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Hearing of the Terrorism, Nonproliferation, and Trade Subcommittee of the House Committee on Foreign Affairs - U.S. Export Promotion Strategy


Location: Washington, DC

Hearing of the Terrorism, Nonproliferation, and Trade Subcommittee of the House Committee on Foreign Affairs - U.S. Export Promotion Strategy

REP. SHERMAN: I want to thank you all for being here, especially our ranking member, Mr. Royce. Today's hearing is an examination of our national export strategy. The administration has chosen to paint a rosy, and I believe, misleading picture, claiming just a year ago that the trade numbers tell a very positive story about the state of America's trading relationships with the rest of the world.

A $700 billion deficit is one of the largest trade deficits in the history of life on earth exceeded only, I believe, by our trade deficit one year ago.

Now, while the trade deficit is slightly down we need to talk about the total trade debt. That is to say, we borrowed over $700 billion last year on top of the well over $700 billion we borrowed the year before.

Our deficit -- our debt owing to foreign countries is now at $2.3 trillion. We have gone from being the world's largest creditor nation in the 1980s to being by far the largest debtor nation in all of human history.

And by the end of this year that $2.3 trillion figure will be at ($)3 trillion. And there is no end in sight until an inevitable crash. To pay our accumulated debt to the world we would not only need to bring our trade deficit to zero, a concept so -- that is thought by our foreign policy establishment to be not worth thinking about.

But we would have to do something more. We would have to accumulate $3 trillion more of additional trade surplus just to pay our debt. A small portion of our trade deficit can be addressed by proposals which we're allowed to discuss in polite society.

One of those proposals we are allowed to discuss is efforts to promote our exports, and that's the focus of today's hearings. Another approach that can be discussed in polite society is to improve our process in the export of military and dual-use items. That is a subject that this subcommittee has dealt with both in hearing and in a markup.

Of course, to make a real dent in our trade deficit we need to see either a radical realignment of currency, something on the order of ($)3 or $4 per euro or radical changes in our trade policy, something approaching ending or threatening to end MFN for China.

The trade and foreign policy establishments, aided by their handmaidens, the press, have decreed that radical approaches cannot be discussed in polite society, and I will do my best to don that role here today.

We will hear from the administration about these two charts; let's make sure the charts are properly interpreted.

The first shows that our FTA trading partners represent only 7.3 percent of the world's economy. But we're running a $126 billion trade deficit with this 7.3 percent of the world's economy. That's 18 percent of our trade deficit.

And we're here being told that FTAs are wonderful because they allow us to take part of the world that has 7.3 percent of the world's economy and a $126 billion trade deficit.

Comparing our current FTAs on the one hand to our -- best exemplified by NAFTA, and I'll referred to it as the NAFTA approach, to our regular trade policy, best exemplified by MFN with China is like comparing heroin with crystal meth and trying to sell heroin as a health product because it's not as bad.

It is true, our trade deficit of $126 billion with the FTA countries is not as big as our $666 billion trade deficit with the non-FTA countries. That is again like arguing that heroin is healthy because it's not as harmful as crystal meth.

It can be argued that the trade deficit per dollar of trade is less with the NAFTA countries. That is to say that $126 billion trade deficit doesn't represent as enormous a percent of our trade with those countries as the trade deficit with particularly China represents as a percentage of total trade.

That's the bare strings approach to running a business, lose money on every transaction but make it up in volume. An addict should not have to choose between one toxic intoxicant and another. There is a third choice, which is giving up the toxins altogether.

America does not have to choose between the NAFTA approach and the MFN for China approach. We could adopt a non-toxic trade policy but, of course, that's too radical to discuss in public.

The harms of our enormous trade deficit and the accumulated debt we've run up to foreigners has yet to come home to roost. We haven't noticed our hollowed-out manufacturing capacity because the world has furnished us with manufactured goods and lent us the money to pay for it.

It's only a matter of time before this card -- house of cards collapse.

Until then some will argue that we should joyfully live beyond our means and rejoice in the supposed strength exemplified by the fact that the world is willing to lend us $700 billion this year just to finance this year's trade deficit.

And of course, to renew the $2.3 trillion of debt from accumulated trade deficits.

I think a lot of homeowners have discovered this year that just because the world is willing to loan you money on increasingly bad terms but just as -- just because the world is willing to loan you money that is not a sign of robust strength, either for the borrower, or for the financial system overall.

Now, let's look at what we can talk about, and that is our trade promotion practices. A brief look at our competitor nations makes it clear that the U.S. is being both outspent and outmaneuvered.

Nations like Spain, Germany, Canada, Japan, France, and Britain all spend significantly more as a percentage of GDP on export promotion than does the United States. As a percent of GDP, France and Canada spend five times what we do. Germany and Japan spend double what we do. And Great Britain spends eight times as much on export promotion.

It's easy for some in the administration to preach an Adam Smith utopian view that if we do nothing to promote our exports other nations will do the same. But the administration has done nothing to cause our competitors to reduce their export promotion programs.

