SPEAKERS CONTENTS INSERTS
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44–885 CC
1998
FAST TRACK, NAFTA, MERCOSUR, AND BEYOND: DOES THE ROAD LEAD TO A FUTURE FREE TRADE AREA OF THE AMERICAS?
HEARING
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY AND TRADE
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
JULY 9, 1997
Printed for the use of the Committee on International Relations
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COMMITTEE ON INTERNATIONAL RELATIONS
BENJAMIN A. GILMAN, New York, Chairman
WILLIAM GOODLING, Pennsylvania
JAMES A. LEACH, Iowa
HENRY J. HYDE, Illinois
DOUG BEREUTER, Nebraska
CHRISTOPHER SMITH, New Jersey
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
CASS BALLENGER, North Carolina
DANA ROHRABACHER, California
DONALD A. MANZULLO, Illinois
EDWARD R. ROYCE, California
PETER T. KING, New York
JAY KIM, California
STEVEN J. CHABOT, Ohio
MARSHALL ''MARK'' SANFORD, South Carolina
MATT SALMON, Arizona
AMO HOUGHTON, New York
TOM CAMPBELL, California
JON FOX, Pennsylvania
JOHN McHUGH, New York
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LINDSEY GRAHAM, South Carolina
ROY BLUNT, Missouri
JERRY MORAN, Kansas
KEVIN BRADY, Texas
LEE HAMILTON, Indiana
SAM GEJDENSON, Connecticut
TOM LANTOS, California
HOWARD BERMAN, California
GARY ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
MATTHEW G. MARTINEZ, California
DONALD M. PAYNE, New Jersey
ROBERT ANDREWS, New Jersey
ROBERT MENENDEZ, New Jersey
SHERROD BROWN, Ohio
CYNTHIA A. McKINNEY, Georgia
ALCEE L. HASTINGS, Florida
PAT DANNER, Missouri
EARL HILLIARD, Alabama
WALTER CAPPS, California
BRAD SHERMAN, California
ROBERT WEXLER, Florida
STEVE ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
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JIM DAVIS, Florida
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
Subcommittee on International Economic Policy and Trade
ILEANA ROS-LEHTINEN, Florida, Chairperson
DONALD A. MANZULLO, Illinois
STEVEN J. CHABOT, Ohio
TOM CAMPBELL, California
LINDSEY O. GRAHAM, South Carolina
ROY BLUNT, Missouri
JERRY MORAN, Kansas
KEVIN BRADY, Texas
DOUG BEREUTER, Nebraska
DANA ROHRABACHER, California
SAM GEJDENSON, Connecticut
PAT DANNER, Missouri
EARL F. HILLIARD, Alabama
BRAD SHERMAN, California
STEVEN R. ROTHMAN, New Jersey
BOB CLEMENT, Tennessee
TOM LANTOS, California
BILL LUTHER, Minnesota
MAURICIO TAMARGO, Chief of Staff
YLEEM D.S. POBLETE, Professional Staff Member
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AMOS HOCHSTEIN, Democratic Professional Staff Member
JOSE A. FUENTES, Staff Associate
C O N T E N T S
WITNESSES
Mr. Charles Jainarain, Executive Director of the Summit of the Americas Center, Florida International University
Mr. Thomas O'Keefe, President of MERCOSUR Consulting Group
Mr. John Sweeney, Policy Analyst for Latin America, Heritage Foundation
Ms. Thea Lee, Assistant Director of International Economics, Public Policy Department, American Federation of Labor and Congress of Industrial Organizations
Mr. Ramon Rasco, President, Rasco, Reininger and Perez, P.A.
Ms. Arely Castellón, Vice President and General Manager for the Americas, Global One Trustee, Caribbean/Latin America Action
APPENDIX
Prepared statements:
The Honorable Ileana Ros-Lehtinen, a Representative in Congress from Florida
Mr. Charles Jainarain
Mr. Thomas O'Keefe
Mr. John Sweeney
Ms. Thea Lee
Mr. Ramon Rasco
Ms. Arely Castellón
FAST TRACK, NAFTA, MERCOSUR, AND BEYOND: DOES THE ROAD LEAD TO A FUTURE FREE TRADE AREA OF THE AMERICAS?
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WEDNESDAY, JULY 9, 1997
House of Representatives,
Subcommittee on International Economic Policy and Trade,
Committee on International Relations,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:20 p.m., in room 2172, Rayburn House Office Building, Hon. Ileana Ros-Lehtinen (chairman of the Subcommittee) presiding.
Ms. ROS-LEHTINEN. The Subcommittee will come to order.
Today we are here to discuss a work in progress—an idea that is still evolving and taking shape, and one which saw its birth in the historical ties that bind the countries of the Western Hemisphere but has been fueled by the increase of globalization of the marketplace. I'm referring to the concept of FTAA.
While it may have been brewing for some time, it was first formalized in 1990 when the Enterprise for the Americas Initiative included a proposal to establish a Western Hemisphere free trade area. The objective was to begin the bilateral free-trade negotiations—those between the United States and Mexico serving as a test case and the Canada-U.S. free trade agreement as a model. After years of negotiations, this would come to fruition in the form of the North American Free Trade Agreement (NAFTA).
However, soon thereafter, given the wake of democratization that has been sweeping through most of the hemisphere, and the emerging economic strength of the region, the leaders of the free countries of the hemisphere decided it was time to move forward.
They looked to developments in other regions as indicators of the future global economic landscape, realizing the trade currents were rapidly redefining geopolitical boundaries through the process of integration. Supporters of integration and this globalization argued that if the United States did not become actively involved going beyond simply being a participant to a leader and indeed an innovator, it would fall behind and would be unable to maintain its predominant economic position.
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As a result, in December 1994, at the Summit of the Americas held in my hometown of Miami, Florida, the leaders of 34 of the region's democratic governments committed their countries to the goal of creating a Free Trade of the Americas (FTAA). This area would be setting a deadline of 2005 for finishing the negotiations to lowering the barriers and for reconciling different policies toward trade and investment.
What opportunities and challenges does this present? To address the issue of opportunities, I underscore the points raised by proponents of a free trade area who support their contentions with data from the U.S. Department of Commerce, and the Office of the U.S. Trade Representative.
The statistics they say show that as a region, the countries of the Western Hemisphere constitute the largest market for U.S. exports, and the second largest regional market for U.S. foreign direct investments. The figures reflect that U.S. exports to the region of Latin America and the Caribbean account for approximately 38 percent of the total U.S. exports. By contrast, it is reported that on average, the countries of the Pacific Rim, including Japan, purchase 31 percent of U.S. exports, and the European Union countries bought 21 percent of U.S. exports.
Supporters of further integration toward a hemispheric trading block translate these figures into arguments saying that these experts support an estimated 11.3 million jobs in the United States with over 1.4 million of those having been generated by increased exports over the last 4 years. They further contend that export-related jobs are good jobs paying 13 to 16 percent more than non-trade-related jobs.
But the need for further integration goes beyond these direct benefits. Proponents of a free trade area see an imminent threat for U.S. exports and investments arising from the movement toward preferential trade agreements in the region without U.S. involvement and participation.
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By contrast, opponents and skeptics argue that the potential benefits are overstated while the potential costs are ignored or hidden. They refer to the case of NAFTA, the promises made and the expectations raised versus the reality of its implementation.
They underscore the wage differentials and the overall economic disparities between the United States and would-be partners in a trading bloc. They argue that agreements with low-wage countries—absent strong labor and environmental provisions that are fully enforceable—lead to a loss of U.S. jobs and investment capital.
They further point to the shift in the bilateral trade balance with Mexico as a preamble of what could potentially happen with other countries if the United States proceeds with its plan toward NAFTA expansion and a hemispheric free trade area.
Concerns about NAFTA's impact on the U.S. domestic scenario, many observers would contend, have led to a stalemate on fast track, and that Congress and the President have called a draw until September. Others will extend this argument further and say that the entire movement toward FTAA is now currently ''off-track'' as a result. They indicate that the United States, lacking fast-track authority, has been unable to provide the kind of momentum necessary to ensure that the process evolves in a manner that is supportive of U.S. interests.
Without fast-track authority to expand NAFTA, it is argued that the United States will be unable to secure its comparative advantage over other countries and over other trading blocs that are engaging the Hemisphere, wishing to capture this emerging market.
By contrast, there are those—including some of our witnesses today—who argue that whether or not fast track is granted, financial and economic integration of the Western hemisphere will continue at a record pace.
Nevertheless, even if fast-track negotiation authority were to be extended, the question of divergent country interests still remains. Specifically, resistance from Mexico could slow the progress in expanding NAFTA southward, with resistance from Brazil potentially retarding efforts to harmonize norms and reach an agreement on structural framework.
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These were the issues raised during the meeting in Belo Horizonte and, in conjunction with numerous others, they will continue to be raised during this process of negotiations and consultations.
In the end, we must ask what all this means for a future FTAA. What is the status of a hemispheric trading bloc? Are NAFTA, MERCOSUR, and other regional blocs stepping stones to global trade liberalization, or trade expansion, or are they becoming fortresses and thus impediments to multilateral liberalization? What is and will be the impact on American businesses on the labor force and overall U.S. domestic scenario, and on U.S. global competitiveness?
The witnesses testifying today will attempt to answer some of these questions and provide recommendations for us on the most appropriate course of action to ensure benefits for us all.
And we thank them very much for being here with us today.
We will now like to hear, before we get to hear from our panelists, from the Members of our Subcommittee, Mr. Sherman of California.
[The prepared statement of Ms. Ros-Lehtinen appears in the appendix.]
Mr. SHERMAN. Thank you, Madam Chair. Thank you very much for holding these hearings.
Any effort to expand NAFTA is obviously very important, and as you well summarized, Latin America is critically important to jobs in the United States.
I very much regret the fact that the Administration has decided not to be here. They will at some point, I think, ask for fast-track authority, and they would be on the strongest position to do that if they used these hearings as a chance to have their ideas tested rather than leave us today without any Administration input. I think those requesting fast-track authority carry a very heavy burden of proof. They are asking this Congress to dispense with our traditional procedures. Now and then I have a proposal that I put before the Congress, as we all do, and we would love to get fast-track treatment of our bills. That happens only in extremely rare circumstances. And those who advocate fast-track negotiating authority need to show that those circumstances are present.
