Emergency Committee For American Trade - Publications

SECTION 11: REGIONAL TRADE ARRANGEMENTS AND COUNTRY-SPECIFIC ISSUES

Western Hemisphere

Expansion of U.S. trade and investment in the Western Hemisphere strongly contributes to the growth of the U.S. economy. In 2004, U.S. trade with the 34 countries in the Western Hemisphere negotiating the Free Trade Area of the Americas (FTAA) equaled $866 billion, and the region accounted for 44 percent of U.S. goods exports.

The United States must, therefore, maintain its leadership role in promoting progress toward an integrated hemisphere as discussed in section 4. In addition, the United States should build on the success of the NAFTA agreement by ensuring its full and effective implementation, implement the U.S.-Central America-Dominican Republic FTA and seek to expand trade with the other countries of the region as negotiations for the FTAA and other regional and bilateral free trade agreements, as with the Andean Pact countries, proceed.

North American Free Trade Agreement

Just over 11 years ago in November 1993, the U.S. Congress approved the North American Free Trade Agreement – NAFTA – after one of the most charged debates over trade that our country had seen in several decades. It passed the House by 34 votes (234-to-200); it passed the Senate by 61-to-38. The NAFTA entered into force in 1994 and remains one of the world’s most comprehensive free trade agreements, covering a region with 427 million people who produce over $11 trillion worth of goods and services. Between 1993 and 2004, U.S. trade with Canada and Mexico grew by nearly 140 percent, from $297 billion to $712 billion, accounting for approximately one-third of total U.S. trade in 2004. On average, NAFTA trade equals approximately $1.7 billion a day.

The NAFTA agreement phases out tariffs among the United States, Mexico, and Canada on goods produced in North America. The agreement provides for the elimination of tariffs on three-way trade by 2008. Tariffs on qualifying goods between the United States and Canada were eliminated on January 1, 1998. With current reductions, Mexico’s average tariffs on U.S. goods equal less than one-half of one percent (compared to the pre-NAFTA average of 10 percent). The NAFTA agreement includes broad disciplines providing for the elimination of non-tariff barriers on goods and services, increased access to government procurement, non-discriminatory treatment for investment, removal of foreign investment restrictions, and protection for intellectual property rights. In addition, it provides several dispute settlement mechanisms. As well, there are three side agreements to the NAFTA: the North American Agreement on Labor Cooperation, the North American Agreement on Environmental Cooperation and the Understanding Between the Parties to the North American Free Trade Agreement Concerning Chapter Eight: Emergency Action.

Success of NAFTA in Expanding Trade

Trade among NAFTA member countries has increased significantly during the first 11 years of the agreement. U.S. exports to the NAFTA countries more than doubled between 1993 and 2004, from $142 billion to $300 billion, while U.S. exports to the rest of the world rose at a much lower rate. Mexico is America’s second largest trading partner after Canada.

Since NAFTA went into force, average Mexican tariffs on U.S. products have fallen from 10 percent to less than one-half of one percent, while average U.S. tariffs on Mexican products have fallen from 3.15 percent to less than 0.35 percent. As a result, U.S. firms have gained more than a nine-percentage point margin of preference in NAFTA markets over non-NAFTA competitors. Virtually all goods traded between the United States and Canada are free of any tariffs. The U.S. auto, chemical, textiles, and electronics sectors have seen particular benefits from NAFTA. In January 2001, the NAFTA countries announced the third set of accelerated tariff reductions, which will eliminated tariffs on approximately $867 million in trade among the three countries, including on certain footwear, chemicals, pharmaceuticals, auto parts, and batteries. In January 2002, the NAFTA countries announced the fourth round of accelerated tariff reductions on $25 billion in trade, covering such goods as rubber and plastic footwear, motor vehicles, electrical and electronic goods, toys and chemicals.

During Congressional consideration of the NAFTA, proponents and opponents alike made enormous claims of the potential effect of the NAFTA on the economies of our countries, our jobs, our labor and environmental conditions and our futures in the global economy. With the benefit of more than 10 years of hindsight, it is clear to most that NAFTA was a major breakthrough for trade and investment liberalization in the region and for the world at large.

It was a comprehensive agreement, not only covering comprehensively for the first time all major trade issues, from goods to services, but covering investment protections and liberalization in the same agreement as well.
The timing of the agreement was very important; indeed, it is cited as a primary reason that Mexico was able to maintain more open policies that allowed it to recover from the peso crisis more quickly and completely. NAFTA helped to make Mexico’s recession of the mid-90s shorter and less severe than its 1982 recession. NAFTA also helped Mexico withstand internal pressures to impose trade-restrictive measures in response to the recession. As a result, U.S. exports to Mexico recovered within 18 months of the 1995 crisis.

While some argue that the commercial impact has been exaggerated, given that 12 years ago, in 1993, America's GDP was almost 20 times larger than Mexico's, and U.S. tariffs on Mexican goods already averaged a low 4 percent, there can be no question that the U.S. economic relationships with these countries are stronger today.

The NAFTA codified and expanded an already vibrant trade relationship. Between 1993 and 2004, the value of two-way U.S. trade with Mexico has more than tripled, from $81 billion to $267 billion.
Canada and Mexico are now America's number one and two trading partners, respectively.
And contrary to the critics, employment in the United States rose – from 120 million in 1993 to 135 million in 2001, before the recent drop, caused not by NAFTA, but by broader economic circumstances in the U.S. and global economies.

At the same time, it is clear that trade and investment are not panaceas and that perhaps their most significant effects will take decades to take root. NAFTA did not cause, nor has it solved, for example many of the economic problems in the agricultural sectors of the three countries. These problems, particularly in Mexico, preexisted NAFTA and will take economic growth and development, which NAFTA can help spur, to resolve. At the end of 2003, the World Bank published an extensive study on the NAFTA entitled: Lessons from NAFTA for Latin American and Caribbean (LAC) Countries: A Summary of Research Findings, by Daniel Lederman, William Maloney, and Luis Servén. The report found that:

“The report’s main conclusion regarding NAFTA is that the treaty helped Mexico get closer to the levels of development of its NAFTA partners. The research suggests, for example, that Mexico’s global exports would have been about 25% lower without NAFTA, and foreign direct investment (FDI) would have been about 40% less without NAFTA. Also, the amount of time required for Mexican manufacturers to adopt U.S. technological innovations was cut in half. Trade can probably take some of credit for moderate declines in poverty, and has likely had positive impacts on the number and quality of jobs. However, NAFTA is not enough to ensure economic convergence among North American countries and regions. This reflects both limitations of NAFTA’s design [strict rules of origin and trade remedy laws] and, more importantly, pending domestic reforms.”

Other key conclusions of the report include:

“NAFTA has brought significant economic and social benefits to the Mexican economy.” (pg. viii)
(pg. viii)
“Contrary to some predictions, NAFTA has not had a devastating effect on Mexico’s agriculture. In fact, both domestic production and trade in agricultural goods rose during the NAFTA years.” The report goes on to explain why, citing factors as increased demand and productivity (pg. xiii)
“In spite of popular perception, there is little ground for concerns that NAFTA, or FTAs more generally, are likely to have a detrimental effect on the availability and/or quality of jobs. Consistent with the region-wide evidence, there is little indication of higher unemployment, increased volatility of the labor market, or increased in formalization associated with trade liberalization. In fact, Mexican firms, as those of the region, more generally, that are exposed to trade tend to pay higher wages, adjusted for skills, are more formal, and invest more in training.” (pp. xx-xxi)

Moving beyond the commercial aspects, there are also extremely important regional and foreign policy benefits that NAFTA helped to foster. While not the sole or even greatest influence, NAFTA – through its encouragement of economic cooperation and transparency – was, nonetheless, a major contributing factor in Mexico’s move towards a more mature and open democracy and towards modernizing and liberalizing its overall economy.

Mexico’s leadership in promoting trade and investment liberalization in the region and beyond can also be in part attributed to the NAFTA and the habits it spurred in Mexico. Mexico now has more regional FTAs than the United States, with countries as diverse as Chile, El Salvador, Guatemala, Honduras, Venezuela and Brazil. It is also playing an important role in the WTO.

NAFTA Dispute Settlement – Chapter 20

Chapter 20 of the NAFTA addresses the avoidance and settlement of all disputes relating to the interpretation of the NAFTA, with the exception of matters covered in Chapter 11 (Investment), Chapter 14 (Financial Services) and Chapter 19 (Antidumping and Countervailing Duty final determinations). If disputes are not settled through consultation, either Party may refer the issue to a non-binding panel. Three cases have been completed under this process – the United States’ challenge to Canadian agricultural tariffs, Mexico’s challenge to the U.S. safeguard on broomcorn brooms, and, most recently, Mexico’s challenge to U.S. restrictions on cross-border trucking services.

The final report in the third case, Mexico’s challenge to the United States’ provision of cross-border trucking services, was issued on February 6, 2001. The Panel unanimously found that the United States had not adequately implemented its commitment to open cross-border trucking services to Mexico as required under the NAFTA. (The NAFTA required the United States to allow Mexican trucks in four border states by 1995 and the entire United States by 2000. The Clinton Administration had refused to implement this provision, arguing that Mexican trucks were unsafe.)
While the Panel decision upholds the principle that the United States can impose its own safety requirements, the Panel found that the blanket exclusion of Mexican trucks was unjustified. At the U.S.-Mexican summit on February 16, 2001, Presidents Bush and Fox issued a joint communiqué stating that the two governments would begin “immediate discussions” to implement the NAFTA panel decision. After extensive discussion between the Administration and Congress throughout 2001, House and Senate negotiators reached a compromise agreement on the imposition of safety measures to implement the NAFTA panel ruling in November 2001. Included as part of the conference report to the Transportation Appropriations Act (H.R. 2299), the compromise requires the Administration to carry out certain safety precautions before Mexican trucks can enter the United States, including safety inspections, a certification by the Secretary of Transportation that Mexican trucks do not pose an unacceptable safety risk, an electronic verification of the validity of Mexican licenses and the establishment of a system for giving each truck a unique Department of Transportation number. The legislation also requires physical inspections of trucks every 90 days. The Transportation Department Inspector General must also conduct an audit of the U.S. government’s ability to enforce the safety standards on Mexican trucks before they can operate in the United States.
The Department of Transportation issued final rules to implement this legislation in November 2002 and the Administration lifted the U.S. ban. In June 2004, the Supreme Court reversed the decision of the U.S. Ninth Circuit Court of Appeals which had blocked the lifting of the ban. In order to be eligible to enter the United States, Mexican trucks must first undergo mandatory inspections, which Mexico has resisted.

NAFTA Dispute Settlement – Chapter 19

Chapter 19 of NAFTA provides a process for independent binational panels to review U.S. and Mexican determinations in antidumping and countervailing duty cases in lieu of judicial review in national courts. Chapter 19 does not require the United States to make any substantive changes in its antidumping or countervailing duty laws, but it did require Mexico to implement procedural reforms guaranteeing U.S. exporters effective judicial review. The Chapter 19 review process is based on a similar mechanism applied under the U.S.-Canada Free Trade Agreement.

