Statement The Honorable Carla A. Hills
Chair and CEO Hills & Company, International Consultants
House Foreign Affairs Committee
Subcommittee on Terrorism, Nonproliferation, and Trade
Wednesday, March 28, 2007
Mr. Chairman and members of the Subcommittee, I am pleased to join you today to discuss how our trade policy substantially advances our nation's economic, security, and strategic interests worldwide.
U.S. Trade Policy of Opening Markets Boosts Economic Growth
For more than 50 years, under both Democratic and Republic administrations, the United States has led the world in opening global markets. To that end, the United States worked to establish a series of international organizations, including the General Agreement on Tariffs and Trade (GATT) in 1947 and the World Trade Organization (WTO) in 1995. In 1947, only 23 nations participated in the first round of trade negotiations. Today, 150 nations are participating in the ninth round, the Doha Round.
Our experience proves that increased economic interdependence boosts economic growth and encourages political stability. The results to date have been spectacular. World trade has exploded and standards of living have soared at home and abroad. Economist Gary Hufbauer in a comprehensive study published in 2005 by the Institute for International Economics, now the Peterson Institute for International Economics, calculates that 50 years of globalization, defined as the free flow of goods, services, capital, and ideas, has made the United States richer by $1 trillion per year or about $9,000 added wealth per year for the average U.S. household. Dr. Hufbauer's studies calculate that, going forward, open global trade would raise U.S. income by $500 billion per year, making the average U.S. household richer by an additional $4,500 per year. No other policy decision could come close to having such a positive impact on U.S. economic well-being.
U.S. Trade Policy of Opening Markets Reduces Poverty
Developing countries have also gained from the opening of global markets. On average, poor countries that have opened their markets to trade and investment have growth nearly five times faster than those that kept their markets closed. Studies conducted by the World Bank show that globalization has raised some 375 million people out of extreme poverty over the past 20 years.
A broad agreement in the Doha Round could further help to reduce global poverty by integrating poor nations into the global trading system. Today nearly three billion people, almost half the world's population, live below the international poverty line of $2 per day. According to studies by economist William Cline at the Center for Global Development, removing global trade barriers would yield $200 billion annually in long term economic benefits for poor countries and lift 500 million people out of poverty. About half the benefit would come from opening markets in agriculture goods, which account for roughly a quarter of poor countries' exports and represents the sector that employs roughly half their population.
Today, tariffs on agriculture goods are five times higher than tariffs on industrial goods, and it is the only sector where export subsidies and tariff rate quotas are still permitted. A multilateral agreement dealing with agriculture barriers will maximize poverty alleviation for it will require commitments from all nations. Developing countries as a group have higher tariffs than industrial countries and trade disproportionately with other developing countries. Thus, a global trade agreement will best integrate poorer nations into the global trade system by maximizing opportunity for their people and stimulating their economic growth.
U.S. Trade Policy of Opening Markets Helps Strengthen Failing States
A strong multilateral agreement that reduced barriers to trade in agriculture and manufactured goods and opened up markets for services could help strengthen weak and failing states that jeopardize U.S. Security. Impoverished states often lack the ability to enforce their laws and secure their borders, making it much more difficult for the U.S. government to deal effectively with transnational problems such as terrorism, organized crime, narcotics trafficking, money laundering, illegal arms sales, disease pandemics, and environmental degradation.
William Cline's studies that I earlier mentioned meticulously map global poverty. Three WTO members---Bangladesh, Indonesia, and Pakistan---each have roughly 100 million people living below the international poverty line. Six African members-the Democratic Republic of the Congo, Kenya, Mozambique, Nigeria, Tanzania, and Uganda, together account for another 200 million people living in dire poverty. All are located in regions beset by instability. Dr. Cline calculates that on average a one percent increase in a country's ratio of trade to output eventually boosts its income by one-half percent, which translates into a one percent reduction in poverty and a concomitant increase in stability.
Relationship of Trade Policy to Foreign Policy
The United States has many interests, economic, strategic, and military, that need to be balanced. Not all issues in any one category are of equal importance in advancing our national interest. Even those that rank high cannot always be pressed effectively at the same time.
Business, labor, agricultural, environmental, human rights, ethnic, and religious groups vigorously compete for the attention of U.S. policy makers to move their issues to the top of the new global agenda. The input of concerned groups of citizens is a fundamental part of our democratic process, and it influences both the content and implementation of our nation's trade and foreign policy.
Ultimately it is the responsibility of the President and the members of his cabinet tasked with responsibilities for foreign affairs, security, finance, and trade working with Congress to develop a sound multi-dimensional policy that strikes a proper balance among our varied national interests---and is comprehensible---not only to other nations but to our own citizens.