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I should point out that we need more and more to point out in trade discussions the role we play in providing for the world's peace and security. One example comes to mind here, the MERCOSUR countries—I hope I'm pronouncing that correctly—have made a point of saying, ''Well, if they don't cut a deal with us, they could cut a deal with the Europeans.''
I think the Europeans ought to reflect on the fact that we have consented—as a matter of fact, led—in the expansion of NATO, a development which now insulates Germany, creates a situation where all of the countries of Western and Central Europe are more secure, at some significant expense to the U.S. taxpayer.
While we are providing for greater European security, it would be a shame if the European Union were here in this hemisphere trying to undermine our efforts to insist on environmental standards, and insist on labor standards as a price for, or consideration in, trade agreements in common markets.
I would hate to have a situation put to us where we're told we had better cut a deal without labor standards, without environmental standards, because the Europeans for whom we provide security are busy undermining our efforts in our own hemisphere.
I would point out that imports from Latin America sometimes do displace American jobs, but also do displace imports from China and other countries that have no labor standards, and no environmental standards, and that we have to when we look at imports from Latin America see what those imports are displacing.
So I look forward to hearing from our panelists and working toward a trade relationship with Latin America that's based on democracy, stability, environmental standards, and labor standards.
Ms. ROS-LEHTINEN. Thank you, so much, Brad.
Mr. Roy Blunt of Missouri.
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Mr. BLUNT. Thank you, Madam Chairman. I'm grateful to you for holding this hearing. I think it's a great time to take the pulse of NAFTA and see where it's heading and what we can learn from what has already happened, and look forward to the witnesses.
Ms. ROS-LEHTINEN. Thank you.
Mr. Luther.
Mr. LUTHER. I just thank you very much, Madam Chair, for this opportunity, and I have nothing further beyond what's been said.
Ms. ROS-LEHTINEN. Thank you.
Mr. Moran.
Mr. MORAN. Madam Chairman, thank you. I have no statement.
Ms. ROS-LEHTINEN. Thank you.
Mr. Rothman.
Mr. ROTHMAN. Madam Chairman, I don't have any statements, and do I want to congratulate you on holding this hearing.
Ms. ROS-LEHTINEN. Thank you. Thank you so much.
Now, let us proceed with the introduction of our witnesses. I'd like to request that you limit your statements to the 5 minutes alloted.
Our initial witness is Mr. Charles—and I hope I don't slaughter your name too badly—Jainarain.
Mr. JAINARAIN. Close enough.
Ms. ROS-LEHTINEN. Close enough. OK. I've got a difficult last name also.
Mr. Jainarain is the executive director of the Summit of the Americas Center at Florida International University, my alma mater. Charles is a specialist in international economic development and has spent close to 11 years as a practitioner in his field.
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His prior assignment was at the Beacon Council, Miami's Economic Development Corporation, as its director of International Economics and Research.
He has been widely published, particularly in the fields of international trade and multinationals. We welcome you here.
He will be followed by Mr. Thomas O'Keefe, who serves as the president of the MERCOSUR Consulting Group, and as managing editor of Focus Americas. He's an attorney having worked in New York and DC focusing on general commercial litigation and products liability, and on international corporate law. He has worked in the legal department of the Chilean Human Rights Commission, and in the legal department of the Bicardia de la Solidadidad. He has written extensively on MERCOSUR and issues of Latin America economic integration, and we welcome Mr. O'Keefe with us today.
Next, we will hear from John Sweeney—or ''Jack'' as he prefers to be called—who serves as the policy analyst for Latin America at the Heritage Foundation. He is the founder and long-time director of the influential Venezuelan newsletter, ''Ven-Economy,'' and a former publisher of ''En Degas Mexico Insight.'' He has also reported on Latin American affairs for the Journal of Commerce, Business Week, and the International Herald Tribune, among others.
We welcome Mr. Sweeney with us today.
Our next witness will be Ms. Thea Lee, who serves as assistant director of international economics in the Public Policy Department of the AFL–CIO, where she oversees research on international trade and investment policy.
Previously, Ms. Lee worked as international trade economist at the Economic Policy Institute in Washington DC, and is an editor of Dollar & Sense magazine in Boston. We welcome you today.
Following Ms. Lee is a good friend of mine, long-time friend of our family, Ramon Rasco, who serves as president and partner of a law firm in Miami, and as you will note, Ramon has quite a diverse portfolio. He serves as director and secretary of Ready State Bank, as director and vice-president of Royal Palm Gardens, as director and secretary of Century Partners Group, and is trustee of the Latin Builders Association Worker's Compensation Fund.
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Previously, Mr. Rasco served as an arbitrator for the American Arbitration Association as an attorney, associate, and parter in various firms, and as a tax accountant for Coopers & Lybrand.
I'm thrilled that he was able to join us today, and I would like to recognize also his lovely family sitting in the audience, as well as the Pando family, who are also good friends of the Rascos.
And our final witness is Ms. Arely Castellón, vice-president and general manager, Latin America Region, Global One, where she is responsible for Global One's commercial activities in the business, consumer, and carrier markets, as well as field operations and business development in Latin America.
Previously, Ms. Castellón served as vice-president and general manager of the America's Region for Sprint International; as executive director of the International Carrier Services in the Americas for Sprint; and has held various sales and marketing positions at AT&T and Xerox.
Ms. Castellón serves as a trustee of the Caribbean Latin American Action, and is representing that organization today.
We thank all of you for being here today, and we thank you for your testimony. And we will start with Florida International University's Mr. Jainarain.
STATEMENT OF CHARLES JAINARAIN, DIRECTOR, SUMMIT OF THE AMERICAS CENTER, FLORIDA INTERNATIONAL UNIVERSITY, MIAMI, FLORIDA
Mr. JAINARAIN. Thank you very much.
Thank you for the opportunity for providing this hearing so that we can hear some of these issues as they concern the FTAA, MERCOSUR, accession to NAFTA, and fast-track authority. I think it is critical to the United States, and especially critical to Florida.
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My testimony today focuses on the fact that while creation of FTAA is critical to U.S. hemispheric commercial relations, we should recognize that this issue goes beyond short-term commercial policy and into long-term U.S. global policy. While NAFTA, fast track for Chile and FTAA are seen as economic structures for lowering business costs in this hemisphere, these integration schemes also need to be placed within the quilt of U.S. global trade policy. We have an opportunity to assume hemispheric leadership for the first time to bring the Americas closer together.
Since the proposal to create FTAA, however, we have fallen behind. When it was announced in 1994, for example, that Chile was next in line for accession to NAFTA, very little thought was given to bloc-to-bloc negotiations because regional integration structures in Latin America and the Caribbean were nascent. Because fast track never materialized and MERCOSUR has grown in strength, we are now at the point where it is unlikely that MERCOSUR members will negotiate separately with the United States. The question of country-by-country versus bloc-to-bloc negotiations is now moot.
Since 1995, MERCOSUR has grown far beyond its four founding members. Today it encompasses Chile and Bolivia as associate members, and is negotiating with the Andean countries. The Central American common market members are also beginning to view MERCOSUR as the only game in town.
The reason that we have little negotiating strength is the lack of fast-track negotiating authority for Chile's accession to NAFTA. When we analyze the ramifications of accession, however, the argument that it would have a detrimental effect on the U.S. fate, Chile's economy is about the same size as Miami's economy. If all of Chile's trade were conducted with the United States, it would only account for less than half of 1 percent of total U.S. trade. Chile has a uniform tariff of 11 percent, and an open foreign investment regime. Therefore, very little change is expected from Chile's accession to NAFTA.
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The implications for the United States, however, lie in hemispheric trade strategy rather than economic considerations. Chile's accession would send a signal that the United States is dedicated to the creation of FTAA.
Florida supports the creation of FTAA. It is clear to us that international business is a key component of our economic growth in the past decade. It is always clear to us that international business is our future in the State of Florida.
Florida currently accounts for over 40 percent of all U.S. trade with Latin America and the Caribbean; and within Florida, 65 percent of our total trade is with these regions. This has led, for example, to Miami International Airport's ranking as the leading international cargo airport in the United States, and the second leading airport in the United States for international passengers.
Yet Florida's international business goes beyond infrastructure and tangible goods exports. Because trade and services such as exports of tourism, educational services, health care services, and professional business services is where growth is occurring, Florida is ideally positioned to capitalize on the growing demand for services from Latin America and the Caribbean.
Our support for the FTAA is evidenced in a recent 17-member Florida delegation led by Florida's Governor Chiles to a third trade ministerial in Belo Horizonte, Brazil, where we presented a Florida position paper.
Note that while Florida counts for the bulk of U.S. trade with Latin America and the Caribbean, we are not alone in benefiting from market expansion in these regions. The top six sources of exports to these regions are Texas, California, Michigan, New York, and Illinois.
In sum, the United States took the first step in western hemispheric free trade with its vision of FTAA, but it's not yet taken the second step. This is an issue that goes beyond short-term economic gain and into long-term global directions for the United States. The essential question is, is the United States committed to the FTAA? If we are, we have to deliver some tangible evidence to the rest of this hemisphere of our commitment. We believe that the role for the United States still leads to FTAA. But we must make a down payment for the journey ahead.
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Thank you very much, and I look forward to your questions.
[The prepared statement of Mr. Jainarain appears in the appendix.]
Ms. ROS-LEHTINEN. Thank you, so much.
Mr. O'Keefe.
STATEMENT OF THOMAS O'KEEFE, PRESIDENT, MERCOSUR CONSULTING GROUP, LTD, WASHINGTON, DC
Mr. O'KEEFE. Thank you. Let me begin my remarks by thanking the House Subcommittee on International Economic Policy and Trade, and in particular its Chair, Congresswoman Ileana Ros-Lehtinen, for the invitation to share with all of you our viewpoints on MERCOSUR and how the continued lack of fast-track authority for the executive branch is negatively affecting the ability of the United States to shape the agenda for FTAA.
