Chaired By: Senator Max Baucus (D-MT)
Witnesses: Everett Eissenstat, Assistant U.S. Trade Rep. for Western Hemisphere Affairs; James Owens, Chairman and CEO, Caterpillar; Thea Lee, Policy Director, American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); Sam Carney, President-Elect of the National Pork Producers Council
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SEN. BAUCUS: The meeting will come to order. I apologize for the delay. The vote -- same time this meeting was scheduled to be in, so in interest in efficiency, we decided to go vote first and then we can begin and not be interrupted. So the witnesses have my apologies.
Today we discuss our trade agreement with Panama, a country at the crossroads of the world. Panama links the Americas -- North and South -- with a land bridge that ties together two continents. Panama also links the world -- East and West -- with a canal that has changed the course of global trade. Our trade agreement with Panama also puts all of us -- this committee, this administration, and this country -- at a crossroads.
This agreement provides an opportunity for this committee to build on its past work of creating jobs through exports. It provides an opportunity for the new administration to demonstrate its support for an outward-looking trade agenda. And it provides an opportunity for the kind of export-driven economic growth that our country desperately needs.
I urge the administration not to hesitate too long at this crossroads. I urge them to move forward with this agreement.
This agreement includes the comprehensive labor provisions that I helped negotiate with Democrats and Republicans in May 2007. And the current Panamanian government has agreed to far-reaching changes to its labor code to comply with those provisions. But the current Panamanian government leaves office in a few short weeks. And it is not clear that the next government will go as far. If we wait much longer, we may end up with a worse deal.
The Panama agreement also provides new opportunities for American farmers, ranchers, and businesses. Panama already exports most of its goods to the United States duty-free under our trade preference programs. This trade agreement will level the playing field. It would provide the same duty-free treatment to our industrial and agriculture exports to Panama.
This agreement will, for example, immediately eliminate all duties on more than half of our agricultural exports to Panama. That includes high-quality American beef from states like Montana. And these exports won't get tied up in unscientific trade barriers that have frustrated us in other markets. Panama has appropriately recognized the United States' food safety and inspection system for U.S. meat and poultry as equivalent to its own.
This agreement will also immediately eliminate tariffs on 80 percent of U.S. industrial exports to Panama. Panama has begun a significant expansion of the canal, and it will need more construction and other heavy equipment to finish the job. Under this agreement, United States equipment manufacturers like Caterpillar will get a leg up over their competitors.
I would be remiss if I did not also mention Panama's tax laws and practices. I share the goal of the G-20 leaders, the OECD, the administration, and this committee that tax havens must be shut down. I have introduced legislation that would improve the IRS's ability to detect and deter offshore tax evasion. My interest in moving the trade agreement does not diminish my desire to address offshore tax abuse in Panama and other countries, and to move tax legislation as well. I understand that Panama is prepared to address these issues, and has made clear that it intends to do so by working both with the United States government and through the OECD process.
I want to see rapid progress on tax issues in Panama. But I also believe that we can and should move ahead on our trade agreement right now.
Starting any ambitious initiative, whether it's a new trade agenda or a new waterway, begins with a first step. The first step of the Panama Canal's construction in 1880, as well as the first step of its expansion in 2007, was marked by the detonation of earth-shaking explosives. I hope that we can begin the process of considering the U.S.-Panama trade agreement with considerably less drama.
So let us instead break ground with an open and honest hearing of the facts. Let us engineer the best path forward. And let us help to move this U.S.-Panama trade agreement down the path.
SENATOR CHUCK GRASSLEY (R-IA): Thank you, Mr. Chairman. I appreciate very much your involvement with this.
And I want to give an overview before I go to my statement. And that overview is in regard to everything that we can do on opening up trade is going to as much good with getting us out of the recession as -- and keeping us out -- as we do specifically through stimulus and other things that we have done already. And I don't think it's something that's been on -- high enough on the agenda of the administration. And I know that the president has very good intentions in trade. But moving quickly and talking about it on a very regular basis would be a very big help to enhancing the attitude of getting out of the recession in this country.
I have an opportunity to introduce Mr. Sam Carney, a pork producer from Adair and president-elect of the National Pork Producers Council, who is one of the people that you're going to be introducing. Thank you very much, Mr. Carney, for coming in. He's from Adair, Iowa.
I support the timely implementation of this trade agreement, long overdue. Its implementation has been sidetracked for a variety of reasons. But now that the Finance Committee is taking the first step to advance a positive agenda of trade liberalization under the new administration, I want to take a moment to address the critics who would rather we not implement any of our pending trade agreements with Panama or with Colombia or with South Korea, let alone negotiate otherwise.
The chief argument I've heard is that given the magnitude of our global trade deficit, the last thing we should do is implement a new trade agreement. Well, those arguments I've heard from some colleagues. The problem is, that argument is based on false premise. It suggests that trade agreements translate into trade deficits. That's not true.
Consider our trade agreement with countries like Central America and the Dominican Republic. Before implementation, we ran a cumulative trade deficit.
Following implementation, we enjoyed a trade surplus of about $6 billion just last year. How do we explain that shift? Well, the trade agreement required our trading partners to give our exporters the same duty-free access to their markets that their exporters already had to ours under our unilateral preference programs. In other words, we leveled the playing field, not for the benefit of somebody else, some other country, but for the benefit of our own country. In other words, that's very important for helping our economy.
The opponents of our trade agreements point to a large U.S. trade deficit with Mexico. They argue that our bilateral trade deficit is the result of North American Free Trade Agreement because we had a relatively small trade surplus with Mexico before we implemented this agreement. Again, I think the validity can be questioned.
Before NAFTA, over 51 percent of the imports from Mexico entered the United States duty-free, and the average tariff on the remaining imports was about 4.2 percent, for an overall average tariff of just over 2 percent. In contrast, Mexico had an average tariff of about 12 percent on imports from the United States before NAFTA. And with NAFTA, this tariff disparity no longer exists. And as a result, our exports to Mexico is increased significantly, particularly with respect to agricultural products.
If we'd never implemented NAFTA, would we have substantially altered the growth of international supply chains? I doubt it. If NAFTA had not been implemented then, the trade deficit that we see with Mexico this very day would be shifted to some extent among other countries, but without the increase in exports to Mexico that our exporters enjoy today. Moreover, oil and gas imports are a big part of our recent trade deficit with Canada and Mexico, and I doubt that the absence of NAFTA would have changed that significantly.
In this time of economic downturn and uncertainty, we can ill afford, then, to base our trade policies on these, just a few examples of false premises that I give. Trade is more complicated, and the benefits of expanding trade are too important for both us and our trading partners. U.S. exporters understand that, and we're going to hear from some of that from our witnesses. Critics may question other elements of our trade agreement and economic relationships, but resting criticism on a bilateral trade deficit is a red herring.
One aspect of our economic relationship with Panama that has come under scrutiny is the absence of Tax Information Exchange Agreements between our two countries. In 2000, the Organization of (sic: for) Economic Cooperation and Development identified Panama as a tax haven. Just last month, the OECD listed Panama as a jurisdiction that has -- that has committed to provide for exchange of tax informations on request without regard to bank secrecy, but has not yet substantially implemented that standard. I welcome today's report that Panama's vice president-elect has committed Panama to negotiating with the United States this year a legally binding instrument to facilitate the exchange of tax information pursuant to Panama's OECD commitments, and I look forward to hearing the administration's reaction to that announcement.
I fully support concluding a Tax Information Exchange Agreement with Panama as soon as possible. But I don't see why our exporters should have to pay for that agreement with lost exports, which is what now is happening. Particularly in this time of economic downturn, export sales are more critical than ever. The expansion of the Panama Canal is moving ahead, so our exporters are losing potential opportunities every day.
I urge the Obama administration to continue to pursue aggressively the negotiations of this tax exchange agreement. At the same time, I urge the administration to submit this Panama Trade Promotion Agreement to Congress for approval next month.
I yield the floor.
SEN. BAUCUS: Thank you, Senator.
I'd now like to introduce the panel. The first witness is Everett Eissenstat, assistant U.S. trade representative for Western Hemisphere Affairs. Mr. Eissenstat was involved in negotiation of this free trade agreement. He'll be charged with implementation once Congress acts to approve it. And, of course, Everett really served in another capacity as -- on the committee, especially for Senator Grassley and also for the committee in general. Welcome back, Everett. Deeply appreciate your return.
Next witness is Mr. James Owens, president and CEO of Caterpillar. Regrettably, you did not work here prior to your current job. (Laughs, laughter.) I can't give the same kind of introduction to you. Mr. Owen, I must say, though, I love driving your equipment. It's a lot of fun. (Laughs, laughter.)
SEN. GRASSLEY: Don't say that in Waterloo, Iowa.
SEN. BAUCUS: No, no, I won't. But John Deere -- I like John Deere, too. (Laughter.) In fact, I've driven a lot of John Deere tractors and a lot of Caterpillars. And one of my biggest privileges was buying the biggest Cat, I think, in the state of Montana about four or five years ago when I was on a job -- construction job in Montana. So Mr. Owens, thank you very much.