The NAFTA working group on dispute settlement is continuing to examine ways to improve the Chapter 19 dispute settlement process, including addressing problems associated with delays in the Chapter 19 review process arising from inadequate funding, problems in selecting panelists, transparency issues, and translation difficulties.

NAFTA Chapter 11

Chapter 11 of the NAFTA sets forth the Parties’ obligations with respect to investment and related issues. It requires the Parties to eliminate barriers and adopt market-oriented domestic policies that treat investment fairly and in a non-discriminatory manner. A full discussion of the NAFTA Chapter 11 commitments, recent cases and the basic investment protections is found in section 6.

NAFTA and the Environment

The North American Agreement on Environmental Cooperation (NAAEC) created the Commission for Environmental Cooperation (CEC) and aims to foster the protection and improvement of the environment in the United States, Canada, and Mexico through cooperative activities and the creation of a system for addressing environmental disputes. The agreement explicitly provides that each of the member countries retains the right to set its own environmental standards; it requires only that the three countries ensure that their environmental laws are adequately enforced and provide access, transparency, and due process. The NAAEC promotes cooperative activities to foster the protection and improvement of the North American environment. It also established two dispute resolution procedures to address allegations that a country has failed to enforce its environmental laws – a government-to-government procedure (with the possibility of fines and the suspension of NAFTA benefits) and a review of complaints submitted by non-governmental organizations (NGOs) (with the possibility of a factual record being prepared on the issue, but no possibility of fines or sanctions).

The CEC, which oversees implementation of the agreement, is a trinational organization composed of a governing Council of the environmental ministers from each country and a Secretariat located in Montreal. Since its establishment, the CEC has engaged in a wide variety of cooperative activities focusing on environmental conservation, water use, human health, law enforcement and public outreach. It has developed trilateral action plans to eliminate toxic chemicals in the North American environment and promoted species and habitat protection. In December 2002, it adopted a 2003-2005 Program Plan, under which it will focus on four core areas: the environment, economy and trade; conservation of biodiversity; pollutants and health; and law and policy. To help carry out its mandate, the CEC created the North American Fund for Environmental Cooperation (NAFEC) in 1995 to provide community-based grants. Since it was established in 1995, the NAFEC has issued over 196 grants totaling more than $9 million.

No Party has requested government-to-government consultations. There have been, however, 50 citizen submissions, ten of which have resulted in the CEC preparing factual records.

The United States and Mexico also created the Border Environment Cooperation Commission (BECC) and the North American Development Bank (NADB) in 1993 to help border communities with environmental infrastructure projects. The BECC provides technical assistance and grants to border communities and certifies environmental infrastructure projects for financing consideration by the NADB. The NADB facilitates financing for the implementation of projects certified by the BECC, provides financial and managerial guidance, structures financial packages and provides loans to fill financing gaps. The NADB also administers the U.S. Environmental Protection Agency’s grant resources for the border region. Both the BECC and NADB focus on communities located within 100 miles of the U.S.-Mexico shared border. By the end of 2004, the BECC and NADB had help promote over 105 projects, with a total cost of approximately $2.4 billion. The BECC’s technical assistance program has already allocated more than $30 billion to the development of 228 environmental infrastructure projects.

NAFTA and Labor

The North American Agreement on Labor Cooperation (NAALC) created the Commission for Labor Cooperation (CLC) and aims to improve working conditions in the three NAFTA countries and promote core labor standards. The NAALC explicitly provides that each country retains the right to set its own labor standards but commits the three NAFTA countries to ensure that their own labor laws are adequately enforced. The NAALC aims to promote cooperative activities among the three NAFTA countries to improve working conditions and promote core labor standards. It established two procedures for reviewing a country’s compliance with its labor standards: (1) a government-to-government dispute settlement system that could result in fines or the suspension of NAFTA benefits for a country’s persistent failure to enforce its labor laws with respect to occupational safety and health, child labor, minimum wage, and technical labor standards, and (2) a process for reviewing complaints by private parties (with no possibility of fines or sanctions). The CLC, which oversees implementation of the Agreement, is a trinational organization composed of a governing Council of the labor ministers from each country and a Secretariat based in Dallas, Texas. Each country has also set up a National Administrative Office (NAO) to coordinate participation in the Agreement and to review complaints.

Since its formation, the NAALC has engaged in a wide range of cooperative activities, including seminars, training sessions, exchanges of professional and technical delegations, and joint reports. No government-to-government consultations have been requested under the dispute settlement system. To date, 28 cases have been filed by private parties under the NAALC, covering issues ranging from freedom of association and illegal use of child labor to allegations that manufacturers in Mexico discriminate against pregnant women.

Mexico

U.S. trade with Mexico has grown significantly since the implementation of NAFTA. Mexico has surpassed Japan to become America’s second largest export market and second largest trading partner. Indeed, the United States exported $110.7 billion in goods to Mexico in 2004, more than double U.S. exports to Japan in 2004 of $54.4 billion.

Major U.S.-Mexican Trade Issues

The United States and Mexico are continuing work to resolve several important trade disputes, including the United States’ cross-border trucking restrictions (discussed above), Mexico’s imposition of antidumping duties on high fructose corn syrup (HFCS), and discrimination in Mexico’s telecommunications sector.

In March 2004, the United States also initiated a WTO challenge to Mexico’s tax on soft drinks produced with HFCS, adopted in January 2002 (following its termination of antidumping dumping duties found to be contrary to WTO rules). A WTO panel was formed in July 2004. The United States and Mexico are also continuing discussions about Mexico’s NAFTA Chapter 20 complaint regarding access to the U.S. sugar market.

On August 17, 2000, the United States also requested WTO consultations with Mexico regarding its implementation of telecommunications commitments under the General Agreement on Trade in Services. In particular, the United States has been concerned that Mexico is (1) not maintaining adequate disciplines over Telmex, its former monopoly telecommunications provider; (2) not ensuring timely, cost-effective interconnection for competing carriers; and (3) continuing its practice of charging U.S. companies above-cost rates for international calls. On October 10, 2000, the Mexican Government issued new rules to regulate anti-competitive practices by Telmex and reduced long-distance interconnection rates for 2001. On November 10, 2000, the United States requested the establishment of a WTO dispute settlement panel. Consultations with Mexico were held in January and in March 2001. Some progress was made on this issue in late 2000 and 2001, after U.S. carrier WorldCom reached a rate agreement with Telmex and Mexico promised additional reform. On February 16, 2002, however, the United States again requested establishment of a WTO panel – this time only with respect to Mexico’s discriminatory treatment with regard to above-cost rates for international service. In March 2004, the WTO panel ruled largely in favor of the United States, finding that Mexico’s telecommunications regime violated its WTO commitments. Mexico did not appeal the decision and the United States and Mexico agreed that Mexico would have to July 1, 2005 to implement the panel’s findings.

In June 2003, the United States requested WTO consultations on Mexico’s imposition of antidumping duties on rice and beef and related matters. A WTO panel was formed in February 2004.

Mexican Trade Agreements and Negotiations

Mexico continues its efforts to negotiate free trade agreements, to build upon the NAFTA and free trade agreements and other bilateral agreements that it had previously concluded with the EU, Chile, El Salvador, Guatemala, Honduras, Venezuela, the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland), and Brazil. Mexico and Japan signed their FTA in September 2004.

Canada

Canada remains America’s largest trading partner, accounting for $189 billion in U.S. goods exports last year. The Canadian and U.S. economies are more integrated than ever, and bilateral trade has doubled over the last decade. Both countries also share common interests in pursuing FTAA negotiations and achieving a successful WTO round. Bilateral relations with Canada are frustrated, however, by several major ongoing disputes as discussed below.

Major U.S.-Canadian Trade Issues

Softwood lumber, wheat and a few WTO cases remain primary areas of dispute between the United States and Canada.

Softwood Lumber

Following the March 31, 2001 expiration of the 1996 U.S.-Canada Softwood Lumber Agreement, the U.S. timber industry filed antidumping and countervailing duty cases against softwood lumber imports from Canada. The Commerce Department announced final countervailing duties of 19.34 percent and final antidumping duties of 2.26 percent to 15.83 percent on March 22, 2002, and the U.S. International Trade Commission made affirmative determinations, allowing the imposition of final duties.

Under the Softwood Lumber Agreement, Canada had imposed fees on softwood lumber exports from four Canadian provinces in return for a commitment from the United States to refrain from initiating any unfair trade cases against the Canadian softwood lumber sector for five years. The U.S. lumber industry has argued for the last decade that Canadian stumpage prices and its log export ban represent unfair subsidies that have injured the U.S. industry. The Canadian industry and government adamantly disagree with the suggestion that their practices result in subsidies.

Canada has filed numerous WTO and NAFTA challenges against both the U.S. antidumping and countervailing duty cases, including the calculation of margins and the finding of threat of material injury. In November 2004, the United States filed a request for a NAFTA Extraordinary Challenge Committee (ECC) to review a NAFTA panel’s finding that the International Trade Commission’s injury decision was flawed. A separate WTO panel has reached a similar conclusion. In the meantime, the ITC has issued a new injury decision to comply with the WTO panel decision.

The U.S. and Canadian governments have engaged in extensive negotiations to try to resolve these longstanding issues.

Wheat

On February 15, 2002, the Bush Administration made an affirmative Section 301 finding that the Canadian Government grants the Canadian Wheat Board (CWB) special monopoly rights and privileges, which disadvantage U.S. wheat farmers and undermine the integrity of the trading system. In particular, USTR found that the CWB’s monopoly has been able to take sales away from U.S. farmers because it is insulated from commercial risks, benefits from subsidies, has a protected domestic market, and has competitive advantages due to its monopoly control over a guaranteed supply of wheat. USTR announced a four-prong approach to resolve this problem, including: (1) examining whether to bring a WTO case against Canada and the CWB; (2) examining the possibility of initiating countervailing duty and antidumping cases; (3) working with the U.S. wheat industry to identify specific Canadian barriers to U.S. wheat; and (4) pursuing comprehensive and meaningful reform of monopoly state trading enterprises in the WTO agriculture negotiation.

On October 23, 2002, the Administration initiated antidumping and countervailing duty investigations into Canadian wheat as requested by the North Dakota Wheat Commission. The Commerce Department made affirmative decisions. The ITC found no injury in the case of durum wheat, but found injury from imports of hard spring wheat, resulting in the imposition of 14.5 percent tariffs. Canada has filed a NAFTA appeal.

In December 2002, the United States requested WTO consultations with Canada arguing that the export practices of the Canadian Wheat Board as well as Canada's handling and transporting of imported grain violate Canada's obligations under the WTO. In April 2004, the WTO panel considering the case, found in favor of the United States, ruling that Canada’s grain handling system and rail transportation regime discriminated against foreign grain. The panel found in favor of Canada with respect to the Canadian Wheat Board, stating that the WTO did not prohibit state trading companies from using their monopoly position to disadvantage foreign suppliers. The United States appealed that part of the decision; in August 2004, the Appellate Body upheld the panel’s findings. The United States and Canada reached agreement that Canada would have until August 1, 2005 to implement the panel’s ruling on grain handling and rail transportation.