Let me just begin by pointing out that we do have a rather unique perspective on these issues because our focus really is more with the knitty-gritty of how these various subregional economic integration programs operate.
We assist U.S. companies either investing or exporting to South America, and our particular specialty is advising U.S. companies in how they can benefit from the opportunities provided by these subregional economic integration programs.
Therefore, our viewpoint is one that's much more practical because we see on a daily basis how these subregional economic integration programs are functioning; or for that matter, are not.
Accordingly, the comments I make today are coming from more of a private sector perspective.
The first thing I would like to emphasize is that whether or not the Clinton Administration ever gets fast-track authority, it seems to us that the economic and financial integration of the Western Hemisphere will continue. If one looks at what the private sector is doing in terms of increased exports and increased direct investment in the region, the integration of our hemisphere is almost inevitable.
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So we feel that even if fast-track authority is not granted, for example, in September, or in the foreseeable future to the Clinton Administration, we believe that the integration process will continue, and that eventually, the private sector will push the political actors to act.
Second, we also do not see the emergence of a strong MERCOSUR, or for that matter, a MERCOSUR-led South American Free Trade Area as undermining the ultimate goal of FTAA. If anything, we believe the subregional economic integration programs throughout Latin America, including MERCOSUR, help to facilitate the FTAA goal, and that they first iron out problems that inevitably result from attempts to integrate economies that are vastly different in size and development, on a much more manageable subregional level where the disparities tend to be less stark.
Furthermore, from our perspective a strong MERCOSUR, or NAFTA, may actually serve as an effective negotiating counterweight to the United States and force our own country to finally get rid of our own protectionist policies that are often cloaked in terms of measures designed to ''combat'' unfair trading practices.
For example, imposition of anti-dumping our countervailing duties, but from our perspective, it only serves to hurt the U.S. consumer by forcing them to buy more expensive and/or inferior goods.
Having said all this, however, I think it would be extremely unwise to think that continued congressional inaction on granting President Clinton fast-track authority will not have serious negative repercussions on the United States. We believe that as long as the executive branch lacks fast-track authority, it will sharply diminish the negotiating position of the United States to shape the agenda for an FTAA.
Such a situation would mean that there are certain things that one finds, for example, in NAFTA that might never be included in an FTAA. I think this is a particular concern dealing with things like liberalization of the financial services market, liberalization of the telecommunications sector, and liberalizing government procurement opportunities.
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If one looks at MERCOSUR—and I'm focusing on MERCOSUR, because in reality, of all the Latin American integration programs, this by far is the most important integration program today, not only in terms of population, GEP, but just also in terms of sheer dynamism of the MERCOSUR integration process—if one looks at MERCOSUR, one will find that the member States are permitted to restrict operation of telephone systems, media ownership, participation of financial intermediary services, bidding on government procurement contracts, and other things to their own nationals.
Now, they are doing this on a subregional level where there is very little serious threat or competition coming from companies within the region. If that's what they are doing subregionally, imagine what they are going to do in the face of far more superior competition that would be offered by the United States or Canada.
To be quite frank, we believe also that this continued lack of fast-track authority has already had negative repercussions for the United States, as we speak. Many people continue to talk in the media and in also the foreign policy establishment here in Washington about fast-track authority being needed for Chilean accession to NAFTA.
Well, as far as we can see, that issue is no longer feasible. We believe that the whole issue of Chilean accession to NAFTA is now—the historical moment for that is past. And with that, perhaps, the idea that was initially proposed during the summer of the Americas in December 1994 that NAFTA would serve as the agreement that would be extended further south to include other countries in the region serving as the foundation of the base of an FTAA, we believe that because of what's happened with Chile, that's over.
We believe that that died for all intents and purposes on June 25, 1996, when Chile signed a free trade agreement with MERCOSUR. The reason for this is that Article 52 of the Chilean MERCOSUR free trade agreement requires that any concession that Chile, or any of the other signatory States, may grant to another third-party country, must be extended to the other members of this Chile-MERCOSUR free trade agreement. If not, that country is required to extend some sort of compensation.
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This is not an idle threat. As I'm sure most of you know, Canada and Chile signed a free trade agreement in December. It will be coming shortly into effect. It was ratified yesterday in the Chilean Senate. It was already ratified in Canada. And the MERCOSUR countries are already demanding that the concessions that Chile granted on agricultural products to Canada also be extended to them.
We also believe, contrary to much of what's been reported in the press, that the new Chilean-Canadian Free Trade Agreement does not facilitate, but rather creates further stumbling blocks for Chilean accession to NAFTA.
Now, I've outlined the specific reasons why in the written remarks, which I won't go into now. However, I think it's important to realize that there are some very important concessions that the Chileans obtained in that agreement that the United States has already gone on the record as saying that they would never permit in terms of Chilean accession to NAFTA.
I'm talking for example, about the foreign investment, the capital retention program for foreign investment the Chileans have; the requirement that 30 percent of capital on a foreign loan be deposited in a noninterest bearing account in the Chilean Central Bank for a period of up to a year. Their rules of origin requirements are vastly at odds with the types of rules of origin requirements that exist in the NAFTA, et cetera.
In sum, then, while we do not view the continued failure of Congress to grant fast-track authority to Congress as necessarily fatal to the FTAA process, nor do we see MERCOSUR as a looming menace which threatens to undermine attempts to create an FTAA, we do, however, see that the lack of fast-track authority has sharply diminished the ability of the United States to shape the agenda for an FTAA in a way that will benefit the greatest number of U.S. workers.
In our view, the failure of Congress to grant the President fast-track authority does not really go to the question of whether there will be an FTAA. We believe that that's inevitable. But rather really goes to the question of what will this FTAA be like.
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Thank you.
[The prepared statement of Mr. O'Keefe appears in the appendix.]
Ms. ROS-LEHTINEN. Thank you, so much.
Mr. Sweeney.
STATEMENT OF JOHN P. SWEENEY, POLICY ANALYST, INTERNATIONAL TRADE AND LATIN AMERICAN ISSUES, THE HERITAGE FOUNDATION, WASHINGTON, DC
Mr. SWEENEY. Thank you, Madam Chairperson. It's a pleasure to see you again.
Thank you for the opportunity to address this Subcommittee on the issues of fast track, NAFTA, MERCOSUR, and U.S. trade policy in the Western Hemisphere.
Does the road lead to a future free trade area of the Americas? Eventually, perhaps in another 10 years or so. I disagree with my friend and colleague, Tom O'Keefe, about whether or not Chile can or can't get into NAFTA. It's my personal feeling that——
Ms. ROS-LEHTINEN. Sounds like the death knell for poor Chile, there.
Mr. SWEENEY. Well, no, it's my personal opinion that if the United States were to come up to the table with a firm offer to Chile and other countries in Latin America, including Argentina, they probably would take the leap, even if the MERCOSUR rules nominally bind them not to take such a leap.
Anyway, does the road lead to an FTAA?
The answer to that we'll know in September when the White House sends to Congress finally its formal request for a new fast-track negotiating authority. The Administration claims that it has no need for fast track until March, 1998, when the President will travel to Chile for the second Summit of the Americas. That's where formal FTAA negotiations are supposed to be launched.
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However, it is our view at the Heritage Foundation that the Administration's position that fast track is not needed yet is both naive and misleading. The road to a future FTAA begins right here in Washington DC. And the first step down that road is to renew the Executive's fast-track negotiating authority. Without a fast-track negotiating authority, the President of the United States cannot undertake any new trade initiatives anywhere in the world. This is not just about NAFTA and Chile, and Latin America. Fast-track authority is about U.S. trade policy in the entire world. Without fast track, U.S. trade policy is effectively stalled, and U.S. leadership has diminished around the world. Moreover, while the United States watches from the sidelines, other countries are negotiating free trade agreements throughout the Western Hemisphere, and American business is losing export and investment opportunities in these opening hemispheric markets. And as a result, American workers are being hurt because less American trade ultimately means fewer American jobs.
Except for special extensions granted by Congress for the specific purposes of completing the NAFTA and Uruguay Round negotiations that created the WTO, President Clinton has been without a fast-track negotiating authority since May 1993. He is the first U.S. President since 1974 to have served a complete term in office without fast-track negotiating authority. This is frankly, in our view, quite extraordinary.
And in the specific case of the Latin American region, the lack of fast-track trade authority has not only hurt U.S. credibility and leadership, it has also put the United States increasingly in disagreement with Latin America on many issues, as you well know, including Cuba policy, immigration, and fighting drug traffickers in the region. Because when you take trade off the agenda, you have nothing left on that agenda but issues which are tension creators. And that's exactly what's happening in the region.
I'd like to touch briefly on NAFTA since so many Members of Congress have indicated that how they may ultimately vote for fast track will be determined as to how they perceive NAFTA.
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Now, NAFTA, as a commercial agreement—because that's all it was ever meant to be; it wasn't meant to solve all of the other problems in U.S.-Mexico relations—as a commercial trade agreement, it has been successful in its first 3 years. Trade between the three countries of NAFTA increased by 43 percent, or $127 billion in NAFTA's first 3 years. If that sum were a country, that trade increase would be our fourth largest trading partner today.
I also want to make the point that NAFTA, in our opinion at the Heritage Foundation, and also the opinion of my good friends down at the North-South Center in Miami, NAFTA has shattered the myth that trade deficits destroy jobs. The combined U.S. trade deficit with Canada and Mexico increased during the first 3 years of NAFTA's implementation from $9 billion in 1992 to $39.9 billion in 1996, mainly because Canada and Mexico have suffered from economic recessions, meaning they cannot buy as many goods from us as we can buy from them.
Since 1992, however, the U.S. economy has created 12 million net new jobs. Moreover, manufacturing employment grew from 16.9 million jobs in 1992 to 18.3 million in 1993, an increase of 1.4 million net new jobs during this period.
The general unemployment rate in the United States declined from 7.5 percent in 1992 to 5.3 percent in 1996, and went down to 4.8 percent in the first quarter of this year, if my memory serves me correct.
Moreover, the largest post-NAFTA gains that we've seen in U.S. exports to other NAFTA countries have been in high-technology manufacturing sectors, also in agricultural sectors, and also even in sectors that claim to be affected by trade, such as the textile industry. Since NAFTA went into effect, many textile mills in South Carolina and other States that were in trouble before NAFTA, have come back to life, a second coming, because of the cross border arrangements they've been able to work out with Mexican textile firms.