Instead the administration fantasizes about a world in which no country promotes or subsidizes its exports, does nothing to create this fantasy world, but insists upon running our trade policy as if we live in such a fantasy world.

We live instead in a global economy where the nation state promotes their best interests, their industries, and their exports. As a result, nearly every one of our competitors' exports comprise a dramatically greater percentage of their GDP than exports represent of our GDP.

Exports is over 30 percent of Canada's GDP, is approximately 15 percent of Japan's, and over 40 percent of Germany's. When we look at the United States we see only 10 percent of our GDP in exports.

Some cite the accurate but misleading statistic that we are the largest exporter in the world by volume.

That's like turning to my own State of California and saying we buy more ski hats than anywhere else. That may be true; it's just because we're so much larger than every other state. It is not because what -- the weather in California is colder than in Maine.

Compared to our imports our exports are anemic and compared to the size of our economy our exports are very disappointing.

In the face -- and this is the key statistic, folks, in the face of this poor record in -- the administration has requested a 10 percent cut in Fiscal Year '09 funding for export promotion programs.

Clearly we've got to reorient our policy. Beyond being simply outspent we must place a greater national importance on export promotion. We have an export promotion policy stretched out over a dozen agencies, all with different missions.

The GAO reported in 2006 on a number of the problems, the first of which is that our various agencies do not share mutual goals based on broad national priorities. The second is that the goals of our export strategy shift from year to year with very little review of which programs worked well and which didn't.

We do have -- we do not have an effective system for measuring the success of the goals that we were set.

And fourth, the priorities that are laid out do not match up with our budgetary request from the administration.

How could they? The strategy report for 2008 hasn't been released but we've already received request for 2009. Not only do we have these problems but when we do focus there isn't really a -- an accurate review of the success.

The administration claims that its focus last year was on fast- growing economies like India. And we did in fact see a, quote, "75 percent increase" in our exports to India. But all of that increase is due to one sector, aerospace.

So our entire export promotion policy is focused on selling one product basically to one country. In actuality for two-thirds of the categories for goods and services we have a trade deficit with India.

And for 2008 we have a projected trade deficit of $7.4 billion with India.

We must better organize our trade promotion strategy and establish goals that benefit American working families. Perhaps we need to establish a department of trade that has the clout and resources to address our trade deficit. But in the near term we should focus on getting more U.S. businesses to export for the first time, help businesses that export to only one or two countries to expand to similar markets, and increase our overall efforts at export promotion.

We also have to change the mix of risks and rewards that are faced by our foreign policy establishment, particularly those in the State Department. Every other country tells their foreign ministry, "Sell our products."

Yet, after the first Gulf war when we saved Kuwait we sat back and there wasn't a peep by the State Department when Gulf states decided to buy French telephone systems.

If we had had a French foreign ministry for a day they would have got on the phone and said, you can't -- when you dial 911 on a French phone system, you don't get the Pentagon. And the Gulf states would have learnt in the wake of the Kuwait war that if they valued their independence, as the Kuwaitis did, they would get a phone system that would work more effectively.

Let me give you another example of how our State Department doesn't focus on helping American working families.

So it's a story we heard in this subcommittee, I believe, it was last year. We had in front of us a gentleman who was, I think, acknowledged to be one of this nation's top diplomats, highly respected, a man who would never make even a modest mistake on anything he thought was important to the United States.

But he was here before this subcommittee telling us how he had helped promote American products. He said he wanted to make sure that South Koreans had a chance to see how good our automobiles were. And he put out on the lawn of the United States embassy, for a bit of -- (inaudible) -- DaimlerChrysler products, like the 300M and the Crossfire.

I'm looking around for the car aficionados here. The Crossfire is made by DaimlerChrysler that was at the time in Germany. Could you imagine what would happen to a German diplomat who put on the lawn of their embassy to try to promote sales an American-built car?

Their career would be over no matter how good they were at everything else. They could have won a Nobel Prize, they'd be out, but here in this country I'm the only one who really focused on even that testimony at all, because when it comes to prioritizing the interests of working families the State Department and the other agencies that deal with foreign governments, Commerce perhaps an exception, does not prioritize the interests of working families.

And I cannot name a single ambassador who was not hired or promoted because he nor she failed to promote the interests of American working families. It's not on your radar screen, they don't teach you to do that at the Woodrow Wilson School. It is beneath them, they are contemptuous of it, and when they deem to do it they don't bother to check their facts.

I'm here to hear from our witnesses today on changes we can adopt to expand American exports and perhaps I'll also hear an explanation of why when you were running the largest trade deficit in history -- at least looking at -- not necessarily a particular year but looking over several years, why when we're running a $700 billion trade deficit, the administration wants to cut our budget for export promotion.

I thank my ranking member for his indulgence of this opening statement which I'll always claim lasted only five minutes, and I will yield to the gentleman from California.



REP. SHERMAN: I thank the ranking member.

I should note for the record that since NAFTA, our trade with Mexico has gone from a surplus to a $74 billion deficit and with Canada from a substantial -- well, from basically breakeven to an enormous deficit as well.