Trade policy is by no means supreme or sacrosanct. It is one of the many interests that our government must weigh and balance along with our foreign policy and strategic objectives. At times trade can play a role in helping to achieve these objectives. For example, the United States has used economic and trade sanctions against state sponsors of terrorism, non-state terrorism and states that seek to acquire nuclear weapons. And, our government does not begin trade negotiations unless foreign policy and national security officials believe that a successful agreement will advance our nation's broad policy and strategic goals as well as its commercial interests. In this regard it is noteworthy that trade negotiations with Thailand were suspended after the coup. On the positive side, nations with whom we have a strong trading relationship are usually more supportive of our broad policy objectives than those with whom our trade is of minor importance.
Impact of Our Trade Deficit on Our Foreign Policy
It is hard to conclude that the U.S. trade deficit hinders our foreign policy objectives. The United States is the world's largest customer, which is more important to those that trade with us than our balance sheet. Having said that, there is no question but that as an economic proposition our trade deficit is too large to be sustained indefinitely, and we should look for ways to reduce it.
The three best ways to trim the trade deficit are (1) open foreign markets through trade negotiations; (2) increase domestic savings, particularly by reducing the federal budget deficit; and (3) encourage flexible exchange rates.
It is interesting to note that the nations with whom we have a free trade agreement account for almost half (44 percent) of our exports and about one third of our imports. The vast bulk of our trade deficit (in excess of 80 percent) is with nations with whom we do not have a free trade agreement.
Relationship of Trade Agreements to Anti-Terrorism and Weapons Proliferation
While trade agreements can help to create the resources to combat terrorism or weapons proliferation, there are other fora and policy tools to deal more directly with those challenges. Having said that, trade agreements that open markets encourage growth, help to alleviate poverty and encourage transparency, respect for property and rule of law that contribute to global stability, one antidote to terrorism.
I do not pretend to be an expert on proliferation, but it is interesting to note that the nations that have persistently tried to acquire nuclear weapons were for the most part nations that when they set their nuclear acquisition program in motion did not have a big stake in international trade or investment. I have reference to India, Iraq Iran, Pakistan, Libya, and North Korea. It is also interesting to note that all of the nations that were successfully persuaded by the United States to refrain from acquiring nuclear weapons had a substantial stake in the global economy. I have reference to Brazil, South Africa, South Korea, and Taiwan.
The Impact of U.S. Trade Policy on the American Worker
As I noted earlier, trade through open markets over the past half century has increased average family incomes by close to $10,000 per year. American workers would be worse off had we failed to open global markets over the past half century.
By opening global markets, our trade agreements create new opportunities for our services, farm and factory producers to increase their exports. The U.S. economy suffers when exports lag. In addition, firms engaged in international trade on average pay better wages, expand faster, and have more stable employment than those that do not. Thus having more U.S. firms engaged in trade benefits American workers.
We have seen a steady shift of jobs from the manufacturing sector to the services sector over the past four decades. Helped by faster and cheaper transportation and communications, manufacturing enterprises have transformed themselves from being vertically integrated to more fragmented enterprises---sourcing components from around the world.
U.S. manufacturers are significant investors overseas. At the same time foreign companies have invested here, creating more than 6 million jobs and contributing exports of more than $160 billion. In fact, globalization of production has caused our manufacturing productivity to soar, and with it our overall standard of living.
In the last decade alone, output by manufacturing enterprises has jumped 30 percent, with 22 million fewer workers. According to Alliance Capital Management, job losses in manufacturing are not peculiar to the U.S. The losses have been global. Over the past 10 years, Japan's manufacturing employment has dropped by 16 percent; China's by 15, Brazil's by 20, and the U.S. by 11.
Studies document that trade has played a very small part in this transformation of employment in the United States; notwithstanding that trade agreements are often portrayed as the enemy of the American worker. The real driver has been technology---cheaper and faster communication and transportation.
Technology has eliminated some jobs, for example by substituting ATMs for bank tellers, computers for dictation, and robotics for manpower on assembly lines while creating others like computer engineers. Technology has also created jobs like computer engineers and programmers. Of the 20 occupations the Bureau of Labor Statistics projects to grow the fastest to 2010, ten are IT related. The top five are all IT related. Most of these jobs did not exist a decade ago.
This continuing transformation of work force has made our economy one of the most dynamic in the world. U.S. unemployment at 4.5 percent is low by historic standards. According to the Bureau of Labor Statistics, more jobs were created on average than lost every year in the past decade. Between 1992 and 2004, on average 32.5 million jobs were created each year whereas on average 30.8 million jobs were lost each year.