And Ms. Lee, thank you very, very much returning, too. Thea Lee, policy director, AFL-CIO. You've been very forthright, very helpful in many appearances before this committee. And thank you for your good work, very, very much.
And of course, Mr. Carney, who's a pork producer -- in fact, he's president-elect to the National Pork Producers Council and a pork producer from the great state of Iowa. Thank you, Mr. Carney. I'm sure someone else might have something to say about you a little later today, seated to my left. And anyway, thanks for taking the time to come here and participate in this discussion.
As is our usual practice, the witnesses will, you know, speak about five minutes. I asked you to speak about five minutes. Your full statements will be in the record. And I just urge you to proceed.
I'll begin with you, Mr. Eissenstat.
MR. EISSENSTAT: Thank you very much, Senator Baucus. It's such an honor to be here with the chairman and ranking member today. And I appreciate this opportunity to testify before the committee on the benefits of the United States-Panama Trade Promotion Agreement.
I also want to thank you, Mr. Chairman, and all the members of this committee for the informed views and invaluable guidance we've received since we initiated negotiations with Panama over five years ago.
The president believes that the United States needs a new framework for trade. He recognizes that trade is essential to America's prosperity and has the potential to lift up workers in America and around the world. But for trade to accomplish its objective, our trade agreements need to include strong labor and environment standards. We also need to do a better job enforcing our trade agreements, and we need domestic policies to help Americans succeed in an increasingly dynamic economy.
The president looks forward to outlining this framework in the very near future. At the same time, we want to make sure that any new trade agreements that are advanced, including our agreement with Panama, be part of this broader framework. The administration is working with Panama to ensure that this agreement and its implementation fully reflect the values of the president's vision. In particular, we have been working with Panama to address labor law concerns and look forward to anticipated legislative and regulatory action by Panama that implements the agreement's labor provisions.
We also share concerns that have been expressed about Panama's tax policies and are working with Panama to address these concerns. This agreement and the closer relationship it provides will enable us to progress much more quickly in addressing these issues than we could otherwise. Successfully addressing these concerns will be an important step in determining when, in close consultation with Congress and as part of the president's broader trade strategy, this agreement should be considered by the Senate and the House.
The Panama agreement is an historic development in our long- standing and close relationships with Panama.
The agreement will put into place a strong and up-to-date structure for the U.S.-Panama trade and investment relationship that will create new opportunities for American workers, farmers, ranchers and businesses.
Today, U.S. exporters face an unfair playing field. Last year, approximately 90 percent of Panama's imports entered the United States duty-free. In contrast, U.S. exports of consumer and industrial goods face an average tariff of 6.4 percent, with tariffs as high as 20 percent on some products. U.S. exports of agricultural products face an average tariff of 15 percent, with tariffs on some of our key exports as high as 70, 90 and even 260 percent.
The agreement will eliminate these tariff barriers, but the agreement goes far beyond tariff reductions. One of the best opportunities for U.S. exporters lies in the $5.25 billion expansion of the Panama Canal, as the agreement will ensure that U.S. firms have the opportunity to participate in one of the largest infrastructure projects in the hemisphere. The agreement will also provide important new opportunities in Panama for the whole spectrum of U.S. service providers. The agreement provides strong protection for intellectual property rights and ensures a secure, predictable, legal framework for U.S. investors in Panama. It does not, in any way, undermine the ability of either the United States or Panama to regulate the financial sector or investment practices to protect the financial system.
The labor and environmental provisions of this agreement incorporate Congress's guidance. As a result, Panama's committed to implement ILO fundamental labor rights in its labor regime, reforms which will significantly enhance the rights of workers in Panama. Protection of the environment will also be enhanced, as the agreement requires Panama to fulfill its obligations under specified multilateral environmental agreements. These provisions, along with our renewed focus and commitment to trade enforcement, reforms to trade adjustment assistance and the administration's investment in domestic infrastructure and competitiveness demonstrate how trade and economic policy can combine job creation and creation for working families at its core.
Mr. Chairman and members of this committee, the agreement offers an opportunity to strengthen the economic and political ties we already have with Panama, set an example of how cooperation and commerce can elevate working and environmental conditions and send a message to the region that the United States is engaged with willing, responsible parties. It is a strong agreement that fits with the president's goal to build trading relationships that are fair, equitable and benefit the citizens of both countries. It has the potential, as part of the president's broader trade strategy that he will outline, to move America's trade policy forward.
I hope that after carefully reviewing this agreement, the members of this committee and the U.S. Congress will agree that it is a solid agreement that is strongly in our national interest.
Again, thank you very much for the privilege of testifying today.
SEN. BAUCUS: Thank you, Mr. Eissenstat.
MR. OWENS: Chairman Baucus, Ranking Member Grassley and members of the committee, I am Jim Owens. I'm chairman and president -- CEO of Caterpillar. And I'm very honored to be here today to make this presentation on behalf of not only Caterpillar, but the U.S. Chamber of Commerce, the Business Roundtable and the Latin American Trade Coalition. It's an honor to share our views on the proposed U.S.- Panama trade promotion agreement.
Caterpillar and the companies I represent believe that the Panama Trade Promotion Agreement and agreements like it promote economic growth both at home and abroad. In just the Western Hemisphere, we now have trade agreements with Canada, Mexico, Chile, Central America and the Dominican Republic. I'm pleased to report that Caterpillar exports have dramatically benefited from all of these free trade agreements. Since the FTAs have gone into effect, Caterpillar exports have increased. In fact, last year our exports were up four-fold to the NAFTA countries, three-fold to Chile and have nearly doubled in the CAFTA-DR countries in the short time that agreement's been in place.
Others have benefited as well. Last year and for the first quarter of 2009, the U.S. had a trade surplus in services, in agriculture, and even in manufactured goods. And that's collectively across the 17 countries that have implemented free trade agreements with the United States. However, that surplus was more than offset by a large trade imbalance of manufactured goods from non-FTA partners.
I think that demonstrates that American manufacturers can compete, but we need open markets and the type of level playing field that this trade agreement will provide.
Like past agreements, the Panama TPA will substantially improve market access for American farm products, consumer and industrial goods and services in Panama. It will bolster the rule of law, investor protections, internationally recognized workers' rights, transparency and intellectual property protections.
Some dismiss Panama as a small country that should not be a U.S. trade priority. We disagree. Panama is an ally and a good friend of the United States. It has major ports to both the Atlantic and Pacific, and the canal is a major transit port for world trade. Further, Panama is a good place to invest. One-third of its population speaks English fluently; it has a dollarized economy; and it is strategically located, which makes Panama an excellent place to locate logistic and Latin American customer support operations.
For Caterpillar, the canal expansion is particularly exciting. It's one of the largest public works projects undertaken globally since the Three Gorges Dam in China, over 5 billion (dollars) as previously mentioned. If we can sell our U.S.-produced products to Panama duty-free, it will help our customers provide us with a competitive edge over products made in other parts of the world. In practical terms, the agreement means that Panama's 10 percent duty on off-highway trucks, motor graders, wheel tractor-scrapers and diesel engines will be eliminated. The same would be true for other types of Cat equipment and products that are sold in Panama. Those tariffs today range from 3 to 10 percent.
For other manufactured products, Panama's tariffs are even higher -- tariff on autos, 15 percent; furniture, 15 percent; and for computers, 5 to 15 percent. By eliminating these duties, the Trade Promotion Agreement will provide the average Panamanian customer with a higher standard of living by offering more product choices at lower prices and, of course, it enhances American manufactured competitiveness in the country.
There are other reasons why the TPA has -- and an expanded Panama Canal will benefit the United States. Trade barriers take many forms, and one of the most onerous, certainly, is weak infrastructure or lack of infrastructure. If you can't physically get the product to port in good time and cost-effectively, tariffs don't matter so much.
Today, almost 5 percent of world trade passes through the Panama Canal, and much of that trade originates in ports of Miami, New York City and Los Angeles. But with canal capacity currently fully utilized and many of the newer, larger ships unable to use the canal, it takes longer than it should for some U.S. exports to reach overseas markets. An expanded canal will help fix that and allow many American manufacturers to be more competitive by shortening their global supply chain and reducing inventories.
In summary, the proposed Panama free trade agreement -- or Trade Promotion Agreement will be good for our country and we have to do very little to realize it, as has been previously pointed out. We have, through the previous agreements and acts, essentially unilaterally granted Panamanian manufacturers duty-free access to our markets.
So Mr. Chairman, Senators, I urge you to move with urgency to pass the Panama Trade Promotion Agreement, as well as the pending agreements with Colombia and Korea. Not only do these agreements promote U.S exports and support American jobs; they also promote an understanding and improve living standards among all citizens in both countries. Further, at this tenuous time for the global economy, passing the Panama TPA would send a loud message to the world that the U.S. is indeed open for business.
Again, I thank you very much for the opportunity to testify for what I think is a very important trade agreement.
SEN. BAUCUS: Thank you, Mr. Owens, very much.
MS. LEE: Thank you, Mr. Chairman, Senator Grassley, members of the committee. I appreciate the opportunity to come here today on behalf of the 11 million working men and women of the AFL-CIO and talk about this important issue.