Dairy

The United States also successfully challenged Canada’s export subsidies to dairy farmers in the WTO, in an October 1999 Appellate Body ruling for the United States. Following Canada’s implementation of reforms, the United States requested reestablishment of the panel to review Canada’s compliance on February 16, 2001. The United States also sought authorization to retaliate. In July 2001, the panel found that Canada had failed to implement fully the earlier WTO rulings by continuing to provide export subsidies at levels inconsistent with its WTO commitments. On December 3, 2001, the Appellate Body concluded that it did not have enough information to make a ruling against Canada, and the United States requested that the panel be reconvened to present additional evidence. On June 24, 2002, the panel found that Canada’s new measures were inconsistent with its WTO obligations. The Appellate Body made the same determination in December 2002. In May 2003, the United States and Canada reached a settlement under which Canada agreed to eliminate it export subsidies with respect to dairy exports to the United States and reduce its subsidization of exports to other countries. Barriers, however, continue to exist that limit U.S. dairy and dairy product exports to Canada

Canadian Trade Agreements and Negotiations

Canada is also continuing to seek out other countries with which to negotiate free trade agreements in order to build on NAFTA, Canada’s free trade agreement with Israel, and its NAFTA-like agreement with Chile. In 2001, Canada concluded an FTA with Costa Rica and a trade and investment agreement with Nigeria. Canada has initiated FTA negotiations with Central America (El Salvador, Guatemala, Honduras and Nicaragua), the European Free Trade Association (Iceland, Norway, Switzerland and Liechtenstein) and Singapore and is consulting with Bolivia, Colombia, Ecuador, Jordan Peru, Venezuela and others.

Caribbean Basin Countries

Total U.S. trade with the Caribbean and Central America has more than tripled between 1990 and 2004. In particular, U.S. exports to the 24 countries of the region have grown from $7.7 billion in 1990 to nearly $25 billion in 2004. Imports have followed a similar course. Critical in spurring this growth in trade has been the implementation of the Caribbean Basin Economic Recovery Act (CBTPA), providing duty-free treatment to a host of goods from these countries, and, most recently, the Caribbean Basin Trade Partnership Act, which substantially broadened the products to which duty-free treatment applies.

Implementation of the United States-Caribbean Basin Trade Partnership Act

After years of negotiation, the CBTPA was enacted in 2000 to provide duty-free, quota-free treatment for certain apparel products from eligible Caribbean Basin countries and to provide duty-free treatment for products not currently eligible for duty-free treatment under the Caribbean Basin Economic Recovery Act (CBERA). The primary provisions are as follows:

Eligibility Criteria: In determining whether Caribbean Basin countries will be eligible for the CBTPA benefits, the President must find that a country has met the eligibility criteria under the CBERA and must take into account several additional factors, including a country’s commitment to undertake WTO obligations and participate in FTAA negotiations, protection of intellectual property and internationally recognized worker rights, participation in the Inter-American Convention Against Corruption, and government procurement practices.
Textile and Apparel Provisions: The CBTPA provides duty-free, quota-free treatment for the following articles:
- apparel assembled in a CBTPA country made from U.S. fabric that is made from U.S. yarn; apparel cut and assembled in a CBTPA country from U.S. fabric that is formed from U.S. yarn, if the articles are also assembled with U.S.-formed thread;
- certain apparel knit-to-shape in a CBTPA country from U.S.-formed yarn and knit apparel articles cut and wholly assembled in CBTPA countries from U.S. or regional fabric that is made from U.S. yarn. Knit apparel products are capped at 250 million square meter equivalents and outerwear T-shirts are capped at 4.2 million dozen, with an annual increase of 16 percent for the first four years of the program;
- certain brassieres;
- certain apparel that is both cut (or knit-to-shape) and sewn or otherwise assembled in a CBTPA country from fibers, fabric, or yarn not available in commercial quantities in the United States; and
- certain textile luggage.

Safeguards against Import Surges and Transshipment: The CBTPA provides for a snapback of the tariff preferences on textiles and apparel if import surges cause serious damage to the U.S. industry. The CBTPA also authorizes the denial of trade benefits to exporters found to be involved in transshipment and the reduction of benefits for countries that fail to prevent transshipment.
Additional Tariff Preferences: The CBTPA provides additional tariff benefits to other products not currently eligible for tariff preferences under the 1983 CBERA, including canned tuna, certain footwear, petroleum and petroleum products, certain watches and parts, and certain leather goods. Tariffs on these products are reduced to the rate that applies to imports from Mexico.
Customs Procedures: The CBTPA requires beneficiary countries and importers claiming CBTPA tariff benefits to comply with customs procedures, including requirements for certificates of origin, equivalent to those required under the NAFTA.

As part of the Trade Act of 2002, Congress amended the CBTPA to provide that the benefits with respect to textile and apparel goods made from U.S. fabrics would only be available if the fabric were dyed and finished in the United States. This modification unfortunately narrows the benefits provided by the original legislation. Congress also amended the Act to clarify that knit-to-shape products are eligible for duty-free, quota-free treatment contrary to an earlier Customs Service interim ruling.

Following enactment of the CBTPA, all 24 countries were found to be eligible for CBTPA’s benefits (following, in some cases, additional commitments regarding labor, anticorruption and other issues): Antigua and Barbuda, Aruba, the Bahamas, Barbados, Belize, Costa Rica, Dominica, Dominican Republic, El Salvador, Grenada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Montserrat, Netherlands Antilles, Nicaragua, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Trinidad and Tobago, and British Virgin Islands.

Designated Caribbean countries became eligible for most duty-free treatment effective December 21, 2000. Designated countries will only be eligible for the duty-free apparel benefits after the Administration determines that they have implemented provisions to comply with the certificate of origin requirements. At the end of 2002, the following 14 countries were designated as eligible for the apparel benefits: Barbados, Belize, Costa Rica, Dominican Republic, El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica, Nicaragua, Panama, Santa Lucia, and Trinidad and Tobago.

On October 5, 2000, the U.S. Customs Service published interim rules to implement the benefits of the CBTPA and the Africa trade bill discussed below. These rules have yet to be finalized, which has limited the full benefits available under the CBTPA. Several problems also exist in the regulations, including the exclusion of knit-to-shape apparel, which Congress corrected last year. In addition, CBTPA HTS designations created by the Customs Service for CBTPA products and the Customs Service’s interpretations of the legislation are severely limiting the ability to use U.S. components. Another such problem is the requirement that every importer provide sourcing and supply chain details on the CBTPA. This information is extremely confidential and if disclosed to a competitor could be very harmful.

In 2004, the United States signed the U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA). As discussed in section 2, ECAT strongly urges the implementation of this agreement as soon as possible, which modernizes, simplifies, and makes permanent critically important new rules of origin for textiles and apparel products that will sustain and expand the competitiveness of the U.S., Central American and Dominican Republic textile and apparel industries now that global quotas were lifted on January 1, 2005.

ECAT POSITION: ECAT supports U.S. efforts to promote greater economic reform and growth in the Caribbean Basin. In particular, ECAT supports full implementation of the Caribbean Basin Trade Partnership Act in a manner that will promote greater U.S. trade with the Caribbean Basin. ECAT remains concerned that the U.S. Customs Service is interpreting the CBTPA in a manner that is not consistent with the legislative intent of the Act. More critically, ECAT urges Congressional implementation as soon as possible of the U.S.-Central America-Dominican Republic FTA (CAFTA) which includes new, simpler and permanent rules that are critical to promote the competitiveness of U.S., Central American and Dominican Republic partnerships.

Andean Pact Countries

U.S. exports to the Andean countries totaled $13 billion in 2004. Imports from these countries equaled $40 billion. Much of the U.S.-Andean relationship has been defined by the unilateral preference programs, starting with the Andean Trade Preference Act and its successor, the Andean Trade Promotion and Drug Eradication Act.

In 2002, Congress passed and the President signed into law a renewal and expansion of the 10-year-old Andean Trade Preference Act as part of the Trade Act of 2002. Renamed the Andean Trade Promotion and Drug Eradication Act (ATPDEA), the new legislation aims to expand economic and trade incentives for four Andean countries – Bolivia, Ecuador, Colombia, and Peru – and to encourage the production of legitimate products by these countries in order to help them move out of the drug trade.

This legislation authorizes the President to grant duty-free treatment to ATPDEA beneficiary countries through December 31, 2006 for non-import-sensitive items that were excluded from the original legislation, including specified footwear, petroleum products, watches and watch parts, handbags, luggage, flat goods, work gloves, leather wearing apparel, and certain tuna in foil or certain flexible containers (if harvested by U.S. vessels or ATPDEA beneficiary country vessels). The ATPDEA excludes from duty-free treatment certain textiles and apparel articles ineligible on January 1, 1994: rum; tafia; sugars, syrups, and sugar-containing products subject to over-duty rates; and tuna prepared or preserved in any manner in airtight containers (except as otherwise provided).

The ATPDEA provides duty-free, quota-free treatment for apparel articles sewn or assembled in one or more ATPDEA countries or the United States from any combination of the following:

Fabrics wholly formed or knit-to-shape in the United States from yarns formed in the United States or ATPDEA beneficiary countries (with all dyeing and finishing in the United States).
Fabrics formed or knit-to-shape from yarns from ATPDEA beneficiary countries if such fabrics are in chief value from llama, alpaca, or vicuna.
Fabrics or yarn not produced in the United States or in the region, to the extent that apparel articles of such fabrics or yarn would be eligible for preferential treatment, without regard to the source of the fabrics or yarn, under Annex 401 of the NAFTA (short supply provisions).
Apparel articles sewn or otherwise assembled in one or more beneficiary countries from fabrics or fabric components formed or components knit-to-shape, in one or more beneficiary countries, from yarns formed in the United States or in one or more ATPDEA beneficiary countries, whether or not the apparel articles are also made from any of the fabrics, fabric components formed, or components knit-to-shape in the United States. Imports of apparel made from regional fabric and regional yarn would be capped at 3 percent of U.S. imports growing to 6 percent of U.S. imports in 2006, measured in square meter equivalents.
Certain textile luggage.

The ATPDEA directs the Commissioner of Customs to study and report to Congress on the extent to which each ATPDEA beneficiary country has cooperated fully with the United States with regard to circumvention of existing quotas on imports of textile and apparel goods.

In designating beneficiary countries, the President is directed to consider certain criteria, including: (1) whether the country has demonstrated a commitment to undertake its obligations under the WTO and to participate in negotiations toward a Free Trade Area of the Americas (FTAA); (2) the extent to which the country provides protection of intellectual property rights consistent with or greater than that required under the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights; (3) the extent to which the country provides internationally recognized worker rights; (4) whether the country has implemented its commitment to eliminate the worst forms of child labor; (5) the extent to which the country cooperates with the United States in counter-narcotics efforts; (6) the extent to which the country has taken steps to become a party to and implement the Inter-American Convention Against Corruption; (7) the extent to which the country applies transparent, nondiscriminatory, and competitive procedures in government procurement and contributes to international efforts to enhance transparency in government procurement; and (8) the extent to which the country has taken steps to support U.S. efforts to combat terrorism.

On October 31, 2002, the President designated the four Andean countries as generally eligible for the benefits under the ATPDEA, as well as eligible for the textile and apparel benefits. The President authorized duty-free treatment for over 600 products and did not designate any products as import-sensitive.

