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Statement by Timothy Reif Before the House Committee on Ways and Means Subcommittee on Trade

Statement by Timothy Reif
General Counsel
Office of the United States Trade Representative

Before the House Committee on Ways and Means
Subcommittee on Trade

Washington, DC
November 17, 2009

Good morning, Chairman Levin and Congressman Brady. I would like at the outset to express, on behalf of my agency and Ambassador Kirk, great appreciation to you for convening this hearing on this vital subject. The optimal design and functioning of U.S. trade preference programs is a critical component of both U.S. trade policy and U.S. development policy.

U.S. trade preference programs have helped to spur economic growth in developing countries. Each of you, joined by your colleagues and predecessors on the Subcommittee and Committee, have played a central role in maintaining and enhancing the strength of these programs over the last decade - to the lasting benefit of both American workers, farmers, ranchers and businesses, and developing and least-developed countries around the world.

This morning, I would like to address 10 subjects.

1. Bipartisan, Bicameral, Congressional-Executive Collaboration Success Story

First, the conduct and expansion of U.S. trade preference programs over the last 35 years, and particularly over the last decade, is a bipartisan, bicameral, congressional-executive collaboration success story. In the last 10 years alone, Congress has passed, and the Executive has signed into law on 23 separate occasions, improvements, expansions and extensions to the five pillar U.S. preference programs: the U.S. Generalized System of Preferences (GSP); the Caribbean Basin Initiative (CBI); the African Growth and Opportunity Act (AGOA); the Andean Trade Preference Act (ATPA); and the Haitian Hemispheric Opportunity Through Partnership Encouragement Act (HOPE). See chart.

This track record is remarkable and reflects the strong and sustained commitment of this Committee, the House of Representatives, the Congress and the Executive, to expanding economic opportunity in the United States and developing countries through these important programs. These efforts have never been easy; little that is worthwhile is. However, as we face the challenging issues ahead, we can take particular confidence that we will meet them head-on and successfully based on this strong track record.

2. Economic Development in Developing and Least-Developed Countries

Expanded trade with the world's developing countries is critical to boosting their growth, reducing income inequality, and providing people living in these countries with greater hope and confidence for their economic future. Our preference programs have achieved important successes in helping to improve lives and generate greater opportunities and to advance these indicia of economic development.

In 2008, the total value of U.S. imports under our preference programs was $110 billion. Imports under our preference programs in 2008 held a 5.3 percent share of total U.S. goods imported for consumption.

There are many individual success stories behind these larger numbers. For example, Afghanistan's agricultural and artisanal exports to the United States have increased substantially since we strengthened outreach on the duty-free export opportunities available to the country's producers. In 2007, only dried apricots and a small amount of dried berries were exported to the United States under GSP. In the first nine months of 2009, however, gold jewelry and six additional types of agricultural products, including dried plums, prunes, figs, dried peas, and dried fruit mixtures, have begun to enter under GSP.

In October 2008, USTR worked with the Departments of State and Commerce to provide a series of GSP educational seminars and industry meetings in three Tunisian cities. Since that time, imports of many of the products discussed have increased, notwithstanding that total imports from Tunisia have dropped. These products include sauces, condiments, and other food preparations (which have increased by 268 percent); electrical switching apparatus (which have increased by 76 percent); and dates (which have increased by 39 percent). Small and medium-sized enterprises benefit from these increases.

Similarly, in September 2008, USTR sponsored a joint outreach effort to Georgian producers and exporters. In the intervening year, exports from Georgia's agricultural and processed food sectors - which were emphasized during the USTR outreach seminars because of their benefit to rural Georgians - have increased substantially, even as its overall exports to the United States under GSP have decreased. For example, imports of jams and jellies have increased by 600 percent, imports of sweetened mineral waters have increased by 126 percent, and imports of prepared or preserved vegetables have increased by 100 percent.

The GSP program provides duty-free access for many items produced by small- and medium-sized businesses, including in rural areas, such as wooden jewelry boxes, rattan basketwork, string instruments, and certain national flags. Exports of these flags by least-developed countries Cambodia and Haiti in 2009 have grown by over 4000 and 9000 percent, respectively, compared to the same time period in 2008.

3. Generating New Economic Opportunities in the United States

As noted earlier, our preference programs help not only beneficiary developing countries, but also U.S. businesses and families. These programs are a major source of imports and products for U.S. businesses, including small- and medium-sized companies, and include important partnership opportunities between U.S. workers and businesses, and workers and businesses in beneficiary developing countries.