REP. ROYCE: And if we add, Mr. Chairman, if I could just add to that if we look at the amount of those imports from Mexico that cost of oil is virtually that sum of oil that we import from Mexico.

REP. SHERMAN: And I don't think our country will survive economically if we take the idea that we import oil but don't export to pay for it.

And I will now yield to, I believe it was Mr. Wu who is here first or --


REP. SHERMAN: Thank you. I just want to make one observation and then place three charts into the record. The one observation is that we should not put ourselves -- think that the only choices are exemplified by the Columbia Free Trade Agreement on the one hand and a continuation forever of the highly unfair and one-sided Andean Trade Preferences Act on the other. We can't go beyond two bad choices.

I'd like to put in the record without objection three charts. The first one here shows the enormous increase in our trade deficit, it shows that our trade was balanced in the '70s, not so bad in the '80s, and then beginning roughly at the time NAFTA was adopted in the early '90s has become an enormous trade deficit that will hurt this country and the world for decades to come.

The second chart shows that our exports are a much smaller percent of our GDP than the exports of the U.K., France, Canada, and Germany. And the final chart shows that our spending on export promotion is very small as a percent of GDP when compared to the countries of France, Canada, Germany, Japan, and Great Britain.

With that our first witness and I'd like to welcome in here is Israel Hernandez, assistant secretary for Trade Promotion and director general of the U.S. and Foreign Commercial Service. He is the point of contact in the United States government for trade promotion and business advocacy assistance. Prior to his confirmation, Mr. Hernandez served as a senior advisor to the secretary of commerce. Let's hear from Mr. Hernandez. Excuse me, Secretary Hernandez.


REP. SHERMAN: Well, thank you for your presentation. I'll start off the questioning.

You're doing the job you're doing and you described that as a -- obviously you think you're doing a good job. As far as I know, you are.

MR. HERNANDEZ: (Laughs.) Thank you.

REP. SHERMAN: So you think you're doing a good job, you convince me you're doing a good job with what resources you have, why is the administration cutting your budget by 10 percent?

MR. HERNANDEZ: Well, I think you -- the reference you're making is that the reduction --

REP. SHERMAN: What have I said, I mean the budget for all the related agencies that promote trade -- the exports.

MR. HERNANDEZ: The reduction in budget with respect to Department of Agriculture, I think, relates to some of the services they feel they did not need or they felt that at this point was not necessary, and so the reduction comes from the Department of Agriculture. I think, for the most part, the budgets for other agencies within TPCC have either -- have stayed unchanged.

REP. SHERMAN: Unchanged, so in an inflationary environment they've gone down in purchasing power, in terms of the world economy they've declined. Why if we don't need to support the export of our grain products, and obviously grain around the world is at a very high price already, why are we not shifting those resources to helping the manufacturers that Mr. Manzullo and others have mentioned?

MR. HERNANDEZ: Well, every agency within the TPCC has a different authorizing committee. So we -- at that point everyone has to go through their own process --

REP. SHERMAN: Oh, I know how Congress works.


REP. SHERMAN: Why is the administration proposing a net 10 percent decline in our efforts to promote our exports and if it's appropriate to reduce the amount we spend promoting the export of grain, why have they not also shifted those funds to promoting the export of our other products?

MR. HERNANDEZ: Chairman, I think that's a question that I -- that really for the most part I'm focused on what I can do with the Department of Commerce, I can't answer for the Department of Agriculture about fundings or --

(Cross talk.)

REP. SHERMAN: Yes, so what's happening to your budget in the president's proposal -- proposed budget to Congress?

MR. HERNANDEZ: It's very much the same from last year.

REP. SHERMAN: So in terms of percentages of everything and in terms of purchasing power, it's just like, cut. You've come here to convince us you're doing a great job, but the administration is cutting the purchasing power allocated to your agency.

MR. HERNANDEZ: Well, I think that -- well, I think the burden that I have is that I have to make sure that the money that I'm given is used effectively and that there is actually effectiveness and efficiency, and before we even dedicate more money to any one program you have to explain what it is that you do with it.

Now, the great thing about what we do with our budget is that we have found ways to reach more companies creatively and strategically about how is it that we find and change the mind-set of our companies because there is a shift that needs to take place within the American business community about what is really taking place around the world. And so before you would -- and before you bring more money as the reason, as a solution, you have to make sure you have the right strategy in place and I can tell you at this point --

REP. SHERMAN: Sir, let me interrupt you there -- I hope you would have, now in the seventh year of the administration, a strategy that the administration likes and I know that you have not reached out and touched even half of the possible exporters in this country. So you've got unlimited opportunities to reach out and do more.