In conclusion, Congress should have no doubts about the success of NAFTA. It is only 3 years old, yet it is growing very rapidly; it is doing quite well. And it's already clear that critics of NAFTA have been wrong on all counts. There has been no giant sucking sound of jobs and manufacturing and employment and industry leaving this country. Quite the contrary, this country is benefiting from trade.
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And Congress will be acting in the U.S. national interest when it approves a new fast-track negotiating authority so that the Clinton Administration can put U.S. trade policy back on track, not only in the Western hemisphere, but around the world as well.
Thank you.
[The prepared statement of Mr. Sweeney appears in the appendix.]
Ms. ROS-LEHTINEN. Thank you so much. I have a feeling Ms. Lee may have a different point of view on the NAFTA success.
Ms. Lee.
STATEMENT OF THEA LEE, ASSISTANT DIRECTOR OF INTERNATIONAL ECONOMICS, PUBLIC POLICY DEPARTMENT, AMERICAN FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS
Ms. LEE. Thank you so much, Madam Chair, Members of the Committee. The AFL–CIO appreciates this opportunity to present its views on the renewal of fast-track negotiating authority and FTAA.
The choices we make now with regard to fast track and FTAA will have enormous consequences—not just for trade with our hemisphere, but also for future multilateral trade and investment policy with Asia, Africa, and Eastern Europe. We are setting rules for trade. We're not just lowering trade barriers, and those rules can benefit different groups within society.
In May, the labor federations of the Western Hemisphere and many social organizations met in Belo Horizonte, Brazil, for the Third Annual Labor Forum of the Americas. This forum coincides with the meeting of the trade ministers who are laying plans for the FTAA.
I'm happy to report that the labor and social groups that attended the labor forum made a lot of progress in reaching consensus on the kind of economic and social integration we would like to see our countries achieve. We agreed on the need for labor rights and environmental protection as an integral part of any new trade agreement. We agreed on the need for a negotiation process that recognizes the difficult transitions individual countries will have to make.
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And finally, we agreed that labor and civil society deserve a seat at the table while these negotiations take place. I have attached to my written testimony a copy of the joint declaration that was signed in Belo Horizonte.
But I'm sorry to report that the trade ministers' final report did not reflect our concerns. Despite the efforts of the U.S. trade negotiating team, the ministers chose not to recognize the labor forum and to give it parity with the business forum, which is closely linked to the annual ministerial meeting.
This seems like an ominous sign for the future direction of the FTAA. The trade ministers of the Western Hemisphere see an important role for the private business sector in guiding the negotiations, but none for labor or other social groups. They have established 12 working groups to begin the negotiating process toward the FTAA. None of these 12 working groups will address labor or environmental concerns.
Trade policy affects business, bottom line. But it also affects workers' pay checks and working conditions. The 13 million members of the AFL–CIO and their 30 million counterparts in the rest of North and South America deserve a voice in this process. While the labor leaders and environmentalists in the hemisphere are working together to craft a consensus, our trade ministers are taking us back down a path we have already trodden, toward a repeat of NAFTA-style trade liberalization. You're right, Madam Chair, I do have some disagreements with Mr. Sweeney's testimony.
But now is the time to reverse that course, to set a different course for trade policy. We have to learn from the mistakes we've made in the past, and ensure that the trade agreements of the future benefit workers here and abroad, encourage environmentally responsible and sustainable development, and incorporate the voice and input of all members of civil society.
Trade can bring many benefits, but it doesn't have to. Our current trade policy is lopsided in the sense that it's protecting copyrights, but not worker rights. It's taking care of international investors, but not the environment. We're opening markets abroad in financial services and agriculture, but we are not taking care of displaced workers at home. We have to get our priorities straight before we launch another round of the wrong kind of trade liberalization.
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The AFL–CIO will oppose fast-track legislation that does not require enforceable labor and environmental standards in the core of any new agreement. If we limit fast track in this way, we will send the clearest possible message, both to our own negotiators and to our trading partners that we are ready and willing to chart a new path in the global economy, and that no country should be able to gain a competitive advantage by sacrificing its environment and its work force.
In our view, NAFTA has harmed workers in all three North American countries. Not only did our trade deficit grow, costing hundreds of thousands of jobs, but here in the United States even the workers who have kept their jobs have felt downward pressure on their wages. Their bargaining power has been undermined. The U.S. companies that have enhanced their flexibility and their mobility through NAFTA have used the threat of moving production to Mexico to extract deep wage and benefit concessions. And they are not paying their Mexican workers any better.
NAFTA failed to deliver prosperity and stability to Mexico as was promised. Instead, it exacerbated the Mexican economic crisis, limited the government's ability to address the crisis, and deepened income polarization and social divisions.
Rather than enjoying automatic prosperity as the result of trade liberalization as NAFTA's proponents had predicted, average Mexicans have seen their debts skyrocket and their wages fall since NAFTA took effect. The labor and environmental side agreements of NAFTA have proven ineffective. Under the terms of the labor side agreement, even when the workers have proven their case satisfactorily, when they've won their cases before the National Administrative Office, nothing has changed. The workers have not gotten their jobs back, the abuses have continued, the companies and the government have not paid any fines. None of the workers who lost their jobs in the cases brought before the National Administrative Office have been rehired.
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NAFTA's provisions on trucking standards are inadequate to ensure highway safety or safe working conditions for American and Mexican truck drivers. The safety of fresh and frozen produce in American supermarkets is in jeopardy. Increased volumes of trade in agricultural products in conjunction with industry pressure to speed border inspection have resulted in woefully inadequate oversight of fruit, vegetable, and animal product imports.
Americans have the right to continue to enjoy safe highways and supermarket produce, and to know that new trade agreements will not jeopardize that right.
All in all, it should be clear that NAFTA fulfilled virtually none of the promises made on its behalf. Instead of extending NAFTA to Chile and the rest of this hemisphere, we must drastically rethink the trade and investment rules we need as we approach the 21st century. We need to protect core labor rights and environmental standards right in the body of any new trade agreement, and we need to write this right into fast-track legislation.
The AFL–CIO is open to expanding trade through bilateral multilateral agreements so long as those agreements reflect the legitimate concerns of workers and communities, and not just those of business. Past trade agreements have taken care of employers' rights. Future trade agreements should protect the people who do the work and the environment we all share.
Madam Chair, we stand ready to work with you and Members of the Committee to structure legislation that will bring shared prosperity to all the workers of the hemisphere.
Thank you.
[The prepared statement of Ms. Lee appears in the appendix.]
Ms. ROS-LEHTINEN. Thank you, so much, Ms. Lee.
Mr. Rasco.
STATEMENT OF RAMON E. RASCO, ESQ., PRESIDENT, RASCO, REININGER & PEREZ, P.A., MIAMI, FLORIDA
Mr. RASCO. Thank you, Madam Chair. Members of the Subcommittee, thank you, for the honor of being here today with my family and friends.
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Living and practicing in South Florida gives me some insight on the issues before you today. The paths that lead to free hemispheric trade have crossed, and I believe will always cross, in Miami.
Today as this Subcommittee addresses the issue of considering fast-track authority, my remarks will address three points.
First, the effects of NAFTA on the South Florida business community as seen from my standpoint and those of my colleagues in my areas of expertise and involvement.
Second, the view of NAFTA and the possible FTAA as perceived by my clients, business relations, and counterparts, from Latin America and the Caribbean.
And third, my recommendations to this Subcommittee on FTAA.
From my perspective and that of my contacts in South Florida, my impression is that on balance, NAFTA has been favorable for us. Trade and investment have flourished, and while some jobs have been lost, others have been created. International trade, particularly north-south trade, international banking—which is critical to South Florida—international business and inbound investments are some of the increasingly important engines that drive the South Florida economy, and that have benefited, and will continue to benefit from NAFTA.
As free trade areas are created and expanded, South Florida and the rest of the country will reap the benefits of increased economic activity. It follows then that international trade, business, banking, and investments, in South Florida, in Florida, and in the country, will benefit from the accession of Chile into NAFTA, and from an FTAA.
Art Simon, the director of Florida's Division of Banking, recently reported that Florida's economy is growing, largely as a result of international trade and commerce. Latin Americans buy many of the luxury condos in South Beach, Fisher Island, and Aventura, and contribute to our economy in many, many, other ways.
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We have always felt the economic shock waves when Mexico, Venezuela, Brazil, Argentina, suffer economic downturns. Compare the problems Mexico had in the 1980's to its problems 2 years ago after NAFTA. With our valuable and timely assistance, those problems have been basically resolved and Mexico has repaid its debt early and with interest.
Regional trade agreements give us more input and increase our ability to influence policy and to help solve our neighbors' problems which have always affected us.
Finally, from the South Florida perspective, Miami International Airport and the Port of Miami, which derive much of their business from Latin America and the Caribbean, have continued to experience increased passenger and cargo traffic every year, further increasing their tremendous contributions to the job base and the economy of South Florida.
An FAA study that was recently released last April estimates that operations at Miami International Airport will grow dramatically faster than in the nation's 100 busiest airports in the next 13 years.
From the standpoint of our Latin American-Caribbean neighbors, my contacts are asking me why Mexico and not us. Our neighbors understand our common border with Mexico, and our political realities made it exigent for us to have entered into the treaty with Mexico. But now, other countries are requesting NAFTA parity or accession. I suggest that we give them the standards they need to meet, and let them strive to get there. Moving forward is in our interest and theirs.
In my opinion, the record speaks very loudly of NAFTA's benefits to our economy. Witness our economic performance in the last 3 1/2 years. It is doubtful that we will be enjoying the present economic prosperity if too many of our jobs are being exported south of the border without offsetting job gains. And I would cite you to an article in the Wall Street Journal that appeared last week, documenting case after case of jobs that were certified by the Labor Department as having been lost to NAFTA, but which were, in fact, lost for numerous other reasons.
