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Testimony

The Need for New Fast Track Legislation

by C. Fred Bergsten, Peterson Institute for International Economics

Testimony before the Committee on Finance
United States Senate
Washington, DC
June 3, 1997


The American economy can reap enormous benefits from new international trade initiatives that reduce foreign barriers to our exports. Implementation of such a strategy requires Congressional renewal of fast track negotiating authority, which is one of the most beneficial steps the Congress could take this year to help our economy. Provision of such authority is extremely urgent because our competitors around the world are taking advantage of the absence of American activity, because opportunities for pursuing beneficial trade initiatives abound, and because other countries will not negotiate with us in the absence of fast track. I will briefly elaborate each of these three statements on the view that they should provide the focus for American trade policy in 1997 and because they make a powerful case for prompt Administration initiative and early Congressional action.

 

Trade and the American Economy

The main problem facing the American economy is the slow growth of average living standards over the past generation. Our economy has created 50 million jobs over the past 27 years and we are essentially at “full employment.” But the median family income remains virtually unchanged from the 1970s. The average real wage has been flat for almost twenty years. Our cardinal economic problem is to create better jobs with higher wages and benefits.

Trade provides an important part of the solution to that problem. Export jobs pay 10-15 percent more than the average wage. Productivity in export firms is 20 percent above the norm. Exporting firms expand their employment about 20 percent faster than others and are 10 percent less likely to fail. Small and medium-sized firms account for 70 percent of these results.

The rapid export expansion of the past decade has come largely in high-wage manufacturing industries. Since 1992, a majority of our manufacturing workers have been employed in plants that export. The export surge has almost stopped the decline of unemployment in the manufacturing sector (see chart 1). A continuation of recent trade trends could restore net growth in manufacturing jobs within the next few years. It could even restore their previous (1979) peak in the first decades of the next century.

Increased globalization thus provides substantial benefits for American workers and the American economy. Indeed, the competitive pressures generated by globalization are an important element in our ability to maintain price stability and thus to push unemployment far below levels considered “safe” by most economists only a few years ago. Moreover, the increase in imports that comes with globalization is often extremely helpful to our poorest people; the long-standing quotas on apparel, for example, have been robbing the lowest quintile of our population of fully five percent of their total incomes.

To be sure, we must undertake a series of domestic steps to empower our people to take full advantage of the opportunities provided by globalization.

The most important are better education for all Americans and continuous training for our work force. In addition, we must provide an adequate safety net to cushion the transition for those whose lives are disrupted by rapid economic and technological change--which is accelerated, though not primarily caused, by globalization. But these efforts would be needed even if we had no trade, and globalization enables our society to exploit their benefits to the maximum possible extent. There is no reason to settle for more modest returns on our investment in education, training and the safety net when global integration offers such handsome benefits.

 

The Crucial Importance of Trade Negotiations

Even if we do everything right at home, such benefits are available only if we continue to succeed in breaking down barriers to our exports abroad. The United States now has an enormous opportunity to do so because we face a hugely asymmetrical international situation. On the one hand, we have already eliminated virtually all impediments to foreign access to our own market. On the other hand, most other major economies--particularly the large and rapidly growing markets of Asia and Latin America--continue to impose substantial restrictions on our (and others') sales to them. “Reciprocal” liberalization in the future thus essentially means that other countries reduce their barriers to, or at least toward, our low level. The best way for the United States to achieve truly fair trade is thus to negotiate free trade with our most important trading partners. The only way we can achieve a level playing field is to induce them to emulate our past liberalization.

This is the right time to make such an effort. The American economy is strong and vibrant. (From a domestic political standpoint, now is therefore the ideal time to address and pass new trade legislation.) Our chief competitors, in both Europe and Japan, are suffering from prolonged economic sluggishness and loss of self-confidence. It would be tragic if we failed to seize these opportunities to further improve America's global economic position and thus our domestic economy.

The Reagan, Bush and Clinton Administrations have pursued American interests effectively and courageously by negotiating an ascending series of liberalization arrangements. The initial free trade treaties were with Israel and Canada in the middle 1980s. Mexico was added via NAFTA in the early 1990s. Global progress was made simultaneously in the Uruguay Round.

The greatest potential lies ahead, however. Building on President Bush's proposed Enterprise for the Americas Initiative, President Clinton agreed at Miami in December 1994 to create a Free Trade Area of the Americas (FTAA). In Indonesia a month earlier, he agreed at the second annual APEC summit to achieve “free and open trade and investment in the Asia Pacific region” by 2010 (for the advanced countries that account for about 90 percent of APEC trade, by 2020 for the rest). Building on another Bush initiative, the Administration agreed at the end of the Uruguay Round to pursue further global liberalization in agriculture, services and several other key sectors over the coming years in the World Trade Organization.