You have -- this administration spent seven years developing a strategy on how to do what ought to be done. And you are here to tell us that you're doing a great job with the limited resources you've been given and we still have a $700 billion trade deficit, and you're here to defend not doing more of what you say is a very effective thing to do. Look, you're in a difficult circumstance, you're here representing the administration and perhaps you'd give me different answers in private but I want to move on to the next --

MR. HERNANDEZ: No, but I -- actually if you don't mind I'd love to answer those two points that you raised, one about the strategy and one about the trade deficit. With respect to the strategy and make no mistake about it, I think there's a very good understanding what the strategy has been, and you can tell it with a -- with respect whether it's to -- on multilateral agreements, free trade agreements which I don't think --

REP. SHERMAN: That's another issue -- I'm talking about strategy for trade promotion.

(Cross talk.)

MR. HERNANDEZ: Okay, then let's talk about -- well you raised the issue about our strategy, that's very much what has been in our national export strategy as well, the implementation of and the execution and the education of free trade agreements and what it's done for small and medium-sized businesses. Now with respect to the trade deficit, it's no doubt that it didn't climb for the first time since 2001. It's no doubt that the deficit is a concern since also --

REP. SHERMAN: For the record I believe you meant to say that the trade deficit shrunk for the first time since 2001?

MR. HERNANDEZ: That's right, yes, sir

REP. SHERMAN: Yes? Okay.

MR. HERNANDEZ: Nonetheless, I know that is a matter of concern, but it's also unfortunate the price of oil has impacted our economy and trade because 40 percent of our trade imbalance is due to oil, more than $294 billion. So I think in many ways -- I think that there has to be several things that you have to address in the whole way you talk about the trade deficit.

REP. SHERMAN: I wasn't holding your agency responsible for the whole trade deficit, I'm just focused on trade --

MR. HERNANDEZ: (Laughs.)

REP. SHERMAN: -- promotion. You say you're doing a great job and your bosses say that they're going to slightly decrease in real dollars your resources to bill it. That is a contradiction but let me move on.

Is the Trade Promotion Coordinating Committee capable of coordinating the dozen or so agencies involved in export promotion, or should we move forward to a Department of Trade that would not only deal with promoting exports, but would also have the clout that comes from being the agency that deals with imports as well.

MR. HERNANDEZ: You know, in my experience in working with the agencies and of course, we have -- there's 19 agencies on TPCC, 11 that are on core agencies, there's some that have different mandates, that have different -- that have to come with different solutions, you know, it depends on the markets that they're in, depends on the priorities and the initiatives. In the national export strategy we identified free trade agreements, we also identified priority markets in India, China, and Brazil.

With respect to China, we very much have a very good understanding on what we have to do within the Department of Commerce and we work quite a bit with other agencies on that particular country. But it is also the case that USAID and OPIC have very little or no business to do with China. And so OPIC very much can deal with Central America and deal with Africa, but the Department of Commerce very much is engaged and has a lot of resources with respect to China. So the point is, you know, with respect to trade promotion everyone has a very distinct role, it's cross-collaboration, but not every agency is going to focus on every part of the world, and so every agency is going to have a different mission attached to it.

And so moving to one agency, there is going to be one of these discussions about what -- well, if you talk about USTR, you talk about ITC, you talk about commerce, you know, some of these are independent agencies that have -- that explain the economic impact, some of them discussed policies, some are trained more to promotion, so it's -- it's a bigger discussion than just export promotion that you're elevating.

REP. SHERMAN: All right, thank you for your answer. I do want to point out because people keep saying, oh, it's all about our oil imports, Japan imports far greater percent of its oil than we do and runs a trade surplus with the world, and to do trade statistics where you count our exports to oil exporting countries. So when we sell something to Saudi Arabia that counts as an export, but you think of not counting our imports from Saudi Arabia does not get you an accurate statistic. Every dollar we spend abroad on oil is both an opportunity and creates a necessity for us to export. It's an opportunity because whoever we brought the oil from has a dollar in their hands, they could be buying U.S. products and it's a necessity because if we're going to import oil, we're going to have to export something else. So let us not assume that it's okay to run a trade deficit to the extent of our oil imports. With that I believe --

(Cross talk.)


REP. SHERMAN: Thank you. It is my understand that we do allow our farmers to sell rice to Cuba as long as they get paid in cash, but we do not subsidize such sales or provide good credit terms and maybe that's --

REP. POE: That's the difficulty, Mr. Chairman -- (Laughs.)

REP. SHERMAN: That seems to do it.

I want to thank the Assistant Secretary, Mr. Hernandez for coming before us. And let's move forward with the second panel.

MR. HERNANDEZ: Right. Thank you.

REP. SHERMAN: I'll ask you to take down the charts here, because it's possible that our next panel has their own charts.

MR. HERNANDEZ: Thank you.

(Change in panel.)

REP. SHERMAN: For all people coming forward, I'll tell you how wonderful they are. The first of our wonderful witnesses on the second panel is Thea Lee, the policy director for legislation of the AFL-CIO, where she oversees research on international trade and investment policy. Previously she worked as an international trade economist at the Economic Policy Institute here in Washington, D.C.