Imports under these programs lower costs for U.S. consumers and producers. For example, in 2008, duty-free treatment under GSP resulted in a total savings of approximately $850 million.

In 2005, according to the U.S. Chamber of Commerce, 75 percent of U.S. imports entering duty-free under GSP were raw materials, components or equipment used by U.S. companies to manufacture goods either for domestic consumption or export. The Chamber also found that GSP is particularly important to U.S. small businesses, many of which rely on the program's duty savings to compete with much larger companies. Maintaining lower costs for our small- and medium-sized enterprises is particularly important as companies struggle to recover from the economic downturn.

4. Eligibility Criteria

From the outset, eligibility criteria have been a critical component in Congress' design of U.S. preference programs, and in their operation, to ensure that they are achieving their stated goals and are functioning as Congress and the Administration intended. In this regard, three points are key.

First, the criteria were intended to and have achieved four core goals: (1) strengthened the rule of law in beneficiary countries; (2) provided incentives for sensible policies and policy reforms; (3) promoted development; and (4) improved the operating environment for U.S. exporters in the beneficiary countries. There are numerous examples:

  • In response to a GSP review, Swaziland ratified a new constitution and amended its Industrial Relations Act to strengthen labor rights.
  • In response to GSP and AGOA reviews, Uganda enacted comprehensive labor reform, established a new industrial court to address labor issues, and has undertaken to assign labor inspectors in every district in the country.

  • To have GSP reinstated in 2006, Liberia repealed a decree that prohibited strikes and invited the International Labor Organization (ILO) to assist in bringing its laws and practices into conformity with international standards.

  • The April 2009 Special 301 report announced among other things that USTR would review the IPR practices of beneficiaries, including The Bahamas, as part of its biennial review of the operation of the Caribbean Basin Economic Recovery Act. Following a meeting with U.S. officials and industry representatives in August 2009, the government of The Bahamas announced that it would implement changes to its Copyright Act to restore copyright protection for U.S. pay television content. Those changes went into effect last month.

  • Similarly, increased protection and enforcement of intellectual property rights have occurred in Ukraine and India. Following the suspension of its GSP benefits, in July 2005, Ukraine passed legislation that strengthened its licensing regime and enforcement efforts to stem the illegal production and trade of CDs and DVDs, and its GSP benefits were restored. Also in 2005, India's GSP benefits were restored after it adopted legislation that strengthened its patent protection of pharmaceutical and agricultural chemical products.

Second, the Administration by statute and practice engages in two types of reviews to ensure that the statutory criteria are being met. In the first type of review, by statute, the Executive Branch is required to conduct annual reviews of the AGOA and ATPA programs, and biennial reviews of the CBI program. We solicit information from stakeholders in each of these reviews and publish reports as required by Congress. An interagency team is currently conducting the regular reviews under AGOA, ATPA and CBI.

The second type of review, established by regulation for the GSP program, is petition-driven. Under this approach, every year the interagency team requests petitions from stakeholders regarding the eligibility of beneficiary countries and regarding possible modifications to the list of products eligible for duty-free treatment. Our reviews of beneficiary eligibility focus on issues that interested parties, including unions, NGOs, and industry groups, raise in petitions. Our interagency team, led by USTR, responds to these petitions by examining the issues, raising concerns with the foreign governments, and encouraging reforms. We also conduct in-country visits where appropriate.

Between 2001 and 2009, the interagency group evaluated 61 petitions concerning thirty-four beneficiaries under the GSP program. Progress is frequently achieved in these cases without limiting or revoking benefits. We were able to close fifty-one of these cases without modifying benefits. One case during this time period (Ukraine) resulted in a complete suspension of benefits. However, we were subsequently able to restore Ukraine's eligibility, as well as the eligibility of three countries (Liberia, India, and Pakistan) whose benefits had been revoked prior to 2001.

Third, we are aware that both the criteria and the ways in which they are applied and made effective are subjects that the Committee and others in Congress are interested to discuss moving forward. We stand prepared to answer questions about the operation of the criteria and reviews currently and to date, offer technical advice and engage with you on policy issues as you advance in your deliberations.

