December 09,2005

Grassley Position Paper in Advance of Hong Kong Trade Talks

Statement of U.S. Senator Chuck Grassley of Iowa
Chairman of the Committee on Finance
Goals for the WTO Ministerial Conference in Hong Kong, China, December 2005

Introduction

The Hong Kong Ministerial presents an important opportunity for the United States and our tradingpartners to determine whether or not an agreement on meaningful trade liberalization can occurwithin the short time frame presented by Trade Promotion Authority.

It is important to remember that these negotiations are taking place at a unique moment in theeconomic history of the United States. In the United States, the authority over international tradelies with the U.S. Congress. But, with the passage of the Trade Act of 2002, the U.S. Congressauthorized the President of the United States to negotiate a trade agreement under the auspices ofthe World Trade Organization. Under the Trade Promotion Authority (TPA) procedures establishedby the Trade Act of 2002, any WTO agreement that meets the goals outlined in the Act will beconsidered by the U.S. Congress quickly and without amendment. Ambassador Portman travels toHong Kong with the support of the U.S. Congress and the authority to negotiate a WTO agreementon behalf of the United States.

An appreciation by our trading partners of the unique situation we are in is absolutely critical. TPAprocedures are critical to the implementation of trade agreements in Congress. TPA vastly improvesthe prospects for getting a WTO agreement approved by the U.S. Congress. Without TPA, anyagreement submitted to the Congress can be delayed in the Senate to the point where it may neverbe considered at all. And, without TPA, the agreement can be amended should it ever come to fulldebate. Because it can be amended, there is no guarantee that Congress won’t renegotiate theagreement through the implementation process.

No Extension of Trade Promotion Authority

U.S. Trade Representative Rob Portman has emphad in recent days that the Doha Roundnegotiations must be finalized in 2006. I join him in stressing the need to move these negotiationsforward, and to conclude them, quickly. WTO negotiators face a de facto deadline due to TPA,which provides expedited legislative procedures for trade agreements entered into by the UnitedStates before July 1, 2007.

Representatives of some WTO member states assume that the U.S. Congress will, if WTOnegotiations drag on past 2006, simply vote in 2007 to extend TPA for the limited purpose ofconcluding the Doha Round.

This is a very risky proposition.

As co-author of the 2002 TPA legislation in the Senate, and Chairman of the Committee whichwould be responsible for extending TPA, I can tell you that it would be extremely difficult to extendTPA in 2007 to accommodate delays in completing the Doha Round. This is a political reality giventhe inherent controversy of TPA legislation. Fast-track negotiating authority, the predecessor toTPA, expired in 1994, and this authority lapsed until the passage of TPA in 2002. During thoseintervening eight years, several legislative proposals were made to reauthorize fast-track negotiatingauthority, yet none of those bills passed the Congress. When TPA finally did pass into law in 2002,the vote was particularly close. What's more, it's important to note that any legislation to extendTPA would be subject to amendment, so such legislation could result in changes in the U.S.negotiating objectives for the Doha Round going forward, a development that could furthercomplicate the WTO negotiations. Therefore, expectations that Congress will reauthorize TPAlegislation in 2007, even for the express purpose of accommodating the conclusion of the WTOnegotiations, are highly unrealistic.

In addition, the following year, 2008, is a presidential election year in the United States, and I highlydoubt that controversial TPA legislation would come before Congress at that time. Following 2008,the United States will have a new president and a new Congress, so the prospects of passing anotherTPA bill in 2009 or the years beyond are very unpredictable. Therefore, once again, it's imperativethat we wrap up the WTO negotiations during 2006.

So, the bottom line is that TPA sets a deadline for these negotiations in the United States. WTOmembers that don't work actively to move the negotiations forward to meet this deadline are,knowingly or unknowingly, dooming the Doha Round to failure.

Agriculture

Fully aware of the need to conclude the agriculture negotiations quickly, the United States is workingactively to move them forward. The commitment of the United States to liberalize trade throughthese negotiations is amply demonstrated in the proposal of the United States on WTO agriculturenegotiations that was offered on October 10, 2005. In this proposal, the United States responded toits trading partners who were calling for cuts in U.S. domestic support. The United States madeclear that it is willing to make major reductions in its domestic support, but only if other WTOmembers -- developed as well as developing countries -- significantly lower tariffs that restrict theentry of U.S. products to their markets. The U.S. offer also calls for changes in export competition,such as the elimination of export subsidies by 2010.

Market Access

The single greatest goal of the United States in the Doha Round agricultural negotiations is to obtainsubstantial improvements in market access for U.S. farm products. Any agreement that does notfulfill this objective will be rejected by the U.S. Congress.