We believe it is premature for Congress to consider passing the U.S. --
SEN. BAUCUS: No. Thank you. Ms. Lee, I don't know if your microphone's on.
MS. LEE: I'm sorry. I'm sorry.
SEN. BAUCUS: Thank you. Thank you.
MS. LEE: Good morning, again.
SEN. BAUCUS: Good morning.
MS. LEE: We believe it is premature for Congress to consider passing the U.S.-Panama Trade Promotion Agreement at this time, and we will oppose passage if it is brought to a vote before outstanding and pressing concerns are adequately addressed.
First, needed labor law reforms and tax policy reforms in Panama must be fully adopted and implemented before the agreement is considered by Congress. Second, the administration and Congress should address concerns that have been raised with respect to the investment, procurement, and services provisions in the Panama and other pending trade agreements. Finally, and most important, the administration urgently needs to lay out a coherent and principled overall international trade strategy before proceeding in haste to implement a patchwork policy left over from the previous administration.
Current U.S. trade policy, in our view, has failed to deliver good jobs at home; equitable, democratic, and sustainable development abroad; or a stable global economy. We need to review and reform our trade policy with respect to the overall framework of rules; our chronic and large trade imbalances; and the impact of our trade and investment policies on U.S. manufacturers, farmers, service providers, consumers, workers and the environment. Nor should trade policy impinge on the ability of democratically elected governments at the federal, state or local level to implement and enforce public policies designed to achieve legitimate social objectives.
We applaud President Obama's initiatives to invest in America's future with respect to infrastructure, clean energy, education and health care. These are essential to America's ability to compete in the 21st century, but unfortunately they are not sufficient. We also need to enforce our existing trade laws more effectively, consistently, and energetically. We need to ensure that we are devoting adequate resources to enforcement, and that the different agencies in the government are coordinating with each other to make the best use of those resources. And very importantly, we need a strategic approach to our enormous and growing trade imbalance with China which addresses currency manipulation, worker rights violations and illegal subsidies.
In our view, the administration needs to demonstrate concretely its commitment to a new direction in trade policy before we proceed with the Panama agreement.
With respect to Panama, significant labor law reforms are needed to bring Panama's labor laws into compliance with ILO minimum standards. The Panamanian government must also resolve the tax haven issues that have been raised by the OECD, among others. These issues should be resolved before the U.S. Congress proceeds with a vote. As we have seen repeatedly in the past, if legislative issues are not addressed before the congressional vote, it is much more challenging to convince the government to act in a timely way. The leverage that exists for important issues like this is the greatest before Congress votes, and it evaporates after the vote happens.
In addition to the on-the-ground changes needed in Panama with respect to labor law and tax issues, it is also important to revisit the trade agreement template at this time. In particular, the AFL-CIO has consistently over many years raised concerns with respect to the investment, procurement, and services provisions in trade agreements. As we look forward, we should also look for ways to strengthen and improve the labor and environment provisions, as well as the enforcement of those provisions.
During the 2008 presidential campaign, candidate Obama in the Democratic Party platform emphasized the need for trade policy to "be an integral part of an overall national economic strategy that delivers on the promise of good jobs at home and shared prosperity abroad." We strongly agree that our country needs a new trade policy. The Panama Trade Promotion Agreement does not represent the needed change in direction, and has not been accompanied by the broader reforms that are needed. And for these reasons, we urge Congress to oppose the Panama Trade Promotion Agreement.
Thank you very much for the opportunity to express the views of the AFL-CIO. And I look forward to your questions.
SEN. BAUCUS: Thank you, Ms. Lee, very much. Forthright statement.
MR. CARNEY: Mr. Chairman, Senator Grassley, thank you for inviting me to this hearing.
I strongly believe as a farmer and a small businessman that the future of my family's farming operation depends in large part on future trade agreements and continued trade expansion. I cannot imagine another industry that has benefited more from trade agreements than the U.S. pork industry. We are the poster child of expanded trade. Thanks to new market access from the Uruguay Round and NAFTA and other trade agreements, the U.S. pork industry is now the largest pork exporter in the world.
In 2008, the United States exported approximately 20 percent of the domestic pork production. Pork exports added $48 to the value of every U.S. hog marketed and supported over 65,000 U.S. jobs in 2008. As a low-cost global producer of pork and the largest exporter of pork in the world, the U.S. pork industry is well-positioned to create jobs and generate wealth as the new trade agreements are implemented.
Last year, exports were our salvation. Due to high import costs, we are second worse financial year ever. Without a 4.9 billion in exports, the industry would have imploded last year. Unfortunately, just as things were starting to look up this year, we were hit by H1N1 influenza outbreak which wreaked havoc in our industry. Live hog prices have plummeted due to unwarranted fears about safety of pork and non-science based restrictions put in place by some of our trading partners. We appreciate the support of the committee, Congress, and Obama administration in combating these needless restrictions on our exports.
We are pleased, with the few notable exceptions such as China and Russia, these unwarranted restrictions have been removed. Every recent trade agreement, from NAFTA to CAFTA, have brought significant position benefits to the nation's farmers and ranchers. President Obama recently noted that exports count for 13 percent in U.S. total economic activity, but in agriculture, exports count for as much as 30 percent of farmers' income. In 2008, ag exports reached an all-time record of 115 billion, up from 46 billion in 1994, the year NAFTA was implemented.
The agreement, and the 13 that the U.S. have implemented, subsequently have principle reasons for exports growth. The U.S. Panama Trade Promotion Agreement will provide new market opportunities for a wide range of U.S. ag products. Immediately upon implementation of the agreement, more than half of these products will begin to enter Panama free of all duties. Most of the remaining farm products will become eligible for free access to Panama over a 15-year phase-in period. The American Farm Bureau Federation estimates that by 2027, when the agreement is fully implemented, the total increase in U.S. farm exports is expected to exceed $190 million per year.
NPPC is eager to have the pending three free trade agreements passed by Congress. The Panama Agreement, which implemented, will create important new opportunities for U.S. pork producers.
U.S. pork exports to Panama are currently restricted by small quota and out-of-quota duties as high as 80 percent. However, the Panama agreement, if implemented, will provide immediate duty-free treatment on pork variety meats and expanded market access for U.S. pork muscle meats through the tariff rate quotas. The TRQs will be phased out in 15 years, and after the full implementation period, U.S. pork will have unlimited duty-free access to the Panama market.
In addition to favorable market access provisions, significant sanitary and technical issues have been resolved. By a letter dated December 20th, 2006, the Panamanian government confirmed that it shall recognize the meat inspection system of the U.S. as equivalent to its own meat inspection systems. The technical agreement ensures U.S. pork producers will benefit from the Panama agreement without being blocked by unnecessary sanitary barriers.
According to Iowa State University economist Dermot Hayes, the Panama Trade Promotion Agreement, when fully implement, will cause hog prices to increase 20 cents higher than they otherwise would have been. Exports to Panama would be worth approximately $23 million to the U.S. pork industry in addition to revenue of otherwise would have not been the case.
No one should believe that there are no costs in rejecting these agreements. Other countries are moving forward with agreements that individually and collectively put products at a competitive disadvantage. Some 421 bilateral and regional trade agreements have been notified by WTO through the end of 2008. Another 400 or so are scheduled to be notified and implemented by 2010, through that organization. The U.S. is a party to just 18 of those 800-plus deals, and just 15 are in force. We will fall behind by standing still. Thank you very much.
SEN. BAUCUS: Thank you, Mr. Carney. A question for you, Mr. Eissenstat. I'm just a little perplexed here. There was a template agreed to roughly 2007, all parties on labor environmental provisions inspect the future FTAs -- back 2007 -- and it was not only assumed, it was stated by the parties involved -- this business industry, labor, House and Senate, so on and so forth -- that the next free trade agreements would proceed near that template.
And, it's my understanding that the agreement that's been negotiated with Panama does provide for those labor provisions and I further understand that Panama has agreed to make those changes and yet, and also, the country Panama Torrijos government has said that they would honor that and act in it but it would like the United States to send the agreement up prior to June 30th when the Torrijos government leaves power.
So, I'm just confused. Why would not the administration want to take advantage of that situation and send up the agreements since the labor provisions are those that were in the template, basically, that Panama's agreed to it -- those provisions -- and further, it's my understanding that Martinelli gov -- the subsequent government -- agrees to begin to negotiate a tax information exchange agreement. And, so what's -- I'm just scratching my head here -- it sounds like a pretty good deal to me. Why doesn't the administration just take it?
MR. EISSENSTAT: Well, thank you, Senator. I think you're absolutely correct. This agreement does incorporate the May 10th provisions on labor and the environment and we've been working with the government of Panama to ensure that their labor regime fully reflects that commitment that was the agreement between Congress and the executive branch.
The President believes that it is very important that Panama be considered in the context of a broader domestic agenda. As I indicated in my opening statement, it is important that the President have an opportunity to articulate this framework in conjunction with the Panama agreement so it can be understood how the agreement will fit into the broader, overall domestic agenda.