5. Renewal of the Generalized System of Preferences

GSP is the oldest and most broadly based of the U.S. preference programs, first enacted by Congress in the Trade Act of 1974. Today, 131 developing countries are beneficiaries, with 44 countries receiving additional benefits as least-developed beneficiaries. All GSP beneficiaries receive duty-free treatment for nearly 3500 tariff lines, and least-developed countries receive duty-free treatment for an additional 1400 tariff lines.

In 2008, U.S. imports under the GSP program were valued at $31.7 billion, an increase of 2.6 percent over 2007. To put this in perspective, in 2008, the GSP program provided duty-free treatment to significant percentages of U.S. imports from individual beneficiary countries. For example, 76 percent of all U.S. imports from Paraguay, nearly 60 percent of U.S. imports from Georgia, and over 40 percent of U.S. imports from Fiji, Lebanon, and Macedonia received duty-free treatment under the GSP program. Total U.S. imports under GSP through September 2009 have amounted to $14.7 billion.

The GSP program has been a substantial success. For example, between 2002 and 2006, there was an average 17 percent annual increase in imports under GSP. GSP imports from least-developed countries grew by an annual rate of 26 percent. In addition, individual countries such as Afghanistan, as noted above, have been able to diversify their exports under GSP.

We are, of course, aware of the range of issues that have been under discussion in recent years and the voices for reform of the program within Congress and in the private sector, from all perspectives.

There are a number of important questions that deserve careful deliberation and analysis in considering possible modifications to GSP and the other programs. Among other issues, questions have been raised related to country graduation, harmonization of U.S. preference programs and rules of origin, and possible modifications to eligibility criteria. In view of the very short time remaining before the program expires on December 31, 2009, we would propose to continue to work with all interested Members, and private sector stakeholders, to address these and any other concerns. However, for now, the Administration urges speedy renewal and stands ready to work with Congress to achieve this as quickly as possible.

In regard to the length of an extension, the recent past indicates that Congress provided a one-year extension in 2008, a two-year extension in 2006, and a five-year extension in 2002. The Administration is aware that there may be differences of view now as there were at the time of these earlier renewals on the most appropriate length of a possible extension. The Administration is also aware of - and welcomes and looks forward to participating in - efforts to reform this and other trade preference programs. The Administration favors an extension at this time that is consistent with the sound, efficient and predictable operation of the program. Recognizing that discussions are ongoing in Congress on both immediate extension and reform, we stand prepared to work with you and with all those interested to secure an extension of the program as quickly as possible.

6. Renewal of the Andean Trade Preference Program

The second preference program that expires at the end of the year, as you know, is the Andean trade preference program. This program was proposed by President Bush in 1990, and enacted into law as part of the Andean Trade Preference Act (ATPA) of 1991, and amended and expanded in 2002 through the Andean Trade Promotion and Drug Eradication Act (ATPDEA). A major goal of the ATPA/ATPDEA is to help defeat the scourge of drug trafficking in the Andean region by providing sustainable economic alternatives to drug-crop production, forming a part of our overall counternarcotics strategy.

As demonstrated in a report USTR submitted to Congress in April of this year, the ATPA/ATPDEA program has continued to achieve this goal. For instance, it has created employment for displaced persons in the flower farms and textiles factories of Colombia and has provided jobs for female heads of household in Ecuador's tuna factories

Approximately 90 percent of U.S. imports from ATPA/ATPDEA countries enter the United States duty-free under ATPA/ATPDEA, GSP or most favored nation. Significantly, all twenty leading imports from the region were eligible for duty-free treatment in 2008. Over the past five years, U.S. imports from the region increased 144 percent, and U.S. exports grew even faster, increasing by 203 percent.

In fact, the United States is the leading source of imports and the leading export market for the ATPA/ATPDEA beneficiary countries. The current ATPA/ATPDEA beneficiary countries collectively represented a market of about $21.1 billion for U.S. exports in 2008, and were home to about $13 billion in U.S. foreign direct investment in 2007. Thus, the ATPA/ATPDEA has benefitted both the Andean region and the United States. The Administration encourages Congress to extend the program when it expires at the end of this year.