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Hong Kong's financial secretary from 1961 to 1971 advocated and implemented the theory of positive nonintervention. The theory requires government—and I quote—''to resist the tempation to do something under pressure by critics convinced that they know how to spend public money better than the public does.'' I know that we know different.
Let us not lose sight of the fact that tariffs are taxes imposed by governments on importers and exporters, and always passed on to consumers. In many Latin American countries tariffs also constitute the life blood of the endemic corruption that lies at the heart of so much of the region's problems.
Above all, the people of Latin America and the Caribbean need more jobs, stability, and improved institutional integrity. From the standpoint of our national interest in doing business in exporting to our neighbors to the south, we're losing ground to Europeans and Asians who are aggressively buying banks and businesses in the area. There are currently 27 free trade agreements, or FTAAs, in this hemisphere, of which NAFTA and MERCOSUR are the most important.
In the last 3 years while we have been debating the delegation of fast-track authority, and engaging in partisan politics, both Canada and Mexico have entered into FTAAs with Chile. MERCOSUR entered into FTAAs with Bolivia and Chile, and by the end of this year, Mexico will have a free trade agreement with most of the countries of this hemisphere, including MERCOSUR.
Without fast-track authority, we will continue to fall behind or be completely foreclosed from the region's economic integration; and the export of our goods, services and investments will be subject to increasing discrimination.
Why aren't we moving forward with the commitments made by President Bush and President Clinton to bring Chile into NAFTA, and to continue on the road to the FTAA?
It is largely in my opinion because of the tension between Congress and the Administration over ceding fast-track authority to the Executive, and the differences between those who want a clean trade-only fast track, and others who want environmental and labor considerations to be included.
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In conclusion, in order for the United States to maintain its leadership position, I would recommend to you the following:
First, these issues are much, much, too important to be subordinated to partisan and constituent politics. The time is now to grant the Administration the fast-track authority that it needs to keep alive the spirit of Miami.
Second, I would recommend that Congress recommend to the Administration a framework for FTAA that will; (A), provide for the simplest possible system firmly grounded in the rule of law; (B), permit the largest amount of free trade and investments opportunities; (C), that will address trade and investment inhibitors, such as currency devaluations, restrictions on repatriation of capital, and political instability; and (D), that will be efficient and cost effective to administer.
My third recommendation deals with domestic concern over labor and environmental issues. These issues are obviously very valid and must be addressed. But in my opinion, they should not keep us from commencing and continuing free trade negotiations. Issues such as labor and wage standards, and obviously environmental preservation—which was another of the objectives agreed upon in the Summit of the Americas—can and should be tackled, but they should be done in separate negotiations.
In conclusion, in my opinion we stand at a unique and historic juncture. Never before have we had the opportunity to lead the hemisphere to hemispheric economic integration in our continent where, with the painful exception of my birthplace of Cuba, democracy is flourishing everywhere, economies are stabilizing and expanding, and privatization and reforms are widespread.
The right path to the great economic and societal benefits that are within our reach for the entire American continent lies in adopting fast-track legislation without further delay; pursuing and encouraging a free trade and investment policy is a win-win opportunity for ourselves and our neighbors.
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Thank you very much, and I'll be pleased to entertain any questions.
[The prepared statement of Mr. Rasco appears in the appendix.]
Ms. ROS-LEHTINEN. Thank you for those recommendations, Mr. Rasco.
Ms. Castellón.
STATEMENT OF M. ARELY CASTELLÓN, VICE PRESIDENT AND GENERAL MANAGER OF THE AMERICAS, GLOBAL ONE TRUSTEE, CARIBBEAN/LATIN AMERICA ACTION, WASHINGTON, DC
Ms. CASTELLÓN. Good afternoon, Madam Chair and Members of the Subcommittee on International Economic Policy and Trade.
I want to start by thanking the Subcommittee for giving us the opportunity to testify on a matter of great importance for the economic development and well being of the Caribbean and Latin America.
My name is Arely Castellón. I am vice-president and general manager of Latin America for Global One, and a trustee of Caribbean Latin America Action, C/LAA, a private nonprofit organization dedicated to promoting private sector-led economic development in the Caribbean and Latin America.
I am here today on behalf of C/LAA to express our views on the prospects of establishing a FTAA, and to make sure that the FTAA process works for the smaller economies and countries of this hemisphere.
The question we must answer today is how can we best accomplish that goal. We believe the answer is moving ahead swiftly on fast track in providing a more level playing field for the Caribbean basin countries as they compete for the U.S. market. Fast-track authority, which could be used first for Chile's ascension to the hemispheric free trade agreement, is extremely important for the Caribbean Basin countries. This supports and provides an incentive for reform in all developing countries of the hemisphere, and particularly in our neighboring countries of the Caribbean Basin.
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Enhanced trade for the Caribbean Basin countries will provide added incentive to the region as it prepares for the full FTAA. Countries of the Caribbean Basin do not enjoy a level playing field as compared to Mexico in those industry sectors that were excluded from the Caribbean Basin initiative.
One possible correction to this imbalance would be to provide on a temporary basis some of the benefits Mexico negotiated. Making this happen now would also support the economic reform efforts of the Caribbean Basin countries. As Mexico demonstrated, these incentives for reform might also yield benefits beyond these sectors giving enhanced preferences to trade.
Mexico's ascension to NAFTA served as the catalyst for their telecom liberalization, even though basic telephony was not specifically addressed in the treaty. Providing enhanced trade for the Caribbean Basin and the prospect of future negotiated arrangements would encourage movement toward efficiency and competition across all business sectors. This alone could serve as a tremendous impetus for telecom liberalization opportunities for companies like Global One.
I cannot stress enough the importance of our unwavering support as the region undergoes the process of reform. For countries facing difficulty in political and economic reform such as Haiti and Nicaragua, agencies such as the Overseas Private Investment Corporation (OPIC), can facilitate much-needed private sector investment. We cannot underestimate the importance of private sector investment at this stage of the game. Without it, there is little or no incentive for reform.
Unfortunately, many services such as private financing and political risk insurance are not fully available in the region's emerging markets. Thus an institution such as OPIC can create a safer business climate for the private sector to invest. This is an important support link to reform in light of the political and economic problems that still exist in parts of the region.
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Hence, let me suggest two priorities for this Committee.
First, we must go forward with fast-track authority and use this authority to include Chile as a signal of our sincerity about the reform process in the region.
Second, we must not hesitate another moment with CBI enhancement. Without it, we paralyze the subregions' capacity to negotiate adherence to any hemispheric agreement. With it, we hope to ensure that everyone is in a position to move forward when the time comes.
My written testimony offers a more complete discussion of the importance of trade enhancement with Caribbean Basin.
However, I would like to point out the Caribbean Basin initiative has been exceptionally successful at achieving its goal of export diversification within the Caribbean Basin countries. Furthermore, it has led to a U.S. trade surplus with the region.
I will conclude by saying that trade enhancement for the Caribbean Basin will allow balanced coproduction between both the United States and Mexico, and the United States and the Caribbean Basin countries. Such a balance benefits the U.S. apparel industry, as an example; maintains jobs in the United States, and contributes to regional stability.
CBI enhancement is an opportunity too good and important to ignore. Passivity on the part of the United States would manifest a decline in our credibility and abdication of our leadership role, and a loss of competitive advantage for our companies and workers. If there is one thing that is clear, it is that trade agreements concluded without us cost us business.
Let us decide today, therefore, to make the decision that is right for the United States, right for the Caribbean, and congruent with the free trade direction of the entire hemisphere.
Thank you.
[The prepared statement of Ms. Castellón appears in the appendix.]
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Ms. ROS-LEHTINEN. Thank you so much to all of our panelists for great testimony, good recommendations.
We will begin our round of questioning with Mr. Roy Blunt.
Mr. BLUNT. Thank you, Madam Chairman.
Mr. O'Keefe, I was concerned when you said you thought the historical moment for NAFTA had passed. One of the questions that I wonder about is why did Chile go ahead—at least in relation to Chile and the countries in MERCOSUR now—why did they go ahead and ratify the agreement with the Canadians if they wouldn't be interested in an agreement with us?
Mr. O'KEEFE. Well, let me qualify what I said. I don't mean to imply that there is no chance of a bilateral U.S.-Chilean agreement, free trade agreement. I think that at this point that's probably the most feasible option. What I was talking about was the possibility of Chilean accession to the existing NAFTA.
And while I don't think that it's impossible because of what has happened in terms of Chile's new agreement with MERCOSUR—or for that matter, the agreement that it recently signed and concluded with Canada—I think that there are things in those two agreements that are going to complicate Chilean accession to the already existing NAFTA.
But I certainly would not say that there is no possibility of a bilateral U.S.-Chilean agreement. And I think that fast-track authority being granted this fall would certainly be something that would facilitate that.
Mr. BLUNT. So you think that if Chile came into NAFTA with the NAFTA countries all at once, this triggers a bigger problem with MERCOSUR than if it's a bilateral?
Mr. O'KEEFE. Correct. Because the Chileans are no longer the independent players they were back in December 1994 when this offer was first extended to them. Now, because of their obligations to MERCOSUR, under Article 52, they have to look behind their shoulder, they have to take into consideration whatever it is that they are negotiating with NAFTA, what the repercussions or effects are going to be with their relationships with the MERCOSUR countries.
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Mr. BLUNT. Mr. Sweeney, do you want to comment on that?
Mr. SWEENEY. Yes, I would like to comment on that. I would like to point out that Chile is not a full member of MERCOSUR. Chile is an associate member. And it became an associate member deliberately because full membership, in the view of the Chileans, would have curtailed their autonomy, their independence, in negotiating trade agreements with other countries and other groups of countries.
Thomas and I have had this discussion many times about just how much freedom of action Chile has. It is my firm belief that Chile would join NAFTA gladly if the United States came to the table with a firm offer and a fast-track negotiating authority.
The issue of whether or not Chile might break a rule with MERCOSUR and offend the other MERCOSUR countries, well, let me point out that Mexico belongs to LAIA, the Latin American Integration Association, and under that organization's rules, the deal that Mexico cut with the United States requires Mexico to give the same benefits to all the other Latin American countries that belong to LAIA. In point of fact, Mexico did not do so.