SEN. BAUCUS: Overall? Is that --
MR. EISSENSTAT: The overall domestic and trade agenda. Yes, sir. And many of those elements this committee has been very active on, including health care reform, infrastructure, a lot of the elements that have been on the domestic front. That is not my area of expertise, but it is part of the broader picture and the idea is that we need to ensure that all these pieces fit together so we can build an economic framework that can help the --
SEN. BAUCUS: And trade is part of health care reform?
MR. EISSENSTAT: No. No, Senator. There's several elements to the framework. There's both the domestic policy elements and the international trade framework. And you articulated correctly a couple of the elements of the international trade framework, which is the strong labor and environmental provisions incorporated in the agreement, reflected in the laws of the countries with which we have those agreements. So, that is one element.
There's also the domestic part, so that the American worker can thrive in this dynamic global economy -- Trade Adjustment Assistance, some of the other initiatives that this committee has undertaken -- and working together to provide a framework for the American worker to be able to thrive in a very quick and dynamic economy. The President will be articulate --
SEN. BAUCUS: I need to ask how wide sweeping? How broad? When do we receive this? Meanwhile, June 30 is coming pretty close. (Crosstalk).
MR. EISSENSTAT: No, that's a very good point and it is a difficult situation because we do have the Torrijos government that obviously will be leaving power at the end of June and then a new government -- the Martinelli government -- coming into power shortly thereafter. So, we've got a transition ongoing and we've been working with both governments on issues that's concern on both the labor front and the tax front. As Senator Grassley and yourself pointed out, we've made great progress in both areas and in fact, the statement that Senator Grassley referenced by the -- I believe it was by the Vice President Elect Varela -- is a very powerful statement, I think, to their continued commitment and the incoming administration's commitment to open this in transparency.
SEN. BAUCUS: To be honest, this sounds --. Senator Grassley wasn't with me. I was down with the President. He went to Mexico City and the Summit of the Americas down at Trinidad and we -- I, others were there, members of Congress there -- met with President Torrijos and we discussed their concerns and frankly, what I understand to be the agreement now is a major advance compared with what the state of play was back then. It was not too long ago, about a month ago. And, man, my honest -- (inaudible) -- is don't take it.
We can always negotiate frameworks. You know, trade policy can always come out in the next couple weeks, next month, whenever. But, man, this is a -- I mean, if we don't take this now we've jeopardized getting an agreement. It may not be an agreement. You know, to some degree -- I'll just be honest with you -- I think to some degree there's a sense the United States -- especially with the President's visit to Trinidad -- that is interpreted as good faith effort for the United States to help reach an agreement with Panama and now he seems to be backing off and I just don't get it frankly, personally. Senator Grassley.
SEN. GRASSLEY: A comment on what you just said because I agree with what you said, totally, but I'd also, as I hear Mr. Eissenstat states the administration's position, it sounds to me if trade issues are dependent on health care reform, dependent upon other things, that we vitalize the economy, there's pie in the sky that all those things are going to fit together and they all got to kind of make sure they're all going to pass before we pass a relatively small trade agreement. We ought to be doing things that we can. It may sound a little piecemeal to pass a Panama Free Trade Agreement, but it's going to do some economic good. It's been proven in other trade agreements, particularly in the Western Hemisphere and that we ought to move ahead.
I'm going to start out with my questioning of Mr. Carney. You touched on this a little bit, so I'm not going to ask you just about Panama, but could you elaborate on the value of our trade agreements generally, to address sanitary and technical barriers to trade. For example, with respect to trading partners that don't recognize the equivalency of meat inspection system.
And then, let me follow up with this one. In your experience, do countries with which we had bilateral trade agreements treat our pork exports significantly better than countries with which we do not have bilateral trade agreements?
MR. CARNEY: Yeah, I can explain a little bit on that. First of all, the ones that we don't have agreements and, I'll touch base with, like, Russia. And we've had troubles there and they've de-listed our plants and then they re-list our plants and we don't have -- they're not even in a WTO member -- and we don't have a free trade agreement and right there's a problem. Where we do have the free trade agreements and they are in the WTO, we do -- the sanitary barriers are tried to eliminated in these free trade agreements.
So, if you need more information on that, I can get you --. I don't have it all in front of me right now, but I can get that to you.
SEN. GRASSLEY: I'll follow up with something maybe you or your association can answer in writing then. Ms. Lee, in your testimony, you criticize the government's procurement provisions in our trade agreements. Does the AFL-CIO oppose the provisions in the Panama Agreement that would require Panama to allow U.S. manufacturers to compete for contracts to help expand the Panama Canal?
MS. LEE: The procurement provisions that we object to are those that would limit the ability of the government, including the U.S. government, to use domestic sourcing preferences, to use American taxpayer dollars to create good jobs at home in our own communities. And we think that it's inappropriate for trade agreements to put additional limitations on that. With respect to transparency -- and countries can do whatever they want. If they want to open up their procurement provisions, we're very supportive of transparency in government procurement provisions and volunteer commitments that are made along those lines, but we don't want to do is weaken our own ability to put in place protections that are either -- with respect to social and environmental objectives over respect to job creation at home.
SEN. GRASSLEY: Mr. Eissenstat, what's your reaction to --
SEN. PAT ROBERTS (R-KS): Will the Senator yield? I'm over here.
SEN. GRASSLEY: Yes.
SEN. ROBERTS: I don't understand. Ms. Lee, I don't understand your answer to the Senator's question. Maybe I'm just dense, but I don't get it. I don't know whether I just didn't understand it or that's just your rote answer to what we're trying to do with the Panama Canal or what.
SEN. GRASSLEY: I think what she's getting at, we wasn't quite sure whether or not you see the relationship between U.S. manufacturers, particularly if they're going to use products down there that are manufactured in the United States. Wouldn't you like to have those products manufactured by American workers to be used in the expansion of the Panama Canal?
SEN. ROBERTS: That was the question. I don't understand the answer.
MS. LEE: Well, the answer was with respect to our criticism of the government procurement provisions, in general, in trade agreements. And so I was answering with respect to the argument that we've made that the government procurement provisions and the WTO, TPA and the --
SEN. ROBERTS: Okay, so you're opposed to the government provisions -- and I'm sorry I'm taking your time -- overall, but we're talking about Panama and these particular provisions.
MS. LEE: Right.
SEN. ROBERTS: So, you're tying them together simply because you're opposed to the whole shebang?
MS. LEE: Well, and we're concerned about what the impact of the government procurement provisions have been on U.S. ability --
SEN. ROBERTS: I understand that. But, this particular provision doesn't really deal with that.
MS. LEE: Of course, it does. It's a two-way sword. It's not just about opening up the Panamanian government. It's also about making a commitment on the part of the United States to open its own procurement markets, as well. It deals with both. That's how the procurement provisions work in the trade agreements.
SEN. ROBERTS: I'd just like you to shake hands with the guy to the left of you. He's got a stake in this.
MS. LEE: I'd be happy to. (Laughter.)
SEN. GRASSLEY: Mr. Eissenstat, this is just a short question, and it's not to just what she said, but generally speaking, what's your reaction to the concerns that Ms. Lee raised about Panama labor laws -- and I'm speaking more about her testimony than I am her answer to my question. That's just one example. And then that's the last question I'll ask.
MR. EISSENSTAT: Thank you, Senator. Well, obviously the Congress and the administration have shared some of those concerns and I think, that that is why there was some agreement within the May 10th compromise -- the Congressional-Executive agreement to undertake these provisions as part of the core of the agreement, itself.
And, we have been working with the government to address a lot of these issues and we know that the Torrijos administration has already taken steps as recently as this week on a number of issues that have been outlined in the AFL-CIO testimony and we expect them to continue to take steps forward. They're committed to making sure that these ILO core labor standards are reflected in their domestic labor regime, which will significantly enhance the standard of living in Panama and the working conditions there.
SEN. GRASSLEY: The chairman's list says that Mr. Menendez is next.
SEN. ROBERT MENENDEZ (D-NJ): Thank you, Mr. Chairman. Mr. Eissenstat, let me ask you, one of President Obama's consistent campaign pledges and his consistent engagements since becoming president has been closing tax loopholes and eliminating tax breaks for corporations that off-shore United States jobs. Panama is a renowned tax haven, considered one of the top tax havens in the world, both U.S. and multi-national corporations. It has lax financial regulations and is one of the easiest countries in the world in which to register a foreign subsidiary.
So, what in the agreement that we are discussing today addresses the tax haven problem and what effect, if any, does it have on Panama's regulation of its financial sector?
MR. EISSENSTAT: Senator, those are good questions and I have a two-part answer. First part, there are provisions in the agreement in the services sector that do provide for transparency and openness that do not exist now in the services regulations. So, a more open transparent process there is in the agreement.
But, in parallel to the agreement, as you know, there's a number of steps ongoing, many of which Panama has been taking part in, to address these concerns over taxation issues, including the OECD framework. I would like to note that they have committed to the principles of transparency and information exchange in 2002. We are continuing to dialogue with them.