In recent years, as the circumstances of the original ATPA/ATPDEA beneficiary countries have changed, we have been working to implement the program in a way that addresses these changes. For example, as a result of the President determining that he was not able to certify by June 30 of this year that Bolivia was meeting the program's eligibility criteria, Bolivia is no longer eligible for ATPA/ATPDEA benefits. In the same report to Congress, the President flagged concerns regarding Ecuador, particularly its investment policies, and said that he would monitor all of the concerns. Meanwhile, we need to work with you and review the implications of the February 1, 2009, entry into force of the United States-Peru free trade agreement for Peru's status as an ATPA/ATPDEA beneficiary country. Colombia has negotiated an FTA, but the Administration is still working with Colombia to address labor-related issues. As Congress considers an extension of the ATPA/ATPDEA, we look forward to continuing to work with you on how best to use the program to respond to the specific circumstances presented by each of these countries.

7. The African Growth and Opportunity Act

The African Growth and Opportunity Act (AGOA) is another important U.S. trade preference program. Enacted in May 2000, AGOA was designed to expand U.S.-sub-Saharan African trade and investment, stimulate economic growth, promote a high-level dialogue on trade and investment-related issues, encourage economic integration, and facilitate sub-Saharan Africa's integration into the global economy. AGOA builds on GSP by eliminating duties on an additional 1800 products for beneficiary sub-Saharan African countries, of which there are currently 40. Beneficiary countries must meet eligibility criteria based on "best practices" policies, thereby supporting African efforts to liberalize trade, implement economic reforms, establish the rule of law, reduce poverty, and strengthen labor and human rights.

Congress passed significant enhancements to AGOA in 2002, 2004, 2006, and 2008. AGOA's current authorization ends in 2015, and its special third-country fabric provision is scheduled to end in September 2012.

Over the last nine years, AGOA has helped to increase both the volume and diversity of U.S. trade with sub-Saharan Africa. U.S. imports under AGOA totaled $66.3 billion in 2008, more than eight times the amount of AGOA imports in 2001, the first full year of the program. While much of this increase is attributable to oil, non-oil AGOA imports more than tripled during this period, reaching $5.1 billion in 2008. Thanks in part to AGOA, in recent years more than 98 percent of African exports to the United States entered duty-free, either under AGOA, GSP or zero-rate MFN duties.

Most of those familiar with AGOA are aware of the success stories involving African apparel exports to the United States - such as the great strides that small, landlocked Lesotho, a least-developed country, has made in becoming the leading African exporter of AGOA apparel. Less well known is that AGOA has also helped to spark significant increases in African exports of transportation equipment, footwear, cut flowers, and a wide range of farm and food products, including processed agricultural goods.

The Annual U.S.-Sub-Saharan Africa Trade and Economic Cooperation Forum - better known as "the AGOA Forum" - provides an opportunity for high-level dialogue between officials of the United States and AGOA beneficiary countries, as well as the American and African private sectors and civil society. Most recently, Ambassador Kirk, Secretary Clinton, and Secretary Vilsack led the U.S. delegation to the 2009 AGOA Forum in Nairobi, Kenya in August.

After several years of growth, trade between the United States and sub-Saharan Africa has slowed considerably in 2009, largely as a result of the global economic crisis and declining oil and commodity prices. During the first eight months of 2009, total imports under AGOA declined by 61 percent over the same period in 2008. This is obviously of concern to us and only underscores the importance of helping African countries to continue to build their trade capacity.

One of the biggest challenges we face with respect to AGOA is how best to help African countries to make the most of the program. Many AGOA beneficiary countries have yet to export any significant amount of products under the program as a result of poor or insufficient infrastructure and limited productive capacity. Continued trade capacity building assistance will be crucial to helping African countries to take advantage of AGOA trade opportunities.

8. The Caribbean Basin Initiative and HOPE

The U.S. trade preference programs for the Central American and Caribbean region, known collectively as the Caribbean Basin Initiative (CBI), continue to generate important benefits for beneficiary countries. Expansion of CBI benefits through enactment of the Caribbean Basin Trade Partnership Act (CBTPA) in 2000, and the provisions included in the Trade Act of 2002, the HOPE Act of 2006 and the HOPE II Act of 2008, represents an important affirmation of the ongoing U.S. commitment to economic development in the Caribbean Basin, by expanding duty-free access to the U.S. market for CBI goods.

The CBTPA provisions are being extensively used by CBI exporters and U.S. importers. The total value of U.S. imports from CBI countries in 2008 was $19.6 billion, an increase of $56 million from 2007.

U.S. exporters have also benefitted from the trade expansion fostered by the CBI program. Total U.S. exports to the CBI region, having reached $25.1 billion in 2008, made the CBI region the 14th largest market for U.S. exports.