Since the original Andean Trade Preference Act was enacted, U.S. trade with the four Andean countries has increased considerably, from $8.8 billion in 1991 to $13 billion 2004.

As discussed in section 4, the Administration has launched FTA negotiations with Colombia, Ecuador and Peru in May 2004.

Concerns have grown, that Ecuador in particular is failing to live up to its investment commitments, which would put it out of compliance with the Act’s eligibility requirements.

ECAT POSITION: ECAT supports full implementation of the Andean Trade Promotion and Drug Eradication Act in a manner that fosters greater trade and investment between the United States and the Andean countries and supports greater economic growth and opportunities for the Andean countries. As discussed in section 4, ECAT also supports the negotiation of a comprehensive and commercially meaningful Andean FTA that ensures high standards of protection for U.S. investors. ECAT is increasingly concerned, however, that the Ecuadorian government is failing to live up to its existing investment obligations in a manner that jeopardizes its trading relationship with the United States.

MERCOSUR

Established in 1991, the Southern Cone Common Market (Mercado Comun de Sur, MERCOSUR), made up of Argentina, Brazil, Paraguay and Uruguay, is the largest economic grouping within Latin America, comprising over 210 million people. Following the creation of a free trade area in goods in 1995 (when most duties were phased out for intra-regional trade), the MERCOSUR countries continued work on creating a common market by establishing common external tariffs, ranging from zero to 20 percent on most goods. Some goods remain outside the common external tariff structure and will gradually be covered, including capital goods and certain information technology goods. The countries have a goal of consolidating the customs union by 2006. The common external tariff declined considerably (from 41 percent in 1986 to below 13 percent in 1999).

In 1997, MERCOSUR countries signed an agreement on trade in services to provide each other most-favored nation treatment with respect to service providers. MERCOSUR has also attempted to expand, admitting Chile as an associate member in 1996 and Bolivia in 1997. MERCOSUR and the Andean Pact countries began free trade area negotiations in 1998. In December 2000, at the MERCOSUR Presidential Summit, the four MERCOSUR members agreed to a six-year phase in of automobile trade into the common external tariff, with Argentina and Brazil agreeing to an immediate 35-percent common external tariff on passenger vehicles.

Trade within the MERCOSUR union has grown five-fold since its creation in 1991. In the past few years, however, trade disputes over textiles, pork, poultry, steel, and footwear products have strained relations among MERCOSUR members. In 1998-99, for example, the MERCOSUR countries relied upon a three-member Tribunal to resolve disputes over Brazil’s imposition of licensing restrictions on various imports. This was the first time that MERCOSUR countries resorted to this dispute settlement mechanism since its creation in 1994.

In 2001, MERCOSUR faced significant pressure as a result of Argentina’s deepening financial crisis. Argentina has considered whether to withdraw from MERCOSUR’s common external tariff, but in an October 2001 agreement with Brazil, agreed not to do so in exchange for Brazil’s willingness to discuss Argentina’s proposed safeguard measure on Brazilian imports. Discussions are ongoing.

U.S. trade with the MERCOSUR countries has more than doubled since 1990, from $16 billion to $43.6 billion in 2004. As part of the so-called Four Plus One framework (initiated in 1991), the United States and MERCOSUR resumed meeting more regularly in September 2001. The Four Plus One met in April 2002 and continued its agenda of discussing multilateral trade and other issues, with working groups on agricultural trade, industrial trade, investment development and electronic commerce.

The United States and Brazil and, to a lesser extent, the other MERCOSUR countries, continue to have differing views on how to proceed with the Free Trade Area of the Americas as discussed in more detail in section 4.

Several ongoing disputes remain in the U.S.-Brazil trading relationship, including the existence of major non-tariff barriers, including licenses, registration and similar barriers; non-transparent government procurement practices; unscientific barriers to agricultural trade; investment and other barriers. There are also significant concerns over Brazil’s protection of intellectual property rights, and the Administration is currently reviewing a request to terminate Brazil’s preferences under the Generalized System of Preference program as a result of inadequate protection.

In March 2005, the WTO Appellate Body largely upheld Brazil’s challenge that U.S. farm programs unfairly subsidize cotton contrary to U.S. commitments. The United States is still reviewing the decision, which not only has significant implications for other farm programs, but also several U.S. unilateral preference programs and other agreements that require a yarn-forward rule of origin, which necessitates the use of U.S. cotton.

U.S. companies have been adversely affected by Argentina’s asymmetrical pesification policies and are pursuing a number of investment cases pursuant to the U.S-Argentina Bilateral Investment Treaty.

The EU is in FTA discussions with MERCOSUR. MERCOSUR and Andean countries have also agreed on a framework for FTA negotiations.

Asia-Pacific Region

Asia Pacific Economic Cooperation Forum

The Asia Pacific Economic Cooperation (APEC) forum has 21 members and accounts for approximately 46 percent of global trade. In addition to the United States, APEC members are Australia, Brunei Darussalam, Canada, Chile, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Taiwan, Thailand, and Vietnam.

Total U.S. trade with APEC members increased to nearly $1.5 trillion in 2004, representing 64 percent of total U.S. trade last year.

The 1994 APEC Bogor Declaration established the goal of achieving free and open trade in the Asia-Pacific region by the year 2010 for developed countries and 2020 for developing countries. The 1995 Osaka Action Agenda established a plan for achieving liberalization consistent with the Bogor Declaration goals in 14 areas, including tariffs, non-tariff measures, services, investment, customs, intellectual property, and government procurement. APEC members have developed individual and collective action plans to implement liberalization in these areas. In 1997, APEC members established the Accelerated Tariff Liberalization (ATL) initiative to seek to eliminate tariffs in eight sectors: chemicals, energy products, environmental products, fish, forest products, gems and jewelry, medical and scientific equipment, and toys. APEC sought its expansion to the WTO in 1998 with the goal of achieving the critical mass of participation necessary to conclude the agreements. The eight sectors represent a balanced package and reflect the interests of both developed and developing countries. These sectors account for approximately one-third of total U.S. industrial exports in 2001. While not formally part of the Doha Declaration, efforts will continue to push for a WTO agreement to eliminate tariffs in these sectors.

At the 13th APEC Summit in Shanghai, China, in 2001, APEC Ministers “reaffirmed their strong commitment to launch the WTO new round of multilateral trade negotiations in 2001.” The Ministers reiterated support for the WTO accession of China and Taiwan and the “advancement” of accession by Russia and Vietnam. APEC Ministers also agreed to extend the APEC-wide moratorium on the imposition of customs duties on electronic transmissions until the next WTO Ministerial Conference.

At the 14th APEC Summit in Los Cabos, Mexico, in 2002, APEC leaders agreed to take a leading role in the multilateral trading system to pursue concrete negotiations across all areas of the Doha Development Agenda (DDA). In particular, APEC Trade Ministers agreed to adopt the specific transparency standards in the Shanghai Accord to bring about openness and predictability in governments, and to reduce trade obstacles crucial for the digital economy by creating cooperative settings among groups of countries called “Pathfinder Initiatives,” in which 16 economies have agreed to participate. They also initiated a Trade Facilitation Action Plan that could decrease international business transactional costs by five percent over the course of five years within the APEC region. Ministers also reaffirmed the Doha Development Agenda deadlines discussed in section 2.

At the 15th APEC Summit in Bangkok, Thailand in 2003, APEC leaders committed to move the Doha Development Agenda forward and agreed to work to abolish all forms of agricultural export subsidies and unjustifiable export prohibitions and to continue to work on rules issues. Work on the Pathfinder Initiatives and Trade Facilitation Action plan continued, and the APEC Ministers endorsed the Future Work Agenda on International Implementation of the APEC Privacy Framework, which includes instructing APEC members to continue efforts to develop a regional approach to privacy that will support global business models, such as privacy codes.

At the 16th APEC Summit in Santiago, Chile, in 2004, APEC leaders:

identified WTO negotiations as their “first priority;”
launched the Santiago Initiative for Expanded Trade in APEC to take concrete steps towards trade and investment liberalization and trade facilitation; and
endorsed the Santiago Commitment to Fight Corruption and Ensure Transparency.

Over the past year, APEC completed work on the APEC Privacy Framework, which seeks to promote a consistent approach to information privacy protection across APEC Member economies, while also avoiding the creation of unnecessary barriers to information flows. Creation of the APEC Framework also contributes to broader APEC e-commerce objectives to increase cross-border trade and growth in e-commerce in the region. The APEC Framework seeks to achieve four main goals: (1) develop appropriate privacy protections for personal information; (2) prevent the creation of unnecessary barriers to information flows; (3) enable multinational businesses to implement uniform approaches to the collection, use and processing of data; and (4) facilitate both domestic and international efforts to promote and enforce information privacy protections. APEC economies are now working to implement the framework and have agreed to:

Develop a multilateral mechanism for promptly, systematically and efficiently sharing information among APEC Member economies;
Develop cooperative arrangements between privacy investigation and enforcement agencies of Member economies; and
Support the development and recognition of organizations’ cross-border privacy codes across the APEC region.

The APEC privacy initiative is particularly important given concerns about the proliferation of different privacy standards around the world, as discussed with respect to the European Union in section 6.

ECAT POSITION: ECAT supports the APEC forum as a vital part of expanding trade and investment in the Asia-Pacific region. ECAT supports ongoing efforts to promote trade and investment liberalization and trade facilitation, as well as APEC’s transparency programs. ECAT strongly supports concrete work within APEC to implement many of APEC’s principles, including with regards investment, infrastructure and energy issues. ECAT also supports work to implement the APEC Privacy Framework to achieve a streamlined approach to the recognition of cross-border privacy codes.

Association of Southeast Asian Nations

Formed in 1967, by Indonesia, Malaysia, the Philippines, Singapore and Thailand, the Association of Southeast Asian Nations (ASEAN) works to promote political and economic cooperation and regional stability. Membership in ASEAN now also includes, Brunei, Vietnam, Laos, Myanmar, and Cambodia.

ASEAN economies are continuing their recovery from the Asian financial crisis and each of the countries reported positive GDP growth in 2003. U.S. goods exports to the region in 2004 equaled $48 billion.

At the fourth ASEAN summit in 1993, the members agreed to establish an ASEAN free trade area (AFTA) by 2008. At the 1999 ASEAN summit, members agreed to speed up AFTA efforts and conclude the agreement by 2002, although tariffs will not be eliminated until 2010 for the group of six (Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand) and 2018 for the group of four (Cambodia, Laos, Myanmar and Vietnam). The AFTA will require that tariff rates on certain goods be reduced to between zero and five percent and that quantitative and other non-tariff barriers be eliminated. The ASEAN countries agreed to some tariff cuts by 2002, which were accelerated to 2000 as a result of the financial crisis.

At their annual meeting in Hanoi in September 2001, ASEAN countries agreed to eliminate tariffs on information and communication technology goods by 2005. The group of four will have until 2010 to eliminate such tariffs. ASEAN countries also moved up the deadlines for full implementation of the ASEAN Investment Area. Exceptions for investment in the manufacturing, agriculture, forestry, fisheries and mining sectors must now be eliminated by 2003 for the group of six and 2015 for the group of four.

