STATEMENT

THE HONORABLE CARLA A. HILLS

CHAIR AND CEO, HILLS & COMPANY

SENATE COMMITTEE ON FINANCE

TUESDAY, FEBRUARY 27, 2001

Mr. Chairman and members of the Committee, I am pleased to be here today to discuss globalization and trade policy.

As we move into the new century, dramatic reductions in the cost of communications and transportation are pushing nations toward greater and greater economic integration, with the prospect of increased growth and prosperity. But what is possible is not inevitable. Globalization is a choice, not a destiny. To ensure that the United States secures the benefits from globalization, we need to continue to open markets abroad and to provide our citizens with the tools and training to take advantage of emerging opportunities.

Past U.S. Leadership in the Global Economy

For the past half century, the United States has led the world in opening global markets. Democrat and Republican Administrations recognized that economic interdependence encouraged political stability, and to that end worked to establish a series of international organizations, including the General Agreement on Tariffs and Trade - the GATT - to promote global trade and economic growth.

The results were spectacular. During this period of "globalization" - defined as the free flow of goods, services, capital and ideas - millions of people were lifted out of poverty and standards of living raised worldwide, including in the United States.

In the 80s, when protectionism began to hinder world growth, the United States pressed for a new round of trade talks.

In the 90s, our leadership in the Uruguay Round and the North American Free Trade Agreement locked in market reforms and encouraged further economic liberalization.

These two trade negotiations spurred the change that was occurring in economic thinking worldwide. Governments began to understand that competition and market forces - not state controls - were the best tools to stimulate growth and raise standards of living.

This remarkable shift in national economic policies created an explosion of new opportunities for the United States - in Asia, Latin America, Eastern Europe, and the former Soviet Union.

Our gains went beyond the strictly commercial. In the wake of increased prosperity came widespread political reform. Without U.S. leadership, the world would look very different today.

Self-interest requires us to continue to exercise leadership with respect to global economic issues - building on our past success and moving forward.

Trade Raises Standards of Living

Today, open markets and rules-based trade and investment still constitute the best engine we have to raise living standards, increase prosperity worldwide, and create the wealth to raise labor and environmental standards. We must develop a broader domestic understanding of this basic fact.

The economic arguments for free trade are clear. Consumers gain through access to the best goods and services at the lowest prices, and manufacturers through access to inputs and equipment that make them more competitive. The economy gains from increased competition, which encourages innovation and technological development. In short, open markets create a more efficient and productive economy that grows more rapidly, generating greater prosperity for our people.

The United States is the world's largest exporter, importer, and investor, with a major interest in ensuring that global markets are open. Roughly 80 percent of world economic consumption takes place outside of the United States. Overseas customers buy more than half our computers, cotton, aircraft, and soybeans; more than one-third of our construction machinery, semiconductors, and machine tools, and over a quarter of our farm machinery, flat glass, and corn. We need access to foreign markets to sell the goods we produce.

Economic studies conclude that trade creates far more jobs than it puts at risk and that the jobs that it creates pay better wages, provide greater benefits, and offer more security than jobs unconnected to trade.

We need to remember that trade means not only exports, but also imports. Both are necessary to our economic well-being. Although about 90 percent of what Americans consume is produced here at home, we need some foreign goods, like oil, to keep our economic engine running at full speed.

As others nations sell us their goods and services, they earn foreign exchange with which to buy our goods and services. If we stopped trading tomorrow, companies big and small that depend on foreign markets or imported inputs or technology would shrink or vanish, jobs would disappear at those companies and at the firms that service those companies, and our workers, who are also consumers, would pay more for a narrower range of goods and services.

Because our barriers to trade and investment generally are lower than those of most other countries, it is in our interest to persuade our trading partners to lower their barriers. As they remove their trade restrictions, we gain disproportionately in terms of new opportunity.

Future Challenges Are Huge

To capture the benefits that flow from open global markets will require a collaborative effort by the Administration and the Congress to:

· Put the United States back in a leadership role on the broad initiatives to open world markets - in this hemisphere, throughout the Pacific Rim and in the World Trade Organization (WTO).

· Deal creatively with a number of complex, pending trade disputes with key trading partners;

· Decide how to complete the negotiation or approval of trade agreements previously completed or commenced, including those with Vietnam, Jordan, Singapore, and Chile; and

· Address a variety of other issues, from China's entry into the WTO to a series of bills such as the Iran-Libya Sanctions Act and the Export Administration Act that expire this year.