The current obstacles to market access for U.S. agricultural products are readily apparent. U.S.tariffs on imports of agricultural products are significantly lower than those of almost all of ourtrading partners. This is true of our developed country trading partners. According to a 2005 WorldBank report, the average U.S. trade-weighted applied agricultural tariff is 2.7 percent. In contrast,the average trade-weighted applied agricultural tariff for the European Union is 11.8 percent, forJapan is 34.6 percent, and for Korea is 93.9 percent. Accordingly, the average applied tariff of theUnited States is more than 4 times lower than that of the European Union, over 12 times lower thanthat of Japan, and over 34 times lower than that of Korea.

The disparity between tariffs of the United States and its developing country trading partners ispronounced as well. According to another 2005 World Bank report, the U.S. trade-weighted averageapplied tariff for agricultural and food products is 2.4 percent (slightly lower than in the other WorldBank report noted above). The average such tariff for Brazil is 5 percent, for Indonesia is 5 percent,for Argentina is 7.1 percent, for South Africa is 8.8 percent, for Mexico is 11.6 percent, for Thailandis 29.7 percent, and for India is 50.3 percent. Significantly, all of these countries are members ofthe G-20, a negotiating group that is calling for increased access to the U.S. market. The averageapplied agricultural and food tariff of Brazil, a leader of the G-20, is over twice as high as that of theUnited States. India, another G-20 leader, applies tariffs to agricultural and food products that areover 20 times higher than those of the United States. Before the United States commits to evenfurther liberalize its agricultural market, we need strong assurances that these developing countrieswill provide greater access for U.S. agricultural products.

Likewise, the average trade-weighted bound agricultural tariff of the United States -- 6.2 percent --is much lower than that of most of our developed country trading partners. The average such tarifffor the European Union is 20.5 percent, for Japan is 62.1 percent, and for Korea is 103.5 percent.Given that cuts in agricultural tariffs in the Doha Round will be from bound rates, which are oftenmuch higher than applied rates, it's imperative that tariff cuts be deep enough to reach down to, andlead to real reductions in, applied rates.

Moreover, tariff peaks should be eliminated, leading to more harmonized agricultural tariffs. Inorder to ensure improved market access for U.S. producers, the number of products designated inthe market access negotiations as "sensitive" or "special" should be kept low. The European Union'sagricultural proposal of October 28 calls for 8 percent of EU tariff lines to be designated as"sensitive," and as a result subject to lesser disciplines. The ability of the European Union to shield8 percent of its tariff lines from effective liberalization would severely limit the ability of farmersin the United States and other countries to improve their access to the European market. Accordingto one calculation, a much lower limit -- of only 2 percent -- would exclude 80 percent of tariff linesof products that are traded in significant amounts from regular tariff cuts.

Domestic Support

The United States understands that, in order to obtain better agricultural market access abroad, itsWTO trading partners expect it to give in other areas, and in particular in the area of domesticsupport. The U.S. agricultural proposal of October 10 does indeed propose significant cuts in U.S.domestic support, cuts that are, once again, contingent upon receiving markedly improved marketaccess for our exports. With major proposed reductions in the U.S. aggregate measure of support(AMS), the overall U.S. levels of trade-distorting report, and in the de minimis allowance for tradedistortingdomestic support, the United States is working to move the Doha Round negotiationsforward.

The U.S. proposal comports with the WTO framework agreement of August 2004, which providesthat there will be a "strong element of harmonization" in cuts in domestic support, and that "higherlevels of permitted trade-distorting domestic support will be subject to deeper cuts." Accordingly,the United States proposes that WTO members with higher levels of domestic support, such as theEuropean Union and Japan, make deeper cuts in their subsidies. Most notably, with the EuropeanUnion currently able to provide over $60 billion annually in trade-distorting domestic support -- anamount that is over three times the $19 billion limit of the United States -- it's essential that theEuropean Union move forward with deep cuts in its subsidies in order to achieve a harmonizingresult at the end of the negotiations. Moreover, the European Union, unlike the United States, usesblue box subsidies, which can be provided in unlimited amounts.

With regard to the blue box, from what I understand the United States -- prior to the reaching of the2004 framework -- was seeking to eliminate the blue box. After all, it didn't seem fair that just theEuropean Union and six other countries have blue box subsidies. The United States dropped itsdemand to eliminate the blue box, however, after agreement was reached to include countercyclicalpayments in the "new" blue box. The U.S. agricultural offer of October goes beyond the frameworkand proposes to reduce the amount available for use in the new blue box from the framework's 5percent to 2.5 percent of the total value of agricultural production of a WTO member.