Other countries are clearly ready to liberalize further and it would be irrational for the United States to fail to join them. The APEC trade ministers met in Montreal in April and, building on APEC's crucial role in achieving the Information Technology Agreement (ITA) last year, agreed to pursue an ITA II, an accord on financial services in the WTO by the end of 1997, and a series of new sectoral initiatives. New Zealand has accepted the Administration's invitation to pursue a bilateral free trade agreement with the United States--which could catalyze similar agreements throughout the region, perhaps starting with Australia and Singapore, and APEC-wide liberalization as a whole. Chile, the Central Americans and the Caribbean countries are anxious to engage in trade-liberalizing pacts with the United States.

Most importantly, the members of the World Trade Organization agreed to pursue a series of major new global negotiations in the concluding act of the Uruguay Round and reaffirmed that program at their initial Ministerial Conference in Singapore last December. This “built-in agenda” includes such items of central interest to the United States as agriculture, services, and investment and competition policy. The European Union's chief trade negotiator and a number of important countries are advocating the early launch of a new “Millennium Round” in the WTO to address the whole range of outstanding trade policy issues.

The Administration can pursue most of these initiatives only with the provision of fast track negotiating authority by the Congress. Without fast track, the United States will be unable to reach agreements with other countries because they would fear that Congress might impose crippling amendments and thus essentially reopen the negotiations. Even Chile, whose President Frei recently addressed the Congress eloquently on these issues, will not deal with the United States in the absence of such authority (but has made agreements with Canada, Mercosur and others which carry tangible disadvantages for the American economy). APEC's initial effort to launch its liberalization program got off to a slow start last year in part because the United States was unable to move and other countries were unwilling to do so in our absence.

The exceptions prove the rule. The United States was able to lead two major successful trade negotiations over the past year, the Information Technology Agreement and a deal on basic telecommunications services in the WTO. Each eliminates barriers on over $500 billion of trade in two of the world's most dynamic sectors. Both are hugely in the interest of the United States and were strongly promoted by American companies. But they were possible only because the Administration did not need new negotiating authority for them.

 

The Urgency of Action

It is extremely urgent for the Congress and the Administration to work out new fast track authority. World trade and investment patterns are moving and shifting at breakneck speed. Other countries and groupings are rapidly filling the void left by the American inaction (with the two exceptions cited above) of the past two years. We run a serious risk of being left behind if we do not quickly re-engage. Examples abound:

  • Tired of waiting for the United States, Chile has struck bilateral free trade deals with Mercosur and Canada (including a total phaseout of antidumping rules and legitimization of continued capital controls). The United States is already losing sizable sales because Chile's new preferential arrangements discriminate against our exports.
  • Mercosur, already the third largest trading bloc in the world, is consolidating virtually all of its neighbors into a South American Free Trade Agreement and will continue to do so as long as the absence of negotiating authority blocks us from engaging its members in serious negotiation to achieve an FTAA. It would be an enormous historical irony if the US initiative to launch an FTAA had the effect of enabling Brazil to assemble a South American grouping that was permitted, through our own failure to follow up, to build such vested interests in Mercosur itself that the South American countries lost all interest in pursuing the original idea of hemisphere-wide integration.
  • The subregional arrangements in Asia, notably the ASEAN Free Trade Area, have accelerated their own liberalization timetable and will thus increasingly discriminate against us unless we are able to energize APEC to bring down barriers across the entire Asia Pacific region.
  • Prolonged American absence from implementation of APEC's liberalization goals could revive interest in an Asia-only arrangement along the lines of Malaysian Prime Minister Mahathir's proposed East Asia Economic Caucus (EAEC).
  • The European Union is doing deals throughout the world, including with Mercosur and East Asia, which are only consultative at this point but could become much more substantive if the United States continues to dither.

Hence we delay at our peril. The time has long passed when the world would simply wait for the United States to act. The Asians, Europeans and Latin Americans have all become major autonomous players in the world economy. They will move on without us if we are not ready.

At the same time, American leadership is essential to push the global trading system in the most constructive directions. We simply must get back in the game if we are to protect our own interests, and to exploit the opportunities to achieve the enormous future benefits described above.

 

Some Specific Proposals

I believe that the Congress should in fact authorize permanent fast track negotiating authority when it considers the issue later this year . For the reasons already cited, it is simply too costly for any President to be without such authority for any prolonged period of time. The United States is in a state of continual negotiation on trade and related issues, with a wide variety of countries, and should be fully equipped for the effort at all times.

At the same time, the Congress must of course be in on the takeoff as well as the landing for all significant trade negotiations. Hence I recommend that the President be given general authority to negotiate but that he be required to seek prior Congressional approval to enter into any major new initiative.

