free treatment for the U.S. imports dairy products from the five Central American countries is not likely to have a significant economic effect on industries in the United States producing like or directly competitive products. Nor upon consumers provided that the liberalized access to the U.S. dairy market provided by the FTA is respected to dairy products produced from milk and dairy ingredients that truly originate from those five countries. This will be the case if the rules of origin for the proposed U.S. Central American FTA provide that all milk and dairy ingredients for which access to the U.S. market is liberalized must be manufactured from milk produced by cows in the five Central American countries themselves. The North American Free Trade Agreement contains rules of origin for dairy products that effectively provide for this type of restriction with respect to dairy products from Mexico and Canada. However, in the absence of such rules of

48 0 0 origin, dairy products and dairy ingredients produced in third countries, particularly New Zealand, Australia, and member countries of the European Union, could easily be trans-shipped through Central America to benefit from the large difference in tariff treatment afforded products that will qualify for liberalized access to the U.S. market under a bilateral agreement. This would have a significant and negative impact on U.S. industries producing like or directly competitive products. Under the most scenario dairy processing operations based in Central America could import concentrated storable dairy components in the form of butter oil, hydros milk fat, skim milk powder, and whole milk powder, as well as products such as hard cheese for further processing and use them to produce products such as cheeses of various kinds and diary containing food preparations and chocolate preparations to export to the United States. In the assumed absence of stringent dairy specific rules of origin similar to the NAFTA dairy rules of origin, these processes would qualify as origin-conferring substantial transformations enabling