We also have with us Mr. Frank Vargo, vice president for International Economic Affairs at the National Association of Manufacturers. I guess, we didn't pose this right for the pictures and have the NAM representative right next to AFL-CIO representatives, but --

MR. VARGO: But Thea and me are -- and I are great friends.

REP. SHERMAN: But it's good to have labor and business here together. I also welcome Dr. James Morrison, president of the Small Business Exporters Association of the United States, a nonprofit organization devoted exclusively to small and medium sized exporters.

Lastly, I welcome Daniella Markheim, who -- the Jay Van Andel Senior Analyst in the Trade Policy department or bureau of The Heritage Foundation center for International Trade and Economics.

With that let's hear from Ms. Lee.


REP. SHERMAN: Thank you. I would point out that China, Japan, and most other countries do everything possible to weaken their currencies. But in this country, of macho showmanship in politics you stand up and say, we got the biggest army and the strongest currency, and -- what can I say, you sound like a Viagra commercial and people cheer. But the fact is a weaker U.S. dollar, well, it's not good across the board, but will certainly help our exports.

Mr. Morrison.


REP. SHERMAN: Thank you. I'd like to ask Mr. Vargo and I know this is a question that can't be answered, but you're the most -- you're one of the most qualified people to ask, and that is just how important have the trade promotion services of the federal government been to our exports and to make the question quantifiable and impossible to answer, what percentage of our exports, manufacturing exports wouldn't occur if it weren't for one or another of these agencies that promote our exports.

MR. VARGO: Right.

REP. SHERMAN: Just give me a precise percentage in a -- (laughter) --

MR. VARGO: Well, I am a believer in marketing and advertising, and having a competitive product is not enough especially when a lot of your potential exporters are small and medium sized firms that just don't have the time on their own to go explore foreign markets.

I don't know what percent, I'm reminded of the story when I was back in graduate school many, many decades ago and we had an executive from one of the big soda pop companies come and we said, you know, "You spend a lot on advertising, isn't a lot of that a waste." They said, "Yeah, we'd looked to cut out 90 percent if we just knew which 90 percent."

I have seen individual instances where companies have started exporting and they started exporting to new countries. My view is that the figure is relatively small and part of the reason for that is our promotion program is relatively small.

REP. SHERMAN: Would you -- you can decline to answer this, but would you say even 10 percent of our exports wouldn't occur if we didn't do anything in the area of promotion, 5 present --

MR. VARGO: Well, I used to run the research office in the Commerce Department and developed a healthy respect for data, I don't want to give you a number I can't defend; I don't know.

REP. SHERMAN: Anybody else want to answer this question, Mr. Morrison?

MR. MORRISON: I could just make some anecdotal response to it, obviously, I haven't studied either. But when it comes to companies, smaller companies that are trying to learn about foreign markets, they go into their USEAC their local U.S. Export Assistance Center and they get that information and it means a lot to them.

It eliminates some of the lack of information and the fear factor that they're not going to have eliminated any other way. It's particularly relevant for companies that need trade finance, banks will not lend when there's foreign risk, without government guarantee behind it.

The trade finance is provided by SBA and by Ex-Im, I believe, support sales that would not otherwise happen and in fact I know they would not otherwise happen for the SMEs.

MR. : Mr. Chairman, could I modify a little bit. One of the few programs for which I've seen data is the Market Development Cooperator Program.. And my understanding is that it has generated about ($) 3 billion of exports for an expenditure of ($) 2 million a year. So you know, if you were to increase that very significantly, I think we would continue to get a 100 to 1 return on our investment and that would contribute substantially.


MS. LEE: Also not going to give a figure, but I thought one of the more cost effective areas that we have is the use of our embassies and the staff there that are trained, that are going to be on the ground in any case. And if they can take the information that they're -- they gather from being on the ground and pass it on to companies that need information about the economy, about the market and so on, that seems to me a good use.

I mean, you know, we rely very heavily on our labor attaches in the state, in our embassies abroad. And it's, I think, the same kind of idea that you have the expertise, you have the institutional facilities already there and they should be used to good effect.

REP. SHERMAN: I know that those officials in our embassies who's wearing an economic or a trade hat or -- you know, give that priority that's their job. I know we're dealing with anecdotes here. I haven't been able to nail you with the statistic.

Do you have any anecdotes of any one who is what I'll call general state department, an ambassador, charge d'affaires, any political officer that has ever been promoted, rewarded, recognized by the State Department for what was effective promotion of U.S. exports?

MR. : Oh sure, Chuck Ford, he was our ambassador to Honduras, I believe, was noted by the State Department for the outstanding job of both being a manager as well as export promotion and then promoted to ambassadorship. And we've had a number of other instances as well. Now, you know, the promotion program was moved out of the State Department many years ago and moved to the Congress Department which was the --

REP. SHERMAN: But I regard every ambassador as part of that promotion program --

MR. : Oh, yeah.

REP. SHERMAN: -- and you're bringing to my attention someone who was in general foreign policy and actually worked on trade promotion.

MR. : Right. But you know, our -- I have seen ambassador after ambassador really be a chief trade salesman for American trade.


