[Senate Hearing 108-398]
[From the U.S. Government Publishing Office]
S. Hrg. 108-398
FAIR OR FOUL: THE CHALLENGE OF NEGOTIATING, MONITORING AND ENFORCING
U.S. TRADE LAWS
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HEARING
before the
OVERSIGHT OF GOVERNMENT MANAGEMENT,
THE FEDERAL WORKFORCE AND THE DISTRICT OF COLUMBIA SUBCOMMITTEE
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
DECEMBER 9, 2003
__________
Printed for the use of the Committee on Governmental Affairs
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COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Amy B. Newhouse, Chief Clerk
------
OVERSIGHT OF GOVERNMENT MANAGEMENT, THE FEDERAL WORKFORCE AND THE
DISTRICT OF COLUMBIA SUBCOMMITTEE
GEORGE V. VOINOVICH, Ohio, Chairman
TED STEVENS, Alaska RICHARD J. DURBIN, Illinois
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois FRANK LAUTENBERG, New Jersey
JOHN E. SUNUNU, New Hampshire MARK PRYOR, Arkansas
Andrew Richardson, Staff Director
Marianne Clifford Upton, Minority Staff Director and Chief Counsel
Cynthia Simmons, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Voinovich............................................ 1
WITNESSES
Tuesday, December 9, 2003
Loren Yager, Director, International Affairs and Trade, U.S.
General Accounting Office...................................... 6
James J. Jochum, Assistant Secretary for Import Administration,
Department of Commerce......................................... 7
Charles W. Freeman, III, Deputy Assistant, U.S. Trade
Representative................................................. 11
Franklin J. Vargo, Vice President, International Economic
Affairs, National Association of Manufacturers................. 26
Thomas J. Duesterberg, President and Chief Executive Office,
Manufacturers Alliance/MAPI.................................... 28
Tim Hawk, Vice President and General Manager, American Trim,
L.L.C.......................................................... 31
Alphabetical List of Witnesses
Duesterberg, Thomas J.:
Testimony.................................................... 28
Prepared statement........................................... 108
Freeman, Charles W., III:
Testimony.................................................... 11
Prepared statement........................................... 84
Hawk, Tim:
Testimony.................................................... 31
Prepared statement........................................... 130
Jochum, James J.:
Testimony.................................................... 7
Prepared statement........................................... 69
Vargo, Franklin J.:
Testimony.................................................... 26
Prepared statement with attachments.......................... 92
Yager, Loren
Testimony.................................................... 6
Prepared statement........................................... 39
Appendix
Questions and Response for the Record for Charles W. Freeman,
III, from Senator Lieberman.................................... 134
FAIR OR FOUL: THE CHALLENGE OF NEGOTIATING, MONITORING AND ENFORCING
U.S. TRADE LAWS
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TUESDAY, DECEMBER 9, 2003
U.S. Senate,
Oversight of Government Management, the Federal
Workforce and the District of Columbia Subcommittee,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. George V.
Voinovich, Chairman of the Subcommittee, presiding.
Present: Senator Voinovich.
OPENING STATEMENT OF SENATOR VOINOVICH
Senator Voinovich. I apologize for the fact that there are
not more Senators sitting in these chairs, but as you know, we
are in session today. In fact, I am going to have to preside at
12 o'clock today, and many of the Senators just frankly are not
in town at this time.
I felt it was important to have this hearing now because I
am hoping that between now and when the Senate comes back on
January 20 that some action can be taken on some of the
concerns that I am going to raise at this hearing today,
because there are a lot of people in this country that feel
that we are running out of time on some of these issues, and it
is having an enormous impact on the economy of my State and on
the economy of Pennsylvania, Michigan, Indiana, and Illinois. I
was just in Illinois yesterday, and they have the same concerns
that we have in the State of Ohio.
Today's hearing will focus on the ability of our trade
agencies to effectively negotiate, monitor and enforce our
complex trade laws in a rapidly-shifting global trade
environment. As our country adapts to the changing trade
dynamics, I am interested in learning if we have handicapped
our economy, especially the manufacturing sector.
On April 23, 2002, nearly 20 months ago, this Subcommittee
held a hearing to examine the personnel challenges faced by the
Securities and Exchange Commission and the Department of
Commerce. The hearing was held, in part, in response to the
General Accounting Office's 2001 High Risk Series, which stated
that, ``A lack of sufficient numbers of experienced staff with
the right expertise limits the ability of the Department of
Commerce, U.S. Trade Representative and the Department of
Agriculture to monitor and enforce trade agreements.''
This remains a concern of mine today. The Department of
Commerce maintains a database of nearly 300 international trade
agreements to which the United States is a participant, and
over the past several years the roles and responsibilities of
our trade agencies have increased in scope and technical
complexity. Unfortunately, as GAO pointed out during the April
2000 hearing, the staffing levels at our trade agencies have
not kept pace with this increased workload.
This combination raises doubts about our ability to
effectively monitor our trade relations, and I am interested in
learning how the Department of Commerce and the USTR have
refined their human capital strategies to respond to a complex
set of trade-related policies and workload capacity problems.
The importance of our hearing today is underscored by the
fact that the United States has lost over 2.7 million
manufacturing jobs since July 2000. In my State of Ohio we have
felt these losses acutely, most recently seeing the loss of
6,300 manufacturing jobs in just October of this year. In July
2000 there were more than one million manufacturing jobs in my
State. Today that number has fallen to 840,000. This is a loss
of 17.6 percent of the State's manufacturing employment, a loss
of more than one out of every six Ohio manufacturing jobs.
These numbers represent a crisis for Ohio's economy, especially
since the manufacturing sector in Ohio accounts for the second
highest weekly earnings of any economic sector, and supports
local community and schools with more than a billion in
corporate franchise and personal property taxes.
I can tell you, our local political subdivisions are
getting hammered because of the loss of these jobs and the
value of the property.
In my opinion these numbers are the result of several
factors, rising healthcare costs, high natural gas prices and
other energy costs, out-of-control litigation, and our current
trade policies, or rather, the mismanagement of our trade
policies.
Manufacturing companies are distressed by our current trade
priorities especially with regard to China. As I meet with
business leaders throughout the State, their number one concern
is the inability to compete on a level playing field with their
Chinese competitors. I take these statements very seriously.
Throughout my years in public service, I have long
advocated free trade provided it is fair trade. I was a strong
supporter of permanent normal trade relations with China when
the Senate passed the legislation in September 2000. In recent
months, however, I have begun to question my vote on that
issue. Although China's economic reforms and rapid economic
growth have expanded U.S.-Chinese commercial relations in
recent years, disputes have arisen over a wide variety of
issues including China's currency pick and its failure to
protect U.S. intellectual property rights.
While many of these concerns over China's trade practices
were addressed in negotiations with China over its accession to
the World Trade Organization (WTO), China has failed to
implement many of its WTO obligations.
An issue I consistently hear about from manufacturers is
the harm that China is doing to our economy by deliberately
undervaluing its currency against the U.S. dollar. This makes
Chinese exports less expensive and puts U.S. workers at a
severe disadvantage. This is simply unfair. If the value of
China's currency was allowed to float freely as the currencies
of other major trading partners do, it would reflect China's
enormous trade surplus and the value of China's currency would
increase significantly.
In addition, I hear that manufacturers continue to
experience significant intellectual property rights problems in
China, and others in addition to manufacturers, especially in
terms of illegal reproduction of software, retail piracy and
trademark counterfeiting. It is estimated that counterfeits
account for 15 to 20 percent of all products made in China,
which totals about 8 percent of China's gross domestic product.
It is also estimate that IPR piracy in China costs U.S. firms
$1.85 billion in lost sales in 2002.
I am not surprised by these numbers though. I really am
not. This has been an ongoing problem with China for some time
now. The USTR cited China's failure to provide adequate
protection of patents, copyrights and trade secrets back in
1991 when it threatened to impose a $1.5 billion in trade
sanctions.
When I was in China on a trade mission in 1995--I brought
about 18 Ohio businessmen to China, visited four cities--that
again was an issue that we raised with the Chinese Government.
At that time the International Intellectual Property Alliance,
IIPA, an association of major U.S. copyright based industries
was estimating that IPR piracy by China firms cost U.S. firms
$2.3 billion in lost trade. The terms of China's WTO accession
require that China immediately bring its intellectual property
laws in compliance with the WTO Agreement on Trade-Related
Aspects of Intellectual Property Rights, but I have not seen
any evidence that China's behavior has changed a bit since
then.
We need to stop standing by and watching as year after year
China continues to counterfeit U.S. products, costing many
Americans their jobs. I have not been encouraged, frankly, by
statements from the administration that are working on these
problems, and that we in Congress, I have been told, have to be
patient. We have to be patient. We have to be patient.
Manufacturers in the midwest, including Ohio, have run out of
patience as they see family businesses dwindle to shadows of
what they once were and loyal employees out on the street
without a job.
As a member of the Senate Task Force on Manufacturing, I am
working on a number of solutions to address these challenges.
In June 2003 we introduced legislation to establish the
position of Assistant Secretary of Commerce for Manufacturing
within the Department of Commerce. This new post would be
responsible for representing and advocating the interest of the
manufacturing sector as well as developing policies to promote
the expansion of manufacturing.
On Labor Day I was pleased to appear with President Bush in
Richfield, Ohio when he announced his support for the creation
of this new position, and I recently added language to the
Omnibus Appropriation bill to fund this new position. It is my
hope that this position will allow the Department to focus on
the impact the slow economic recovery has had on manufacturing
and our Nation's overall competitive position in the global
marketplace.
I was an original cosponsor of a resolution strongly
encouraging the Chinese Government to keep its commitment to
move to a market-based valuation of its currency in accordance
with its commitments to the trade rules and principles of the
international community. The resolution passed the Senate on
September 25, 2003.
I introduced legislation on October 20, 2003, entitled the
Currency Harmonization Initiative Through Neutralizing Action
Act of 2003, what we call the China Act. It will level the
playing field on Chinese products with new tariffs in the event
that the country fails to heed calls to let its currency trade
freely. Specifically, it would require the Secretary of
Treasury to analyze and report to Congress whether China is
manipulating its currency to achieve an advantage in trade. If
manipulation is found, the Secretary would be required to levy
tariffs equal to the percentage of manipulation found. This
would be in addition to tariffs currently in place on Chinese
imports. Full membership in the community of modern nations
requires China to deal fairly with its trading partners, but
that is not happening, and such behavior has to end.
On November 25, Senator Snow and I introduced comprehensive
legislation, the Small Manufacturers Assistance Recovery and
Trade or SMART Act, to aid the Nation's troubled manufacturing
sector and to help manufacturers hard hit by foreign
competition and trade barriers to get back on their feet. With
small business manufacturers constituting over 98 percent of
our Nation's manufacturing enterprises and employing 12 million
people, it is impossible to overstate the role of small
manufacturers within the overall manufacturing industry and our
Nation's economy.
Most recently I have been working on a resolution that
would urge the USTR to initiate a 301 investigation into
Chinese currency manipulation. Unfortunately, the Treasury
Department objected to it. This is very frustrating to me that
there appears to be no coordination between agencies on this
issue. On one hand I hear Congress talking about how concerned
they are with the currency manipulation issue. Yet when I
talked to Secretary Evans about the issue, he tells me that he
cannot talk about it because it is Treasury's responsibility.
If this issue was such a big deal, if it is such a big deal,
Commerce and the USTR should be pushing Treasury to get the job
done. They ought to be working together.
I have to tell you if I was Governor of Ohio and I had a
problem and I sent different people over to China to talk, I
would make sure that if something was high on my priority list
that they would be hearing comments from finance or anybody
else, OMB, that you sent over there, so they get it. So you hit
them with a big hammer so that they understand that something
has got to be done.
I want to say one other thing. I have concerns about State
and trade. I have had for a long time, as a governor and mayor.