These unemployment figures must be read in light of our remarkably flexible labor market. It is that flexibility that makes the U.S. economy so productive. But it takes a toll on our workers. On average one of five Americans gain or lose a job each year. American workers change jobs more often than workers in most Western countries and often when they do, even with reemployment, they suffer earnings losses. This churn in our labor market fuels high worker anxiety and can create hardship. Today we are suffering from very high worker anxiety.
The studies at the Peterson Institute for International Economics that calculate gains for the U.S. economy of $1 trillion per year from past market openings and additional gains of $500 billion per year from new market openings also calculate the lifetime costs of worker displacement to be roughly $50 billion per year. Currently the nation spends about $2 billion annually to address directly the costs connected to displacement.
To maintain public support for open trade that advances our nation's economic and strategic interests, and significantly improves the well being of average Americans, our nation needs to allocate more of the gains derived from trade to assist those who are dislocated whether from trade or technology.
Wage insurance is one way to supplement the income of the displaced worker who takes an entry-level job in a new, more promising sector. Such a program encourages the worker to stay in the workforce, thus reducing the outlays for unemployment insurance, while providing the most effective job training possible, which is training on a real job.
There is a wage insurance component in our Trade Adjustment Assistance Program, but it is extremely limited. The program does not cover service workers who now comprise 80 percent of our workforce. It only applies to workers 50 years of age or older, and it has a $10,000 cap. Also subsidizing a portion of the displaced worker's health insurance premiums is another.
Studies by the Peterson Institute for International Economics estimate the costs of expanding both the Trade Adjustment Assistance Program and the Health Care Tax program to cover dislocated workers to be between $3 to $12 billion per year depending on the breadth of coverage and the amount of benefits----far less than the $1 trillion gains that the United States presently gains from open trade and far less than the additional gains that we could secure by a further opening of global markets.
I also believe that our nation must devote more attention and resources to education and skill building. We live in the knowledge age. It is not acceptable that 30 percent of our high school students fail to graduate. That number soars to close to 50 percent in our inner cities. For years, Washington has given tax credits to encourage capital investment. To keep our nation competitive, policymakers need to find effective ways to encourage similar investment in human capital.
The challenge in keeping our work force the best trained and most productive in the world is not limited to government. Business could do more. Some companies have launched effective educational programs for their employees. For example United Technology reports that it pays the tuition costs and gives paid time off for its employees to attend accredited universities. Since the program began in 1996, 15 percent of UTC's domestic employees are upgrading their education, which is about three times the national average. About 16,000 employees have obtained degrees since the program began.
In addition the company offers a 4-year scholarship to any employee who is displaced because of job relocation. The company pledges that if an employee at UTC loses a UTC job due to work relocation, whether that be to Delhi or Dallas, the company will pay for four years of college.
What we should be talking about is not how to slow down the opening of markets to trade and investment that will give our economy a tremendous boost, but instead how to help those who are adversely affected by today's rapid technological change and increased international competition.
Trade Promotion Authority and Trade Agreements are Vital to U.S. Interests
The economic case for continuing to work for open global markets is clear. When the United States persuades other nations to open their markets, our economy receives a substantial economic boost which benefits American households and helps to alleviate poverty in some of the most challenging regions of the world. The combination of multilateral, regional and bilateral agreements creates new markets for our farm and factory producers and our service providers.
Looking at the 14 regional and bilateral agreements that the United States has negotiated over the years, with the exception of our agreement with Canada and Australia, all of the nations involved before the negotiations commenced had substantially duty free access to our market through our various General System of Preference programs, the Caribbean Basin Initiative, the Andean Trade Preference Act, and the African Growth and Opportunity Act. Illustrative are the three bilateral agreements awaiting Congressional approval: Today Colombia has 90 percent free access to our markets; Panama has 95 percent; and Peru has 98 percent. And, in all three cases, our producers of goods and services face substantial trade restrictions. When these agreements are approved, our producers and their workers will see a substantial reduction in tariffs and other trade restrictions gaining new export opportunity. Some would call this leveling the playing field.
And, trade pays off in more ways than purely economic. Our trade agreements encourage rule of law, respect for property, and transparency. In the world at large there is a strong correlation between more open economies and the growth of a middle class that inevitably clamors for clean air, clean water, safe streets, and a more accountable government.
Our efforts to open markets require trade promotion authority. Without it, the United States is sidelined, loosing a proven engine for economic growth, a demonstrated means for alleviating poverty, and a valuable tool for foreign policy objectives.
Conclusion
As we look to the future, we need to stay focused on three key goals: (1) to work hard to get global markets open to create opportunity that will raise standards of living at home and abroad; (2) to educate and train American workers to be the very best in the world; and (3) to develop programs to assist our work force to cope more effectively with rapid pace of change that will continue to affect job opportunities worldwide. Progress in these three areas will guarantee a strong, confident, and prosperous America.
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