In 2001, ASEAN also agreed to a Closer Economic Partnership with Australia and New Zealand to establish a broad framework to improve trade and economic ties.

In October 2002, President Bush announced a new trade initiative with ASEAN countries called the Enterprise for ASEAN Initiative (EAI). Under this initiative, individual countries will be allowed to pursue bilateral FTAs with the United States as long as potential FTA partners are members of the World Trade Organization and have concluded a Trade and Investment Framework Agreement (TIFA), thereby laying the foundation for a future FTA. The United States has negotiated TIFAs with Indonesia, the Philippines and Thailand and launched FTA negotiations with Thailand (as discussed in section 4).

ASEAN countries have also begun to pursue an FTA with China, which could open up a $2 trillion market with 1.7 billion consumers.

China

ECAT has long viewed United States’ engagement with China and China’s full participation in the global trading system, including China’s commitment to and implementation of the rules of that system, as critical to promoting U.S. commercial interests, as well as promoting our country’s broader interests in development and the rule of law. China’s accession to the World Trade Organization (WTO) in 2001 represented the culmination of years of effort to encourage China’s commitment to the rules of the global trading system. It also represented the first step in the long, complex, but extraordinarily important, process of ensuring that China implements those rules fully and effectively.

The United States and China share a robust trade and investment relationship and China has now surpassed Japan as the United States’ third largest trading partner. Since China’s entry into the World Trade Organization (WTO), U.S. exports to China have increased by $15.5 billion or 84 percent, growing from $19.2 billion in 2001 to 34.7 billion in 2004. All other U.S. exports to the world increased at a slower 10 percent growth rate. Over the last year alone, U.S. exports to China have increased by 22 percent. Imports from China also expanded almost 49 percent, from $102 billion in 2001 to $196.7 billion in 2004, in many cases displacing exports from other parts of the world. China is now the United States’ fifth largest export market worldwide.

The United States has a growing agricultural trade surplus with China, growing from a $600 million surplus in 2001 to a $3.4 billion surplus in 2004.

The most recent services data available indicate that the United States had a services trade surplus of $3.3 billion in 2002.

Following China’s entry into the WTO on December 11, 2001, much of the focus of the U.S. commercial relationship with China has been on its implementation of its WTO commitments. Recently, concern has intensified over China’s delay in initiating negotiations to join the WTO Government Procurement Agreement (GPA) and its proposed new government procurement rules, being initiated first in the software sector, which represent a major barrier to U.S. trade

Summary of China’s WTO Commitments

Full and effective implementation of China’s accession to the WTO provides tremendous new opportunities for American goods, services, and agriculture in the world’s largest and fastest growing market. The terms for China’s accession were: (1) comprehensive, removing major trade barriers in all major sectors of the economy, (2) fully enforceable, and (3) designed to produce rapid results. Highlights of some of the major achievements are summarized below.

Agriculture: The bilateral agreement provides expanded market access for U.S. wheat, corn, soybeans, cotton, barley, and rice under a new system of tariff-rate quotas, reduces Chinese tariffs on priority products such as beef, citrus, and dairy from over 30 percent to 12 percent, and eliminates Chinese export subsidies. In a separate side agreement, the Chinese agreed to eliminate non-science-based food safety measures that restrict entry of U.S. beef, pork, poultry, and wheat.
Trading and Distribution Rights: China agreed to provide full trading rights for U.S. and other foreign companies to import, export, and distribute products directly to Chinese customers, including after-sales service and repair, without going through a local trading company or distributor by December 2004.
Tariffs: China agreed to cut tariffs to 9.4 percent by 2005, including major tariff reductions on the farm products noted above. In the auto sector, China agreed to reduce its tariffs on autos to 25 percent by 2006 and to reduce tariffs on auto parts to 10 percent. As it committed to as part of its accession, China has joined the WTO’s Information Technology Agreement (ITA) that requires China to reduce its tariffs on computers, semiconductors, telecommunications, and other high-technology products to zero.
Services: China agreed to provide comprehensive market access for U.S. telecommunications and financial services under the WTO Telecommunications and Financial Services Agreements. China has made specific market-access commitments in all services industries of primary interest to the United States, including the Internet, audio-visual, banking, insurance, securities, and auto finance. U.S. publishing and information services also will benefit from China’s commitment to remove restrictions on distribution and to reduce restrictions on investment.
Safeguards: China also agreed to a 12-year product-specific safeguard provision that ensures that the United States and other countries can take action against increased imports from China that cause market disruption in their economies. The agreement also guarantees the United States the right for the next 15 years to continue to use special non-market economy methodologies in antidumping cases brought against China.

U.S.-China Relations Act and Congressional-Executive Commission on China

In 2000, Congress passed and the President signed into law the U.S.-China Relations Act. In addition to authorizing the President to determine that Title IV of the Trade Act of 1974 should no longer apply to China, and to proclaim the extension of PNTR treatment to China (after certifying to Congress that the terms and conditions for China’s accession to the WTO are at least equivalent to those agreed by the United States and China on November 15, 1999), it also included the following key provisions:

Import Surge Safeguard. Title II implements the product-specific safeguard included in the November 1999 U.S.-China bilateral WTO agreement and China’s protocol of accession. The safeguard permits a WTO member to impose temporary import restrictions in cases where products from China are being imported into its territory in such increased quantities or under such conditions as to cause or threaten to cause market disruption to competing domestic producers. This special safeguard applies to China for 12 years following China’s accession to the WTO.
Congressional-Executive Commission on China: Title III establishes a Congressional-Executive Commission on China, modeled loosely after the Commission on Security and Cooperation in Europe (Helsinki Commission). The China Commission consists of nine members of each House plus five Presidential appointees. It is charged with monitoring human rights and labor market issues, and monitoring and encouraging the development of the rule of law and democracy-building in China. The House Committee on International Relations is required to hold hearings on the Commission’s annual reports, including any recommendations for legislation or executive action that the Commission makes.
Monitoring and Enforcement: Title IV requires the United States Trade Representative (USTR) to issue an annual report on China’s compliance with its WTO obligations. It also instructs the President to press for a WTO mechanism to review China’s compliance on an annual basis. Title IV also authorizes appropriations for the Departments of Agriculture, Commerce and State, as well as USTR, to monitor and enforce China’s and other foreign governments’ compliance with trade agreements.
Task force on prison labor: Title V instructs the President to establish an interagency task force, chaired by the Secretary of the Treasury, to monitor, investigate, and enforce the prohibition on imports made by prison labor as provided for in section 307 of the Tariff Act of 1930 (which bars imports of goods made with forced or indentured labor).
Technical assistance for China: Title V authorizes appropriations for the Departments of Commerce, State, and Labor to establish programs to provide training and technical assistance in China to develop the rule of law with respect to commercial and labor-market standards. These programs would assist China in bringing its domestic laws into compliance with WTO and International Labor Organization standards.
Broadcasting: Title VII authorizes additional appropriations for Radio Free Asia and Voice of America to expand and enhance U.S. international broadcasting operations throughout China and nearby countries.

Ensuring Implementation of China’s WTO Commitments

China’s accession to the World Trade Organization (WTO) in December 2001 represented the first step in the long, complex, but extraordinarily important process for China to implement WTO rules. ECAT members recognize that China will not automatically be transformed overnight or in a year, yet we continue to work with the Administration, Congress and on the ground in China in a constructive manner to promote the change that the terms of China’s WTO accession promised. ECAT and its members will identify at an early stage potential and actual implementation concerns and work with the U.S. Government and Chinese officials and other governments to help avoid or rectify any problems. Successful implementation of China’s commitments requires capacity-building and technical assistance from the United States government and business community and from the WTO and its other members as well. Recourse to WTO dispute settlement should receive consideration in those situations where accession commitments are clearly or intentionally being flouted by the Chinese government or the government erects new discriminatory barriers.

In December 2001, the Administration created a Trade Policy Staff Subcommittee on China to guide the Administration’s multi-pronged monitoring approach on China, to include:

Using State Department economic officers, Foreign Commercial Service and Multilateral Agreements Compliance officers from the Commerce Department, and Foreign Agricultural Service officers to gather information and help companies address day-to-day concerns.
Using an inter-agency team of experts to monitor compliance and seek information from U.S. business, trade associations and other sources.
Educating and assisting Chinese officials to improve compliance with complicated WTO commitments in a constructive manner.
Actively participating in the WTO’s annual Transitional Review Mechanism on China.
Taking action to resolve issues quickly, using bilateral means, the Transitional Review Mechanism, and WTO consultations under the Dispute Settlement Understanding where appropriate.

In 2000, the Senate Finance Committee and House Ways and Means Committee requested the General Accounting Office (GAO) to monitor China’s compliance with its WTO commitments with a report one year after China’s accession and yearly thereafter. The GAO has already issued a number of reports related to China’s WTO compliance:

Opportunities to Improve U.S. Government Efforts to Ensure China’s Compliance with World Trade Organization Commitments (October 2004), making several recommendations to improve the Administration’s capability and review of China’s WTO commitments.
U.S. Companies’ Views on China’s Implementation of Its Commitments (March 2004), finding that China was making progress in implementing its WTO commitments, but that much work remains.
First Year U.S. Efforts to Monitor China’s Compliance (March 31, 2003), examining the complexity in monitoring fully China’s implementation of its commitments.
Analysis of China’s Commitments to Other Members (October 3, 2002), examining the scope and type of China’s commitments and the interrelationships of those commitments.
Selected U.S. Company Views about China’s Membership (September 23, 2002), examining the private sector expectations, in which approximately 90 percent of companies surveyed expected China’s accession to have a positive impact on their businesses.
Observations on China’s Rule of Law Reforms (June 6, 2002), finding that the U.S. private sector believes China’s rule of law reforms are critical.

In accordance with the U.S.-China Relations Act of 2000, USTR has issued three annual reports on China’s compliance with its WTO commitments in December 2004, December 2003, and December 2002. The December 2004 report found that:

. . . while China’s efforts to fulfill its WTO commitments are impressive, they are far from complete and have not always been satisfactory, and China at times had demonstrated difficulty in adhering to WTO rules.

ECAT companies similarly have found that China has made some important progress since its accession, but still is lagging in its implementation of key commitments. In particular, China made progress in implementing such commitments as:

tariff reductions;
reductions in non-tariff barriers, where China eliminated hundreds of WTO-inconsistent requirements;
trading rights reforms, where China implemented its commitments six month early to allow companies to import and export directly;
TRQ implementation in 2004 for agricultural products which were finally brought closer in line with China’s commitments; and
expanded market access in a number of services areas.