In April, President Bush will join the hemisphere's other 33 democratically elected leaders at the Quebec City Summit. In January, Vice Ministers could not agree on when to start the negotiations on the Free Trade Agreement for the Americas, or how to proceed.

During the campaign, President Bush spoke eloquently of his desire to promote a fully democratic Western hemisphere bound together by free trade. To revive these negotiations the President will need to make clear that the United States is willing to make concessions in our import-sensitive areas, and that securing trade-negotiating authority is a top priority.

The entire world will study what is said at this meeting in an effort to assess the new Administration's commitment to international trade and economics.

In June, the President will travel to Italy for the G-7 meeting of leaders of industrialized nations where he will want to have a bipartisan strategy with respect to restarting the WTO negotiations that collapsed in Seattle at the end of 1999.

In November, the President will attend the Asia Pacific Economic Cooperation (APEC) forum hosted by China in Shanghai, bringing together leaders of the 21 economies, including Taiwan, that ring the Pacific. Negotiations over trade liberalization in the region have stalled. A move to revive them could give these economies a much-needed boost and help our exporters.

Current U.S. Leadership Waning

The agenda is very full. Yet while the importance of the global economy to the United States has grown, our leadership in that economy has waned. The United States is no longer driving the big initiatives to open markets - in this hemisphere, throughout the Pacific Rim, or in the WTO.

Over the past 5 years, some 20 significant trade agreements have been negotiated in Asia and Latin America without our participation.

Other countries are signing deals opening markets for their products, but not for ours. As a result, we are losing billions of dollars of exports to the detriment of our workers and producers. Today, a Canadian farmer can ship wheat to Chile on better terms than our farmers. And, increasingly, U.S. manufacturers are forced to relocate to the Southern Cone of South America to sell to the MERCOSUR countries (Argentina, Brazil, Paraguay and Uruguay) or to a country that has a free trade agreement with MERCOSUR to avoid the higher tariffs imposed on U.S. exports.

Need for Trade Negotiating Authority

We need to reassert our position of leadership in trade. The benefits we could derive from these multilateral and regional initiatives are huge. But so are the obstacles.

The biggest one is the President's lack of trade negotiating authority. For the past six years the United States has been sidelined by the lack of trade negotiating authority because of a disagreement about trade policy here at home.

On the one side are those who believe that the United States must continue to lead the world in opening global markets and supporting the WTO. They are convinced that open markets and rules-based trade and investment raise standards of living and create the wealth necessary to deal with important social issues.

On the other are labor unions, environmentalists, and advocates for religious freedom, human rights and various social concerns who insist that trade negotiations address their specific issue and believe that attacks on the WTO and globalization will advance their interests.

The Administration needs to build a new consensus in support of trade. But members of Congress who care about the future economic well-being of our nation must help build that consensus. Our nation cannot afford to continue to permit trade to be held hostage to a growing list of non-trade issues.

To protect our nation's economic interests, we must deal with labor and environmental issues without damaging the prospects for our economy. The United States has enjoyed a decade-long boom fueled in part by globalization. The three great drivers of our record prosperity are a flexible economy, information technology - and an open market.

Angst over Globalization

Having said that, globalization does not make everyone a winner. Polls show that most Americans recognize that globalization benefits the overall economy. But they are split as to whether it creates jobs.

When a company responding to competitive pressures shrinks or shifts employment to a distant facility, those fearing or experiencing displacement care little that domestic not foreign competition was the likely cause or that the overall economy experienced a net job gain.

Americans' anxiety about job stability is running very high, particularly considering the current environment where unemployment is hovering just over 4 percent. In 1981, when we were in the midst of a recession, International Survey Research found that 12 percent of workers were fearful of losing their job. Today, the same organization reports that fear of job loss has more than tripled.

Unless we can convince our people that trade is the best tool we have to create good jobs and better assist those who are hurt, we risk eroding the consensus favoring open markets that is the bedrock of our prosperity.

Remedies

The question is how to accomplish this. I believe that government, business and labor need to take action in three areas - right now!

Trade and the WTO

First, every company - large and small - ought to take the time to make their employees aware that trade creates far more jobs than it puts at risk and that the jobs it creates pay better wages, provide greater benefits, and offer more security than others. This effort should command the CEO's attention, ranking right up there with efforts to enhance productivity.

At the same time, Members of Congress and the Administration should use every occasion possible to explain these benefits to their constituencies.

These efforts should include education about the WTO - explaining that it plays a vital role in establishing and enforcing the trade rules that keep our economy humming.