The HOPE program allows duty-free access to the U.S. market for certain Haitian-made apparel and other articles, with the goals of fostering stability and economic development in Haiti. As I am sure you are aware, Haiti is the poorest country in the Western Hemisphere, with 80 percent of the population living in poverty and 54 percent in abject poverty. The economy has recovered in recent years, but four tropical storms in 2008 caused nearly $1 billion in damages, killed over 800 people, and severely hurt the transportation infrastructure and agricultural sector.

U.S. economic engagement under the HOPE program has boosted apparel exports and investment in Haiti. HOPE II has further improved the environment for the apparel sector by extending preferences to 2018. The first international buyers' forum in Haiti took place in October, with senior USTR officials in attendance. USTR continues to work with various agencies to help Haitian and U.S. businesses take full advantage of the benefits under HOPE and HOPE II. We remain hopeful that the HOPE program can help to improve conditions across Haiti.

9. Trade-Related Development Assistance

Expanded trade under the right framework of rules is a necessary condition for sustainable economic development. At the same time, trade alone cannot be expected to be the solution to issues of economic development. Expanded trade must be accompanied by the right mix of policy efforts on the part of the host country and various effective forms of technical and development assistance. Trade expansion is essential for the smallest and poorest developing countries to access markets of sufficient size and with sufficient demand to support rapid expansion of production, employment and incomes.

The Obama Administration has an aid strategy integrated within our overall development assistance framework. U.S. trade-related assistance helps developing countries to achieve sustained and broad-based economic growth through three program approaches: (1) development of well-functioning markets; (2) enhanced access to productive activities; and (3) strengthening the international framework of policies, institutions and public goods, which provide benefits for many. Expanded rules-based trade is a key component of each of these elements.

Second, the most effective form of trade-related development assistance in a given instance is likely to vary widely. For example, providing to African countries more staff qualified in U.S. sanitary and phytosanitary standards (SPS) can help those countries' governments and businesses to understand better U.S. SPS legal requirements and procedures. In this way, exporters in those countries have a greater opportunity to satisfy U.S. legal requirements and to export products that American consumers can enjoy. Similarly, improving infrastructure and modernizing customs administration can better enable beneficiary countries to access more fully the benefits of trade. One size does not fit all.

Third, the goal of the Administration is to work with Congress, countries and the private sector to improve the aid dimension. Our goal is to provide the most effective assistance to maximize the benefits provided and the synergies between that assistance and fully enabling beneficiary countries to take advantage of the opportunities afforded by the world trading system. For this reason, U.S. trade-related assistance focuses on country-based bilateral and regional programs, thereby ensuring that programs are flexible and can respond in a timely way to local needs and opportunities.

Another example of trade-related assistance is our Millennium Challenge Corporation (MCC) programs. These programs enhance economic growth in a way that delivers tangible benefits to the poor. MCC partner countries have prioritized Aid for Trade in their proposals. More than half of all the funds MCC has obligated from 2005-2008 fall within Aid for Trade. From 2005 to 2008, total U.S. trade-related assistance was almost $6.4 billion. In fiscal year 2008 alone, the total annual trade related assistance was $2.24 billion, 60 percent higher than in 2007.

10. Challenges Ahead

For more than thirty years, Republican and Democratic Administrations and Republican and Democratic Congresses have worked closely together and tirelessly to craft and implement preference programs that will promote development and economic growth in developing countries, in turn providing a stronger multilateral trading system by expanding opportunities for American workers, farmers, ranchers and businesses. Our collective efforts have resulted in a strong and steady growth in trade with our developing country trading partners, in good measure thanks to these preference programs. This growth in turn has benefitted those countries and their workers, as well as U.S. businesses and families.

The success of our preference programs provides a strong foundation on which to build and ensure that U.S. trade policy toward developing countries and U.S. preference programs leads to even more effective economic integration with developing and least-developed countries as well as new opportunities for American workers, farmers, ranchers and businesses. We recognize the importance of the continued success of these programs. We know that more work lies ahead and are fully committed to and prepared to engage in this effort.

Here at home, there are questions about the best ways to ensure that we maintain the most effective framework and structure for these programs and achieve the broadest possible utilization of them by all countries. Much has been achieved, but much remains to be done. We look forward to working with you as we work to address the many and important challenges ahead.

Thank you again for convening this important hearing and for inviting USTR and the Administration to testify this morning.