I'm concerned, for example, about North Korea and Taiwan
getting in the way of strategic trade issues that impact on our
economy. I hope that the President has these issues on his
plate today when he talks with Wen Jiabao. As a matter of fact,
they are talking today. I am hoping that he talks about the
issue of currency. I hope he is talking about intellectual
property rights. I hope he is talking about their compliance
with the WTO, that the American people are becoming very
frustrated, and some of the greatest supporters in the U.S.
Senate, including this Senator, has almost had it. I am going
to be watching carefully any new trade initiatives that come
out of the administration in terms of whether or not they are
getting the job done.
I am looking forward to learning what the U.S. Government
is doing to help our ailing manufacturing sector and whether
key trade agencies have the workforce needed to get the job
done. For example, if we had more staff with the right skills
at USTR and Commerce, would China continue to violate U.S.
intellectual property rights? Is the Federal Government being
proactive enough to protect American manufacturing jobs? These
are important questions. They need answering. I am hopeful that
today's hearing will provide some answers as well as some
solutions to challenges facing manufacturers in order to help
weather this crisis, and it is a crisis.
We have an impressive lineup of witnesses, and I look
forward to a very informative discussion.
Our first witness today is Dr. Loren Yager, the Director of
International Affairs and Trade at the U.S. General Accounting
Office. Dr. Yager testified at our hearing in April 2002, and I
am really looking forward on an update on what has happened.
Representing the Bush Administration are Hon. James Jochum,
Assistant Secretary for Import Administration of the Department
of Commerce, and Hon. Charles Freeman, III, Deputy Assistant
U.S. Trade Representative.
Linda Cheatham, Chief Financial Officer and Director of
Administration of the International Trade Administration and
the Department of Commerce is also available. You are here to
answer the tough questions. Is that it? [Laughter.]
Our second panel, we will hear from Frank Vargo, Vice
President of the National Association of Manufacturers. Joining
him is Dr. James J. Duesterberg, President and CEO of the
Manufacturers Alliance for Productivity and Innovation. And
rounding out this panel is Tim Hawk, Vice President and General
Manager of Superior Metal Products and American Trim, L.L.C., a
Lima, Ohio based company. His father, Leo Hawk, is sitting here
in the audience with us today, and I want to thank you both for
making the trip today to Washington. Thank all of you for
coming, and we look forward to your testimony.
It is the custom of this Subcommittee to swear in all of
our witnesses, and I would therefore ask all of our witnesses
to stand and raise your right hand.
Do you swear the testimony you are about to give before the
Subcommittee is the truth, the whole truth, and nothing but the
truth?
Mr. Yager. I do.
Mr. Jochum. I do.
Mr. Freeman. I do.
Mr. Vargo. I do, yes.
Mr. Duesterberg. I do.
Mr. Hawk. I do.
Senator Voinovich. Let the record note that they answered
in the affirmative.
Please sit down. I would appreciate if you could please
make your statements in 5 minutes or less, try to keep it at
that if you can. All of the statements will be entered in the
record in their entirety, and Dr. Yager, I would appreciate
your starting the testimony today.
TESTIMONY OF LOREN YAGER,\1\ DIRECTOR, INTERNATIONAL AFFAIRS
AND TRADE, U.S. GENERAL ACCOUNTING OFFICE
Mr. Yager. Thank you, Mr. Chairman. I am pleased to be here
today to discuss the human capital challenges faced by trade
agencies in the current world environment. Trade has become an
increasingly important component of the U.S. economy, and
therefore, the institutions and arrangements that regulate this
trade have also increased in importance.
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\1\ The prepared statement of Mr. Yager appears in the Appendix on
page 39.
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At least 17 Federal agencies are involved in developing and
implementing U.S. trade policy, with a relatively few agencies,
including the U.S. Trade Representative (USTR) and the
Department of Commerce having lead roles in negotiating new
agreements and monitoring the compliance of other nations with
existing agreements.
The main point of my testimony today is that U.S. trade
agencies need to more actively pursue human capital planning to
successfully meet the challenges they face. In this statement I
will briefly summarize some of those challenges, as well as
focus on a few of the human capital practices that GAO has
discussed before this Subcommittee on numerous occasions.
My observations are based on a number of studies that we
have conducted on important trade developments since the last
hearing that you mentioned in your opening statement. We have
also updated some of these studies with recent interviews with
USTR and with Department of Commerce officials. In addition, we
have incorporated insights from the human capital reports and
testimonies, where this Subcommittee has taken a leadership
role.
Let me first talk about three key challenges that face
trade agencies in the current environment, and I provide more
detail on each of these challenges in my written statement.
The first is a substantial increase in importance of
security since September 11 for many of the personnel who have
front line trade responsibilities in U.S. border points and in
other locations. In addition to their existing functions of
ensuring revenue collection and compliance with other
requirements, these personnel are now required to guarantee the
goods destined for the United States are free from weapons of
mass destruction.
The second challenge is the ambitious negotiating agenda
involving active negotiations in the multilateral WTO, the
regional FTAA, and numerous subregional bilateral agreements.
Ambassador Zoellick has stated on numerous occasions that
efforts on all three fronts are part of the competitive
liberalization strategy of the United States. However,
participation in these negotiations is quite demanding on the
staff of USTR as well as the agencies such as the Department of
Commerce, due to their key role and expertise in various
aspects of the negotiations.
The third challenge is the most wide ranging, and that is
responding to the inevitable but unpredictable changes brought
about by globalization. One aspect of this involves ensuring
that existing agreements and structures are serving U.S.
interests. I should note in this regard that USTR has just
announced significant changes to update one of those
structures, the 25-year-old Trade Advisory System. GAO reported
last year that the system no longer reflected the current
composition of the U.S. economy. It also means responding to
major changes in the trade environment, such as the challenge
brought on by China. Our prior reports and ongoing work stress
the importance of actively monitoring China's commitments to
the WTO, and we note in particular that Commerce's market
access and compliance group has increased its staff to
accomplish that goal while USTR has reorganized its Asian work
to enable this function to be performed more effectively.
Everything I have said up to this point refers to the human
capital challenges facing U.S. trade agencies, but of course,
that is only half the equation. On the other side of the
equation are the insights on the ability of these agencies to
respond to these challenges. Let me make two observations based
on the numerous testimonies the GAO has provided before this
Subcommittee and outlined in our High Risk Series and other
reports.
First, the approaches have to be tailored to meet the
specific needs of the organizations. In the case of the trade
agencies this means there must be close coordination between
the agencies on the wide range of functions that require that
coordination whether it is negotiations or monitoring and
enforcement. USTR was designed and remains a small organization
that relies heavily on the expertise supplied by other
agencies.
Second, human capital planning should be used to ensure
that the agencies are capable of achieving the strategic goals
identified in their planning cycle. In addition, planning can
identify and address areas where human capital practices could
be made more flexible to accomplish the goals more effectively
as well as to respond to the international events that
inevitably occur and require the agencies to adapt their
policies during the course of the year.
Mr. Chairman, I should also mention that we have just
started work on two subjects that you mentioned in your opening
statement. We have a request from Chairman Manzullo and
Chairman Snow to look into the currency practices in China and
other Asian countries, and we also have a request from Chairman
Davis of the House of Representatives to look into the
enforcement of U.S. intellectual property rights regulations
around the world.
This concludes my testimony, Mr. Chairman. I would be happy
to answer any questions that you have.
Senator Voinovich. Thank you very much, Dr. Yager. Mr.
Jochum.
TESTIMONY OF JAMES J. JOCHUM,\1\ ASSISTANT SECRETARY FOR IMPORT
ADMINISTRATION, DEPARTMENT OF COMMERCE
Mr. Jochum. Thank you, Mr. Chairman. I know those of us in
the administration appreciate your dedication to this issue,
and I appreciate the opportunity to further define the
administration's efforts in this regard.
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\1\ The prepared statement of Mr. Jochum appears in the Appendix on
page 69.
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For the President and Secretary Evans, the importance of
trade extends well beyond the economic realm. As the President
has stated, open trade is not just an economic opportunity, it
is a moral imperative. When we negotiate for open markets, we
are providing new hope and promoting political freedom. It is
because of the economic and social imperative behind trade that
the administration has moved aggressively in pursuing an
ambitious free trade agenda. We will continue to move forward
to expand trade and economic opportunities that it creates for
all Americans and to eliminate barriers to the free flow of
American goods, services, investment, and ideas.
The administration understands, however, that an aggressive
trade-liberalizing agenda must be accompanied by the strict
enforcement of our trade laws. We understand the value of
competition and that it leads to innovation, growth and a
higher standard of living. But some of our trading partners
have failed to fully embrace fair competition. While we
continue to encourage the opening of new markets like China, we
expect our trading partners to compete on a level playing field
and reduce practices that distort normal and fair trade
relations.
Today's hearing offers me the chance to review some of our
findings from the more than 20 roundtable discussions that the
Commerce Department held with U.S. manufacturers, both large
and small, across the country as part of our manufacturing
initiative. In addition, I will briefly discuss the trade
relationship with China in the context of other issues raised
by U.S. manufacturers.
The administration understands the importance of
manufacturing to the success of our overall economy, our
workforce and our Nation's future. The manufacturing sector
represents 14 percent of our GDP and 13 percent of total
private sector employment. Manufacturing innovations at home
and abroad are also important contributors for success in other
sectors such as agriculture and services. Advances in John
Deere's cotton-picking equipment manufactured in Des Moines,
Iowa, for example, made cotton producers throughout the South
and West more efficient and productive, and advances in servers
produced by Cisco and Sun Micro Systems enable hospitals across
the country to offer both high quality and lower cost
healthcare to millions of Americans.
Having said that, there is a growing perception in the
media that American manufacturers are weak, cannot compete, and
are being hollowed out, and much of that stems from the
significant pressure that U.S. manufacturers faced in the
recent downturn of the economy and from stiff competition
abroad.
It is important to remember then that even in the face of
significant challenges, American firms have built the
strongest, most dynamic manufacturing sector in the world. The
U.S. remains far and away the largest producer and exporter of
manufacturing goods in the world, and standing alone, our
manufacturing sector would rank as the world's fifth largest
economy, larger than the entire economy of China. That is why
manufacturing not only matters, but it is worth fighting for,
and fortunately the stimulus of recent years has softened the
blow from the recent downturn and set the stage for vigorous
economic growth going forward.
Just to repeat the numbers we have seen lately, the third
quarter of this year experienced an 8.2 percent raise in
growth, the best in about 20 years, and the manufacturing
index, the Institute of Supply Management, showed the highest
number in 20 years. Even on the employment front there are good
signs that the economy is growing. The most recent figures from
the Labor Department reveal that the unemployment rate at 5.9
percent in November has trended down and the economy has
created 328,000 new jobs in the past 4 months.
This positive news, however, does not negate the fact that
you mentioned, Mr. Chairman, that the manufacturing sector has
lost more than 2 million jobs during the recent downturn. In
short, our manufacturers continue to face a highly global
competitive environment and we need to foster an environment in
which our firms can compete and succeed in manufacturing.
In March of this year, during Manufacturing Week, Secretary
Evans announced the President's Manufacturing Initiative, and
this announcement was followed up by roundtable discussions in
more than 20 cities across the United States to gather input
for a report on the state of manufacturing and recommendations
for policy reforms.
While international competition is what has garnered most
of the attention in the press, by far the greater weight of the
manufacturers' comments focused on domestic issues. We heard
that while U.S. manufacturers have tightened their belts and
raised their productivity, those productivity gains have been
eroded by everything from higher energy costs to higher medical
and pension costs, to higher insurance costs due to a runaway
tort system. For example, we heard from manufacturers in New
Jersey that 30 cents of every dollar of revenue went to pay
health benefits for their employees, which was an increase of
well over 100 percent in just a few years. We heard about
asbestos litigation and other lawsuits that hang over the heads
of virtually all U.S. manufacturers, raising their insurance
costs and dampening their returns. The manufacturers also
pointed to declining vocational school programs, declining
enrollments in engineering and the funding of scientific
research, all of which are essential to the productivity gains
that keep our manufacturing sector competitive.