We understand from our conversations with the Torrijos administration, they're going to take some steps very soon to deal with what's called numbered accounts, which would be a way to hide assets from an individual owner. We also understand that they recently took steps to put in place a presidential committee that will make recommendations to immobilize bear shares which requires legislation in Panama. The immobilization of bear shares is very important, because as you know, someone with a bear share is able to hide an asset --
MR. MENENDEZ: Let me just interrupt you for a moment.
MR. EISSENSTAT: Sir.
MR. MENENDEZ: These are all prospective aspirations. They are not included in the agreement.
Is that correct?
MR. EISSENSTAT: No. The taxation issues are generally in parallel to the agreement. Yes, sir.
MR. MENENDEZ: They're parallel to the agreement. They are not part of the agreement. Is that correct?
MR. EISSENSTAT: There's nothing in this agreement specifically -- there are exceptions on taxation policies -- but generally the agreement does not apply to tax issues.
MR. MENENDEZ: Okay, so if the agreement does not apply to tax issues, then largely speaking, we are working on the aspiration that the government of Panama will change its tax laws and regulatory processes in a way that we would hope to see so that in fact, it does not continue to be the tax haven that it is for U.S. -- other companies, as well, but as far as we're concerned, U.S. Companies.
MR. EISSENSTAT: Well, we are and in fact, I think that because of the relationship that we have and because we've built this relationship through the negotiations for so many years, we've been talking to them about this and making significant progress, some of which --
SEN. MENENDEZ: If we would have passed the agreement tomorrow, nothing that we really, for the most part, want to see as it relates to the reality of Panama being one of the world's top tax havens, would change. Is that true?
MR. EISSENSTAT: Well, I think that --
SEN. MENENDEZ: As a result of the agreement, would it change?
MR. EISSENSTAT: As I said, generally the agreement does not apply to taxation issues. If I could just mention one other factor that I think is important that as I discussed, there's a transition ongoing. There's a new president elect that was just elected -- the Martinelli administration. There was, as was noted, a very important statement that was put in the press by the Vice President Elect today and I could read that if you would be interested.
SEN. MENENDEZ: No, I'd be happy to receive it. I sit on the Foreign Relations Committee, so I'm very aware of what the new administration is aspiring to, and I think they're headed in the right direction. The point is I don't want anyone to be misled that this agreement does anything as it relates to those tax havens and so we are looking aspirationally towards what the government of Panama may do down the road. But, if we were to pass the agreement tomorrow, we'd still have Panama at least, in this point in time, as a major tax haven. That's a fair statement --
MR. EISSENSTAT: The work is ongoing. Yes, sir.
SEN. MENENDEZ: But, as of tomorrow, it would still be a major tax haven. Is that not the case?
MR. EISSENSTAT: Until these steps are taken, there are elements of that.
SEN. MENENDEZ: And, then finally, with reference to the labor provisions -- which I agree with the chairman -- have been incorporated in this agreement, but in your testimony you talk about what's going to happen in terms of implementation. Is that implementation viewed in the time frame that would take place before both here or is that an implementation that again is in the future?
MR. EISSENSTAT: Well, we've actually seen steps on some of the issues that we've discussed with Panama being taken as early as this week. So, actually, some of the reforms are in place as of today and our understanding in our conversations with the current administrations, they're going to continue moving in that direction. They're both legislative and regulatory steps that are going to be taken and we anticipate that they will be in place. I can't give you a specific time frame, but I know that they're committed to it and we would expect that to occur before the end of the administration.
SEN. MENENDEZ: Thank you, sir.
SEN. GRASSLEY: Yeah. Thank you, Mr. Menendez. Mr. Crapo stepped out, so now Senator Bunning.
SEN. JIM BUNNING (R-KY): Thank you, Ranking Member Grassley. First of all, it's been since June since 2007. Both countries -- both the United States and Panama -- signed this agreement in 2007, June 28th. So, we've been dealing with it for two years. Almost everything that Panama sends to the United States is duty-free. Almost everything. Not quite everything, but almost. Ninety-six percent is duty-free. More than 88 percent of the U.S. manufacturing exports would be duty-free if this agreement were in force, with the remaining tariffs phased out over 10 years. That's according to what we've already signed. More than 60 percent of our agriculture exports to Panama will receive duty-free treatment immediately, and the remaining tariffs will be phased out over 15 years.
Approval of the U.S.-Panama Trade Agreement would also improve Panama's economic development and maybe -- and just maybe -- the improvement of the Panama Canal so that it could actually handle the larger ships that need to be handled. Unfortunately, they're limited right now.
My question for Mr. Eissenstat. I support the Panama -- (inaudible) -- agreement, but I also believe that we have a Colombian trade agreement is essential to our national interest, especially because Colombia's proximity to Venezuela. Can you tell me what the administration is doing specifically to move Colombia along with Panama? You outlined this broad picture for us that it has to fit into a broader picture, but it didn't say anything about things which we have already agreed to, which are Colombia and Panama and, not Korea yet. We're still working on that one.
But, health care is going to be done at the pace that this administration would like to see it done here in this committee. But, trade is not health care. What I'm trying to say, is that we understand the broad picture. We see it every day in -- if you're on the Energy Committee or you see an energy bill coming before us that deals with a lot of different things and in this committee, we're going to see a health care bill. And, so we understand the broader picture. But, specifically on trade, we do not see any movement. So, maybe I can get a better explanation from you.
MR. EISSENSTAT: No and thank you. And I appreciate that opportunity. I do think that the way that I articulated it, it gave a perception that these were conditions precedent and I don't want to give that perception. These issues move in parallel, the trade agenda, the domestic agenda. It's all part of the broader framework that the president will be laying out in his vision of how this fits together. Now --
SEN. BUNNING: When would that happen since we've dealt with these for two and three years? I mean, we've had an agreement with these foreign countries and I think preferential trade agreements are proven to be very beneficial to the United States and our trading partners.
MR. EISSENSTAT: Well, I think that the key question would -- or one of the key elements is to move the agreement at a appropriate time in consultation with Congress, so it gets its support and enables us to move forward on the broader trade agenda, including other items like Colombia, so it's not --. Panama's a very important agreement and that's why we've been working on it since the administration began.
SEN. BUNNING: Well, because they're changing administrations, first of all.
MR. EISSENSTAT: That is -- part of the transition does require some movement and some discussion and some review of the agreements, I think, that would be expected. But, since that time, we've also been working with them to understand their labor regime, make sure their labor regime fully implements the commitments under there, to address some of the taxation issues, which are somewhat recent concerns because of the financial situation --
SEN. BUNNING: I've got to ask one more question.
MR. EISSENSTAT: Yes, sir.
SEN. BUNNING: So, I'm not trying to cut you off, I just want to make sure I ask the question of Mr. Owens.
I appreciate your testimony about how the pending trade agreement will open up new opportunities for American companies like Caterpillar. I realize that this hearing is on trade policy, but I also believe that U.S. tax policy has a dramatic impact on the ability of American companies to compete in the global marketplace. If policies like the repeal of tax deferral on overseas income were pursued, can you talk about how that would affect the ability of U.S. companies to compete with foreign multi-national companies in international marketplaces?
MR. OWENS: Thank you, Senator. I'd be pleased to. As you know, it's a very significant concern to the multi-national business community. I think the fundamental question for the American public is, "Do we want to have leading U.S. multi-nationals -- companies based here that are the leading companies in the world". If the answer's "no", which I'd be surprised and disappointed, I'd guess we could all move our headquarters.
I think the answer's "yes" and if the answer's "yes", then we have to think about what does it take to have U.S. headquarter companies be competitive and be winners in the global marketplace. If we repeal deferral or if we, you know, completely repeal deferral and keep one of the highest corporate tax rates in the world, we render American multi-national companies uncompetitive.
Just take a small example: China. I compete in China. I have investments in China. I compete with Koreans, Japanese, European companies, as well as domestic Chinese companies. I would really like to see our government -- the United States government -- negotiate a level playing field for me there. I feel like I can compete and I know other multi-nationals feel we can compete given a level playing field.
But, let's say their tax rate in China is 25 percent. We pay that tax as we earn profits on the investment in China. So do the Japanese, so do the Koreans, so the Europeans and the domestic players. Level playing field. If we have to top ours up to 35 percent immediately on all the profits made, the differential tax of 10 percent on all the profits we earn, we simply can't compete. We'll end up having to sell our Chinese subsidiaries as will other U.S. multinational headquarter companies or move our headquarters.
Almost every major trading competitor we compete with has a territorial tax scheme where you pay the tax in the country you earn the profit in. And that you can then repatriate that money tax free back to your home country base. It seems to me that would serve the United States very well.
I fully recognize U.S. companies need to pay their fair share of the tax, and we're prepared to, we want to. And we want to stay an American based company.
SEN. BUNNING : Thank you very much.
SEN. BAUCUS: Mr. Roberts, you're next.
SEN. ROBERTS: Mr. Chairman, thank you for your courage and your very candid comments and the same for Senator Grassley and my dear friend from Kentucky.