But much more work needs to be done by the Chinese government, to open their markets to U.S. goods and services and to implement China’s WTO commitments. In particular, ECAT companies are concerned about the following key issues in the U.S.-China commercial relationship:

Distribution Rights. China has failed to implement fully key distribution rights reforms in accordance with its WTO commitment to allow domestic and foreign companies in all sectors to distribute products by December 11, 2004. China’s commitments on distribution rights were a critical part of the WTO accession, agreement as the lack of full distribution rights represents a substantial barrier.
Intellectual Property Rights Enforcement. While China’s laws on the protection of intellectual property have been improving over time, there remain substantial problems in China’s enforcement of such protections. As a result, piracy and product counterfeiting continue to flourish in numerous sectors. Despite progress last year, as discussed below, the level of piracy and counterfeiting remains extremely high and requires continued intervention and improved market access for suppliers of legitimate products, including lower tariffs, the elimination of restrictions on distribution and more transparent and timely review of products under China’s censorship regime.
Government Procurement. China’s March 2005 proposed regulations governing central and local government procurement of software would erect enormous barriers to the participation of U.S. and other foreign countries in Chinese software procurements at all levels, in addition to undermining China’s ability to benefits from the highest-quality, most cost-competitive software in the world. There is also increasing concern that the precedent China is trying to set in the software sector will be repeated in other major areas of Chinese procurement if China continues down this path. China’s failure to even initiate its accession to the WTO Government Procurement Agreement, let alone engage in constructive and time-limited negotiations, represents a major problem for the U.S.-China commercial relationship.
Industrial Policy. China’s continued governmental intervention in the marketplace to the advantage of domestic companies is exemplified not only by the new proposed software regulations discussed above, but also through measures in other sectors of the economy. For example, while China’s May 2004 automobile industrial policy corrected some of the major areas of discrimination found in the earlier draft policy, the final policy continues to create preferences for domestic parts and technology.
Other Non-Tariff Barriers. China continues to maintain and create burdensome and opaque customs, customs valuation, entry, licensing, and regulatory requirements that place major barriers to agricultural, goods and services trade. These include barriers that not only impede new market entrants, but, particularly in the key services sector, undermine existing operations of companies that have already entered the Chinese market. As well, while making some progress, China continues to impose non-scientific and non-commercial barriers in agricultural trade in particular, with unnecessary and unfounded phytosanitary barriers to agricultural trade (Decree 73 issued on June 16, 2004, effective July 1, 2004, presents a clear example).
Transparency. While remarkable progress has been made from the opaque situation which most companies experienced 10 years ago, there remains uneven and inadequate transparency in the promulgation of governmental measures, standards and other governmental actions. Lack of full transparency undermines significantly the ability of U.S. companies seeking new or continued market opportunities in China.
Discriminatory taxation. While China made progress in lifting its discriminatory tax rebate for certain semiconductors (discussed below), it continues to maintain and erect discriminatory taxation measures that undermine the ability of U.S. and other foreign companies to compete on a level playing field with their Chinese competitors.

Each of these barriers represents an enormous problem for U.S. companies and ECAT urges continued work on their resolution as quickly and effectively as possible.

In February 2003, USTR launched the U.S.-China Trade Dialogue, a new bilateral forum focused on bringing U.S. and Chinese officials together to discuss bilateral and multilateral trade issues and to help resolve potential disputes.

In March 2004, the Administration took an historic and heavily considered step – it filed the first WTO case ever filed against China. The U.S. challenge to China’s discriminatory tax treatment of U.S. semiconductors is notable: it involved well-substantiated and clear violations of China’s WTO commitments. After consultations in April 2004, the United States and China reached a mutually agreed settlement that was notified to the WTO on July 14, 2004. Under the agreement, China agreed as of July 2004 not to issue any refunds to any companies for value-added taxes paid on integrated circuits/semiconductors.

This case and those that are likely to follow are critically important to address not only specific instances of China’s non-compliance, but also to send the message that the United States will not turn a blind eye to China’s failure to comply with its obligations. The challenge going forward will be to identify cases that can set most effectively the direction and impetus for China to implement its commitments. Consultations with U.S. industries and strong efforts at consultations should precede the filing of any such case.

At the April 2004 meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT), China also agreed to several new commitments and initiatives, including:

Intellectual Property: Agreeing to an action plan to reduce significantly IPR infringement levels, increase penalties for IPR violations through greater and more effective criminalization of violations by the end of 2004, crack down on violators and improve protection of electronic data, among other actions; progress in this area has been limited as piracy remains rampant.
WAPI: Delaying indefinitely the adoption of a wireless access protocol for wireless computer networks (WAPI) and agreeing to take into account comments by foreign and Chinese firms and to participate in international standards bodies.
Distribution and Trading Rights: Agreeing to implement its WTO obligations on trading rights by July l1, 2004 (six months ahead of schedule) and distribution rights by the end of 2004, and to open its market to American shipping through the Bilateral Maritime Agreement signed during the JCCT.
Agriculture: Agreeing to implement new transparency procedures and issue product approvals, including for biotech soybeans, canola and corn, and making it easier to export wheat, cotton, corn and other products.
3G Standards: Supporting a technology neutral approach with respect to the adoption of the third generation of wireless standards for mobile telephones (3G), allowing telecommunication service providers in China to make their own choice of standards and excluding Chinese regulators from negotiating royalty payment terms.

The United States and China also agreed to hold JCCT meetings in the future on insurance, structural issues, agriculture and intellectual property.

This U.S. effort to promote China’s full compliance with its WTO obligations will also require the active engagement of the WTO itself and other WTO members, but most agree that U.S. leadership will be the pivotal factor.

Section 301 Petition on Chinese Labor Rights

In 2004, the AFL-CIO filed a section 301 petition alleging that China’s violations of internationally recognized labor rights constitutes an unreasonable act or policy that burdens U.S. commerce. The AFL-CIO has proposed several remedies, including up to 77 percent tariffs on imports from China and a cessation in the negotiation of new WTO agreements until labor rights become enforceable WTO commitments.

As indicated in the April 7, 2004 letter from ECAT and other members of the U.S. business community and an April 15, 2004 ECAT letter on broader U.S.-China relations, ECAT argued that the section 301 petition on Chinese labor practices and the remedies it proposed represented neither an appropriate nor effective approach to improving labor conditions in China. For several decades, the United States has adopted a policy of economic engagement with China that Congress revitalized in 2000 when it granted China permanent normal trade relations upon its entry into the World Trade Organization. That same legislation included a number of separate activities to promote our broader U.S. interests in helping China adopt improved social, human and labor rights. The section 301 petition and its proposed remedies, including WTO-violative tariffs, as well as a suspension in negotiating new WTO agreements, are more likely to hamper, not advance, U.S. efforts at securing China’s compliance with the rule of law and would have devastating consequences for U.S. farmers, companies and their workers.

On April 28, 2004, the Administration rejected the section 301 labor rights petition, finding that sustaining the policy of economic engagement was the most effective course forward and that the section 301 proposal would likely worsen, not help improve, labor practices in China.

Efforts to Force China to Modify its Currency Policies

Throughout 2004 and into 2005, there have been Congressional and other efforts to force China to delink its currency, the renminbi, from the dollar to which it is pegged. Section 301 petitions filed with respect to China’s currency policies in 2004 by the China Currency Coalition and Members of Congress argued that China’s currency policy maintains its currency, the renminbi, at an artificially low level and acts as a prohibited export subsidy. The Administration rejected both petitions.

The Senate voted on April 6, 2005, not to table an amendment introduced by Senators Schumer (D-NY) and Graham (R-SC) to the Foreign Operations Authorization bill that seeks to force China to adopt a market-based currency within six months (or make a good faith effort to do so) or face a 27.5 percent tariff on Chinese exports to the United States. (This amendment was based on S. 295, introduced by Senators Schumer and Graham in February 2005). An agreement has been reached for the Senate to vote on this measure as a stand-alone bill by July 27th.

ECAT strongly opposes the approach taken by both S. 295 and last year’s Section 301 currency petitions as discussed in section 5. Forcing this type of change in China’s currency policy may lead to significant destabilization of the Chinese economy and financial system, in a manner that would harm, not help, U.S. commercial interests. The imposition of 27.5 percent tariffs would violate the United States’ WTO commitments and likely result in billions of dollars of retaliation against U.S. exports. To the extent that action is warranted, we believe that the Administration has a multitude of more effective diplomatic and policy tools to promote positive change in China in a manner that will benefit U.S. commercial and economic interests.

ECAT POSITION: ECAT supports the full implementation of China’s WTO commitments and other constructive reforms to promote the rule of law and level the playing field for U.S. companies. Of particular importance to ECAT companies are the following issues in the U.S.-China commercial relationship: (1) distribution rights; (2) intellectual property rights; (3) government procurement; (4) industrial policy; (5) burdensome and opaque customs, entry, licensing, regulatory and other requirements; (6) uneven and inadequate transparency; and (7) discriminatory taxation.

ECAT welcomes the constructive and multiple initiatives of the U.S. Trade Representative and the Department of Commerce and other parts of the Administration to promote China’s compliance with its WTO and other commercial commitments, as well as broader reforms in China, including initiatives developed at the April 2004 meeting of the U.S.-China Joint Commission on Commerce and Trade. ECAT also strongly supports full funding for the commercial, labor, legal system and civil society programs authorized by the U.S.-China Relations Act. ECAT welcomes the Administration’s decision to reject the section 301 petitions on labor and currency practices as an inappropriate and ineffective way to address these issues. ECAT also very strongly opposes S. 295 as both violative of U.S. WTO commitments and an ineffective and potentially destabilizing proposal.

Japan

U.S.-Japan trade totaled $184 billion in 2004, with U.S. exports increasing moderately to $54 billion in 2004 from $52 billion in 2001. Japan remains the United States’ third largest export market.

In June 2001, President Bush and Japanese Prime Minister Koizumi inaugurated the new U.S.-Japanese Economic Partnership for Growth. This Partnership will include an ongoing trade forum to examine trade issues related to the manufacturing, services, and agricultural sectors and to act as an “early warning system.”

Through macroeconomic and fiscal policy reforms and other measures, Japan has taken significant steps to reform and deregulate its economy. The United States-Japan Framework for a New Economic Partnership (Framework Agreement) and the U.S.-Japan Enhanced Initiative on Deregulation and Competition Policy (Deregulation Initiative) have been important contributors to this reform. As part of the Economic Partnership for Growth, President Bush and Japanese Prime Minister Koizumi agreed to a new Regulatory Reform and Competition Policy Initiative, which will replace the earlier Deregulation Initiative. This initiative includes government officials and representatives from the private sector. During its first year, four working groups were established on telecommunications, information technology, energy, and medical devices/pharmaceuticals. A cross-sectoral group also considered economy-wide issues such as regulatory reform, competition policy and corporate restructuring. The United States makes yearly recommendations as a basis for bilateral discussions and then a report is prepared detailing areas where Japan has made progress. The United States’ fourth request was submitted in October 2004, in which the United States identified numerous sectors where issues needed to be addressed, including the elimination of market barriers in the telecommunications, e-commerce and information technology sectors; the strengthening of intellectual property rights; and evaluation and improved functioning of the new Pharmaceuticals and Medical Devices Agency. The United States and Japan also are continuing discussions under the Investment Initiative, focusing on mergers and acquisitions, tax, labor and land policy.