In addition to keeping our own side of the street clean,
manufacturers demanded a level playing field internationally,
and what that means in practical terms is three things. The
first is exchange rates that reflect economic fundamentals of
the market and not government intervention. The second is an
effort to eliminate tariff and non-tariff barriers to our
exports through negotiations with our trading partners. And the
third is the vigorous enforcement of both the existing
international trade rules and U.S. trade law. The goal is
simply to ensure that everyone on the field is subject to the
same rules of the game.
What we did not hear from the vast majority of
manufacturers that we met with was an interest in outright
trade protection. Rather, our manufacturers see international
trade as a simple question of fairness. If we keep our markets
open to our trading partners' goods, they should do the same
for us.
While we are still in the process of finalizing this report
and its recommendations, Secretary Evans has taken steps in
response to the concerns we heard, particularly the need for a
stronger focus within the U.S. Government on manufacturing. The
first initiative, announced by the President on Labor Day, is a
new Assistant Secretary of Commerce to serve as the point
person in the administration for manufacturing. The second is
the establishment of an Unfair Trade Practices Team to track,
detect and confront unfair competition before it injures an
industry here at home. And the third calls for the creation of
an Assistant Secretary for Trade Promotion, to boost our
exports, particularly to those markets that our negotiators
have recently opened to trade.
During these roundtable discussions, there was no single
topic that garnered more attention than our trading
relationship with China. We all know the stakes are very high.
Our bilateral merchandise trade with China reached the level of
$147 billion last year, and within that year China overtook
both Japan and Mexico to become our second largest source of
imports. Many have noted that our imports from China are more
than five times greater than our exports, and our bilateral
trade deficit exceeded $100 billion in 2002. There is also an
obvious upside to China's growth. The rising standard of living
in China has created consumer demand for U.S. products that did
not previously exist. What that means in trade terms is that
China today represents the fastest-growing market for U.S.
goods and services. Our exports to China surged by 19 percent
in 2001, 15 percent last year, and about 18 percent in the
first 8 months of this year.
The Commerce Department, in close coordination with the
USTR and other agencies, had adopted a multi-pronged approach
to ensure that China honors its WTO commitments. We will
continue to target unfair trade practices wherever they occur,
but enforcing our trade laws is only part of the solution. We
must continue to enhance the ability of U.S. businesses to
compete in China. For example, we are launching ``Doing
Business in China'' seminars in cities across the country to
address concerns about the Chinese market from small- and
medium-size businesses. At the Commerce Department, the
International Trade Administration, or ITA, is charged with
carrying out these activities. ITA's mission is to create
economic opportunity for U.S. workers and firms by promoting
international trade. It has been more than 20 years since ITA
reorganized itself to ensure that we are fulfilling this
mission.
In 2002, while we were conducting our national export
strategy, we went out to our customers and surveyed them on our
work, and as a result we will focus and redeploy our resources
where our clients tell us they need it most.
Although the details of this ITA reorganization are still
being finalized, plans include replacing the existing Trade
Development Unit with the Assistant Secretary for
Manufacturing, consolidating all trade promotion activities
within the commercial service, and streamlining trade law
administration and allocating additional resources to China.
As I said earlier, the new Assistant Secretary for
Manufacturing will focus on both domestic and international
aspects of U.S. industrial competitiveness, and will work
closely with a new interdepartmental committee that will be
created to focus and coordinate all of our Department's
expertise on the problems of the manufacturing sector.
The second step in the reorganization will consolidate all
trade promotion services within the commercial service. This
initiative will allow us to link our advocacy efforts more
directly to the domestic and overseas networks to enable early
project support, as well as post-transaction assistance. And,
as someone who has done trade advocacy, this is really what
other countries have done for many years, and what we have
failed to do.
The third step in the reorganization is streamlining our
trade law administration and allocating additional resources to
investigate unfair trade activities within China, and this
function falls within my agency, the Import Administration. We
are creating a new office devoted exclusively to China, which
is the object of a disproportionate number of trade complaints.
And by way of background, during the last 3 years, we have
initiated more anti-dumping investigations and placed more
anti-dumping orders against China than against any other
country, and more than twice as many as we have against the
next leading country. In 2003 alone, more than 50 percent of
all of our new anti-dumping orders put in place have been
against China. Historically that number has been about 15
percent.
As I noted earlier, we are also creating an Unfair Trade
Practice Team that will try to look at trade coming in before
it causes a problem. Our goal here is to preempt things and
allow us to follow up with all the tools we have at our
disposal.
In conclusion, I want to stress that the administration has
heard the concerns of U.S. manufacturers and certainly the
concerns of this Subcommittee, and we are committed to ensuring
a level playing field when competing in today's global
marketplace. The Commerce Department is developing a strategy
to ensure that government is fostering an environment that
promotes a dynamic manufacturing sector. Part of that plan is
the reorganization of ITA that will allow us to better respond
to unique problems of U.S. manufacturers.
Thank you again for inviting me to testify today, and I
look forward to your questions.
Senator Voinovich. Thank you very much. I am impressed with
some of the statistics that you have shared with us. Mr.
Freeman.
TESTIMONY OF CHARLES W. FREEMAN, III,\1\ DEPUTY ASSISTANT U.S.
TRADE REPRESENTATIVE
Mr. Freeman. Thank you, Mr. Chairman. It is an honor and a
privilege for me to testify here today on behalf of USTR. I am
specifically here to testify a little bit about some of the
human capital challenges that we face at USTR with respect to
monitoring and enforcing China's WTO commitments in particular.
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\1\ The prepared statement of Mr. Freeman appears in the Appendix
on page 84.
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As most of you know, Thursday, December 11, is the second
anniversary of China's WTO accession, and in the process of
leading up to that accession on December 11, 2001, there was 15
years of negotiations which structured a very comprehensive,
rather unique agreement with thousands of requirements for
China to implement relatively immediately. And the good news is
that they implemented quite a few of them on time. The bad news
is that they have not implemented all of the things that we
were hoping they would. But let me tell you a little bit about
USTR and how we are focused on the China issue.
Initially, USTR is deliberately a small organization. It is
small, it is nimble, it is designed to be agile, it is the
original networked organization in government if you will. We
work very closely with Commerce and with other agencies in the
U.S. Government. We draw extensively on expertise in other
agencies, as well as internally.
I have to say that the quality of the personnel at USTR is
among the highest in government, in my view, although my
colleagues may disagree somewhat, but really the level of skill
there is first rate, the level of experience is first rate
there. USTR is still considered a place that people in
government want to go because the quality of the work and the
quality of the personnel is so high.
We are very small, even within the China shop, I think
there are four of us that are dedicated full time to working on
China, but within the USTR there are 200 employees totally. We
work with probably 45 additional people, whether it is in the
General Counsel's Office or with respect to the other sectoral
offices, industry services, intellectual property rights and a
variety of issues.
I have to say that Ambassador Zoellick and his deputies
spend a disproportionate amount of time on China, especially
given the high demands places on their time by negotiating the
FTAs, negotiating the Doha agenda and living up to a very
ambitious trade agenda that the President has set. So China
gets its fair share of our time.
USTR is the chair of the WTO TPSC Subcommittee on China's
WTO compliance. There are 14 different agencies that take part,
14 different agencies and departments, about 40 professionals,
and that's really the primary means that we use to coordinate
policy with respect to China's WTO implementation. We meet
perhaps once a month, but there's active discussions among the
various members thereof, and they draw on their own agencies to
bring them into the process.
It has been an increasingly successful way to make sure
that we are hearing the same things from industry, that we are
saying the same things to the Chinese, and that our priorities,
with respect to China's WTO compliance issues, are in order.
Roughly speaking, we have five different areas on which we
are focused with respect to China. The first is obviously WTO
implementation. China has had, as I said, to make thousands of
reforms as part of its WTO implementation so it has been our
job to look and make sure that they are in compliance with the
nuts and bolts of WTO implementation. I will say that nuts and
bolts they may have been in compliance with, but there are a
variety of things where we have been relatively disappointed
with respect to their implementation.
Closely related to the WTO implementation is ensuring that
we have fair market access to China. Our primary means of
looking at issues with respect to the deficits and with respect
to making sure that the trade balance is fair is making sure
that the Chinese understand that, unless we have fair access to
their markets, we cannot maintain the support, as you know, for
maintaining open markets to China.
The other issues on which we are working are transparency
standards and regulations. It is a key WTO implementation
commitment, and China was supposed to make sure that not only
were the processes by which they publish new regulations
transparent, but also that a variety of public, that the
public, in general, including our industry, was given
appropriate means to comment on regulations as they came out.
Other issues on which we are focused are better cooperation
with China and the WTO, making sure that the Chinese are on the
same page with us, in terms of overall liberalization efforts,
and finally we are very focused, last, but not least, on
ensuring China's compliance with our efforts to enforce U.S.
trade remedies.
I am happy to answer any questions with respect to any of
these issues.
Senator Voinovich. Thanks very much.
Mr. Yager, in your agency, cooperation is necessary for
developing U.S. positions to address trade compliance issues.
Mr. Freeman, I think you said you are coordinating, how many,
17?
Mr. Freeman. Fourteen.
Senator Voinovich. Fourteen different agencies in trying to
deal with all of the various issues that come up with trade.
What specifically do you think our trade agencies must do to
improve cross-agency communication, coordination and
cooperation? And the one I just mentioned was the whole issue
of this issue of currency manipulation. It seems like there is
only one agency that can talk about it, and the rest of them
are prohibited from even mentioning the subject, and I would be
interested in your observations regarding that policy.
And the last, of course, is the thing that got me into this
in the first place: Do you think that our trade agencies have
the human capital capacity to move forward? In other words, we
have heard some really wonderful things from Mr. Jochum, for
example, about what the agency is about to do or is doing, but
the real issue is do they have the right people, with the right
skills and knowledge, at the right place, at the right time to
get the job done? That is the real challenge.
Dr. Yager, I would like to have your candid observation. In
your testimony, you say ``Our work shows that these forces have
stretched the human capital resources of the U.S. trade
agencies. Although the government has taken steps to address
some of these challenges, these, and other, changes in the
global trade environment require that the trade agencies
constantly monitor and update their human capital strategies to
ensure that they are closely linked to the strategic goals of
the agencies.'' That is easier said than done.
``The number of fully authorized full-time staff at USTR,
Commerce Import Administration, the Commerce Market Access and
Compliance Division has increased in recent years. However,
actual staff levels are still in the process of catching up
with authorized levels in Commerce and USTR offices, and USTR
has requested additional staff resources for 2004.'' And I am
really pleased that you are doing that, Mr. Freeman.
And then you have gone on in your testimony, Mr. Yager, and
you say, ``In recent years, the U.S. has been pursuing a broad
trade policy agenda whose cumulative impact has tested the
limits of the government's negotiating capacity.'' I mean, we
are just really involved right now in a lot of stuff that
perhaps we have not been involved with as aggressively in the
past and perhaps in other administrations. I am not here saying
that we should not be doing it, but the agenda includes
undertaking negotiating efforts in multilateral regional and
bilateral arenas. I am surprised Mr. Zoellick gets any sleep.
[Laughter.]
The administration has characterized this effort as the
strategy of competitive liberalization. The United States was
actively involved in the challenging WTO round of negotiations
at Doha, Qatar, in 2001;
Second, the United States is also co-chair in ongoing
negotiations to create the Free Trade Area of the Americas,
which was something that people in South America complained
about when I visited them in 1998, that we were not moving
forward with it;
And, finally, with the passage of the Trade Promotion
Authority in 2002, the United States has launched a series of
bilateral and subregional Free Trade Agreement negotiations.