My statement goes into why trade is important to Kansas and I think that's obvious but I would like to mention that our Kansas farmers and ranchers know that 35 percent of the Kansas farm economy relies on egg exports much like Sam was talking about our cash receipts totaled over $11 billion. That's what's at stake here, $11 billion here in regards to Kansas producers, we have to export over half of our wheat crop. And if you cannot do that in regards to what we're already doing and we have an opportunity to do more especially in Panama, every farmer and rancher will pay the price. So I have little feeling about this.
And it's just not Kansas agriculture or manufacturers exported. 4.7 million in transportation equipment last year, that's a big number in Kansas, I know it is and you know we talk about billions and trillions here but it's a million bucks, it's relatively significant. Approximately 80 percent of export are small and medium size enterprises, lowering barriers would certainly help these folks and their workers. U.S./Panama trade agreement levels the playing field for two way trade, I'm not going to get into all that, it's been stated before.
I want to say something. As the former chairman of the Senate Intelligence Committee and I worried about the Southern Command, there are 31 nations in the Southern Command, 360 million people, average age 14 and most of them malnourished and we're entering into a situation now where our relationship with our Latin American allies and all those countries in that Southern Command have grown more hostile towards the United States. Panama is a very important country in between, it is strategically located obviously the Canal is extremely important to us not only in terms of a shipping route but I guess strategically.
So I think this is a national security issue as well as a trade issue.
Is that for me?
MR. : I'm sorry.
SEN. ROBERTS: That's okay. That's all right. Yeah. Well Franki was trying to get in touch with me. She wants me to shave the beard but then that's another whole issue.
SEN. BAUCUS: You want to expand on that Senator?
SEN. ROBERTS: No, I don't. (Laughter.) I've already expanded enough.
And Mr. Owens I was going to ask you how the exports side of your business has been impacted by the recent economic slow down and I know the answer but how have exports helped your ability to sustain your business in the middle of this slow down?
MR. OWENS: Okay. Thank you very much. Well roughly 50 percent of everything we manufacture in the United States is exported. Last year we exported about $16 billion worth of product that not only effects our own employment directly but also probably three times as many employees of small and medium size companies who are our suppliers. So I think we demonstrate we can very effectively compete in the global marketplace from a U.S. manufacturing base and I would encourage us to think more about competitiveness of U.S. manufacturing and encourage exports, so we're proud to be there.
But we have been severely impacted. The global economy is in a severe unprecedented since the '30 recession and it has had a huge impact on our employment and our suppliers' employment as we've downsized our business this year.
SEN. ROBERTS: I appreciate that.
Mr. Eissenstat, you know all about the beef industry and it's pretty central to our state's economy and then the pork industry from Iowa, you know about the consequences of what diseases like SBE and more recently the H1N1 virus can do to the livestock industry. Countries can and they do shut down their trade based on fear or politics or whatever while ignoring sound science and their broader trade obligations. In your statement you highlight the sanitary and -- (inaudible) -- sanity, the SPS portion of the agreement. Can you expand on why the consensus in the SPS area is so important?
MR. EISSENSTAT: Well Senator it is vitally important. I think that the tariff reductions are one element to our ability to export quality products like beef but if there are sanitary and unjustified scientific barriers to those exports, we can't get into the market.
As you know we have a very sound agreement with Panama that is really made a difference from what I understand in our ability to export to that market and the tariff reductions will actually enhance and be a big part of that whole picture enabling us to continue to take advantage of that export market.
SEN. ROBERTS: I appreciate your answer.
Mr. Chairman, my time has expired. I'm nine over, but I just want to say something. I remember clear back in NAFTA when I worked with Kika de la Garza the esteemed chairman of the House Agriculture Committee, he was the Democrat I was the Republican.
A lot of criticism about NAFTA and it still remains but I said at that time I think a lot of trade agreements are oversold. I think we tend to oversell them in regards to the prospects of what we can do but the real thing that I want to touch on is that they're definitely over criticized. And boy are we seeing that today.
And you've asked the question when is the president, when is this administration going to move on this prior to June whatever that date was that you mentioned. Mr. Eissenstat said that we are going to have to articulate a broader domestic agenda. Man, I don't know how much broader it can get. I mean, you've got a fire hose coming at us.
We're going to nationalize, we've nationalized the banks, we've nationalized the automobiles, we've nationalized insurance, credit cards you name it and as these things fly by us and we're going to do it with education, we're going to do it with health care, we're going to do it with cap and trade that may or may not work, probably won't but that's just my prejudice and as this stream of change comes by in all these little bits and pieces, I want to grab on to them and so whoa, wait a minute, let's have a hearing, let's put in regular order, let's put it in the committee of jurisdiction. If we're waiting on the president to articulate all that, we're going to wait years. When's he going to make the speech on the broader domestic picture? I'm not doing that right, I tried to write this down and I used to be a reporter but I can't read my writing. (Laughter.)
I don't understand when we're trying to increase trade as a possibility to Cuba with Raul Castro and Fidel in whatever shape he's in and Max and I went down there to see him one time and spent a whole evening learning about the world according to Fidel. And then we trade with China which is probably in violation of every human rights agreement in the world, and I shouldn't say that but that's exactly what we're doing.
And then we're even talking about possible trade to Iran as a carrot out there to say stop what you're doing in regards to your nuclear ambitions. Here we have three countries, South Korea and Columbia and now Panama strategically located very important to our national security, very important to send a signal to manufacturers like Caterpillar or to the hog industry or the pork industry -- (inaudible) -- and Kansas with $11 billion and we're not doing anything. We have one senator who has raised nine different objections on the labor laws of Panama. Shucks, he ought to run for labor secretary of Panama. And I don't see it happening. In some ways I think you have great courage to have this hearing but I don't think it's going to happen. And this is nuts. Absolutely nuts. Ms. Lee, you can complain about everything from apples, aardvarks to zebras, my Lord, in the circus of trade, and I understand that and the Lord knows during this economy we want to do everything for the worker but you're cutting off your nose to spite your face.
SEN. BAUCUS: Senator, thank you very much. Why don't you make as we walk and chew gum much better than we do now. Okay. Senator Wyden, thank you for your patience.
SEN. WYDEN: Thank you Mr. Chairman. As the new chairman of the trade subcommittee on the basis of what Senator Roberts has just said I'm going to have my hands full and I want my colleague to know I'm going to work closely with him and of course with the chairman.
First question to you if I could Mr. Eissenstat, how many multinational corporations have subsidiaries in Panama now?
MR. EISSENSTAT: Senator, I do not know the exact number but I believe it's over 300,000.
SEN. WYDEN: So as of today there are over 300,000 corporations with subsidiaries and obviously on the basis of what colleagues are asking about there are questions about whether this is being done to take advantage of Panama's status as a tax haven. And I think the question I'd want to ask on the basis of what colleagues have already gotten into at this point is what is the agreement, does what the FTA do to the standing of these corporations, these hundreds of thousands of corporations to challenge current and future U.S. regulation and take an area of financial services, any area.
MR. EISSENSTAT: Well thank you Senator, I'll note at the outset that while there are many subsidiaries there I think there's a misperception that many of them move there primarily because of the taxation regime. I do not believe that is the case. I think a lot of them move there to expand market share in the region, it is a transportation logistical hub in a very important growth market with eight percent growth.
On your specific question the agreement actually builds upon the bit that's been in place now with Panama for 25 years and it actually takes and modernizing the bit to take into account many of the new elements including the elements of the investment agreement in the May 10th agreement to incorporate those elements as part of our investor state dispute process. So the question is what does this agreement do to enhance those rights? It actually those rights exists for corporations today under the bit. This brings in and builds in new protections, procedural protection and also sets out some standards for review when these issues go forward.
SEN. WYDEN: What would be an example of such a protection?
MR. EISSENSTAT: Well that's a good question and it's actually one of the areas that we've advanced very significantly on the procedural protections in consultation with this committee for example in the investors state arbitration I'll just run through a quick list here. Hearings and documents are public, it's eligible for -- (inaudible) -- so if somebody has concerns with a particular case that's been filed, they have the right to have that case put before a dispute settlement panel and have it reviewed by that panel and those facts taken into account and those legal arguments put forward as well.
The tribunals also have the ability to dismiss frivolous claims and if there is a frivolous claim filed they have the ability to award attorney's fees in that instance. In a couple other, governments can actually review the opinions before they're issued and there's also a provision that enables governments to issue a joint interpretation of the rules that are binding once that occurs.
So those are some of the protections and also substantive protections, it's a very complex area as you know. But basically the substantive protections are designed as part of the work of this committee to reflect U.S. Constitutional principles of taking the juris prudence and that is what basically the substantive elements of the investor chapter is intended to do.
SEN. WYDEN: And what else can be done to address senator's concerns? And I'm sure I'm going to get this, Chairman Baucus will get this, to address the concerns of senators about Panama as a tax haven?
MR. EISSENSTAT: Well it's a very good question and there are a couple of steps that have already been taken. Very recently one which I don't want to be under minimized is the step that the three host government is committed to taking on barer shares which is basically the ability to hold corporate shares without identification which is one way to hide your assets and evade taxes and he's committed to mobilizing those which is a very important step forward in transparency and has formed a committee in fact of legal has done just this week to do that and we expect legislation on that in the near future.