Improving access to Japan's auto market will also remain an important issue for the United States in 2005. In 1995, the United States and Japan reached an Automotive Agreement intended to eliminate market-access barriers and expand sales opportunities for U.S. auto and auto parts exports in Japan. This agreement expired at the end of 2000. Prior to its expiration, the United States noted that progress had been made under the agreement, particularly in the areas of vehicle standards, certification and the deregulation of the auto parts after-market. However, the United States expressed serious concern that the overall market-opening objectives had not been achieved. In particular, sales of U.S.-made vehicles to Japan have fallen dramatically since 1995 and sales of U.S.-made auto parts to Japanese firms and their transplants in the U.S. have also decreased. After months of discussions in 2001, the United States and Japan established the U.S.-Japan Automotive Consultative Group to assess trends in the automotive industry and market-access and regulatory reform issues in Japan. The Group is co-chaired by the Commerce Department and USTR and the Ministry of Economy, Trade and Industry and the Ministry of Land, Infrastructure and Transport. The Administration has indicated that it will seek to address cross-cutting issues, such as transparency, investment and corporate restructuring that affect the automotive sector as part of the Economic Partnership. The first meeting was held in January 2003 to discuss deregulation, transparency and competition laws. Despite the work in this forum, the United States remains concerned about falling sales, the lack of transparency and regulatory and other barriers to U.S. automobile and auto parts manufacturers.

In August 2003, Japan imposed an emergency safeguard duty on imports of chilled beef, raising it from 38.5 percent to 50 percent as a result of concerns regarding Bovine Spongiform Encephalopathy. The United States continues to urge Japan to remove this measure.

In its annual consultations under the 1992 U.S.-Japan Computer Agreement, the United States continues to urge Japan to improve its implementation of that agreement, which was intended to increase the sales of U.S. computers to Japan's public sector. Japan has insisted that the 1992 agreement does not guarantee any market share and that its government purchases are conducted in a fair, transparent manner. The most recent bilateral review was held in 2001.

U.S. officials will also continue to monitor trade and enforce key agreements with Japan in insurance, telecommunications, semiconductors, and other sectors. In March 2002, the United States also requested WTO dispute consultations with Japan over sanitary and phytosanitary restrictions imposed on imports of apples. The WTO Appellate Body found in November 2003, that Japan’s measures on apples violated its WTO commitments as they were imposed without sufficient scientific evidence. While Japan amended its rules, the United States requested a WTO panel to review the rules because they do not appear to be compliant. As discussed in section 3, the United States and Japan are involved in other WTO disputes particularly over several U.S. trade remedy issues.

As discussed in section 13, the United States and Japan ratified a bilateral tax treaty last year

Japan concluded its first bilateral FTA – Singapore – in 2001 and its second FTA – with Mexico – in 2004.

Korea

U.S. exports equaled $26 billion in 2004, with total U.S.-Korean trade amounting to $73.5 billion.

The United States is continuing efforts to conclude a bilateral investment treaty with Korea. Among the remaining issues are the U.S. request for greater access for U.S. investors in Korea's telecommunications sector and for Korea's commitment to fully comply with the WTO TRIPS agreement. The United States continues to press Korea on improvements on both issues.

The United States will also continue to press Korea to improve market access for autos under the 1998 U.S.-Korea Memorandum of Understanding (MOU). During March 2001 meetings in Seoul, President Bush pressed Korean President Kim Dae Jung for greater market access in autos. A working group was created in 2001 to improve dialogue and progress on these issues. In 2003, Korea established a self-certification system for automotive safety standards and simplified and reduced one automotive tax. U.S. vehicle sales increased in 2003, but the United States remains concerned about Korean market and government policies (including tariffs and taxes and standards and certification issues) that discourage the purchase of foreign automobiles.

In agriculture, the United States continues to press for the reduction of tariffs on agricultural products, as well as import restrictions such as quotas and tariff rate quotas. The United States is also concerned about burdensome documentation requirements for GMO crops following Korea's adoption in July 2001 of more rigorous labeling requirements for food containing GMOs, although it is a positive development that Korea has now approved 26 genetically modified crops. The United States continues to press Korea to open its beef market, after it banned U.S. beef in December 2003. Korea also banned poultry imports in 2004, although it now appears more likely to lift that ban this year.

Korea was raised to the Special 301 "Priority Watch List" in 2004, as a result of significant concerns over motion picture and music piracy problems.

Vietnam

U.S. trade with Vietnam has grown substantially since the resumption of economic relations between the two countries, from $223.3 million in 1994 to $6.4 billion in 2004. Major U.S. exports to Vietnam include industrial machinery, fertilizers, and semiconductors and major imports include crude oil, footwear, shrimp, and coffee.

As discussed in section 3, Vietnam has applied to become a member of the WTO and WTO Working Party Members are currently negotiating the terms of accession.

On June 12, 2001, President Bush transmitted the U.S.-Vietnam Bilateral Commercial Agreement to Congress. The House approved the agreement on September 6, 2001, by voice vote and the Senate approved it on October 3, 2001, by a vote of 88-to-12. Congressional approval of the trade agreement, combined with the Presidential waiver of the Jackson-Vanik freedom-of-emigration provisions, resulted in the extension of normal trade relations status to Vietnam (removing it from the column 2 schedule – enacted as part of the Smoot-Hawley Tariff Act of 1930 – with tariffs averaging 40 percent, more than 10 times the applied tariffs for countries with an NTR relationship to the United States). Vietnam has also been eligible, since the first Jackson-Vanik waiver in 1998, for Overseas Private Investment Corporation (OPIC) and Export-Import Bank programs. Approval of the Bilateral Commercial Agreement and the extension of normal trade relations represent a major step in the normalization of U.S. trade relations with Vietnam, building on prior decisions to open some travel to Vietnam in 1991 and 1992, resume international lending and U.S. involvement in development projects in 1993, lift the economic embargo in 1994, open normal diplomatic relations in 1995, and waive the Jackson-Vanik freedom-of-emigration provisions since 1998.

Over the objections of many in retail industries, however, USTR began discussions in February 2002 to negotiate a textile agreement with Vietnam in order to cap textile exports. Since Vietnam is not a member of the WTO, the United States can impose textile and apparel quotas if no agreement is reached. An agreement was reached in April 2003.

Vietnam presents investment-related problems, such as a discriminatory and time-consuming investment-licensing process. Vietnam also faces widespread corruption throughout all aspects of business operations, a problem admitted to by the Government of Vietnam.

Indonesia

The United States has had a significant economic stake in Indonesia. Before the onset of the Asian financial crisis and the increase in political unrest in Indonesia, it was a regional economic power with an economy twice as large as Singapore’s. Indonesia was among America’s top 25 trading partners, accounting for $6 billion in U.S. exports and $7.6 billion in U.S. foreign direct investment in 1996. U.S. investment in Indonesia has been primarily in the oil and gas sector. Following the financial crisis and serious political unrest that brought down the corrupt regime of former President Suharto, Indonesia has faced the difficult challenge of rebuilding its government and economy.

U.S. exports to Indonesia equaled $2.6 billion in 2004. Indonesia’s total exports to the United States equaled $10.85 billion in 2004.

Inflationary pressures are increasing and reform has been complicated by ongoing governmental transitions. Indonesia has also been slow in implementing agreed-upon reforms under the IMF structural adjustment agreement and, as a result, has completed only three reviews under the program (which calls for quarterly reviews).

U.S. and Indonesian officials met several times to address issues in the U.S.-Indonesian commercial relationship, including through the bilateral Trade and Investment Framework Agreement. Among the key issues are intellectual property, Indonesia’s ban of U.S. poultry and barriers in the automotive and other sectors.

The United States remains concerned about continued piracy of U.S. software, books, videos, pharmaceuticals, and apparel trademarks in Indonesia. The Indonesian government remains on the Special 301 “Priority Watch List” for its inadequate intellectual property regime and failure to bring its laws into conformity with the WTO TRIPS Agreement. To help resolve these shortcomings, the U.S. Government provided Indonesia with an IPR Action Plan in May 2002. In July 2003, the Indonesian government took some initial steps by passing a copyright law focusing on activities that seek to bypass technological protection measures, penalties in relation to corporate end-user piracy and regulations on optical disc production; however, the legislation fails to provide adequate enforcement.

The United States is also concerned with Indonesia’s 2000 presidential decree updating its government procurement code, including through providing special preferences for domestic sourcing. Korea is not a member of the WTO’s Government Procurement Agreement.

The United States continues to monitor Indonesia’s efforts to revive its national automotive industrial policy. The United States successfully challenged the WTO consistency of Indonesia’s barriers to trade in automotive products. Indonesia modified its auto policies to bring them into conformity with the WTO panel decision, and the United States does not want Indonesia to reimpose barriers to auto trade. Tariffs on SUVs, sedans and motorcycles remain high. As well, U.S. companies remain concerned about Indonesia’s services and other barriers.

India

The economic growth that India has enjoyed since it embarked on economic reforms in 1991 continues. India’s population has now surpassed one billion, and projections suggest that by 2016 its population will exceed that of Europe and the rest of the industrial world, excluding Russia. Nevertheless, India has over 22 percent unemployment and significant poverty, and there remain continuing concerns over bureaucratic controls and basic infrastructure needs, including roads, ports, power and drinking water. India’s tremendous market potential cannot be realized unless the Indian government accelerates the pace of economic reform and opens its markets to foreign investment.

U.S.-Indian trade grew to $22 billion in 2004 from $18 billion in 2001, with U.S. exports equaling $6.1 billion in 2004. The United States is India’s largest trading partner.

In August 2001, the United States and India agreed to implement the 2000 agreement to establish a formal trade policy dialogue with consultations at regular intervals. At the same time, the United States expanded benefits under the Generalized System of Preferences for India, providing duty-free treatment to an additional 42 products (mostly jewelry), covering some $543 million in exports.

As discussed in section 8, in September 2001, the United States lifted the remaining sanctions that it imposed on India in 1998 as a result of its nuclear tests. To that end, the United States and India fulfilled a commitment made by President Bush and Prime Minister Vajpayee to boost high-technology trade by agreeing on a set of principles with respect to dual-use items that require export licenses. The principles provide for a review to ensure that all parties follow licensing requirements for dual-use goods and technologies and describe ways to deal with export control violations. The Hi-Tech Commerce Agreement was signed in February 5, 2003.

The United States remains concerned about high Indian tariffs in several sectors, including on soda ash imports. The United States also is concerned about barriers to participation in India’s financial services and non-financial services markets, its non-transparent and discriminatory government procurement market, and investment barriers, including equity caps and the lack of a secure legal and regulatory framework.

India also remains on the United States' Special 301 "Priority Watch List" for its inadequate intellectual property regime and its failure to come into compliance with its TRIPS commitments.

Sub-Saharan Africa

Economic growth continues in the countries of sub-Saharan Africa, but higher growth is needed to decrease poverty overall. Average per capita income remains lower now than at the end of the 1960s. Civil conflict, problems in governance, extensive state control of the economy, trade barriers and other economic problems continue to plague many of the countries of the region. Outdated and inadequate infrastructure, including ports, roads, and schools, also continues to slow growth and development. In countries such as Ghana that have undergone economic reform and liberalized trade and domestic markets, however, growth has been the strongest and poverty has declined.

Two-way trade between the United States and the 48 countries of sub-Saharan Africa totaled $42 billion in 2004. U.S. exports remained heavily concentrated in two countries, South Africa and Nigeria.