The increase in the number of these negotiations at the same
time that major global and regional trade initiatives are
underway has strained available resources.
In other words, the question is do we have too much on our
plate to handle, to do a good job with the job that needs to
get done?
Mr. Yager. Well, that is a good question, Mr. Chairman. I
think the one point that you made, which is certainly valid, is
that since Trade Promotion Authority passed the Congress, there
has been a very sharp increase in the amount of activity that
is going on. Of course, we have long been involved in the
multilateral negotiations as part of the WTO, and the FTAA
process has also been ongoing for some time. But where there
has been a rapid increase in activity is with the bilateral and
subregional agreements that are currently being negotiated by
USTR with the assistance of Commerce and other agencies.
And so, at the current time, we are negotiating with the
Central Americans. We are also negotiating with Australia and
other countries. And as soon as those agreements are completed,
there are other countries that are waiting to start
negotiations. For example, we are due to start with the
Dominican Republic, to add that to the CAFTA, and then there
are a number of countries in the Andean region that are also
waiting to begin negotiations.
So there is no question that there is a lot of activity,
particularly in these bilateral-type agreements, and that is
something that has certainly increased in importance in the
last couple of years.
One of the things we thought that made it particularly
important is that USTR, given the fact that it does rely so
heavily on expertise from other agencies, such as Commerce,
Agriculture and others, needs to look at these kinds of
negotiations as part of its planning process and discuss more
actively the kinds of personnel they will need, the kinds of
assistance they will need, and frankly the kinds of budgets
that those support agencies will also have to put in place to
enable them to do the travel, to do the negotiations and to
have the kind of people involved that are required in order to
make sure that these agreements actually serve the U.S.
interests.
And so we think that, given again the small size of USTR,
as Mr. Freeman noted, it really makes it imperative that they
work this into their planning process and coordinate very
closely with the other agencies because they do depend upon
those other agencies in order to supply the kinds of expertise
that they need.
Senator Voinovich. Yes, but based on the expanded area of
responsibility within our trade agencies, do you think they are
organized properly? In other words, if they have to rely on
several other agencies in order to get the job done, those
agencies themselves, in terms of management, are having
difficulty just trying to look at whether or not they have got
the people that they need to get the job done.
Then, you have to coordinate with another agency to make
sure that you have the people so they can get their job done.
Would it be better off if some of these areas were organized
differently. For example, the USTR relies heavily on the use of
detailees, do you think this is an effective human capital
strategy?
Mr. Yager. Let me answer two ways or provide two parts to
an answer on that one.
The first is that there is a process by which certain
officials from Department of State, Agriculture and Commerce
are actually loaned to USTR at various points in time in the
form of detailees. When they do need that kind of expertise on
a longer term basis, there are a number of detailees that are
placed in USTR for a period of years.
Senator Voinovich. The question is have you reached the
stage where the detailees should be permanently located in the
USTR and be responsible to their chain of command?
Mr. Yager. That is a good question, Mr. Chairman. I think
what is very important though is that it is clear to those
people at the beginning of their employment at Commerce or
other locations that they are in, and an important part of
their duty is to serve with USTR as part of the negotiating
team. And I think that is again one of the reasons why we think
it has to be addressed early. It has to be made clear to those
people, in their performance requirements, that part of this is
to assist in negotiations.
Obviously, these are smart people that are working at
Commerce and the other agencies, and they are responding to the
kind of performance incentives and the end-of-year feedback
that they get. It needs to be clear that what they are there to
do is to help serve with USTR and to move forward in those
negotiations.
Senator Voinovich. I hate to nitpick with you, but even in
performance evaluation, if I am working in one agency and I am
on loan to another agency, who does my performance evaluation?
Is it my agency or is it in the other agency? When people are
hired, do they know at the Department of Commerce that they are
going to be on loan, for example, to the USTR?
Mr. Yager. I think the other part of that answer that I
wanted to mention was the fact that it is inevitable that USTR,
whether it becomes larger, will still require the expertise
from some of these other agencies. There is certainly no way
that one agency will ever have the expertise on the wide range
of topics that are currently contained in a trade agreement,
whether these are safety or health or at certain times the
business relationships or expertise that are required. So it is
inevitable that they will rely on other agencies.
Now, whether they could have more personnel within USTR to
handle some of those functions, that is a question, but,
inevitably, other agencies, as I mentioned in my statement,
there are about 17 agencies that do participate in trade
policy, and some of that has to do with the complexity of trade
policies and the types of agreements that are currently an
issue.
Senator Voinovich. Do you think it would be wise if
somebody examined that situation to make a determination as to
whether or not perhaps they ought to have more people on board
that have the expertise that they are now getting from other
agencies? Do you think it might be worthwhile to look at that
with----
Mr. Yager. That certainly is a question that we could look
into, Mr. Chairman, if you want to go forward with that.
Senator Voinovich. I think I would. I think it is important
that we look at that issue.
First of all, I would like to say, Commissioner Jochum, I
was impressed with some of the statistics that you shared with
us this morning, and I agree with you. I have said in many
instances, and you have had 20 hearings, and I have had at
least four hearings in Ohio. In fact, I recently had a hearing
in my office with four Ohio manufacturers, and Secretary Evans.
He was kind enough to come and spend over an hour with us. I
think it is important that we make clear today that even if we
solve the issue of the manipulation of currency by the Chinese
or their violating intellectual property rights or not
complying with other requirements of the WTO that our
manufacturers in this country continue to have some significant
problems.
For example, if we could do something about the cost of
natural gas, it would have enormous impact on manufacturers. In
my State, mutual gas costs have doubled. Unfortunately, we are
not producing enough natural gas to keep up with the demand.
Furthermore, some environmental concerns are exacerbating the
demand for natural gas--which is another reason why we should
pass the energy bill.
The other issue is litigation. It is not on the table, and
it is not being talked about, but litigation is a tornado that
is ripping through the economy of America. And, again, we have
legislation in Congress to deal with asbestos reform and
malpractice lawsuit reform. Each impacts the cost of healthcare
in this country, and costs associated with class action
lawsuits. In fact, I asked the American Tort Reform Association
to do a study to investigate the cost of class action lawsuits
in Ohio.
Litigation is costing every Ohioan $650 a year. So it is
another fact we need to address, instead of just saying, well,
if we just take care of China everything will be OK. The fact
of the matter is we could take care of China, and we are still
going to have some significant problems.
And then of course you have to deal with the healthcare
issue, and that is a tough one. Again, we may be hearing from
some of the other witnesses, but in our State it costs about
$10,000 for a business to take care of family healthcare
protection for an individual. They are competing in the global
marketplace, say, with China, where those healthcare costs are
not reflected in the cost of their product. We are now in a
global marketplace, and the real issue is are we organized in a
way to compete in that global marketplace in terms of the costs
that are incurred by our businesses.
So I think it is important that we make that a point so
that people understand that we must have a full-court press on
lots of issues and not just concentrate on one and think that
it is the silver bullet that is going to take care of dealing
with all our problems.
I would like to ask you, Mr. Jochum, what is the status of
the reorganization that you talked about? Now, I was pleased
the President announced that Secretary Evans went up to Detroit
to the Economic Club and explained what he was going to do. I
talked informally with the Secretary. I wondered whether or not
you were going to get somebody in-house to do the job. At that
time, I suggested maybe it would be good because it takes new
people a while to learn the organizational structure. However,
it seems like you moved away from hiring someone from the
inside. I understand you are now having interviews for someone
that would head up the new position.
I just want to tell you that we have to get going. I do not
know, is this new person going to require confirmations by the
Senate, for example? I see somebody nodding their head.
Mr. Jochum. I would assume so.
Senator Voinovich. And you know what that is around here.
It is not easy.
It seems to me that by the time we come back in January,
you guys ought to have whoever it is that you want in place and
come in here and talk about it and let us get going because we
are running out of time.
How are you doing?
Mr. Jochum. As someone who went through confirmations twice
in the last 3 years in the Senate, I can tell you it is not
only an enjoyable experience, but you stretch it out over many
months so you can really enjoy it. [Laughter.]
My understanding on the reorg, Mr. Chairman, is that the
parts I believe that you have noted today are all within the
omnibus appropriations bill, and that if that bill were to pass
the Senate this week--and I know that is uncertain, although it
did pass the House yesterday--we would be poised to move
forward.
My understanding is that the personnel decision regarding
who that individual may be is working its way through White
House personnel, but they are fairly close and ready to
announce someone if we had the authority to do so. So that is
my understanding of the elements that we mentioned today.
There are other parts of the reorg that I mentioned that we
can do now. For instance, the Unfair Trade Practices Team
within my agency is part of the omnibus bill, but I think that
is something we can do without additional funding, and so we
are putting measures in place to get that up and running
immediately, and have actually started carrying out some of the
functions of that team. But passage of the omnibus bill would
be a great help in moving our reorganization forward.
Senator Voinovich. In the process of putting that whole
organization together, is the U.S. Trade Representative aware
of what you are doing and are they in tune with what you are
doing and some of the other 14 agencies we discussed.
Mr. Jochum. Yes.
Senator Voinovich [continuing]. So that they have an idea
of where you are going?
But the thought that I had which is why I introduced the
legislation--would be that you have to have an orchestra
leader. You are dealing with lots of agencies, and you have got
to have somebody that gets up early in the morning and goes to
bed late at night trying to make sure that they are doing their
job, but also making sure that they are dealing with other
sections of the orchestra that may be in other departments.
Mr. Jochum. No, that is exactly right. And I think the way
it was structured, maybe in the bill and maybe in your bill,
was that they would report to the President. So they would
actually be, technically reporting to the President. So they
would have the ability to orchestrate, if you will, or deal
with other agencies at that level. Notwithstanding some of the
comments on coordination with USTR that we have heard today, I
think we have a tremendously high level of coordination with
USTR, both on a formal basis, through interagency committees--
Mr. Freeman heads some of those up--but even all the way up to
deputies and principals meetings, but also at an informal
level, at my level and at the working level--a tremendous
amount of coordination. So they absolutely do know all of the
initiatives we are putting in place.
I often bounce ideas off people at USTR to get their
thoughs on new initiatives such as the Unfair Trade Practice
Team. So I think it really is a coordinated government effort.
It just happens to be housed in the Department of Commerce.
Senator Voinovich. We made some government-wide human
capital modifications in Title 5 U.S.C. with the Homeland
Security legislation. Has that helped at all in terms of
meeting your recruiting and retention challenges? In other
words, do we need to do more in that area? According to the
statistics, you are authorized for ``X'' number of people, and
you do not have those people on board. Where are we with that?
Are you having a hard time finding people? Is the salary level
not competitive? Are you still using the rule in three or have
you gone to the new flexibility of category ranking.
Mr. Jochum. Ms. Cheatham may be able to go into greater
detail, but my understanding is that there has always been a
gap between authorized FTE levels and the funding needed to
hire those people.
To put it in context, I ran a different agency before I
came over here, at the beginning of the administration, and
hiring is one of the greatest challenges we face. One perverse
effect of the downturn in the economy in 2001-2002 is that,
frankly, we did get a lot of good people who came into the
government, into the Federal service, and I was really pleased
with some of the quality individuals that we had.
In my agency particularly, we use a lot of lawyers,
economists, and accountants--people who really could make more
money in the private sector, for a number of reasons--but
notwithstanding the recent growth in the economy, we had a
tremendous influx of talent. That is not to say we always have
the right mix of people.
And the point you made about matching our priorities with
the experience and expertise that we need is really illustrated
in this China office that is about to be created. This
proposal, which is in the omnibus bill, would require us to
really develop further expertise on China as a market,
specifically. Right now we do not do a good enough job within
the Commerce Department of coordinating all of the activities
on China in one place. And my hope is that with additional
funding levels and FTE authorization, we can get people into
the Department who have a background and expertise on China, in
particular, people like Charles Freeman and others that we
already have. We need them in one place to look at this issue
from a holistic standpoint.