And I think in the case of Chile, we would see exactly the same thing. Chile would gladly join NAFTA if the offer is there and there's a fast track because membership in NAFTA does suit, does fit, Chile's trade policy strategy. They do want to be members of NAFTA, they do want the level playing field that would give them, they do want the dispute resolution clause that would give them, and they do want the Good Housekeeping Seal of Approval that that would give them in terms of bringing more investment to Chile.
So on that point, I disagree strongly with Tom. I think Chile still will go into NAFTA. In fact, I think Argentina will join NAFTA if the United States comes with a firm offer to Argentina. The only reason Argentina is so keen on MERCOSUR now is because MERCOSUR is the only game in town. The United States simply isn't playing.
Mr. BLUNT. I think you mentioned in terms of fast track, the problems of not extending fast track generally. Talk to me a little bit about what happens if we give country-specific authorization for Chile, and maybe Argentina as well, and don't broaden the authorization beyond that; and then I think I'm going to let you comment on the same question, Mr. Rasco.
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Mr. SWEENEY. Well, the approach of country-selective fast-track negotiating authority, while it may understandably be appealing to Members of Congress in terms of how much power or authority they want to cede to the Executive, in point of fact, fast-track negotiating authority in the broadest possible scope is the most important tool of American trade diplomacy.
The United States cannot negotiate any trade agreements seriously with any countries in the world, Latin America, Asia, Europe—you name the region, the United States is not seen as a credible player or negotiator if the Executive doesn't have a fast-track negotiating authority. Because people in other countries who negotiate trade agreements for a living and who make careers of it, unlike people here in the U.S. Government, they know that any agreement that was negotiated and came to Congress without a fast-track authority behind it is going to have so many riders and amendments attached to it that by the time it comes out, it's not even going to resemble the agreement that went in
Mr. BLUNT. But really, there are no negatives to the country-specific authority for the country you're dealing with at the time. You're just saying as a general matter of U.S. trade policy, I believe it is in the best interest of the United States for Congress to give the Executive a broad fast-track negotiating authority. Limit the Executive in terms of what kind of nontrade issues they can bring to the table—like the blue-green issues, the labor environment issues, that they keep trying to link to trade agreements conditionally—but on the other hand, it benefits the American economy to have a broad fast-track negotiating authority so we can continue expanding trade with the world.
Mr. BLUNT. Mr. Rasco.
Mr. RASCO. I'm not sure how much more I could add except to say that in my opinion it's just simply impossible to negotiate with the Administration plus 535 Members of Congress, including the Senate.
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In the private sector, when you negotiate a deal, you need to know who has authority, and you need to negotiate with that person. And that's how we do it. There's just no way that nations can take us seriously without fast-track authority.
Mr. BLUNT. I think the question we'll be dealing with is probably not whether fast-track authority is a good idea, but whether or not we want to issue it whether it's country-specific or not; and of course, if you do that, the country you're dealing with knows you've issued that.
Mr. RASCO. I think you need to issue it for the entire hemisphere. And I think at most you should impose certain standards, certain very basic standards; for example, a democratically elected government. I don't think you should impose the blue-green requirements that Mr. Sweeney mentioned. I think you should negotiate that separately. I think that when you are sitting at the table negotiating fast-track free trade agreements, you have a much better opportunity to sit on parallel grounds of negotiations and get the environmental provisions and agreements that we want, and the labor agreements that we want.
Mr. BLUNT. What's the incentive if you negotiate those separately? Once you've negotiated the trade agreements, what is the incentive to negotiate the other collateral——
Mr. RASCO. When you are partners, you want to keep your partners happy. You have to play ball with your partners. The Administration has got to be—and I'm sure they will be—smart enough to put in some sanctions, some conditions, into the agreements that will be negotiated so that if they don't play ball on the other fields, then we can pull back. But you have to play ball with your partners. Otherwise, it won't work.
Mr. BLUNT. You know, some sort of global fast track, we may do that by September, but it won't be this September. It will be a September far removed from this one, I think.
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Ms. Lee, I think you wanted to——
Ms. LEE. Yes, just briefly. I think there's a little bit of an exaggeration about the impossibility of negotiating trade agreements without fast-track authority. In fact, we have negotiated dozens of small agreements and sectorial agreements without fast-track authority. And in fact, Congress can restrain itself from amending them in the interest of getting those agreements through.
But I think there is a lot of authority given up, and a lot of authority given to the Ways and Means and Senate Finance Committees, under fast-track authority, and that's a real concern.
On the other question just in terms of whether you put labor and environment separate or put them into the fast-track authority, if they are separate, if they are not protected under the fast-track legislation, then they don't get the fast-track treatment necessarily. It's possible to break them off. And it would be possible to, let's say, negotiate a trade agreement that had labor and environment in it, but if they are not mentioned in fast track, they could be, in fact, taken out of the final bill.
Mr. BLUNT. Under FTAA, Mr. Jainarain, what do you see as the potential for Caribbean and Latin American trade in the next 15 years or so compared to our current trade situation with other trading partners?
Mr. JAINARAIN. It is clear from the statistics, there needs to be no discussion about that, that it is clear that U.S. trade with Latin America and Caribbean has grown rapidly, stupendously over the past 10 years. And our exports for the most part are high-tech exports. They are computers and peripherals; automobiles, automobile parts; and heavy duty equipment. We import a variety of foodstuffs.
Those economies have been undergoing various liberalization schemes for the past 8 years, again; relaxation of import controls, relaxation of repatriation of foreign capital, foreign investment, relaxation of currency controls, and you've seen the payoff for many of these changes, many of these changes in policies over the past 5 to 8 years.
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It is expected that that will continue, those rapid changes. Of course, at some point in time, it is going to level off. I don't think any of us here expect that Mexico or Argentina or Brazil will be an industrial power comparable to the United States or Germany within the next 10 years.
Until that, our exports, they should continue, and our foreign investment should continue over the long term.
Mr. O'KEEFE. I just wanted to comment on something about this idea about Argentina perhaps bolting from MERCOSUR. Argentina might have considered that back in 1990, 1991, 1992. But the situation today has changed. About 30 percent of Argentina's international exports today go to Brazil. Only about 8 to 9 percent of Argentina's exports come to the United States. And if you look at the type of economy that Argentina has, its economy is complementary with that of Brazil. Therefore, that agreement makes perfect sense. There is no real incentive for Argentina to bolt from MERCOSUR to join NAFTA if NAFTA accession were offered to it.
One of the problems traditionally that Argentina and the United States have faced is they have not had very good relations. And most of the reason for this is based on the fact that Argentina's exports have traditionally clashed on the international market with those of the United States. The U.S. and Argentina economy are not complementary, and it's very likely that that current 8 or 9 percent, even with NAFTA accession, would never grow that dramatically.
I think the thing to emphasize is that MERCOSUR is a reality. It's not going away. And the United States has to deal with that concrete reality.
Now, very quickly, in terms of what happened with Mexico and LAIA, Mexico along with every other Spanish-speaking country in South America and Brazil is a member of the Latin American Integration Association.
Now, it's true, as Jack Sweeney mentioned, that under the LAIA agreement, any tariff concession that Mexico may have granted to the NAFTA countries when it joined NAFTA, it had an obligation to also extend to the other LAIA countries. It did not do that, that's true. That created a serious crisis within LAIA. And it finally reached a compromise situation in which a year ago, Mexico was supposed to have extended those same concessions or offer compensation to the other LAIA countries. It's true, it didn't happen, but that question is still open. The reason why it's still open, and there's presently not much concern in Latin America, is because everyone's attention is now focused on FTAA. And the thought is that eventually all these Latin American countries will be able to enjoy the same access to the North American market that Mexico enjoys to the United States and Canada and vice versa under NAFTA.
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But the important thing to remember, the reason why Article 52 of the Chile MERCOSUR agreement was included was specifically to address this crisis situation that had arisen back in 1993 when Mexico joined NAFTA where LAIA really didn't provide any concrete alternative to tariff concessions. Now it does.
Mr. BLUNT. What is the per capita income in Argentina?
Mr. O'KEEFE. Well, it depends on who you talk to. Part of it has to do with the fact that if it is what most people seem to think, as most private sector economists seem to think, Argentina would lose GSP, general preference access here to the United States. But more or less, $8,000.
Mr. BLUNT. And Brazil is about——
Mr. O'KEEFE. Per capita?
Mr. BLUNT. —$2,500?
Mr. O'KEEFE. It's higher now. It's more around $3,500–$3,800, as a result of the real plan.
Mr. BLUNT. Mr. Jainarain.
Mr. JAINARAIN. If I may make a comment about that. You know, from a purely commercial standpoint, you look at the different integration schemes in North America, in this hemisphere, and if you got NAFTA with a consuming population say of over 300 million; the Central American Common Market with about 19 million; the Andean community about 100 million; MERCOSUR countries with about 200 million; and you started to come to the point that I'm trying to make which is that you must also look at capacity to consume.
For example, the entire economy of the Central American Common Market, the countries in Central America, can fit within that of Miami. The entire economy.
The collective economy of the Caribbean countries can fit within that of Miami.
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Brazil's economy is larger than Texas.
So you must look at the consuming populations within those countries. Now, you take a country like Chile; Chile, in my opinion is not going to stare a $1-trillion economy, a $6-trillion economy, the United States, in the face and say no, and turn to MERCOSUR. And neither would Argentina.
Those are compelling arguments for other economies in this hemisphere, either to join NAFTA, or to construct a free trade agreement with the United States.
Mr. BLUNT. Thank you, Madam Chair.
Ms. ROS-LEHTINEN. Thank you so much.
Mr. Sherman.
Mr. SHERMAN. Well, one side has clearly aired its views here today, and I hope to take a few minutes to make sure that both sides' views are aired.
I just want to comment that everyone in my district will be flabbergasted when I explain that Ms. Lee, representing the AFL–CIO came here and violently clashed with and disagreed with John Sweeney.
[Laughter.]
Mr. SWEENEY. I was wondering if I could get through a hearing without that.
Mr. SHERMAN. But I am flabbergasted to hear the argument put forward—more than flabbergasted, somewhat angered—that trade deficits are not job killers. And the argument put forward in favor of that proposition is that, well, we have a huge trade deficit, and our economy is doing reasonably well. That's like saying that my diet of burgers and fries is health food just because I haven't keeled over yet.