MS. LEE: Just a -- one quick point is that, you know, we'd certainly like to see our staff overseas focus on promoting U.S. exports produced on American soil, and not so much on looking for business opportunities, sometimes even shifting production. And so we've seen sometimes what I would say a confusion of mission on the part of some of our overseas --

REP. SHERMAN: Yes, I think that there are those in the administration who think that if you can help a corporation make a $100 million profit by firing all its U.S. workers and moving overseas that you've done something spectacular because you've increased the stock price of a particular U.S. corporation.

Hopefully, we'll get the right kind of thinking throughout the administration or some administration. Does anyone here want to identify a -- any one of our trade promotion activities or programs that you think should be substantially reduced?

And Ms. Markheim, I know you may have an ideological opposition to the group as a whole and I've heard your comment. But does -- if you had to cut one of them by 50 percent, is -- anybody -- does anybody know of one that you all think is doing a good job? I see no -- but there oh, Mr. Morrison. (Laughter.)

MR. MORRISON: I'll dive in.

REP. SHERMAN: We'd have to make sure none of his members get cut by a particular agency, what -- Mr. Morrison.

MR. MORRISON: -- not saying that we necessarily have to cut something, but I think we might want to look at the allocation of the export promotion budgets between the Commerce Department and the Agriculture Department.

REP. SHERMAN: That's clearly true to the extent that we are promoting grains, which have gone up so high recently. And does anyone here see a particular one of the many programs you think should be substantially increased? Yes Mr. Vargo.

MR. VARGO: I do. There are several. I noted the Foreign Buyer Program which is a very cost effective way of boosting exports in small companies, because you bring foreign buyers here --

REP. SHERMAN: Those foreign buyers often -- I mean, do they even get visas, say in the same century in which they apply for them. (Laughter.)

MR. VARGO: Well, that is a problem Mr. Chairman. You know, if I could wave a magic wand, I would get a let a lot more of these foreign buyer programs and I'd have the State Department expedite visas for me, you're absolutely right.

In addition, I believe that the -- the program for international partner searches, where the Commerce Department has its offices overseas, locate prospective buyers and distributors for American companies or something, that should be increased.

I think the new program the commerce department has called I think quick search or quick view for Europe where for a small fee an American company can have the commercial offices all over Europe in 27 different countries give a view on where they think they might be able to expand. There are a lot of programs.

REP. SHERMAN: And is that advice limited to how to export American products or will -- if you pay that fee and you get these 27 folks working for you, will they send you back a program, here's how to fire your American workers and make more money. Do they work to maximize profits, do they work to maximize jobs?

MR. VARGO: No, they're working to maximize made -- the export of made in the U.S. products --

REP. SHERMAN: Made in the -- so -- and so they're not going to send you a report about how you can move, how the best way to penetrate the Austrian Market is to move your production to Croatia.

MR. VARGO: No, that's not what they're about --

REP. SHERMAN: No, okay.

MR. VARGO: -- that's not what the NAM is about.

REP. SHERMAN: I'll go to Mr. Morrison very quickly because I have one more question and I've already gone --

MR. MORRISON: One thing that's being done and one thing that ought to be done, Small Business Administration has export finance specialists in 17 USEACs. Those people underwrote 2.2 billion on U.S. exports last year, average exports size is under 200,000. They're -- we're getting a $500 to ($) 1 return on the investment in that program. I don't know why it's only in 17 USEACs, it ought to be in dozens of USEACs.

There's also a bill that you've got here in Congress H.R. 3273. Several members of Congress have cosponsored with Mr. Larsen (ph) of Washington. It has a terrific idea in here for a competitive program, competitive and transparent program to help support U.S. SMEs that want to go on trade missions to China, which they normally can't afford to do. I think it would be great to do in China as well as other countries.

REP. SHERMAN: I believe, my time has expired; we may do a second round, Mr. Royce.


REP. SHERMAN: I'd like to do a second round at least myself and we'll see if Mr. Royce wants to as well. Ms. Markheim you speak from a clear ideologically pure position.

Adam Smith, I don't mean the gentleman from Washington, I mean, the original Adam Smith, could be resurrected and I'm sure given a fine position there at the Heritage Foundation and the administration often embraces your rhetoric.

Are you aware of any serious effort by this administration to push any country to reduce its trade promotion and subsidy efforts? Could be a one word answer to this.

MS. : The answer is, "No I don't." However, not being privy to a lot of the conversations that do go on for instance, if we want to look at China within the SED some of these -- more of a -- the closed-door bilateral talks, there may be something, but I'm not aware of anything.

REP. SHERMAN: Let me let you in on a secret we politicians have. If we ever do anything that we know somebody would really like, we tell them. (Laughter.) Trust me, if the administration was in its -- any of its actions, embodying the spirit of the Heritage Foundation, they'd let you know.

MS. : Well, then my answer is no, far as I know, but should be.

REP. SHERMAN: Got you. Now, let me drift off to overall trade, because all of our trade agreements are based on process. We'll change this law as to tariffs, we'll change this regulation, and we want the other side to change its written rules and regulations.