We do our best to attract these individuals. We use
recruitment bonuses. We sell the fact that you have flex time
and compressed time in the Federal Government, all of those
sort of lifestyle issues, to try to entice people from the
private sector to us.
I was surprised. I looked at my numbers today, and a third
of my workforce has been at Commerce for more than 10 years, I
think. That is encouraging. At the lower level of the spectrum,
you do have a high level of turnover.
As Charles said, I believe my agency is well staffed with,
frankly, some of the best trade lawyers I have ever met. We
could match up with a lot of mid-size law firms in Washington I
would think. But there is always more we can do to entice
people to come into the Federal bureaucracy because there are
limits in terms of income and other factors.
Senator Voinovich. Well, the administration has given high
priority to human capital, and we tried to create an
environment in Congress to help them. And I think that when you
come in with the nominee for that new office, we would like to
have more information about what is happening in terms of
bringing people on board and do you have the folks that you
need to get the job done, and if there are some things that we
can do to help you get it done, we will try and help out. The
human capital provisions in homeland security were the most
significant Civil Service reforms since 1978, but there is
always more we can do to help.
And by the way, another issue is what role Congress should
be playing in all of this? I am meddling in your business right
now. I was a former governor, a former mayor, and I did not
like the legislature to be mixing in sometimes on things that I
thought were in my bailiwick, but as you can tell, I am very
concerned about what is going on here. And the issue is what
role should we be playing? How can we help you get the job
done?
And you also have to understand that there is an enormous
amount of frustration right now among many of us about what is
going on. It is like we want something done, and the reason is
because, when we go back home, our people say we need help now,
not next year or 2 years from now, we need it now, and what are
you doing?
What can we be doing more to help out?
Mr. Jochum. I think on the workforce issues, Mr. Chairman,
you are one person who is already doing more to help out. From
a manager's standpoint, we need flexibility to respond to new
issues, emerging issues, and to be able to get the right people
with the right expertise and experience to respond to those
issues quickly. I think the Federal workforce moves rather
slowly at this point. We need tools to recruit people and to
retain people.
We talked a lot about recruiting, but retention is just as
significant. We have grade levels that are capped out at mid
levels and lower levels, so people do not see an opportunity to
advance. I am no expert on the civil service, but I will take
this as an offer to come and talk with you when we have these
initiatives in place, with Ms. Cheatham at my side, and
determine what you could best do to give us the flexibility to
get the right people.
Senator Voinovich. Well, we are trying to deal with the
safety cap. We have increased the cap. I know, with the Senior
Executive Service, that we have had 75 percent of them making
the same amount of money, and it has not helped the agencies
because it demoralizes those that are really producers.
Mr. Jochum. That is right.
Senator Voinovich. And we are trying to take care of that
problem too.
What I would really like to know, from somebody on the
street, is what we have done is helpful, and if it is not, what
else can we do to help you get the job done?
Mr. Jochum. I appreciate it.
Senator Voinovich. The other thing I would like to find out
from you is, as a governor, I took 10 trade missions overseas.
In some countries, the Foreign Commercial Service Office was
outstanding. We dealt with it. Others, we concluded that it did
not get the job done and went to the private sector. In some
cases, we had ambassadors that really seemed to get it in terms
of economic development and trade. Others did not seem to get
it.
When I was in Bratislava, I became impressed with
Ambassador Weisser, a former resident of Michigan, because he
was out hustling joint ventures and so forth.
What is the status of our former commercial folks around
the world?
Mr. Jochum. Maybe Ms. Cheatham can discuss what we have
been doing in that regard, but one thing the reorg will do is
to match our trade promotion activities with our Foreign
Commercial Service officers, because two different entities are
doing those activities now, which I think really puts us behind
where other countries are. In my latest job in the
administration, I did a lot of advocacy on behalf of defense
contractors around the world, and I just think you need to link
those two functions up.
I do know that we have more than 1,000 people in the
Foreign Commercial Service, and I have used them when I have
traveled, both in the private sector and in the administration,
and I have found them to be extremely helpful. I have also
noted, and I met with a lot of ambassadors--I was in Brataslava
2 years ago--that I believe Secretary Powell has really
instilled a culture in the Foreign Service that appreciates the
economic aspect of the equation. So I think very positive
changes have been made in that regard.
If you want some current sort of details on where the
Foreign Commercial Service will go in terms of the reorg, maybe
Ms. Cheatham can speak to some of that.
Ms. Cheatham. One of the things that we are trying to do,
Mr. Chairman, is to consolidate all of the promotion activities
in the Foreign Commercial Service so that when companies are
doing business overseas, there is one point of contact that
they have to deal with. The advocacy center will also help
here.
As Mr. Jochum said, there are approximately 1,100 people
that we have stationed overseas in about 85 countries.
Senator Voinovich. It is important to help our businesses
do business in some of those countries. Your job is vital
because without your help, it just doesn't happen. I had some
wonderful experiences and I had some not-so-wonderful
experiences.
Secretary Evans was in Beijing on October 28, and he stated
that U.S. patience on China's WTO compliance was, ``wearing
thin,'' and warned of, ``growing protectionist sentiments in
the United States against China.'' This growing anger towards
China's IPR policy coupled with China's rigid adherence to a
pegged currency policy has created an environment that is
conducive to Congressional intervention.
It gets back to the same question I asked before, which is
what role should Congress have in regard to fair trade with
China and our international partners? I have introduced
legislation and Congressman Phil English has introduced
legislation in the House to establish an Assistant Secretary of
Manufacturing at Commerce. Can you explain who is responsible
for the enforcement? Do you work with the U.S. Trade
Representative? Is that strictly their responsibility, Mr.
Freeman?
Mr. Freeman. The enforcement of trade?
Senator Voinovich. Yes.
Mr. Freeman. Generally, we work very closely with Commerce
on all these issues. It really depends on what the issue is to
see who has the lead.
With respect to intellectual property rights issues in
China, I know we have a very strong team that we have worked
together with in China that deals with it, and also with
respect to currency. One of the things that, as you mentioned,
Secretary Evans when he was in China was very strong on the
currency issue was focused on that. I know Ambassador Zoellick,
when he was there earlier in the month, had also spoken on it,
and Secretary Snow back in September. So there has been a very
unified message that the Chinese have heard on the currency
front.
The sense of the administration is that they have the
message and that they are moving forward. It may not be on the
timetable that a lot of us would like to see, but certainly in
terms of making progress, they are pushing in the right
direction.
Senator Voinovich. When I talked about the reorganization,
I was talking about having somebody get up early in the morning
and stay in late at night making sure that we enforced our
trade laws. Fundamentally, the concern is this, is that if I am
dealing with the United States and I am getting away with
things and I can get on the field and run without a flag being
thrown and I almost get to the goal line, I am going to run on
you and run on you.
Where are we in terms of that agency, and is it in your
shop where you have people that get up early and stay late at
night and get the word out there that as soon as you get on the
field and you break the law, we are throwing the flag and we
are on you?
Mr. Jochum. Yes. I guess I would divide enforcement into
two areas. One is the trade laws, in terms of imports and their
effect on U.S. businesses. We enforce the dumping laws, and the
countervailing duty laws. The dumping cases against China that
I mentioned in my testimony, where we brought the textile
safeguards that were announced a couple of weeks ago, all of
that occurred with interagency knowledge and coordination.
Responsibility for monitoring compliance with a trade
agreement as opposed to U.S. trade law, however, is really
split among the agencies. We have a Trade Compliance Center
within the Department of Commerce made up of 18 individuals who
look at trade agreements and whether they are being complied
with. We have a China office now--a little different than the
one that is going to be created--which looks just at China's
commitments to the WTO and within other trade agreements. That
office, again, is a dozen or 16 people working with U.S.
industry to identify where the Chinese have failed to meet
their commitments, and then working with Charles Freeman and
USTR and other agencies to develop a coordinated strategy to
address those situations.
This calls to mind a similar line of questioning you had
with Dr. Yager regarding who looks at these issues. When I was
in the private sector doing international business for a
consulting firm, we were always aware of trade barriers,
probably before the government was, because we were there
trying to have a transaction take place, or trying to enter a
certain market. Certainly, we relied on the Foreign Commercial
Service officers in those countries.
But I think a large part of monitoring trade agreements is
close coordination with the private sector and with the
government, and a lot of that occurs at the Department of
Commerce because we have those relationships built up over many
years--not that USTR doesn't, but we do that on a day-by-day
basis.
So if you are talking about trade laws, we certainly
enforce them. I get up every day worrying about this stuff. If
you are talking about trade agreements, it is more split and I
think USTR probably has the lead in going after IPR issues and
things like that.
Senator Voinovich. The problem is that it doesn't seem that
we are making progress. I have a memorandum, and I am going to
ask that it be submitted in the record, in terms of the IPR and
how long we have been working on IPR. Every year, we talk to
China. Every year, they say it is going to get better. And I
have to tell you something. You need a sledgehammer to make
things better.
[The information of Senator Voinovich follows:]
MISSING ? ? ? ?
I will never forget my 97 trip to South Korea. I am asked
by the big three auto companies to raise the issue of the
export into South Korea of non-Korean vehicles, and I spent 3
days talking to everybody and they said, oh, we have done
wonderful. They have gone from one-tenth of one percent to two-
tenths of one percent. They gave me a response that if they had
given that here in the United States, we would have laughed
them out of the office. They wouldn't have ever tendered that
kind of response to a question from me, and they did it with a
straight face.
And today, South Korea exported more vehicles into the
United States in one day than all of the other countries export
into South Korea in 1 year. Do you get it? In other words, one
day in the United States is more than the entire export into
South Korea, and I am not just talking about the United States,
I am talking about everybody.
When people hear things like that, they have to start to
ask themselves, are we enforcing the trade laws? This is fair
trade? And I think that some of these issues that are out
there, you have got to break the logjam. You have to show you
have made some progress. That is the frustration out there. It
seems like we are talking a good game, but we are not making
progress, and when you do score a touchdown, when you do get
something done, you ought to let us know about it.
Mr. Jochum. I agree, and the last part of what we were
discussing--some of the numbers I gave you in my testimony
about our dumping cases are probably not widely known, although
we put them on our website and otherewise make the information
available. But I think we need to do a better job of
communicating with Congress on the activities that we do do on
a day-to-day basis.
And Mr. Chairman, getting back to your question about what
Congress can do, I have negotiated with the Chinese for several
years now, not on this issue but others, and they really do pay
attention to what Congress is doing. It is a significant part
of their calculation in terms of negotiating with us. So
resolutions and bills that are introduced, I think, have a
tremendous effect and allow us to have a stronger hand when we
go talk to them about these issues.
Senator Voinovich. I sure would have liked the Treasury
Department to--I worked with Dick Lugar's staff to come up with
what I thought to be a very fair objective, and then we get the
word Treasury doesn't want it. Why, I am asked, and that is a
question I am going to ask Secretary Snow.
The last thing, Assistant Secretary, is that some U.S.
companies question the Department of Commerce's ability to deal
with fraudulent data, i.e., there is a problem that arises and
you start dealing with people over there and they provide
evidence to you and some of our people feel that it is fate.
What is your capacity to pierce the veil and really find out
whether or not they are giving you the right information?
Mr. Jochum. This comes up in the context of our undertaking
a dumping investigation, primarily against Chinese companies,
although we face fraud in other parts of the world, as well.
Our statutory authority allows us, when we find fraud, to go
ahead and apply what we call ``adverse facts available,'' the
result being that they would get a much higher dumping margin.
To give you an example, we did a review within the last
couple of weeks. We found fraud. We gave them the highest duty
that we could give them within the case, and so it ended up
that they had a 300 percent tariff coming into the United
States. That is the recourse we have under the statute. We
don't have enforcement authority beyond that.
What we do is work with Customs, because those would be
potential infractions of reporting laws to Customs, to give
Customs the information we have seen, and have Customs
undertake their enforcement authority to pursue those cases.