The fact is that trade deficits are job killers. But trade deficits are not the be-all and end-all of our economy. We have taken tremendous steps to balance our Federal budget. We've done a few other things that are right. And so the cholesterol of trade deficits has not yet killed our economy.
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I should point out that Mr. Rasco is absolutely correct; the Europeans and Asians are buying banks in South America. They are buying other businesses in South America. They are doing it with our money, which we sent there as a trade deficit. When we run multi-billion and tens of billion dollars of trade deficits with Europe and Japan, they will of course have huge amounts of capital. When they've finished buying up all of the real estate in the United States, they still have some money left over to buy businesses in South America.
This illustrates the importance of negotiating more effective trade agreements with our major trading partners in doing something about a deficit that I think is as harmful to our economy as the budget deficit was a few years ago, and that is the trade deficit.
Advocates of trade are constantly telling us that every billion dollars of exports means perhaps 10,000 jobs, and yet when we run trade deficits, there are all these excuses about why imports don't cost jobs while exports create them.
I would now like to turn our attention to the idea that we should grant fast track on a worldwide basis. I think that suspending democracy is something we should do rarely, grudgingly, and only if the situation carries a very heavy burden of proof. Mr. Rasco points out that democracy is growing throughout the Americas, and we're all very happy about that unless democracy declines in the United States. And for us to be told that we shouldn't give any weight to partisan—I agree, we should suspend partisanship—but constituent politics, I think we should listen to our constituents. And our constituents are concerned with the environment. Our constituents are concerned with labor. And when all the think tanks in Washington and all the business groups come to us and tell us that we are intellectually obligated to not listen to our constituents and only listen to the think tanks, then you have to wonder whether democracy is alive and well north of the Rio Grande.
In particular, I simply don't understand why it is necessary that we have to negotiate a deal on a fast track that ignores what we are concerned about. I would ask rhetorically—I don't think that we even need an answer—what would be our chance of negotiating a fast-track deal or NAFTA expansion with Chile if we insisted that it not cover fruit, not cover salmon. Well, fruit and salmon are important to Chile. Being a Californian, I would like to see those two elements excluded. Those elements are important to Chile, they have to be in the treaty. Ms. Lee can comment on this—can you think of any reason why we shouldn't have treaty provisions on labor and on environment if we're going to have treaty provisions on fruit and fish?
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Ms. LEE. Thank you. None, whatsoever.
As you said, this is an issue that the American public is very interested in. There's been a poll that showed 70 percent of the American people thought labor and environmental standards do belong in trade agreements. That's something we don't hear as much here in this city. But there's every reason to put labor and environmental standards into trade agreements, whether or not our trading partners' initial reaction is negative. Their initial reaction to a lot of things we propose, like intellectual property rights protection, was also negative, and yet we prevailed because it was important, because it was high priority.
If we had labor and environmental standards as our top priority, I have no doubt that we would be able to prevail in those areas as well.
It's a question about the competitive environment that you create with your trade laws, and whether you want to put domestic producers who are adhering to high labor and environmental standards at a competitive disadvantage. Or if you also want to hold imported goods to the same standards or even a slightly weaker standard than you hold your domestic producers in order to change the nature of that competition, in order to send the message that companies that hire children, that pay a wage which doesn't reach subsistence, and that trash the environment, don't deserve the same access to our market as other countries.
I think the point that you made about democracy and trade agreements is a very important one. We have to bring it up every time we have a debate about trade agreements. There's a Washington truism that you can't vote on a trade agreement in an election year. If you bring it too close to the election, then people remember how much they don't like trade agreements, and they'll vote out their Members of Congress. But I think maybe trade policy should be voted on in election years. Maybe we should take those votes then so that we remember that people do have a voice that deserves to be heard, and it's not an ignorant voice, but one that comes from real experience.
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Mr. SHERMAN. Ms. Lee, I want to clarify the AFL–CIO position. Is it your position that if we have a bill that grants fast track, that it simply require that there be a labor provision and environmental provision in the treaty that's submitted to us, or are you asking Congress to define in the fast-track legislation what the provision on labor must say, what the provision on the environment must say? Is it just that those two topics have to be covered in the treaty, or do you have content, if you want——
Ms. LEE. They have to be covered in the treaty in an enforceable way. And I think that does mean trade sanctions, or some kind of financial penalty, which we have in NAFTA for some pieces of the labor and environmental side agreements, but not for other labor laws.
Mr. SHERMAN. But you're not saying that Congress's fast-track legislation should say Chile has got to have a $3 minimum wage or a $6 minimum wage, that's to be negotiated by the Administration; then evaluated by the Congress?
Ms. LEE. That's right.
Mr. SHERMAN. I'm frankly surprised that there is this much debate, why the business community would object to having a provision on labor and a provision on the environment. It scares me a little bit when we're told that we can't have a trade agreement that even has some provisions to be negotiated later on those subjects.
I do want to just take a minute to talk about CBI. I realize that CBI is included in a bill that we've moved over to the other body, but it kind of illustrates the way we've conducted trade negotiations in the past. We give access to our markets, gratis, without getting access to the Caribbean nation's market, and without even getting concessions on the issue of bank secrecy, which of course is critical to us if we're going to enforce our drug laws, and going to enforce our tax laws. It is an entirely one-sided agreement. And I think stands as a symbol for the approach that any of the think tanks would like us to take when it comes to trade agreements.
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With that, I think I've pontificated enough.
Ms. ROS-LEHTINEN. Thank you so much for your observations.
Following up on what you were talking to Ms. Lee about, the difference in the testimony that we've heard today and in other occasions about whether NAFTA has been a success or a failure, and obviously, we've heard very different points of view, Ms. Lee. What do you attribute to this significant difference in interpretation? What assessments are being used, the sources, the data, that would give you a different conclusion from other individuals? Do you believe that they are smoke and mirrors kind of—with the figures, or do you believe that in the interpretations—in the numbers given and just a different interpretation of those figures?
Ms. LEE. A couple of things. One is that we can't live the world twice with and without NAFTA. And so there is no objective standard as to what the world would have looked like if NAFTA had not happened. So we can all have a different ''counterfactual,'' if you will. And so I think for the most part, the proponents of NAFTA have relied on saying, ''Everything would have been much worse. Sure the world doesn't look great, certainly in Mexico it doesn't look great, and the U.S. trade deficit with Mexico and Canada doesn't look great, but it would have been worse had it not been for NAFTA,'' which I think is a somewhat weak position.
But there are a couple of objective standards, and that's what we have looked at, and also compared to the promises that the proponents of NAFTA had made.
One of them was on the trade balance. There was an explicit promise that both the Bush Administration, and the Clinton Administration relied on to say that NAFTA would create jobs, and that is that the United States would run a trade surplus with Mexico of $7 to $9 billion by the year 1995. That clearly did not happen.
Why didn't it happen? Well, there was a recession in Mexico and a peso crisis in Mexico. There have also been exchange rate movements with Canada, and a slow recovery from recession over there. But those were all predictable. The general critics of NAFTA had predicted that there would be a peso devaluation in Mexico. It was perfectly obvious that that was coming. There also would have been an economic crisis in Mexico with or without NAFTA. I think that's one of the crucial areas of difference.
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And my argument would be that NAFTA was not an isolated policy. It wasn't just about changes in tariffs at the margin. It was part of a set of economic policies including trade liberalization, privatization, deregulation, financial austerity, that Mexico was embarking upon under President Carlos Salinas.
During the NAFTA debate, we were often told that NAFTA was a reward for the economic reforms that President Salinas was carrying out. My view is that those economic reforms taken together, of which NAFTA was a crucial element, failed. They failed Mexico, and they failed the United States. They did not create stability or prosperity in Mexico. In fact, Mexico is in a horrible economic crisis, as most of you know, and people are really struggling to get by. There's been a very slow recovery from the deep recession that they plunged into at the end of 1994.
So the argument that NAFTA has cost 420,000 jobs, which we have put forth, is based on the swing of the trade balance, that same methodology that NAFTA supporters used before NAFTA was in place to say that NAFTA would create jobs. We measured the swing in the trade balance and applied the Commerce Department job multiplier to it.
Yes, we have low unemployment; yes, jobs have been created on net in the aggregate economy; but as Mr. Sherman said, NAFTA is not the only thing that's been happening in the U.S. economy over the last couple of years. There has been a general economic recovery, and we can say maybe things would have been even better, maybe we would have had more jobs and a better quality of jobs had we not had a policy which encouraged and rewarded companies for moving production to Mexico.
Certainly we know also that a lot of the U.S. companies that spent a lot of money lobbying for NAFTA, and that promised to be increasing exports and increasing jobs if NAFTA went through, in fact were the very same companies that moved jobs to Mexico, that closed down their American factories, that left their workers out in the cold without a job. Most of those workers have taken deep pay cuts.
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We know from the Labor Department that 130,000 or so of those workers have been certified. The Wall Street Journal has a little bit of anecdotal evidence about a couple of certifications that they questioned. But there are also a lot of companies that closed down that never even applied for NAFTA TAA. So I think there's at least as much understatement as there is over statement in those numbers.
Ms. ROS-LEHTINEN. Thank you, so much.
Ms. Castellón, last week, the First Minister of St. Vincent in the Grenadines, James Mitchell, stated that Cuba should join the CARICOM as an associate member, and this brings up a troublesome issue with regards to regional trading blocs and integration, and that is that there may be countries now or in the future who are members of a regional trading bloc which the United States or other countries do not wish to trade with.
In FTAA, all of these regional blocks would be consolidated in a hemispheric-wide free trade zone. And I was interested with the working groups that you have dealt with, has this issue come up about any specific country that any other country might not wish to trade with, and what does this mean to the United States or other countries who will be forced to trade with countries they don't wish to have a commercial relation with, and what would be the reaction of our hemispheric allies were this to happen?