There was also in partially because of the way that we've been working with the government of Panama based upon the overall trading relationship some discussions of them on the taxation issues, this is as you know under discussion for many years, but we are seeing a general movement, not just with Panama but in the world toward greater transparency and the key to that is obviously a trade information exchange.
SEN. WYDEN: Here's my message, push harder.
MR. EISSENSTAT: Yes, sir.
SEN. WYDEN: Because I can tell you when this agreement comes up, this is going to be one of the litmus tests and perhaps one of the key questions that is going to be debated here and certainly going to be debated on the floor. And that's the question of what this agreement does with respect to Panama as a tax haven. So push harder.
MR. EISSENSTAT: Thank you Senator.
SEN. WYDEN: Question for you Mr. Owens if I might, one of out seven jobs in my state depends on international trade, the trade jobs pay better than do the non-trade jobs and I have voted for every major market opening agreement since I've been in the Congress.
My principles on trade have not changed in the least, but the way the American people look at trade has clearly changed, not just in my part of the country, but everywhere else. And there is a sense that these trade agreements are good for people in the front office but they aren't so good for people in the back offices and the people out on the shop floor, there's a sense that their jobs are being exported. And I would like your sense about what else can be done at your company and in this agreement to expand the winner's circle, to expand the winner's circle for the members for example Ms. Lee has a lot of members who want to know what's in this agreement you know for them, what are they going to get out of it?
I said in the past that when there's a major trade agreement that's passed, part of the tariff reduction ought to be shared with the workers and I don't think you even need a piece of legislation to do that. You can just turn around and say we believe in expanding the winner's circle, we want to share some of the winnings with workers. So if you're speaking to blue collar workers that are skeptical about this agreement and other market opening agreements, what's in it for them?
MR. OWENS: A terrific question and I agree there is a public skepticism of trade in general which is astronomical and it's been demagogued every job loss gets blamed on trade. First off I think the business community has an obligation to get out and speak more to our communities and to our employees to help them understand the benefits of trade. A lot of the manufacturing "job loss" the vast majority in fact comes from productivity gains which were changing the demographic of the American workforce.
We spent a lot of time trying to help our employees and our suppliers I might add understand that their jobs are critically related to successful trade agreements. The free trade agreements we've negotiated as we talked about earlier here, we've been hugely successful in expanding our exports to those markets.
Last year if you just took Illinois, the big three plants that we have in Illinois, all very well, you know, paying jobs terrific plants, highly productive, competitive on the world market, close to 60 percent of everything built in those factories was exported. We are the number one or number two player for every major product line on every continent and last year we exported $16 billion worth of product.
Most American companies I think are confident in their ability to compete and given a level playing field. We mask sometimes the benefits, I mean nobody talks about because there are multiple winners. The fact that the average American family, not even the-- (inaudible) -- institute estimate benefits to the tune of about 10,000 annually from the globalization efforts that we've already achieved. And that comes in the form of lower prices for generally everything they buy and a better choice.
I think trade is truly a win/win, you know, we always want to characterize it as win/lose in the fact that it's win/win. You know I find it hard to imagine that anybody in the country particularly anybody who's traveled extensively to China thinks that the world is not better off because the Chinese economy has expanded and the standards of living in China lifting hundreds of millions of people out of poverty, that we're not better off even in our country for that event, that happening.
SEN. BAUCUS: I'd like to know if I can ask a question here. It's, you know, Mr. Owens you like this agreement because it helps obviously your company but what does that do for jobs here at home in America? I mean, -- (inaudible) -- set up plants overseas and so on and so forth which doesn't really help you know Americans looking for jobs in the U.S.?
MR. OWENS: Well I think it's, maybe it's misunderstood in fact we can demonstrate that when we set up overseas manufacturing activity, it's helped our U.S. exports. China's a good example. We have a number of factories in China today that build our product, but it has allowed us to create a marketing and distribution presence in country, a brand recognition, and it has increased our exports to China as we've made that manufacturing investment.
So in China today we sold over $2 billion worth of product last year, the majority of that was exported to China.
SEN. BAUCUS: That's the case, that's my question, I mean, it creates jobs in China --
MR. OWENS: No, it creates jobs in the United States.
SEN. BAUCUS: But I'm saying --
MR. OWENS: Expert jobs.
SEN. BAUCUS: Right, also in the United States but both.
MR. OWENS: Both places. Absolutely.
SEN. BAUCUS: Right. So my question really is on a net basis, more here or more there?
MR. OWENS: Generally speaking more here, I mean, if a multinational company's headquartered in our country, I believe it creates administrative jobs, financial services and tracery related jobs, research and engineering related jobs that are used in our manufacturing operations around the world.
And if we went to a territorial tax regime that's similar to what other large industrial countries have, Germany, all the European countries essentially, Japan, Korea, they have a territorial tax system. If we had that, U.S. multinationals would bring all of their foreign profits back to the United States and we would manage it from here. But we need to be engaged in the world. We're five percent of the global population. If we're going to have leading companies that are U.S. based we have to not only export from the United States but invest in creating a presence if you will in the key countries of the world to allow us to be successful in those countries.
SEN. BAUCUS: (Inaudible) -- and that's a huge big issue -- (inaudible) -- the United States can risk world wide territorial, that's a huge issue.
MR. OWENS: I know.
SEN. BAUCUS: And there's a lot of our, for it. But I'd be interested in getting data from -- (inaudible) -- good you know like how much, how many jobs does Caterpillar invest overseas, how many jobs are created overseas versus how many jobs created in the United States? That would be helpful to me.
MR. OWENS: In broad numbers, we employ about 10,000 people around the world today, about half of them in the United States, half of them outside the United States. And the half outside is scattered. We've been in Brazil for 55 years, we've been in Europe since World War II so we have a manufacturing presence all over the world.
SEN. BAUCUS: I see Ms. Lee seeking recognition here.
MS. LEE: Yes. Thank you. I just wanted to get in on this conversation because I think it's an important one about whether U.S. companies have done a good job in terms of managing globalization and what they've done for American workers.
You know, we talked a lot about exports today, we've heard a lot about exports and the importance of exports and American workers are totally in support of the idea that the United States should be a successful exporting county, but for too much of the time I think we forget we ran a $700 billion trade deficit last year so we were importing $700 billion more than we were able to export. Some of that oil, but a large chunk of it was manufactured goods. We've lost almost five million manufacturing jobs since 2000, not all of them due to trade, but I think about half of them probably due to trade according to the research that we've done.
But even the productivity gains which you talked about are important. We've lost some jobs to productivity gains to improve technology but what we haven't seen is that in the past, there's been a linkage between productivity gains and wage gains. Now that's productivity increases the amounts that each worker produces generally that allows for non-inflationary wage gains, but we've seen a rupture between the growth and productivity which has been pretty substantial over the last couple of decades, and in fact decline or a stagnation in real wages, real hourly wages.
So you know when you talk about the figures, the average American family has benefited from trade, well the average American family is losing ground in real terms. So even given all the cheaper imports that we're able to buy, the average worker, the typical worker, the full time median worker earned less in 2008 than, typical male worker working full time than he did, his counterpart did in 1975. So that's 30-some odd years of technological improvement --
SEN. BAUCUS: Let me ask a question.
MS. LEE: Yeah.
SEN. BAUCUS: Let's assume I mean take your point only for the purpose of the discussion, that is the productivity gains are not passed on to workers, let's take that as a given without arguing it one way or the other, what -- (inaudible) -- is trade relevant to that point?
MS. LEE: I think it's extremely relevant to that point because what I would argue the reason that productivity would diverge from wage gains is that bargaining power of workers is undermined. And there's a couple of reasons why that would be the case.
One is globalization that to the extent the companies are global and mobile internationally and workers are not. We live in the United States, we can't outsource ourselves, we need to find a good job on American soil unlike American companies who can make money wherever they go in the world. So to the extent that the companies sit down and this happens to my members every day, they sit down at the bargaining table and they say you've got to take a pay cut, you can't have health care, you can't have a bathroom break, you can't have safety equipment because we're in a global economy now. They use their global mobility as a way of bargaining down wages. And the second reason for the diminished bargaining power is the decline of unions and the attack on unions --
SEN. BAUCUS: Right.
MS. LEE: -- and globalization has been one part of that.
SEN. BAUCUS: Mr. Owens take a crack at that. Has productivity passed on and what about the point that Ms. Lee was making?
MR. OWENS: Good question. I mean if you look at the industries that have been the most impacted by foreign competition in terms of last jobs, for example textile industry would be near the top of that list, and it by the way was a non-union environment in the textile industry.
MS. LEE: No, no.
MR. OWENS: We have -- largely.
MS. LEE: We have --
SEN. BAUCUS: You want to speak in the microphone, please? You can talk to Mr. Owens, that's fine -- (inaudible) --
MR. OWENS: Anyway, things like high tech industry in the United States, pharmaceutical industry in the United States, some of our highest tech industries are largely you know it's not so much the matter of whether they're organized in terms of labor unions or not, it's a matter of education and skill of the work force I think that has a big impact on compensation.