And we have referred about 20 cases to Customs within the last
couple of years. So when we find fraud, we work within the
context of our case and assess a penalty, and then we refer it
to Customs for them to follow up on the matter.
But this is a situation that is arising more frequently,
and there are a couple of other options that we are considering
right now. I would be glad to come back when we are ready to be
more public about what other avenues we may explore in that
regard and discuss these matters further with you.
Senator Voinovich. Thank you. Mr. Freeman, when is the
International Trade going to go forward with a 301 on China in
terms of their currency manipulation?
Mr. Freeman. Well, there are no plans to self-initiate at
this time. Obviously, if a 301 is brought, we would evaluate it
based on the legal theory. We haven't seen a legal theory yet
for Section 301 on the currency. So right now, we remain
interested and will look for it when it comes.
Senator Voinovich. Well, there are many of us that feel
that you should move forward with it and that there is enough
evidence that we should have a 301. I know that the President
recently disbanded the 201 on steel and I was very much
involved in encouraging him to go forward with that and he made
a decision. But I have to tell you something. If that 201 had
not gone forward, we would not have a steel industry today in
this country, particularly when we are talking about slab steel
and so forth.
President Clinton could have undertaken that at any time
and chose not to do it, and then as a result of that, Congress
introduced several quota bills that really violated the WTO
straight out. It seems to me that Mr. Zoelick ought to be
looking at that issue because many of us are very concerned
about it. It is one legitimate way that you can raise the
issue. That is under the 201--wasn't something somebody pulled
out of a bag. It was available under WTO. It was available
under NAFTA. It was under GATT. It was the surge provisions.
You could do it.
So I strongly urge you to talk to your folks and look at
this, because we are concerned about what is going on and we
expect these people to cease and desist, and if they don't,
then I think we have really got to go forward. And if you don't
move forward with it, you are going to get some stuff coming
out of this place that you may not like, that you may not like.
Last but not least, I want to ask the question about the
personnel. You heard the questions with Mr. Yager, the question
about whether you are organized and do you have to rely too
much on other agencies to get the expertise that you need. What
do you think about that?
Mr. Freeman. Well, we obviously feel that we could work
within the President's budget that he submitted. We do note
that there was some additional money set aside in the omnibus
and we are certainly gratified for that.
The core of our business really is personnel and travel.
Our travel budgets do get crunched now and then, especially
given certain additional costs that are associated with travel
these days, and anything helps. I do think that the people that
we have are first-rate----
Senator Voinovich. But the question is this. Your plate is
much fuller than it ever has been in this country's history and
you have been operating with 200 people and you have been
accessing personnel from other agencies. The question is
whether or not your agency should be expanded and some of the
expertise that you are relying upon in other agencies should be
reorganized into your operation.
Mr. Freeman. Again, we have taken a variety of steps at
USTR to deal with the expanded agenda. We have reorganized our
issues and regional offices to deal with the new demands. We
have overhauled the financial system that allows us to track
travel expenses and so forth. We put new accounting codes in.
There is a variety of other systemic things that we have done.
At the core of USTR is the notion that smaller is better,
that the ability to be agile and nimble and to be responsive is
really at the heart of some of our successes. That said, we do
rely very heavily on both the detailee program that comes from
other agencies and we also rely very extensively on our ability
to work closely with other agencies.
Again, the bottom line is that it is good to be small, but
the job is certainly tough and----
Senator Voinovich. Do you know if anybody is looking at it?
Mr. Freeman. Looking at the----
Senator Voinovich. The issue of whether or not the way you
are organized makes the most sense.
Mr. Freeman. I know. I am here with the Assistant USTR for
Administration, who spends his waking and sleeping hours
fretting about it, so I know he is looking very closely at it.
Senator Voinovich. Well, it is a question that I am going
to continue to ask and I am asking Mr. Yager to get involved in
it.
I want to thank you very much for being here. Your
testimony has been encouraging and you certainly have a lot of
challenges. What you are doing is really important for our
country, for our national security, for our economic security,
and I just want to say to you I appreciate your commitment and
your service to the country, and let the folks that you work
with know that we care about what they do. God bless them for
what they are doing.
Our next panel is Franklin Vargo, Vice President of the
National Association of Manufacturers; Tom Duesterberg,
President and CEO of Manufacturers Alliance for Productivity
and Innovation; and Tim Hawk, who is Vice President and General
Manager of American Trim L.L.C.
I want to thank you for being here today with us. You all
have had an opportunity to hear from our previous witnesses and
I welcome your observations about some of the things that they
have said in their testimony.
We will start out with Mr. Vargo. Mr. Vargo, I understand
that you have had a lot of contact back and forth with our
office and I am looking forward to sitting down with you to
talk to you about some ideas that the National Association of
Manufacturers has and how we can improve the situation that I
consider to be in crisis proportions in some parts of this
country, particularly in terms of our manufacturers, so thank
you for being here.
TESTIMONY OF FRANKLIN VARGO,\1\ VICE PRESIDENT, INTERNATIONAL
ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS (NAM)
Mr. Vargo. Mr. Chairman, thank you for inviting me. I am
really honored to be here because you are one of the NAM's
great heroes. You take backseat to nobody in pressing for the
health of American manufacturing and for restoring 2.8 million
jobs to America's working men and women and we thank you for
that.
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\1\ The prepared statement of Mr. Vargo with attachments appears in
the Appendix on page 92.
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Mr. Chairman, the subject of your hearing is a very
important one. Manufacturing is indeed in need of a lot of
redressing of the ills that have happened over the years. I
want to thank you for introducing, along with Senator Snowe, S.
1977, the SMART Act, and we would like to work with you on
that.
As far as trade resources, the NAM pressed very hard for an
increase in resources for both USTR and Commerce this year and
I certainly hope the omnibus appropriations bill is going to
pass this week because it provides an additional $7 million of
resources to USTR that is very overdue for many years. For
example, USTR is leading now in negotiating 16 different free
trade agreements that are either being negotiated now or they
are on the books.
But the immediate problem is absorbing China into the WTO.
China is now in the second year of being in the WTO and
everybody was willing to cut China slack the first year, and we
understand that China has a lot of transition still to do. But
there are problems that just cannot be allowed to lie around
anymore, and I want to illustrate some.
Mr. Chairman, I am holding a pair of pliers in my hands.
This is a pair of pliers made in China. The wholesale price in
the United States is 49 cents. An NAM member makes a similar
pair of pliers. The problem is that the steel in these pliers
and the rubber is 61 cents, and steel and rubber is not cheaper
in China than it is here. How do you take 61 cents of raw
materials, manufacture it, package it, ship it across the
Pacific Ocean, and sell it for 49 cents? Something is going on,
and it is not just in pliers. It is in the area of fish
cookers, plastic molds, and vibration mounting systems. We have
members that are very concerned that these products are being
either dumped or subsidized.
Now, a lot of Chinese companies don't have to repay their
loans. Up to half of the loans are non-performing. Well, if I
didn't have to repay my loan, I could sell very cheaply at
wholesale.
Assistant Secretary Jochum said they are setting up an
unfair trade practices team and I suggest they start with that
pair of pliers right here.
You mentioned counterfeit goods. My testimony contains some
pictures of real and fake Toro sprinkler heads here. Toro is a
very well-known company, makes garden equipment and others.
When we talk about counterfeiting in China, we are not talking
about knock-offs of designer bags and perfumes. We are talking
about pharmaceuticals that are filled with talcum powder. We
are talking about windshield safety glass that will shatter. We
are talking about lawn sprinklers that are exported from China
around the world, and it has got to stop. Getting China into
the WTO gave us rights we didn't have before and it is time to
exercise them.
I will say, I really want to compliment the new Deputy U.S.
Trade Representative, Ambassador Josette Shiner. She has been
in her office only a couple of months and she has been to China
three times on this single issue. She has adopted it as her
highest priority. The Chinese, in response, have designated a
deputy prime minister to get onto the subject.
USTR has agreed that this will be discussed not just in
theory, Mr. Chairman, but we are going to take specific cases
like this, identify where the factories are. We want those
factories, we want the equipment destroyed. We want the people
who are manufacturing those counterfeit goods arrested. We want
criminal prosecution brought and we want to see decisive action
on this. And if we don't get that, then we are going to have to
move quickly to the WTO. We can't sit around.
One additional area that, Mr. Chairman, you did not mention
in your initial remarks, and that is China is violating its WTO
requirements very seriously in the semiconductor area, where
imported semiconductors into China, including American-made,
pay a 17 percent value-added tax, and that is fair. But if you
design and make the chip in China, you get 14 percent rebated
back to you, and that is not fair. That is totally in
opposition to the national treatment under the WTO and to
specific tax provisions in the WTO.
If we let this continue, our semiconductor industry, the
research and development, our entire global leadership in
micro-electronics risks moving over to China. The Semiconductor
Association produced a detailed report and I would like to
leave that with you, Mr. Chairman. This is something that USTR
needs to stop talking about and do something about.
You mentioned the currency. The Treasury has acknowledged
in testimony before Congress that the Chinese are intervening.
They are intervening heavily for the purpose of preventing the
exchange rate from rising, and by inference, they are saying
that if China did not intervene, the exchange rate would rise.
Well, it is time to do something about that. Secretary Snow
has put this front and center. We are very grateful for that.
But we need to see action from the Chinese. If they cannot move
to a floating currency--they are a huge trading economy. They
need to play by the rules. And in the meantime, they need to
bring their currency up to something that resembles market
rate. I will say one of the best estimates was done by Dr.
Ernie Preeg, who works with Dr. Tom Duesterberg in the
Manufacturers Alliance.
One additional point. We need to ensure that the Commerce
Department is indeed able to use correct methodologies for
dumping and for countervailing duties in China. We do have
companies that say the Commerce Department, in their view, is
not going about the job as well as it ought to in selecting
what are called surrogate companies in a market economy,
because China is a non-market economy. We are very concerned
about the cases of fraud. I was very pleased to hear what
Assistant Secretary Jochum said, but we need to pursue that
more.
And we need to look at whether there needs to be some
change in the law to make it plain that if there are subsidies
in China--and Secretary Evans said that there are--that the
countervailing duty statutes can be used even though China is a
non-market economy. This may need legal clarification, Mr.
Chairman.
In concluding, Mr. Chairman, certainly China trade are not
the only problems or even the primary problem that American
manufacturing faces. You mentioned the cost increases. Dr.
Duesterberg's organization, the Manufacturers Alliance, and the
NAM, as a matter of fact, this very morning had a press
conference releasing this report on how structural costs are
harming manufacturing in the United States. This report
quantifies for the first time the magnitude, and by our initial
estimates, these costs of additional healthcare, of litigation,
of energy costs, are adding 22 percent to the cost of producing
in the United States. Until we deal with that, Mr. Chairman,
that is just like hanging out a sign saying, ``Manufacturers
are not welcome in the United States.'' Thank you, Mr.
Chairman.
Senator Voinovich. Thank you, Mr. Vargo. Mr. Duesterberg,
thank you very much for being here.
TESTIMONY OF THOMAS J. DUESTERBERG,\1\ PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MANUFACTURERS ALLIANCE/MAPI
Mr. Duesterberg. It is a pleasure to be here. Mr. Chairman,
I want to join Mr. Vargo in commending you for your leadership
on this issue and thank you for having me before your
Subcommittee.
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\1\ The prepared statement of Mr. Duesterberg appears in the
Appendix on page 108.
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I am going to try to give a little bit broader overview of
the importance of manufacturing with a view to helping you to
focus your efforts on some of the areas of trade enforcement
that are of particular importance to manufacturing.
I want to begin by giving you a few facts and figures about
why manufacturing is important to the overall economy. It is
not only that it produces high-paying jobs, but we think that
manufacturing is indeed the engine of growth for the American
economy and for the global economy, and that fact is too often
forgotten.