Export Competition

Export subsidies are the most trade-distorting of all support measures. The European Unionprovides 85 to 90 percent of the world's total export subsidies. As export subsidies are used by sofew countries, and as they are so trade-distorting, it only seems reasonable that WTO membercountries agree to their elimination.

The framework agreement provides that export subsidies will be eliminated by a date-certain, andI fully support the U.S. proposal on WTO agriculture negotiations that calls for their completeelimination by 2010. I'm disappointed, though, that the decision on the date on which to terminateexport subsidies has been put off until after the Hong Kong ministerial. This delay, like others,threatens to push the conclusion of these negotiations even further into the future, and we don't havemuch time left.

On a similar topic, I urge U.S. negotiators to press for the elimination of differential export taxes.Differential export taxes in effect subsidize exports of processed agricultural products. I understandthat three of the four WTO member countries that use differential export taxes -- Argentina,Indonesia, and Paraguay -- are members of the G-20 and are asking that the United States lower itstariffs to their products and provide reductions in its domestic support. I encourage the United Statesto negotiate with these countries for the elimination of differential export taxes.

On another topic listed under the subject of export competition, I note that I'm wary of calls by theEuropean Union to limit food aid to cash payments. I'm concerned that cash donations would invitecorruption.

Cotton

A number of WTO members would like to see major reductions in cotton subsidies through the DohaRound. Some have called for the United States to make concessions prior to the completion ofcomprehensive Doha negotiations. Such proposals are politically naive and rooted in fantasy.Politically, the United States cannot implement cotton reform without corresponding concessionsfrom our trading partners. Thus, in reality, roads on cotton reform go through the European Union.

If Europe steps up to the plate and makes a more ambitious offer on agriculture, the currentnegotiations stalemate can be broken. And, the sooner the stalemate is broken, the sooner we willreach a comprehensive agreement, including cotton reform. In short, cotton can't be addressedwithout a successful Doha Round, and without an agreement on agriculture, this round won't close.

Non-Agricultural Market Access

It is important to remember the United States’ agriculture offer is inextricably linked to a robust nonagriculturalmarket access (NAMA) agreement as well as good agriculture and services offers. Arobust NAMA agreement is one that calls for an ambitious formula that will lead to real cuts in bothbound and applied tariffs. Brazil’s recent statements in support of a simple Swiss formula areencouraging and represent the type of leadership that we need to see from the developing world ifthe round is ever to move forward. While we need to get more official detail from Brazil as well asan agreement on ambitious coefficients, I appreciate these positive signals from Brazil.

In the manufacturing sector, there is a glaring disparity between the U.S. tariff levels and tariff levelsin the rest of the world for industrial products. For example, the average U.S. bound tariff is 3percent. The average worldwide WTO bound tariff is 30 percent. This disparity must besignificantly reduced before the U.S. Congress will approve the final Doha Round text. I also expectthe final agreement to contain a strong sectoral component, so that our workers can begin to reap thebenefits of liberalization quickly. We also need to address the elimination of non-tariff barriers toensure that the gains achieved by tariff elimination are not undermined.

While the NAMA negotiations are integral to the growth of the U.S. economy, other members needto understand that their economies stand to benefit from the success of the negotiations as well.Currently, 70 percent of the tariffs paid by developing countries are paid to developing countries.Therefore developing countries need to be active participants in the Hong Kong negotiations in orderto attain benefits from other developing countries.

Services

Service sector liberalization will greatly benefit developing and developed countries alike. Readyaccess to efficient providers of financial, telecommunication, distribution, and transportationservices, to name a few, is essential to the competitive production and sale of both manufactured andagricultural goods. Information technology services create an essential infrastructure for economiesof the future. The availability and utilization of such services is key to a country’s ability to growits economy and increase its participation in international trade.

Services are certainly an important component of the U.S. economy. In 2004, U.S. cross-borderservices exports by companies totaled over $323 billion, and U.S. cross-border exports exceededimports by over $65 billion. Services accounted for about 80 percent of U.S. private sector non-farmemployment and almost 60 percent of U.S. gross domestic product (GDP) that year. But the UnitedStates is not the only country that stands to benefit from liberalization of trade in services. Theservices sector is the largest and fastest growing sector of the world economy, accounting for morethan 60 percent of GDP in many countries and an even larger share of employment.