And I think we can have very high paying jobs here that are competitive in the global market place, and in addition to that of course I think we almost have to get away from this blue collar white collar related discussion, we have employment in our case almost half of our employees in the United States are in tradition of what you might think of as white collar jobs because a lot of our manufacturing operations are very highly automated and robotic and it takes a lot more, you know, design engineers and computer scientists and -- (inaudible) -- and everything else to run our business and global business successfully. So it's all payroll.
SEN. BAUCUS: And I appreciate that and -- (inaudible) -- any more questions, this is an extremely important conversation so my next point, and do not misunderstand it, misinterpret it, but I just can't resist.
I've always for a long, long time wondered why in the world is it that the Panama Canal, the Pacific Ocean level higher than the Atlantic Ocean? (Laughter.) If when water seeks its own level down at the bottom of you know South America. I could never figure that out. And I remember once I asked this question first, it popped into my mind and I was seventh grade or something and I asked my science teacher that question. He thought I was being some upstart wise blankety-blank kid and it was just an honest to goodness question. And I never seem to get an answer to it. So I'm wondering to what degree will this treaty level water level? (Laughter.) Actually I looked into it a little bit and my understanding is the Pacific Ocean is a little bit higher than Atlantic, about 20 centimeters and it's due to a higher density of the Atlantic Ocean versus the Pacific. It's due also to water currents and it's cold and wind current and so forth. But it's, and if there were, if you could dig a ditch between the two right straight on through, water would pass from the Pacific side straight on through to the Atlantic. It'd be a flow of water through. So that's intrigued me, one's higher than the other. (Laughter.)
MR. OWENS: You should talk to my friend Raleigh Bectal (ph). He's the engineering of this thing is to essentially keep the fresh water in the canal because now almost every boat that transits out, all the fresh water goes into the ocean and the engineering of the expanded canal is essentially will preserve the fresh water. It's quite an engineering --
SEN. BAUCUS: That's a very interesting point. You have to keep the fresh water there. That's very interesting. Thank you. Mr. Wyden, you can wrap up.
MR. WYDEN: Thank you Mr. Chairman. I wasn't up on the water level issues but I sure share your views about the American jobs issue and look forward to working with you closely under your leadership.
Let me see if you can get into this issue of the winner's circle a little bit differently because one of the things I want to do working with Chairman Baucus is try to bring business and labor together on trade issues, obviously easier said than done, there's been a lot of tension in the past of terms of trade agreements and trade related issues.
And one of the areas I have focused on in terms of trying to promote better relations between business is labor is this idea of expanding the winner's circle, that you can walk in and go to a hall with Ms. Lee's members or break room at any company in the country and you can explain in understandable terms why a trade agreement expands the winner's circle.
And I will say Mr. Owens I say this respectfully and I ask you the question, that just telling people trade's good for them isn't going to cut it. It's going to take new and concrete specific actions in order to make that case. That's why I suggested this idea that when companies get tariff reductions as part of a trade agreement that they share some of the winnings with the workers. I don't think people even need a piece of legislation to do that.
MR. OWENS: But Senator --
SEN. WYDEN: You just make sure the ideas is clear. That's only one example but if there's going to be a new effort to bring business and labor together, in this area of trade, they're going to have to be specific concrete examples that do it or else Ms. Lee's members and working people generally I think are going to continue to drift away from the position that I think you and I largely share and certainly is reflected in my voting record. So your response.
MR. OWENS: Well Senator I agree with you, I think we've got to really work very hard to first off be sure we do expand the winner's circle, be sure the American public understands how important trade is to our national future. There's no way we're going to build a wall to greatness in this country, it's the best ideas, the most original thinking, the most competitive products. Most tariff reductions by the way get passed to the buyers, consumers.
And so for example if we had a tariff on textiles and we drove up the cost of socks and underwear, who would pay for it, the lowest income people in the country. I mean, you know, we haven't explained it in those kind of terms. I have an obligation and I've worked pretty hard at it, and I might add CNN was outside of our plant when we just had a recent layoff, significant layoffs, and they asked employees coming out, you know, don't you wish we'd passed buy America legislation, don't you wish it was more vigorous. And the hourly workforce coming out of our plant said no. We're global players. If we pass buy America, they're going to pass buy China, buy Germany, buy Brazil, and this is what happens --
MS. LEE: They've already done that.
MR. OWENS: I'd say we need in this tenuous time for the global economy to keep the trade flows going. Close to one in five jobs in the United States is tied to either imports or exports. And there're some of the best paying jobs. And we need to work hard with our trading partners to keep doors open. And in my case, half the employment, half the employment in the United States is tied to our exporting from the United States.
You know, we've got a pretty good infrastructure here. Most of the mining in the world, most of the oil and gas development in the world is occurring elsewhere with our products. So if we're not very successful as an exporting country, we need to be focused more on export competitiveness than on protectionism. And our employees understand that. We need to do a better job --
SEN. WYDEN: I want to let Ms. Lee and Mr. Eissenstat have a crack at this. I would only say that there is no question that market opening agreements are a plus for consumers. It's been a central consideration in my supporting them. I'm just saying they have to do more for workers, they have to do more for workers on the shop floor, that's why I call it expanding the winner's circle.
Ms. Lee, what's your thinking in terms of policies that your members and your organization would find expand the winner's circle?
MS. LEE: Thank you so much Senator Wyden for the question. And I think you're approaching it in the right way, this is exactly the kind of challenge that we need to face. And my view is that it's not so much that we need to explain better to my members why trade is good for them, we need to make trade better for them. And that's I think the whole point of my testimony today is that we need to do some changes. And I think there's a real difference. There's two different things that happen.
One on export promotion. We agree with you Mr. Owens, we think export promotion is a good thing, but we want U.S. producers on American soil to be more competitive and more successful in the global economy. But I think what's happened in the recent couple of decades is that there's been really a confusion between export promotion and the putting in place policies that make it easier for multinational corporations to move around the globe, including to offshore our jobs and to bring the goods back into the U.S. market for consumers, usually at a higher profit.
A lot of times Mr. Owens actually you'd be amazed, I've done some research on it, but the tariff reductions are certainly not passed on dollar for dollar to consumers. A lot of them get really sucked up by the retailers and the middle men. So when a big tariff cut happens or when a company moves production from the United States abroad, a lot of times the price of the consumer product doesn't change at all. So it goes to the profits, the workers lose, the consumers don't see as much of the benefit as you might expect that they would, but you know, I think what I'd like to see and I think that the Obama Administration policies are going in the right direction in terms of investing at home in infrastructure and education and health care and clean energy, that's all the exact right thing to do, and I think that the tax deferral policies are also in the right direction.
But we're trying to incentivize companies to produce on American soil for the global market and not to always serve their global markets by moving to another country, but rather to do that more. And if we start creating more good jobs at home through exports, and I have said you know we certainly appreciate what Caterpillar's done but I don't think that it is necessarily typical of multinational corporations. Many multinational corporations have very little production in the United States and they move production offshore not to serve markets but to bring the goods back into the United States.
And it's that distinction, where we should make a distinction of policy, our tax policy, our currency policies, and our manufacturing support policies need to recognize that difference and figure out how we can incentivize U.S. production.
SEN. WYDEN: Mr. Eissenstat?
MR. EISSENSTAT: Thank you Senator Wyden. This debate is exactly why it's so important to put this agreement into broader framework and why the president wants to talk about the agreement and articulate why this is part of a bigger framework. The hearing title is a hearing on the U.S. Panama Trade Agreement, and that is not what we've been debating here and that's not what we were discussing. We were discussing the role of globalization and how we can make the economy work better. You've got some very innovative ideas on that and the idea that we need to bring these together and talk about them in a way that the American people can understand and communicate with them and show the benefits of trade but at the same time helping the American worker be able to adjust in the global economy, it's clear that trade agreements over the past several years have been much too divisive and we want to ensure that when the Panama Agreement comes forward it doesn't contribute to that divisiveness but actually lays the groundwork for us to be able to move forward on a broader global agenda not just on Panama but on the many other very important trade issues that we have before us.
SEN. WYDEN: I will just tell you especially since we have a company that clearly is trying to do the right thing, acknowledged by Ms. Lee, that the Obama Administration and particularly this committee under Chairman Baucus's leadership we have a chance to build a new business labor alliance on this trade issue, an alliance that essentially has gone by the boards in the last decade. There is much to agree on, I mean both of you have talked about exports, I mean shoot, the way people see exports in the state of Oregon is we want to grow it and build it in the state of Oregon, add as much as value to it as we possibly can in the state of Oregon with family wage employment and ship it somewhere. That's what people really see as a winner for Oregon kind of workers.
So there's a lot to work with and I hope that this Panama agreement as it is considered here in this committee as the committee works with the Obama Administration that this agreement can be used as a model for brining together business and labor, in particular to show workers in a concrete way how this agreement expands the winner's circle, how they get more out of this in terms of being able to fulfill their economic aspirations.
You all are great to come and the conversation will certainly be continued. With that, the committee's adjourned.