We recently published a book trying to explain why we think
U.S. manufacturing is the engine of growth, and I will leave a
copy with you, Mr. Chairman. Some of the things we looked at
though, were that manufacturing is the center of productivity
and innovation in the modern economy. Over 90 percent of new
patent approvals in the United States come from the
manufacturing sector. Two-thirds of all R&D now comes from the
manufacturing sector.
Furthermore, the high-tech investment that is pioneered by
the manufacturing sector, as one of the other witnesses
indicated, spills over into other sectors of the economy, such
as agriculture and such as the services sector, and allows them
to introduce productivity gains, which are the source of
increases in our standard of living.
Given this leadership position of manufacturing as a
research oriented, innovation oriented sector, we think it is
vitally important to the future of the American economy. Some
of the indicators that we talk about are not only the excess
productivity gain compared to the rest of the economy that
comes from manufacturing and spills over into the services
sector, but also the fact that high-technology goods, which on
an average pay much higher wages and which add much more value
than commodity-type consumer goods, are increasingly dominant
in the American economy. I put some charts in my testimony
regarding the increase in our high-tech exports in the last two
decades.
That being said, there is starting to be something of an
erosion in the position of the United States's ability to do
research and development and, in turn, remain competitive in
the advanced technology area. Some 35 percent of our exports
now are in advanced technology products. But whereas in the
1990's we had a large trade surplus, peaking out at $38 billion
a year in advanced technology products, we now estimate that
this year we will have a trade deficit of about $25 billion in
advanced technology goods.
The second part of my testimony looks at some of the other
pressures on manufacturing. Mr. Vargo mentioned the study that
we put out which indicates that the cost pressures that are
externally imposed on the manufacturing sector add up to at
least 22.4 percent of total unit labor costs. Given that labor
costs are only about 11 percent of total costs, overall costs
in manufacturing, this shows you the magnitude of the problem
we are facing with these costs, such as litigation, which you
mentioned, healthcare costs, natural gas costs, and the like.
This has wiped out much of the incredible productivity gains
that we enjoyed in the manufacturing sector over the last two
decades.
Senator Voinovich. I just wanted to interrupt you on that
one, just because you talk to a lot of people in this country
and they say, well, we are not productive. We have had the
greatest increase in productivity that we have ever seen in
this Nation's history, and a lot of it is coming out of the
manufacturing sector, a big part of it, as a matter of fact.
Mr. Duesterberg. It is----
Senator Voinovich. So we are not competitive because we
aren't productive. Nothing could be further from the truth. Our
guys are doing terrific jobs in terms of productivity. But it
is all the other structural costs added onto the back of the
manufactoring sector that is breaking it and hurting them in
the global marketplace. And the real question is, how do we
level the playing field?
Mr. Duesterberg. Let me say a few other things about that.
One of the sources of our strength over the course of time is
our commitment to research and development, and the Federal
Government has always played a role in that. I put a lot of
charts and graphs in my testimony showing that there has been a
slow erosion in relative terms of our commitment to basic
research and to encouraging people, students, to enter into the
professions, such as engineering, mathematics, and the physical
sciences, which are important to manufacturing and which
provide the intellectual capital, the human capital, for these
incredible productivity gains that come out of the
manufacturing sector.
I noted that some of the notable Federal programs of the
past, such as the Apollo program, which in the 1960's was
supported with up to 0.75 percent of total GDP each year, paid
immense dividends over the course of time in terms of our
technology lead, which we still enjoy today.
Unfortunately, there has been a fall-off in the number of
students entering these professions and in the amount of
support that is going into research and development, both at
the Federal level and at the industrial level. And as a result,
even though we are still the technology leader in most of the
areas that are important to manufacturing, that lead is eroding
a slight bit and we need to address that.
Now, third, some of the things we need to be doing, we need
to address these cost pressures through tax policy. Capital in
America is taxed higher than anyplace else in the world except
Japan. Healthcare policy, which you know, legal reform,
regulatory reform, and in that context I would note that even
our environmental costs are higher than most places in the
world. We don't do it as efficiently as we should. Energy
costs, which used to be a source of strength for industries
like chemicals, where we had a trade surplus of substantial
proportions 10 years ago and now we are in a trade deficit. So
that needs to be addressed.
Finally, I would note that there are things in addition to
trade policy that we need to be looking at, and in terms of
trade policy, the importance of intellectual property
protection and enforcement of intellectual property protection,
which Mr. Vargo went into great detail on, is vitally
important.
But we also need to do things like improve elementary and
secondary education, support advanced training in engineering
and the physical sciences. I think we need to establish clear
and inspirational national goals for our space and national
health research programs, both because they meet national needs
and it would be a means to attract students to the academic
disciplines needed to carry out these programs and which are
the heart of modern manufacturing.
We need to support basic research. We need to support
programs that ensure the development of technologies that meet
national security threats. Without a robust and technologically
advanced manufacturing sector, our national security would be
called into question.
We need to streamline and accelerate the drug and medical
device approval process with the Food and Drug Administration,
which tends to retard the development of medical products
which, after all, are manufactured goods.
We need to make the R&D tax credit a permanent part of the
IRS code, and the U.S. Patent and Trademark Office needs
resources to speed up its activities.
Mr. Chairman, I thank you for this opportunity to appear
before you.
Senator Voinovich. Thank you very much.
Mr. Hawk, it is nice to have you with us today. I
appreciate the fact that you and your team from Ohio were in
Toledo when we had our listening session and then were willing
to come to Washington and spend over an hour with Secretary Don
Evans. I thought it would be important that you be here at this
hearing so that the record will reflect your personal
experiences and how small businesses are being effected by the
global trade environment. I am glad you are here to speak on
behalf of an Ohio based company to tell your story of how you
have encountered some enormous burdens that you haven't
experienced before in the life of your company. Thank you for
being here.
TESTIMONY OF TIM HAWK,\1\ VICE PRESIDENT AND GENERAL MANAGER,
AMERICAN TRIM L.L.C.
Mr. Hawk. Thank you. I would like to thank the Subcommittee
for allowing American Trim the opportunity to present today.
American Trim is a 50-year-old manufacturing business that
supplies component parts and assemblies to the automotive and
appliance industry. We stamp, decorate, and finish products
that are seen and used in many households and vehicle systems.
We employ over 1,500 families and operate facilities in four
States. I am a third-generation owner-operator.
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\1\ The prepared statement of Mr. Hawk appears in the Appendix on
page 130.
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Our company's tag line is, ``Forming the Future.'' I hope
today our small company might have an influence on the
formation and enforcement of future trade laws, policies, and
practices.
Today, I will provide an overview of why the U.S.
manufacturing sector is losing jobs at an alarming rate. As you
know, two million jobs have been lost and we have had 34
straight months of manufacturing job loss.
You have given me 5 minutes today and I will give you our
company's ``2-cent'' perspective for why the loss and why the
continued loss if action is not taken. Simply put, it is all
about the other non-controllable costs that we are saddled with
that makes us uncompetitive. This includes rising healthcare,
environmental, OSHA, and basic utility costs.
The part that I am holding up here has been made for more
than 30 years. We have made over a billion of these. We have
invested millions of dollars in high-tech automation to
eliminate the labor cost to the manufacturing. My predecessors
had the foresight to being and achieving the world's low-cost
producer of this product. This product has two cents of labor
content in it. Those costs include the labor to convert the
metal from a flat piece of metal into a finished product and
shipped to the customer.
Competitiveness and the viability of this product in the
lives of our people and employees is being challenged by the
low-cost labor countries and their ability to buy and process
commodities (steel) cheaper than us. We recognize that China,
India, and Indonesia offer labor rates at 90 percent cheaper to
the United States. We don't consider that a factor in competing
with them due to the automation and the productivity levels
that we currently achieve.
I recently conducted a competitive bid process for that
specific product. My goal was to understand the direct material
and labor content associated with the product. Much to my
surprise, material was 25 percent cheaper than what we could
procure it for. The ability to start off with a 25 percent
advantage to us is a bit alarming. I researched other materials
and have found similar stories in different industries.
The purchasing power parity (PPP) seems to be out of
balance. I am by no means an expert on currency manipulation
and its inter-relationship with PPP. All I can surmise is that
the playing field is tilted away from fair trade.
Now let us talk about the other costs besides material and
labor. These costs are almost non-existent to low-cost labor
countries. These include cost of healthcare, environmental and
safety compliance,and utility costs.
As a percent of revenue, our company operates at a 22
percent cost disadvantage due to the unlevel playing field. As
you can see, it is not necessarily about the two cents of labor
in that part that is in front of me. It is all about all of the
other cost drivers that we experience as part of it.
There appears no end in sight for the ongoing cost
escalation in healthcare and utility costs. Natural gas, which
is used to heat our facilities and run our manufacturing
processes, have increased 122 percent since 1998. Healthcare
costs have risen 63 percent since 1999, and is approximately 5
percent of total company revenue.
The original equipment manufacturers (OEMs) have been
developing strategies for sourcing products in China for some
time. This includes the likes of General Motors, Ford, General
Electric, Whirlpool, and Electrolux. They all have very lofty
goals for China sourcing. Ford has a target of $10 billion
within the next 5 years. How many businesses do you think will
be lost to that?
They have one simple message for us: Match the China price
or else. The ``or else'' is being eliminated as a supplier and
the continued creation of more job loss for Ohio. General
Electric is in the midst of following through on the ``or
else'' for our company, costing people their jobs and reducing
the amount of taxes paid.
The OEs are strategically organizing their China efforts.
They are developing in-country beach heads and establishing
very elaborate commodity filters for evaluating products.
Products are screened or plotted on two dimensions. One
dimension is of value added for labor and relative packaging
density. Packaging density relates to the ability to ship many
parts in a container. If they have a high labor content and are
likely candidates for importing.
I think we can all see why China is an attractive area and
place to manufacture goods and why companies will continue to
pursue sourcing goods in that region of the world. It is all
about year-over-year cost reductions that are needed by large
multinational companies. If there is nothing to do to level the
playing field, small to mid-size manufacturing won't exist in
Ohio.
I was asked by a government official if we have plans to
manufacture products in China. I responded, ``I thought it was
about keeping and securing jobs in the United States and
including the flow of taxes to the Government.''
We are at a real crossroad and a heightened sense of
urgency needs to take place. I stand here today wondering if
anything will be done or if we will just watch another industry
sector pass. I am a hopeful manufacturing romantic, but I
realistically can't tell our employees that the future is
prosperous and bright. Thank you.
Senator Voinovich. Thank you for being here today.
A couple of areas. You heard the testimony in response to
my question about whether our trade agencies have the people to
get the job done, and I think the National Association of
Manufacturers, Mr. Duesterberg, and your organization,
supported having an Assistant Secretary of Manufacturing.
The issue is, in your opinion, are they moving fast enough
in this regard. And from your observations, do they have the
people that they need to get the job done? Also, do you think
that the suggestion of evaluating the way our trade agencies
are organized ought to be looked at? We can't even seem to
agree on how many agencies are involved with trade negotiations
and enforcement. And then having the Trade Representative
reaching into the other departments for the expertise, from my
observation, and I have been involved in this a long time as
Governor of Ohio and very much involved in trade and export and
so on, it just isn't working. I would like to have your opinion
on that.
Mr. Vargo. Mr. Chairman, before coming to the NAM, I had
over 30 years at the Commerce Department in international
trade. Several of those years, I worked for Assistant Secretary
Duesterberg, who was a great boss.
There is no question that certainly in USTR they haven't
had the resources they have needed for years. We pushed very
hard, and I want to give Representative Frank Wolf, who chairs
the Commerce, Justice and State Appropriations Subcommittee, a
lot of credit for his tenacity to get funding above and beyond
what the administration asked for for USTR, and that is in the
omnibus appropriations bill and I certainly hope that is
approved by the Senate this week. That bill also, thanks to
your efforts, contains the Assistant Secretary of Manufacturing
position.