Given the significant role of services trade in the world economy, we should strive for an equallybalanced outcome in the services negotiations as compared to the agriculture and non-agriculturalmarket access negotiations. Yet as of November 2005, out of 148 WTO members only 69 hadsubmitted initial offers, and of those, only 30 had submitted improved revised offers. Recentproposals to complement the request-offer process with plurilateral negotiations and collectivetargets will hopefully spur meaningful progress in this important area. Also helpful would be realleadership from other members such as India and Brazil, not only in terms of outlining negotiatingguidelines for services but also in terms of putting ambitious proposals on the table. Finally, withrespect to mode 4, I'd encourage all participants to be realistic in their expectations. I support reformand improved administration of the U.S. visa system. But the fact remains, any reform in this areafor the United States will be driven and shaped by many members of the U.S. Congress, and thisissue is very contentious in the Congress. I also note that mode 4 accounts for less than 1 percentof global trade in services. The real benefits to be had are in liberalizing the other 3 modes ofdelivering services.

Developing Country Contributions

The success of the Doha Round is a shared responsibility. All countries, developed and developingalike, must make significant and meaningful contributions to global market liberalization. In fact,some developing countries that are major participants in the world economy in certain sectors -- suchas Brazil in agriculture and manufacturing and India in services and manufacturing -- shouldcontribute more in the negotiations than others.

For example, on the issue of agriculture and developing countries, providing the same degree ofspecial and differential treatment to developing countries with first-rate, internationally competitiveagricultural sectors like those found in Brazil is unwarranted. The fact is, Brazil's producers ofcommodities can and do compete effectively in the global market. Many Brazilian farms arebetween 30,000 and 200,000 acres in , and one Brazilian farm -- at one million acres -- is 50percent larger than the state of Rhode Island. To provide special and differential treatment to large,internationally competitive producers in Brazil and elsewhere would be unfair to the large numberof farmers in lesser developed countries who truly merit such treatment.

South-South Trade

I'm concerned by the apparent unwillingness of developing countries to push for significant tradeliberalization among themselves. Developing countries need to appreciate that the key todevelopment is not exclusion from liberalization, but liberalization itself. As demonstrated by theirhigh tariffs, developing countries have among the world's most protected economies. This protectionlimits market opportunities for exporters in both developed and developing countries who seek toexport their products to developing countries. In addition, consumers in highly protected developingcountry markets, such as India, are penalized by high tariffs, including high tariffs on essentialproducts like food. By reducing trade barriers, developing countries would enhance their owncompetitiveness, and thus enhance their potential for income gains.

Preference Erosion

I question claims that extensive tariff cuts through the Doha Round will harm developing countriesby leading to "preference erosion." First, the very lowering of tariffs, by both developed anddeveloping countries, would provide new market opportunities for developing countries that couldonly benefit them. Second, evidence of harm to developing countries from preference erosion isweak. According to the International Monetary Fund, losses to the least developed countries (LDCs)resulting from most-favored nation tariff reductions by the world's major economic powers wouldmost likely be less than 2 percent of the LDCs' exports. Recent claims by the European Union that,by maintaining its high tariffs, it will benefit developing countries and thus protect them frompreference erosion, is -- at best -- curious.

The preference erosion argument against liberalization appears to presuppose that these programswill exist forever. That is not the case. The U.S. Generalized System of Preferences program andthe Andean Trade Promotion and Drug Eradication Act both expire on December 31, 2006. TheCaribbean Basin Trade Partnership Act expires on September 30, 2008, and our trade program forAfrica, the African Growth and Opportunity Acceleration Act, expires on September 30, 2015.

As early as next year Congress will begin to reevaluate our trade preference programs. If it appearsthat these programs are being used as an excuse for not engaging in multilateral liberalization, Idoubt very seriously that Congress will be predisposed to renew them. This is not a threat -- it issimply political reality. Those who continue to use “preference erosion” as a stumbling block toliberalization need to appreciate that without a Doha Round there may very well be no U.S.preference programs to erode.

On the other hand, if progress is being made toward a multilateral round, Congress may very wellextend, deepen and even expand our trade preference programs for the poorest countries as part ofimplementation of our Doha Round commitments. In my mind, trade preference programs in ofthemselves do not lead to long-term development. Instead, they are a tool that, if used appropriately,can help countries achieve long-term development. In short, they are not an end in themselves, butinstead, a means to an end. Ironically, the best way to ensure any longevity in the preferenceprograms is to ensure that a comprehensive round succeeds.

Conclusion

I strongly support the completion of a comprehensive Doha Round of trade negotiations. There isa lot at stake, for both the developed and developing world. A study by the University of Michiganestimates that conclusion of a successful Doha Round of negotiations could enhance the worldeconomy by $574 billion and by $144 billion in the United States. In order to reap these gainseveryone must contribute to a successful outcome. Time is short, and we need to make progressnow. If not, we may have lost a once-in-a-generation opportunity to spur economic growth andimprove living standards around the world.