Implementation and Amendment of the African Growth and Opportunity Act

After years of negotiation, Congress reached agreement on the African Growth and Opportunity Act (AGOA), which was enacted on May 18, 2000, as part of the Trade and Development Act of 2000. The AGOA provides duty-free, quota-free treatment for certain apparel from eligible sub-Saharan African (SSA) countries and provides duty-free access to certain products not currently eligible for such treatment under the Generalized System of Preferences program (GSP). The primary provisions are as follows:

Eligibility Criteria: Sub-Saharan African countries eligible for the benefits of AGOA must meet the GSP’s eligibility requirements, as well as several new requirements, including making progress toward establishing or adopting (1) a market-based economy, (2) the rule of law and political pluralism, (3) economic policies to reduce poverty, (4) a system to combat corruption and bribery, and (4) the protection of internationally recognized worker rights. Eligible countries must also be found to be making progress toward eliminating barriers to U.S. trade and investment. Countries may not be found to be eligible if they engage in activities that undermine U.S. national security or foreign policy interests or engage in gross violations of internationally recognized human rights.
Textile and Apparel Provisions: The AGOA provides duty-free, quota-free treatment through September 30, 2008, for the following articles:
- apparel assembled in eligible SSA countries from U.S. fabric made from U.S. yarn;
- apparel cut and assembled or knit-to-shape in sub-Saharan Africa from U.S.-made fabric that is made from U.S. yarn and assembled with U.S. thread;
- apparel wholly assembled from regional fabric, up to a cap of 1.5 percent of total U.S. apparel imports in year one, growing to 3.5 percent of such imports in year eight; lesser developed SSA countries may use third country fabric for the first four years of the program;
- knit-to-shape sweaters made from cashmere or fine merino wool up to 18.5 microns;
- apparel cut and assembled or knit-to shape in sub-Saharan Africa from fabric or yarns not available in commercial quantities in the United States; and
- hand-loomed, handmade, and folklore articles.

Eligible countries must also adopt effective visa systems, domestic laws and enforcement procedures to prevent unlawful transshipment; permit the U.S. Customs Service to verify information; and cooperate fully with the United States to prevent circumvention and transshipment.

The AGOA also establishes procedures to monitor imports and investigate injurious import surges of articles made from regional and/or third country fabric and authorizes a tariff snapback (to the normal trade relations tariff rate) where an injurious import surge is found.

Trade Benefits for Other Products: The AGOA provides duty-free treatment for eligible sub-Saharan African countries through September 30, 2008, for other import-sensitive articles (except textiles and apparel) that are currently ineligible for such treatment under GSP, including certain footwear and luggage. The legislation also eliminates the restrictions under the GSP program that limit the quantity of imports that can receive GSP benefits for eligible sub-Saharan African countries.
Economic Forum: The AGOA directs the President to create a United States-Sub-Saharan Africa Trade and Economic Cooperation Forum to hold annual high-level meetings with African Ministers to discuss expanding trade and investment relations.
Other Provisions: The AGOA directs the President to develop a plan for engaging in free trade agreement negotiations, where feasible, with sub-Saharan African countries and supports comprehensive debt relief and increased involvement by OPIC, Ex-Im and the U.S. Foreign and Commercial Service in Africa.
As part of the Trade Act of 2002, Congress amended AGOA to:
Clarify that knit-to-shape products are covered by the duty-free, quota-free benefits of AGOA (contrary to Customs’ interim ruling);
Clarify that hybrid products (cut in the United States and SSA beneficiary countries) are eligible for the duty-free, quota-free benefits (contrary to Customs’ interim ruling);
Expand the eligibility of products from the least-developed countries to include apparel made from non-U.S. and non-regional yarn;
Raise the cap on duty-free, quota-free apparel imports made from regional fabric and regional yarn to seven percent over the next eight years;
Grant Namibia and Botswana the ability to utilize non-African fabric in apparel production as a “lesser developed beneficiary sub-Saharan African country;” and
Make a technical correction to allow merino sweaters to be eligible for the duty-free, quota-free benefits.

On December 31, 2003, President Bush determined that 37 of the 48 sub-Saharan African countries met the eligibility requirements to receive AGOA benefits. These countries are: Angola, Benin, Botswana, Cameroon, Cape Verde, Chad, Republic of the Congo, Cote d'Ivoire, Democratic Republic of the Congo, Djibouti, Ethiopia, Gabon, The Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Madagascar, Malawi, Mali, Mauritania, Mauritius, Mozambique, Namibia, Niger, Nigeria, Rwanda, Sao Tome and Principe, Senegal, Seychelles, Sierra Leone, South Africa, Swaziland, Tanzania, Uganda, and Zambia. Subsequently, the President added Angola and dropped both Central Africa Republic and Eritrea. These 36 countries are eligible for the non-apparel trade benefits under AGOA.

To be eligible for the duty-free apparel benefits, the Administration must make a separate determination that the country has adopted an effective visa system and enforcement mechanism to prevent illegal transshipment. The following countries have been designated as eligible for the apparel benefits: Botswana, Cameroon, Ethiopia, Ghana, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Senegal, South Africa, Swaziland, Tanzania, Uganda and Zambia. The Bush Administration will continue to monitor other countries’ efforts to adopt adequate visa systems.

AGOA Acceleration Act of 2004

The U.S. Congress approved the AGOA Acceleration Act of 2004, which:

Extends the AGOA program from 2008 until 2015;
Extends third-country fabric provision from September 2004 until 2007 with a phased decline of benefits;
Modifies the AGOA rule of origin for textiles and apparel to allow limited non-AGOA collars and cuffs;
Expands folklore definition for printed fabric;
Provides assistance to develop sustainable infrastructure and increase trade-capacity, including through the promotion of eco-tourism;
Assigns additional personnel to the region to provide technical agricultural assistance; and
Facilitates customs coordination at ports and airports.

Overall imports from the SSA countries have increased since 1999, from $13.8 billion to $33.7 billion in 2004. Imports under the AGOA preferences accounted for over 60 percent of total imports. It is estimated that the AGOA incentives have generated over $1 billion in investments in sub-Saharan Africa, which is very important given that this region receives the least amount of investment worldwide.

As described above with respect to the Caribbean Basin Trade Partnership Act (CBTPA), several technical implementation issues have arisen with respect to both the CBTPA and the AGOA.

As discussed in section 4, in 2003, the United States began negotiations with the five countries that make up the Southern African Customs Union (SACU) (Botswana, Lesotho, Namibia, South Africa and Swaziland) to create a U.S.-SACU Free Trade Agreement.

Russia

Since the dissolution of the USSR in 1992, Russia has been struggling with the challenges of ending state economic control and establishing a stable, market-oriented democratic system. Russia had made some limited progress in reaching these goals over the last several years, with a reduction in military spending, market economy structural reforms, and an increase in private sector economic activity.

U.S. trade with Russia equaled almost $14.8 billion in 2004. U.S. foreign direct investment rose to $1.2 billion and is largely concentrated in the financial and information sectors. As discussed below, Russia remains subject to the Jackson-Vanik provisions of the Trade Act of 1974, and enjoys normal trade relations status, which is currently granted annually based on Presidential certification subject to a potential Congressional vote of disapproval. As discussed in section 3, Russia is also in the process of negotiating its terms of accession to the WTO.

The United States remains concerned over a wide range of trade, investment, and intellectual property issues, including corruption and concerns about the rule of law, the lack of transparency, customs regulations, standards and licensing barriers, government procurement, agricultural barriers, export subsidies, services, and investment barriers.

In March 2002, Russia imposed a ban on poultry exports from the United States, citing sanitary and phytosanitary concerns. By the end of March 2002, Russia and the United States negotiated a protocol to establish improved cooperation among veterinary officials in both countries and create a framework for certifications that would eventually allow U.S. exports to resume. In August 2002, Russia and the United States negotiated a new veterinary certification for U.S. poultry exports. In January 2003, Russia announced the imposition of tariff rate-quotas for poultry and for pork, to become effective in April 2003. In September 2003, the United States and Russia signed another agreement on market access parameters for U.S. exports of poultry, pork and beef. In December 2004, Russia issued quota allocations for U.S. poultry, pork and beef imports consistent with historical levels.

On January 1, 2004, Russia’s new customs code became effective. This code, which seeks to make Russia’s customs regime consistent with WTO requirements, simplifies customs procedures and makes them consistent. The U.S. government and U.S. industry will continue to monitor Russia’s implementation of its customs code implementation

In the 2004 Special 301 cycle, Russia remained on the United States’ on “Priority Watch List” for its inadequate intellectual property regime, particularly in the areas of copyright, patent and data protection. U.S. industry is seeking that a priority designation again in 2005 given Russia’s high piracy levels, coupled with the lack of significant enforcement. Russia’s copyright piracy is one of the most serious of any country, with over $1.7 billion in losses in 2005. Furthermore, piracy has gotten worse as Russia has become one of the world’s largest producers and distributors of illegal optical media material, with 36 known plants. There is also concern over Russia’s reimbursement lists for state-healthcare entities that discourage the use of foreign innovative medicines which are often more effective and safer than local pharmaceuticals. Russia will need to take several steps to address this issue, from making it a political priority to implementing effective enforcement measures, including unannounced inspections, and making modifications to the optical disc licensing regime necessary to ensure better enforcement.

There is also significant concern over financial services entry, capitalization and employment requirements, which represent major barriers that need to be addressed in Russia’s WTO accession. On the insurance side, there are also concerns over foreign investment and capital limits.

Corruption, contradictory investment regulation and notification rules, the lack of adequate dispute settlement mechanisms and restrictions on hard currency medium term loans represent major barriers to U.S. investment. While the United States negotiated a bilateral investment treaty with Russia in 1992 (which the U.S. Senate ratified), Russia has failed to ratify it. With the new Model BIT text discussed in section 6, ECAT urges both the United States and Russia to reactivate BIT discussions. At the same time, Russia has BITs with relatively strong post-establishment protections for investment, including access to neutral dispute settlement, with several European countries. It is also a member of the European Energy Charter (although it has yet to ratify it), which includes strong and long-term protections in the energy sector in particular.

Russia is also expected to introduce a new Law on Natural Resources in spring 2005 to regulate natural resources licensing. The law represents some improvements over the existing system, including by guaranteeing that licenses continue from exploration to development, using administrative law guidance, and limiting potential license revocations. Significant concerns remain, however, over potential strategic expectations and requirements that companies be registered in Russia.

Permanent Normal Trade Relations for Russia

Russia currently receives normal trade relations (NTR) treatment on an annual basis from the United States, pursuant to the Jackson-Vanik provisions of Title IV of the Trade Act of 1974, which governs the extension of NTR treatment to non-market economy countries. The Jackson-Vanik provisions condition the extension of NTR treatment to compliance with freedom of emigration criteria and require that NTR be renewed annually. Russia has been found to be in compliance with the freedom of emigration criteria since 1994.

Concerns have been raised by some in the business community and by Members of Congress that proposals to grant PNTR to Russia prior to WTO accession will weaken the United States’ ability to secure important trade liberalizing commitments as part of the accession process because the United States will be ceding leverage.

ECAT POSITION: ECAT supports continued efforts to promote the rule of law, greater transparency and accountability in the Russian government, as well as to address issues of specific concern in the U.S-Russia commercial relationship, including the protection of intellectual property rights; financial service barriers, foreign investment barriers particularly in the natural resource sector, and agricultural barriers.