And we haven't signed any trade agreements. Talk about results, we'll buy a billion bucks worth of your stuff, you buy a billion bucks worth of our stuff. The question is whether a nation that believes in transparency and the rule of law and independent free -- economically free businesses is insane if it signs process oriented agreements. And Ms. Lee, bear with me a question is coming somewhere at the end of this.

In other words, if on China, I say, I'll sign any agreement you want. You want to try at our tariff laws, fine; we'll have Ms. Markheim write our tariff laws. You want us to change this or that regulation, we're fine.

We'll officially say in every written document that every Chinese company is encouraged or at least allowed to buy American goods. But then when a Chinese company is thinking about American goods, we'll just get on the phone and say to a Chinese businessperson, Mr. Wong (ph), we know you will buy the U.S. goods even if you -- they look good on paper, because we know Mr. Wong, you're a very well-educated man. We'd hate to think that you need re-education.

In other words, oral statements hints didn't have to be this heavy-handed. I just threw that out there for a little comic relief, but the Chinese government can't through oral statements hints and seeks on the boards of the major Chinese companies, say fine, our written regulations will allow everything, but our policy is not to import more than $10 or $20 billion a year worth of U.S. goods. Now, the Europeans are cagey, they'll insist that we import their goods or they won't take ours.

But the Americans are ideological purists, they believe in improved processes. It's a country run by lawyers who will say, well, you can do as long as you write the laws, the written laws that we want, then we'll love you, no matter what the end result is.

Another approach to this is, at least in dealing with a closed economy like China or a government controlled economy like China, a cap-and-trade system, that is to say every time you export goods to China, you get a voucher. Every time, you want to import goods from China, you need a voucher, there'll be a market for vouchers.

This is being talked about in the carbon area in Europe they've got it for the -- for carbon, but could also be applied to trade. In other words, we could have a results oriented system rather than a system that says, if the process has improved, we'll accept any results no matter how damaging to the U.S. economy.

And what I've seen those who are skeptics of the present trade system do is buying into the process idea but you say the process idea shouldn't just protect -- we didn't -- don't want-- we don't just need a written law to protect an electoral property.

We need a written law that protects labor rights or environmental standards and you know -- again, in this -- in this world, written statutes may not matter at all. And also I find that there are a lot of countries that are -- that we have enormous trade deficit with that have pretty good labor standards, pretty good environmental standards.

I've put German laws up against U.S. laws on labor -- sorry, you can't have those today but I know -- (inaudible) -- would prefer them. So should those of us who are willing to depart from the current orthodoxy be trying to improve process, or should we be shifting to a results-oriented paradigm?

MS. LEE: Well, thank you for the question.

REP. SHERMAN: And I know you came here to talk about --

MS. LEE: I'm always happy to talk about trade policy, and you know we -- in a couple of hours, we might be able to really get into it. But I think your basic point is correct that we have a current model of trade agreements and it's one model and the question is whether it really works as well as it ought to, whether it gets the kind of results it should.

And I think we ought to be open to stepping way back from that model. It's not to say we're going to close off trade with the rest of the world or we don't want to get trade barriers down with other countries, but have we done it on the right terms and have we gotten the kind of outcomes we expect.

An example I gave in my opening remarks about currency that we don't deal with currency in our trade agreements.

And yet a big shift in currency as we saw with Mexico right after NAFTA can totally change the terms of what we agreed to and yet we had nothing other than an exit clause out of NAFTA, which is pretty extreme; it's the nuclear option.

And I think, you know, even within the trade agreements, you know, how hard it is, and everyone's talking about how hard it would be to go back and renegotiate the terms of NAFTA, you'd have to get the other two countries to agree on your terms and not give up too much on their terms, but -- maybe, you know, having a results-oriented policy would make more sense.

And one example I would say is the Korea FTA where there has been talk about, you know, the concerns certainly of the auto sector, both -- some of the companies, Ford and the auto workers and some of the congress people has been, we don't trust that we're going to get the kind of access to the Korean market particularly in auto and in industrial goods; they're just producing the tariffs. That you know our trade negotiators have been actually talking to Korea about market access in autos for 10 years.

And they've signed a number of you know, letters and memoranda and things have actually gotten worse during the time. So if we let these same folks go out and negotiate a trade agreement, what makes us think that the outcome is going to be any different or any better.

And so that's one area where Susan Schwab, the U.S. representative has said, "Well, you're talking about managed trade here and it's like a dirty word." And I think what Chairman Sherman has just said is maybe we ought to sometimes be talking about the outcomes and not just the process.

And -- now, one other example I would give, I'm just -- I'm basically saying that I think you're right that we should be open to looking at different ways of trying to achieve the outcomes we hope to get out of our trade policies.

Warren Buffet has talked about the trade deficit and what a huge problem it is in talking about whether you could do some sort of an auction system that would basically put a higher price on imports and that everybody who exported dollars' worth of goods would get a voucher for imports, and that it's sort of a --

REP. SHERMAN: What I'm talking about is pretty similar to what he's talking about, go ahead.