The previous fast track authority required the President to notify the Congress of his intention to launch any such effort and empowered this Committee, and the House Ways and Means Committee, to disapprove any such Presidential proposal. This Committee almost did so in 1986 in the case of the United States-Canada Free Trade Area. No Congressional action was taken with respect to the subsequent launch of NAFTA, however, which undoubtedly added to the difficulty of achieving its approval after the agreement was completed. The Congress as a whole should vote in advance to approve any major negotiation, within the time periods after submission of Presidential proposals required in the past, thereby making it a full partner in initiating the entire process and justifying the grant of permanent authority to follow fast track procedures in approving agreements after they are negotiated.

The new legislation should provide the President with broad authority to pursue all of the opportunities cited above: a Free Trade Area of the Americas, “free and open trade and investment” by 2010/2020 in the Asia Pacific region via APEC, and the built-in agenda (or a new “Millennium Round” to achieve global free trade) in the WTO. Expiration dates should be set for each authority to provide effective deadlines for the respective negotiations.

Objections will immediately be raised that it would be premature to envisage such far-reaching negotiations at this time. Even supporters of the ideas proposed here might argue that there will not be enough time to do so with the legislation to be submitted only in September and a goal of completing action on it by the end of the year. The problem of course is that minimal negotiating authority will lead to minimal negotiations, perhaps limited to Chile and a few other bilateral agreements. This would condemn the United States to continued failure to follow through on its own initiatives, in Latin American and Asia as well as globally, and thereby to cede leadership to others to an increasing degree--despite the strength of our economy and competitive position. Now is the time for the United States to move ahead boldly rather than to waver and procrastinate.

In practice, none of these three major sets of negotiations are likely to proceed very soon. The internationally agreed dates are all some distance in the future: 2005 to work out the FTAA, 2010 or 2020 to reach APEC's goal, 1999 to start the next set of wide-ranging talks in the WTO. The United States could expedite them by reaching earlier agreements with Chile (en route to an FTAA) and with New Zealand (en route to APEC) and should have the authority to push these processes (and the WTO) as fast as the international traffic will bear but there will be plenty of time for the Congress to consider each negotiation in detail before approving US participation in it.

The proposed approach would also help deal with the currently vexatious problem of how the fast track legislation should address the question of the country's negotiating objectives. I believe it is a mistake to generalize; different negotiations with different sets of countries at different times may call for very different US aims. The Clinton Administration, for example, despite its insistence on including labor standards and environmental concerns in any new trade legislation, publicly announced in late 1994 that it would not raise those issues in APEC and has not done so.

The new general negotiating authority should leave such issues open, ruling them neither in nor out. Specific US objectives could then be devised for each specific negotiation starting with those proposed here, worked out with the Congress in that context, and pursued accordingly.

If it turns out to be necessary to address the substance of those issues in the upcoming legislation, a three-part set of objectives could be adopted for both labor and environmental concerns under which the Administration would be instructed to make every effort to:

  • achieve multilateral agreements on the basic standards in question, in the ILO for labor and à la Montreal Protocol (on CFC emissions) for the environment;
  • improve enforcement of those multilateral standards through their own institutions, as in the ILO's recent program on child labor in Bangladesh; and
  • authorize the use of trade remedies to enforce those multilaterally agreed accords, as was successfully threatened when Korea initially failed to comply with the Montreal Protocol, subject to the trade procedures of the WTO itself.

One other key issue is whether “nontrade” elements of the legislation that approves trade negotiations, under fast track authority, should also be handled under fast track procedures, i.e., without amendment and under firm time limits. This issue arose with the Uruguay Round legislation in 1994 because of its “pay-go” budget provisions and related policy questions.

It would be preferable to waive the “pay-go” provisions for trade legislation. Reductions of trade barriers clearly add to our economic activity and thus strengthen rather than weaken the Federal budget position.

If the basic requirement must be retained, it would be desirable to permit amendments to the specific budgetary provisions of the legislation as long as they yielded the same net impact on the federal deficit. However, it would still be essential to retain the timing deadlines or the whole process would founder.

 

Conclusion

The fast track process has proved its worth for over twenty years. Under its procedures, the United States maintained its leadership of the world trading system by negotiating successful conclusions to the Tokyo Round and the Uruguay Round in the GATT. We achieved free trade in North America through successive agreements with Canada and Mexico.

The future prospects are even brighter, for the reasons outlined above. Sharp reductions, and eventual elimination, of barriers to our exports in the world's most dynamic markets in Asia and Latin America are within our grasp. Enormous gains to the American economy and American workers would result. Fast track authority is necessary if we are to seize these opportunities. There are few steps that the Congress could take this year that would be as helpful to the American economy.

In view of all this, I urge the Administration to effectively carry forward the commitments made repeatedly by President Clinton to make fast track one of his highest priorities in 1997 and to recognize that it must compromise on the labor and environmental issues in order to do so. I urge the Congress to then provide the new negotiating authority as soon as possible. It is imperative to move forward on the bipartisan basis that has, with so much benefit to the country, characterized American trade policy for the past 60 years.