So I think Commerce is moving in making plans. I know a lot
of people in Commerce from my years, and they are certainly
working on the plans to implement that, but they need the
authorization and the money, which will be coming very shortly.
So yes, I am satisfied with that. We are looking forward
eagerly to Commerce's manufacturing report, which is coming out
a little bit later than we had expected. What we want is a
report with good hard-hitting recommendations, so we are
looking for that.
As far as the interagency process, my perspective is a
little different because I came from the Commerce Department. I
just don't think it is possible to have all the expertise in
USTR. For example, what you really need in intellectual
property, when you have the patent lawyers, the trademark
lawyers, they are in PTO, the Patent and Trademark Office. I
have not seen over the years a reluctance for those people and
other experts in Customs and all the different agencies to work
with the USTR.
Sometimes the USTR complains that, oh, we are not getting
enough support. Other times you hear complaints that, well,
USTR is just not turning to us. Those are the minority of
cases. By and large, I think the organization is there. It is
the determination to move, the determination to act, both in
terms of----
Senator Voinovich. Do you think that the Assistant
Secretary of Manufacturing is going to make--as I mentioned,
the orchestra leader, do you think that is going to give them
the zip they need to--I mean, you are talking about turnaround
on the pliers and turnaround on this and turnaround on that. It
just seems like it takes forever and a day to get anything done
around here.
If you look at some of the things that have been around--
intellectual property rights, for years China has violated them
and, frankly, it seems they aren't doing anything differently.
You just go one after another and it just doesn't seem like it
is getting done.
Mr. Vargo. It is not getting done, but the tools are there.
It is just a determination to use them. Americans are nice
people. We want to work on a cooperative basis with others. But
now that we have rights, we got China into the WTO, we need to
enforce those rights.
The Assistant Secretary for Manufacturing, I think is a
great idea. We support it. But there also needs to be high-
level interagency coordination and there needs to be attention
of the White House to manufacturing.
Senator Voinovich. So your attitude is that even though
they are up to their ears in rattlesnakes in terms of new trade
agreements, that some of the expertise that they are drawing
from other departments, it is better they just leave them in
those agencies and not bring them into international trade?
Mr. Vargo. No, sir. USTR does need to be augmented, but not
by all these specialists. For full disclosure, I should state
that my wife is the Assistant U.S. Trade Representative for the
Americas and she has 11 out of the 16 trade agreements that are
going to be negotiated, so I never see her. I know they are
understaffed. But the detailed support in the tariff analysis,
in trademarks, etc., we would just be creating two people
instead of one.
Senator Voinovich. Are they getting the quality of people
they need right now?
Mr. Vargo. They are.
Senator Voinovich. They are? Are they holding the people
they have?
Mr. Vargo. They are, remarkably so, so many dedicated
people in the career service, in Commerce, in USTR and other
agencies. I was really proud to have been a part of that. But
that is not to say they don't need more resources. They have
needed them for years. The omnibus bill just kind of makes up
for the deficiency of the last few years, and that will do for
right now, but NAM is going to keep pressing for more in the
next budget cycle.
Senator Voinovich. We are really trying now with these new
human capital flexibilities. As you know, I have been working
for 5 years to give these departments more flexibilities in
keeping the people that they have and dealing with some of the
systemic problems that they have and then trying to attract
more people into them, and I am hoping that is going to help
them do a better job with shaping their workforce so----
Mr. Vargo. Mr. Chairman, it will.
Senator Voinovich [continuing]. They can get their job
done.
Mr. Vargo. It will, but the main thing is, we have to be
willing to use the new rights that we have under the WTO and
these individual trade agreements.
Senator Voinovich. How long do we give them to find out?
Mr. Vargo. I think we are there.
Senator Voinovich. What does that mean? A month from now?
Two months from now? Three months from now?
Mr. Vargo. I think we are talking----
Senator Voinovich. How about the 301?
Mr. Vargo. Well, the NAM is in with quite a few other
associations and the AFL-CIO. We don't see eye to eye with the
AFL-CIO on everything, but we do on the currency and it has got
to move forward. So we are developing a 301 case. I heard
Charles Freeman, who is a good friend of mine, say, well, we
haven't seen the legal basis, and that is true, but we are
developing the legal basis.
Senator Voinovich. I want to help you with that.
Mr. Vargo. Thank you, sir.
Senator Voinovich. They should move forward and do it, and
I know that with some of your members, the 201 was a little
controversial, but the fact of the matter is that a lot did
occur positively as a result of that. Now they have terminated
it, but I think we were entitled to do that.
Mr. Vargo. We were.
Senator Voinovich. And if we don't use what we have, then
you are going to see a lot of stuff coming out of Congress.
Mr. Vargo. Well, we owe it to a lot of our members,
including Mr. Hawk, who is a fine member of the NAM, to get the
job done.
Senator Voinovich. Yes.
Mr. Duesterberg. Mr. Chairman, could I comment just
briefly? I want to reiterate the importance of something Frank
Vargo said about interagency coordination, especially with
regard to the new position of Assistant Secretary for
Manufacturing.
That position simply isn't going to work unless it has the
ability to command the resources of other agencies through an
interagency process. That is why I am interested in your
suggestion that the position report to the President. At a
minimum, some interagency process which gives the Assistant
Secretary for Manufacturing clear authority to command the
resources of other agencies, perhaps in a fashion similar to
USTR now is able to coordinate trade policy, is, I think, a
necessity for that position to work.
Senator Voinovich. Let me tell you something. I think it
has that priority. It deals with our economic security and it
deals with our national security. The $64,000 question, Mr.
Hawk, is how do we deal with this? It is not a level playing
field.
The Chamber of Commerce and Tom Donahue and John Sweeney
about a year or so ago had a press conference and said the
healthcare system is broken. I mean, we have got people
competing in the global marketplace with competitors that don't
have healthcare costs. We have it right here in this country.
Honda in Ohio competes with the Ford Taurus on their Accord.
They have $1,750 less cost because they don't have the legacy
costs that Ford Motor Company has.
And then the next issue is the subsidy in terms of steel
and the behind the scenes, the loans that are never--in Korea,
the banks, the auto companies, and the steel companies are all
in bed together. It is just we are dealing with it, and somehow
we have to figure out how we can level that playing field.
The environmental costs. As you may know, I have been
fighting very hard to try and make sure that we don't go crazy
in terms of some of the things that we want to do, eliminate
coal, for example, and force us into natural gas. I keep
telling my colleagues, if we put manufacturing out of business,
and we will do that if we force all utilities to go to natural
gas, which will exacerbate their heating costs, their electric
costs--these jobs are going to another country, and the
countries they are going to don't have the environmental laws
that we have.
It just seems like there is a disconnect in this country
about what is going on out there. We are still back 50 years
ago when we were king of the mountain and we didn't have the
competition.
You can't answer that question today, but I would like to
have another hearing on the issue of how do we level the
playing field. What things do we need to really direct our
attention to to see how we can compensate for the fact that we
are in a different environment than we were many years ago?
And also we need to look at the other issue of how much
capacity do we need to have for our national security. I keep
going into plant after plant. I ask them, where has this
equipment been made? Italy, here, there, somewhere else. How
come it is not being manufactured in the United States? It was
that way when I was governor and today it is even worse. How
far do you go? Do you just lose your machine tool business? I
don't think we can do that. And somehow within the framework of
all of this we have to figure it out. This is a challenge that
we need to deal with.
Mr. Hawk. Mr. Chairman, when 80 percent of our selling
price to our customers is wrapped up in material, if the
Chinese and the other countries have an advantage to either
manipulating their currency and an ability to purchase
material, we are never going to be able to compete. The small,
the medium-sized manufacturers, which we are, will all be gone.
It is just a matter of time. And that is why the issue of
urgency and being able to do something about currency and about
any subsidies that may be happening and enforcing it. It is
similar to having speeding laws and having no police officers
out on the road to control and to monitor what is going on.
Senator Voinovich. And you can see this is a member who----
Mr. Vargo. Absolutely.
Senator Voinovich [continuing]. They want action and I want
action.
Mr. Vargo. And they deserve it.
Senator Voinovich. They deserve action.
Mr. Vargo. We do, too.
Senator Voinovich. There is just too much talk, and they
are concerned, and----
Mr. Vargo. If I could observe, though, Mr. Chairman, the
first step in solving a problem is to know you have got a
problem, and I do want to give Secretary Evans great credit
under Secretary Aldonas at Commerce. The bus tours they took
around Ohio, Michigan, Indiana, other States, they came back
and they really understood to a degree they had not before that
this is a serious problem for the United States.
So the first steps are being taken, but we can't let it go
at that. Everything in this book, healthcare, energy costs,
none of these are simple problems. That is why they haven't
been dealt with. But I hope what we are seeing now is the
urgency of understanding, difficult as they are, we have to
solve them or, I will go back to what I ended my statement
with, you can just hang out a sign saying, ``Manufacturers not
wanted.''
Senator Voinovich. I want to thank you for being here. I
think you played the case out. I think that you ought to know
that this Senator is going to monitor this issue on a day-by-
day basis. I am looking forward to your coming in to see me. I
am interested in thoughts of how we can deal with this problem.
And last but not least, Mr. Vargo, I would like to talk to
you and Jerry about the issue of some of your members, with
their declarations to people like the folks from Lima, Ohio,
about you are going to outsource this overseas. They are doing
it to compete in the international marketplace, but they are
destroying American jobs and to the extent that they may do
well for a period of time. But if we lose our infrastructure,
then who is going to provide the competition and are they going
to end up in a situation that they don't want to be?
I think that in the manufacturing community, you ought to
get the manufacturers, you have to get the Chamber, you ought
to get the Business Roundtable, you ought to get in a room and
start batting this back and forth about what are we doing. Do
we not care anymore about the future of the country? Are we so
interested in our bonuses in the next 4 years so I can make a
big salary and retire and let somebody else worry about it?
I am really concerned about it. I am concerned about the
environment in this country today. I am worried about my kids
and grandkids. Are they going to have the same standard of
living that I have been able to have? Is this young man going
to go out of business? How many years have you been in
business?
Mr. Hawk. Fifty years.
Senator Voinovich. Fifty years. Are they going out of
business? That is the problem today. And these other guys with
the big multinationals ought to be thinking about some of these
people.
Mr. Vargo. Mr. Chairman, if I could comment, multinationals
get a bum rap with too many people feeling--I am not saying
that includes you, Senator--that they don't care about America,
they don't care about producing here. It is not so. They are
under enormous international pressures because of things like
the overvalued dollar, the unlevel playing field. We have to
address all of those. Believe me, American companies want to
stay in America.
Senator Voinovich. OK, but the fact of the matter is that
the answer to it is to get down and fight here----
Mr. Vargo. It is.
Senator Voinovich [continuing]. Not say, oh, we can't do
anything about it.
Mr. Vargo. Right.
Senator Voinovich. Let us fly the coop. Let us take care of
my next 5 years and let somebody else worry about this. Let us
get them in a room now and say, look, we have got to do
something about litigation. We have got to do something about
healthcare. We have got to do something about environmental
regulation. We want a good environment, but it has got to be
balanced. We have to do something about the fact that some of
these countries are competing with us and they subsidize the
dickens out of their products so, in effect, we can't compete
with them. Those are the things.
Mr. Vargo. Mr. Chairman----
Senator Voinovich. Get them on a piece of paper and deal
with them and don't say, well, I am going to run away and let
these poor other guys worry about it. I am OK.
Mr. Vargo. That is exactly right, Mr. Chairman. We look
forward to working with you on that.
Senator Voinovich. Well, thanks very much for being here.
I want to make one point, that the record will stay open
because some of my colleagues may have questions that they want
answered, so I am going to leave it open and you may be getting
some requests from them to submit answers to their questions.
Thank you. The meeting is adjourned.
[Whereupon, at 12:03 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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