The misunderstandings about the WTO are widespread. For example, it is not true, as suggested by the congressionally appointed Commission on International Financial Institutions, that the WTO has the power to override our domestic laws. It has neither the power nor the authority to impose sanctions or change laws.

If a WTO member chooses not to implement a WTO panel ruling against it, the aggrieved country may, in accordance with agreed WTO rules, withdraw trade concessions in an amount equal to the damage found. But without the WTO, the aggrieved party could do that, and much more.

International Labor Organization

Second, business and government must respond to labor's insistence that the WTO is the appropriate body to enforce "core labor standards". Many are asking, "Why not?"

The right answer is that the WTO has no labor expertise and no credibility in the field. Labor issues are complex and often controversial. Even the so-called core standards require a specific knowledge.

Take minimum age for child labor. What age should be set? Should the standard be different for rich and poor nations? Should there be a difference between light work and heavy or dangerous work? What constitutes the minimum health and safety standards that should be mandatory? I could go on.

The International Labor Organization (ILO), which has been in existence since 1919, is competent to deal with these issues.

My union friends say that the ILO does not have teeth. Actually, the two organizations have quite similar legal authority. Like the WTO, the International Labor Organization authorizes enforcement measures of an economic character against another member refusing to come into compliance with a report issued by an ILO Commission of Inquiry - very much like a WTO panel.

The key difference between the WTO and the ILO is not teeth but commitment - which is based on the extent to which members see the organization as serving their interests.

Our government responds to WTO panel rulings against us not because we fear retaliation from Costa Rica or Venezuela, but because we believe that the rules-based system that we helped to build serves our interests and that to disregard its rulings would undermine that system.

The ILO has not received the same attention. Our government has ratified only 13 of the 182 conventions of the ILO, and only 2 of its 8 core labor standards. That limits the government's ability to initiate complaints.

Although our unions are also members of the ILO, and thus authorized to bring complaints, they have initiated very few.

On this record, it is not surprising that some suggest that those who insist that the WTO enforce labor standards are more interested in crippling the WTO than in obtaining enforcement of labor rules internationally.

At least it raises a legitimate question of the wisdom of adding labor to the already complicated agenda of the WTO, when with a little effort, we could support the ILO, which has the competence and the background to deal with labor issues.

To continue to hold trade captive on the canard that otherwise we have no way to deal with serious international labor issues harms our workers and producers.

Here again, companies, as well as labor and government, need to get vigorously involved. Through their trade associations they can support and help shape the work of the ILO.

Education and Training

Third, we should take more aggressive action to move people up the skill ladder and thereby assure them higher pay and better benefits.

Displacements that result from globalization can cause serious pain, but protecting lower skill jobs is not the answer. Nor is putting a hold on new trade agreements.

In the 1970s, Glenn Watts, President of the Communications Workers of America, spoke eloquently about the need for every worker to engage in a "lifetime of learning". The need is more critical today.

Company Programs

Many companies have launched education programs for their employees. One of the best I have heard of was described in a speech by George David, CEO of United Technologies (UTC). Currently, his company pays the costs and gives paid time off for its employees worldwide to attend accredited colleges and universities, whether or not the course selected is job-related.

And it awards $10,000 worth of UTC stock if the employee obtains a degree. Chairman David says that 16 percent of his domestic workforce is upgrading its education (that is 3 times the national average) and 5000 have obtained degrees over the past 4 years.

He also has announced that his company was extending the program to 4 years for all employees displaced because of work relocated to a 50-mile distant domestic or a foreign facility. As he put it, "if you lose your UTC job to work relocation to China, India, or Texas, we will pay for four years of college, period."

Affordable Education Act

Our government could encourage such efforts by enacting the Affordable Education Act, which has passed the Senate, but no bill has been introduced in the House. This Act exempts tuition reimbursements from the employees' taxable income, even for courses not directly work related, and extends the exemption to graduate level courses.

Wage Insurance

Finally, we should explore the concept of wage insurance to supplement the incomes of displaced workers - whatever the cause - who take an entry-level job in a different, more promising sector at lower pay. This would respond to workers' anxiety over near-term wage loss, encourage them to stay productive in the work force, and obtain the training that has proven most effective - which is training on the job.

Conclusion

As we look to our future, our dual goals should be to educate and motivate more Americans to stand up in defense of open markets, lest we lose the benefits that come from the free flow of ideas, capital, and goods and to raise the skill level of our citizens so that they can take full advantage of the expanding opportunities in the new "knowledge-based" economy.