Ms. CASTELLÓN. It's always such a difficult question because there are always the political and the commercial implications to this. I know certainly from my industry's point of view, from telecom, we would love to enter the Cuban market, as an example. However, it's closed. And in the meantime, we're giving up the telecom opportunities to the Europeans, primarily. It's a debate that there are strong sentiments on both sides, but I would say certainly from a commercial point of view—I guess I look at it from a very simplistic point, and that is that of the private sector, we need to expand, go out and seek other markets besides the United States.
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In order to do that, to grow our companies, to keep growing jobs, to keep the United States in a very strong economic leadership position, we need to have the backing of the U.S. Government. We do what we can on our own, and I think I'm specifically speaking of Brazil as an example, where my company, we just decided to create a network, Internet network in Brazil. We're facing 90-percent import duties. That makes it very difficult to justify any business case.
So I guess to answer your question from a commercial point of view, I'm much more inclined to look at open markets everywhere.
Ms. ROS-LEHTINEN. Thank you. Mr. Rasco, in your testimony you stated that asserting the FTAA benefits us because you said we advocate free trade as soon as possible, not patch trade at reduced rates.
Would you elaborate a little on that phrase? What do you mean by that?
Mr. RASCO. My understanding of MERCOSUR is that it is basically a customs union. It reduces the tariffs by a certain percentage. It never ever goes on to eliminate them. What we have advocated, as I understand it, is a mechanism such as NAFTA which would be expanded into an FTAA where tariffs would be reduced on a periodic basis until they are completely eliminated. And that is what I believe our position should be. And what makes the most sense from a business standpoint.
Ms. ROS-LEHTINEN. Do you see it moving in that direction or are you fearful that it's not?
Mr. RASCO. Well, I think that for us to move in that direction, we have to grant fast track, and we have to let the Administration go forward with—on the road to the FTAA. If we don't, I just don't see it, and I think what's going to happen is they are going to have a lot of small regional agreements that are not really beneficial to us, and that will discriminate if, for example, what Miss Castellón just said, 90-percent tariff to import into Brazil. There are those discriminatory provisions.
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And Mr. Sherman is right, a lot of European banks are buying up banks in Brazil and Argentina. And we are sitting here losing ground everyday because we have not gone forth on the road to FTAA.
Ms. ROS-LEHTINEN. Thank you.
Mr. Jainarain, the Florida citrus and vegetable entries in our State have been severely hurt by NAFTA, and what would you say would be the potential effect of this FTAA on these industries, or do you think that in Florida there are other industries that would benefit so much that it would at least lessen the blow on these very vital industries? There have been lot of promises made to the citrus and the vegetable industries, specifically to Florida during the NAFTA debate. A letter from the President, both Administrations, promised to cushion the blow, and that has not happened.
What can we say to those industries with this new debate on this FTAA? How will it impact those industries, or do you think that others will benefit so much that it won't be a problem?
Mr. JAINARAIN. The agricultural industry in Florida, as you rightly state, is concerned about free trade agreements, and about the loss of—or the dimunition of their industries within the State. My understanding from listening to them is that their position is, we are willing to compete with others anywhere providing we are competing with the same rules. And therefore, when an FTAA is negotiated, or any agreements of that type, we should have rules that are enforceable, especially for example with the tomato industry, where the measurement mechanisms failed—by the time the Florida producers realized that Mexican tomatos were coming into the United States, the season was over. I guess they were counting them, I believe, on a monthly basis.
And so their position, and our position, is let us negotiate those provisions and make sure that those provisions are enforceable
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Ms. ROS-LEHTINEN. So you think that if FTAA were to go through, as long as we negotiated those kinds of arrangements previously that the negative effect would not be there in those industries?
Mr. RASCO. Yes. I think those positions must be negotiated and the agricultural industry obviously must be brought into those negotiations.
Overall, however, we see the benefit to the greater good of Florida would be much higher than the losses to the agricultural industry.
You know, one of the interesting facets of the arguments that I've heard over the months and years since NAFTA is the discussion on jobs; yet we've never heard a discussion on prices and costs to the consumers. And elementary economic theory tells you what costs and the fact that lower prices should result as a result of a free trade agreement.
I was just looking at my suit. It's made in Mexico. Well, heck, I prefer to pay whatever I paid for this than a hundred dollars more from another country.
We need to examine free trade agreements not only in the context of jobs, which is very important, but also from the viewpoint of prices within the entire domestic economy, within the entire U.S. economy.
And so those are two points. One, the agricultural industry, I think, will be brought into this process, and the agricultural industry needs to understand, and needs to participate in the regulation of trade.
And two, we must also look at prices within the economy and not only at jobs
Ms. ROS-LEHTINEN. Thank you. Mr. O'Keefe, how does NAFTA compare to MERCOSUR in terms of its aim, its objective, its structure, it's results, and which one do you think provides the better model if we were to use any of them for the free trade area of the Americas, and why?
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Mr. O'KEEFE. Well, MERCOSUR, you know, as was pointed out, is a custom's union. And NAFTA is—as its name implies, is a free trade area. The idea with a custom's union is that you lower, you completely eliminate the tariff barriers among the member States. That is, on trade that's conducted within the union. However, you do have a common external tariff on goods that are imported from the outside world.
In NAFTA, with the exception of computers and any inputs used in the infomatic sector, each of the three member States retains their own external tariff regime, and among the three member States, trade eventually will be conducted completely free of all duties and tariffs.
I don't think one can make an argument that one type of integration scheme is particularly superior over another. I think when it comes in terms of liberalization of sectors of the economy, beyond just trade and goods, I think in that sense, right now, NAFTA is more superior than the MERCOSUR agreement. The MERCOSUR up to now really has been focused on lowering tariff barriers on interregional trade. There's been very little discussion, for example, on the free movement of the factors of production. For example, the most important one being capital. But also labor, for that matter, too.
And so that's the reason why, for example, you really have no concerted efforts to liberalize the financial services sector within MERCOSUR as you have within NAFTA. And a whole series of other things that NAFTA includes that MERCOSUR at this time does not.
Ms. ROS-LEHTINEN. Thank you.
Mr. Sweeney, coming from the Heritage Foundation, you're obviously familiar with the index that they use on economic freedom. We've heard a lot of positive reforms that have been taking place in our Latin American neighbors' economies, and the structure. Of course, we know that more reform is needed. But looking at the variables that the Heritage Foundation uses to measure levels of economic freedom, how would you rate the level of overall economic freedom of the region of Latin America and the Caribbean, and which countries do you believe stand out as role models, and how has regional integration played a role in making these levels of economic freedom go up of these countries?
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Mr. SWEENEY. Interesting question. I think compared to 10 years ago, the region in general is much more open today. It's much freer. The reforms that have taken place are reforms that the region's governments were compelled to undertake. They really had no choice. It was either start liberalizing their economies, start opening up to the world, start looking for ways to insert themselves into the global economy or follow the road that many countries in Africa have followed.
Having said that, the region still has a very long distance to travel. If you look at our index of economic freedom, you find that most of the economies in Latin America are still designated as mostly unfree.
Chile would probably be the economy that most stands out in terms of being the freest economy, and being the role model for other societies in the region to follow. To a greater or lesser extent, all the countries in the region are going in that direction. But they are all going at their own pace.
Brazil, for example, is one of the latecomers to the liberalization game; whereas, Chile has been doing it now for 16 years.
Ms. ROS-LEHTINEN. Thank you. Yes, go ahead
Mr. O'KEEFE. I just wanted to briefly add something. You had mentioned also which form of integration is superior. Well, let me just point out one thing about a customs union, the advantage that it does enjoy over a free trade agreement. And it's one that really does affect the private sector.
In a custom's union, once it's fully implemented—and by the way, MERCOSUR still has about another 6 or 8 years to go before that happens—you eliminate the need to have certificates of origin. That is, that every good that crosses from one member State to the other has to have a certificate of origin verifying that it complies with the subregional rules of origin requirements. That, because NAFTA is a free trade area that still exists, and will continue to exist. And it creates all sorts of headaches for importers and exporters to the point that many times it doesn't make it very worthwhile for an importer and exporter to take advantage of the tariff-free arrangement that may exist under a free trade agreement because the headaches of having to compile and put together the paperwork to file these certificates of origin don't make it worthwhile.
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Ms. ROS-LEHTINEN. Thank you. Thank you so much, all the panelists. I know Mr. Sherman just has a few more questions. And we'll let you guys go soon. Don't worry.
Thank you. Mr. Sherman.
Mr. SHERMAN. I want to point out that only because John Kasich isn't here, because he does this at the beginning of every Budget Committee meeting, that while unemployment is down, we've suffered wage stagnation for the last 20 years, and that we cannot look at our trade policies or economic policies as being successes until we start hearing complaints from the business community that there's a labor shortage which would translate into higher wages, and higher standards of living, something we used to take for granted in the 1960's, and 1970's. And have almost forgotten about in the 1990's.
There was a very interesting comment—I believe it was Charles that made it—it might have been Mr. O'Keefe—and that was that we have to look at ourselves not only as producers, not only as those who are concerned about the environment, but we're also concerned about consumers, and that lower tariffs mean lower prices. And I wonder if Ms. Lee, I think she was itching to respond to that, can do so.
Ms. LEE. Thanks. Yes, I guess I just wanted to point out that there is not an automatic or necessary pass-through of lower prices because of lower tariffs, or even lower production costs abroad, to the consumers. A lot of the cars that we buy that have been made in Mexico and a lot of the clothing that we buy that is made in countries with very, very, low labor costs, in fact don't cost less than things that are made in the United States. It really depends on the market structure at the retail level. There's a lot of market power at the retail level that causes the markups to be greater on the goods that come in, the imported goods that come in more cheaply. We just need to question whether we can automatically assume that having lower tariffs or lower production prices abroad always translates into benefits for consumers. Thank you.
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Mr. SHERMAN. I know that Charles' suit is made in Mexico. I just checked, mine is made in the United States. If I didn't pay less for this suit than he paid for that suit, then I wasn't a very intelligent shopper. That's a very sharp suit.
Thank you very much.
Ms. ROS-LEHTINEN. Thank you, so much, Brad, and thank you to all the panelists for an excellent hearing. It's on a very controversial subject which will continue through the summer and the fall.
Thank you, so much, and the Subcommittee is now adjourned.
[Whereupon, at 4:02 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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