MS. LEE: So something along those lines where your outcome that you desire is to reduce the trade deficit and you do something very direct about that rather than looking just at the tariff levels. Because we -- what we've -- one of the things we've seen is that -- actually that -- the economic models haven't been very good at predicting the outcome of FTAs, because there are investment flows, there are business strategies that aren't really -- that don't have to do with changes in tariff rate. And therefore, I think there's plenty of room for improving the way we negotiate trade agreements in the future.

REP. SHERMAN: It's my intention to have a hearing on junking the process-oriented approach and shifting to a results-oriented trade strategy. My problem is that as I've said, you're not allowed to talk about these things in polite company, and therefore none of the intellectual resources -- and there's tremendous intellectual resources -- embodied by those before us and many others here in Washington that think about trade, none of them is thinking outside the box of process. I do want to also comment that we have pending in the Senate held up by one senator who will not be named Coburn -- (laughter) -- who is holding up everything including improvements to OPIC that we would deal with some of the concerns that have been voiced here.

Mr. : Chairman?


Mr. : Could -- would you permit me to just make a few comments about process?

MR. : I'll go along with that, but Mr. Chairman, I have a financial services -- (laughter) --

REP. SHERMAN: Actually, Mr. Royce's time will -- oh, here you go, okay.

MR. : We're getting notes that we've to go get the new votes on.

REP. SHERMAN: Okay, well, you go vote, I'll rush in there and cancel your vote out. (Laughter.)

I'm also a member of the Financial Services Committee. My notes say I don't need to be there for an hour, so I'm -- (inaudible) -- to figure it out.

MR. : (Off mike.)


MR. : (Off mike.)

REP. SHERMAN: Your comments will be so incisive and illuminating in there that --

MR. : (Off mike) -- I hope so --

REP. SHERMAN: -- they wouldn't need guidance from me.

Mr. : Mr. Chairman.


MR. : If I might just take a moment of your time, because there has been a really dramatic misunderstanding on what's been happening with our free trade agreement. We don't have a free trade agreement with China as you know, but a lot of people in this country don't.

They look at our huge trade deficit and you know, half of our manufacturing trade deficit was with China and we got a lot of problems there. When we look at our free trade agreements, you know, the figure was up, we have a $126 billion deficit with them.

But what people have failed to note is that if you take out oil, and I'm not saying we don't have to pay for that oil, but when we look at a jobs impact, the importation of oil from our free trade partners is not costing us jobs. So we put that aside and we see that the trade deficit with all our free trade partners is only ($) 35 billion.

And the interesting thing about that ($) 35 billion is with those same countries, seven years ago, it was ($) 40 billion. So the deficit with them outside of oil is very small and it's been falling. Now, the reason for this is we have always been a very open country.

You know, we started with actually Secretary Cordell Hull and President Roosevelt began this very open trade policy. So we're very open; other countries have high barriers.

And there's only one way to get them down, that's to negotiate these agreements with them, and -- so I would welcome a hearing on your part, because I --

REP. SHERMAN: I would point out you're looking at their high barriers in their published materials and you're trying to get those down, because they fooled you into thinking that the only thing that matters is what's printed, and if you can just bring that down, you're going to have access.

What -- if you're dealing with a country that also has not just its written laws, but its unwritten ways of controlling private activity -- you know, I got on the phone to some business in my district and said, "Don't buy the German goods, it's not good, it's not politically correct, buy the American goods."

Either the businessperson would laugh at me or they'd hold a press conference and I'd be looking for a new job. Now, imagine someone who was one of the more important Chinese officials in Shanghai. They make that call to a business, they're not laughed at.

So -- as to our free trade partners after the free trade agreement, our trade relationship was worse. And yes, indeed we should not ignore oil. If we're buying oil from Mexico and Canada, they should be buying our manufactured goods.

The idea that a -- that spending money on oil is fine and we're not going to bring those dollars back, would consign us to a worldwide trade deficit as long as we're importing energy. But I understand them as generally, as I understand it, supportive of free trade agreements although not all --

MR. : For reasons we believe are very sound. So I would look forward to the hearing.

REP. SHERMAN: I look forward to the hearing, but I'd look forward to some thinking that goes way outside the box, because the choice is not between heroin and crystal meth, and the choice does not have to be between -- the Andean free -- you know, the Andean preferences and the Columbia free trade agreement. And the choice does not have to be accepting incredible barriers tariff and non- barrier tariff to our exports on the one hand or negotiating a free trade agreement where we're going to get screwed on the other hand.

There are other ways to deal with this and they start by going to -- if you want results, you need a results-oriented plan. So I want to thank you folks for being here. I would thank my colleagues for their patience, but their patience -- (laughter) -- has expired, and look forward to hearings that go more broadly. We will look very carefully at the specifics that were brought out in these hearings, the particular agencies that deserve additional funding and see what we can do to push that along and thank you very much.


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