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Week Ending July 1, 2005

HR 3045 A bill to implement the Dominican Republic-Central America-United States Free Trade Agreement.

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BRIEF

  The bill text explains that the purpose of this Act is to develop economic relations between the US, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras and Nicaragua for the benefit of all those countries. The economic relations would hinge on the reduction and elimination of barriers to trade in goods and services and investments and to lay the foundation for further cooperation to expand and enhance the benefits of the agreement. Currently it is US exports to the other countries that are taxed. The bill reduces or limits those tariffs.

   Such bills determine basic rules of the game including the country of origin of the product and country of origin of the materials the product is made from. Certain products such as sugar get special attention. The bill was designed not to stop imports of sugar to the US but to absorb, in a way subsidize, the product by either paying the country not to send sugar to the US or to limit the export so not to disturb pricing on US sugar. Export to the US of sugar that exceeds guidelines would be purchased and converted to uses other than for human consumption such as conversion to motor vehicle fuel.

   The ultimate outcome of any trade bill, this one included, is to increase trade thereby increasing manufacturing, therefore jobs and a stimulated economy. Trading with countries among which are a few of the poorest on earth would seek the same ends but with a few added steps in the beginning-The poor Central American countries in the deal would attract investments from around the world, including the US, to do manufacturing business in those poor countries where labor is inexpensive and products necessary for manufacturing exports are cheap and arrive without tariff charges. An influx of foreign investment would eventually raise the standard of living in those countries, make more money available and increase the potential for the purchase of higher end exports from the US.

  This trade agreement increases the requirement that the participating countries make progress in labor rights and transparency of government.

Sponsor: Representative Tom Delay (R-TX)

Vote: Passed House 217 to 215 (RC444) (July 27, 2005) Passed Senate 56 to (RV209) (July 28, 2005)

Cost to the taxpayers: US trade agreements tend to show loss of revenue to the US because tariffs are reduced on imports. In this case, most tariffs from the Central American countries are already zero. The potential for federal government pump priming to subsidize the cost of US exports is likely. The total cost calculation on this agreement is around $5 billion through 2015.

"The Congressional Budget Office estimates that implementing the agreement would reduce revenues by $3 million in 2006, about $1.1 billion over the 2006-2010 period, and about $4.4 billion over the 2006-2015 period, net of income and payroll tax offsets. CBO estimates the bill would increase direct spending by $27 million in 2006, $245 million over the 2006-2010 period, and $621 million over the 2006-2015 period."

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MORE INFORMATION

Calculations From the Congressional Budget Office

Provisions of Interest from the bill such as handling of services, products, sugar, agriculture, etcetera. (Committee Report)

LABOR-

ADDITIONAL VIEWS IN SUPPORT OF CENTRAL AMERICAN LABOR LAWS AND THE TRADE AGREEMENT

DISSENTING VIEWS CONCERNS WITH LABOR LAWS IN THE BILL AND OTHER CONCERNS

CONCERNS ABOUT RESTRICTIONS ON GENERIC PHARMACEUTICALS

CONCERNS ABOUT COMPETITION WITH FOREIGN INVESTORS AND US TRADE POLICY

Revenues (FROM CONGRESSIONAL BUDGET OFFICE)

Under the agreement, tariffs on U.S. imports from the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua would be phased out over time. The tariffs would be phased out for individual products at varying rates according to one of several different timetables ranging from immediate elimination on January 1, 2006, to gradual elimination over 20 years. According to the U.S. International Trade Commission (USITC), the United States collected $518 million in customs duties in 2004 on $17.7 billion of imports from those six countries. Those imports consist mostly of various types of apparel articles and produce. Nearly 80 percent of all imports from the region entered the United States duty-free because the United States has normal trading relations with those six countries or because the goods are imported under one of several U.S. trade programs. However those programs are scheduled to expire in the next three years. The Generalized System of Preferences will expire on September 30, 2006, and the Caribbean Basin Initiative will expire on September 30, 2008.

CAFTA-DR would afford imports from the region preferential treatment similar to what they currently receive. Based on data from USITC and CBO's most recent forecast of U.S. imports, CBO estimates that phasing out tariff rates as outlined in the agreement would reduce revenues by $3 million in 2006, about $1.1 billion over the 2006-2010 period, and about $4.4 billion over the 2006-2015 period, net of income and payroll tax offsets.

This estimate includes the effects of increased imports from the region that would result from the reduced prices of imported products in the United States, reflecting the lower tariff rates. It is likely that some of the increase in U.S. imports from the six countries would displace imports from other countries. In the absence of specific data on the extent of this substitution effect, CBO assumes that an amount equal to one-half of the increase in U.S. imports from the region would displace imports from other countries.

Direct Spending

Effect on Department of Agricultural Sugar Programs. CAFTA-DR would provide the six countries with guaranteed minimum access to the U.S. sugar market. Imports of sugar from these countries would be tariff-free and could increase over time. By increasing the amount of sugar supplied to the U.S. by exporting countries, CBO estimates that the cost of the federal sugar program would likely increase.

Federal government programs support the income of sugar growers primarily by limiting the supply of sugar through domestic marketing allotments--permission to market domestically produced sugar--and import quotas. In addition, a system of nonrecourse price-support loans is used to guarantee sugar growers a minimum price, if the domestic and import restrictions do not result in a sufficiently high market price. The nonrecourse loan program allows producers to pledge their sugar as collateral against a loan from the government at the price-support loan rate. The "nonrecourse" aspect allows them to forfeit their sugar to the government in lieu of repaying the loan when prices are low, resulting in a quantity of sugar being removed from the market, thus supporting the price. The government attempts to limit the supply of sugar through domestic allotments and import quotas to avoid costs in the price-support loan system in most years. Unexpected market events have resulted in substantial costs for the price-support loan program in some recent years (for example, sugar program costs were $465 million in 2000 and $61 million in 2004).

In addition, trade agreements and other commitments have provided other sugar-producing countries with minimum access guarantees to our markets, and tariffs on over-quota U.S. imports from Mexico are scheduled to drop to zero in 2008. Furthermore, if the total amount of U.S. sugar imports in any year exceeds (or is estimated to exceed) a legislated quantity of 1,532 million short tons (excluding some categories, for instance, re-exported sugar), domestic marketing allotments must be canceled under current law, meaning that marketing of domestically produced sugar would be unrestrained.

CBO estimates that by providing additional import access guarantees in compliance with CAFTA-DR, the sugar program will likely cost an additional $500 million over the 2006-2015 period. Annual estimates are shown in the table above. As with programs for most agricultural commodities, conditions in domestic and world markets are highly variable, making estimates of program costs for sugar somewhat uncertain. Actual costs could be either higher or lower in any given year, and these estimated costs represent our best estimate of expected costs over the estimation period. Consistent with the current budget resolution (H. Con. Res. 95), this estimate is relative to CBO's March 2005 assumptions about sugar market conditions. More current information concerning that market indicates that the cost of this legislation would likely be lower in 2006 and possibly lower in 2007, with no significant change in later years.

Merchandise Processing Fee. This legislation would exempt certain goods imported from the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua from merchandise processing fees collected by the Department of Homeland Security. Such fees are recorded as offsetting receipts (a credit against direct spending). Based on the value of goods imported from those countries in 2004, CBO estimates that implementing this provision would reduce fee collections by about $3 million in fiscal year 2006 and by a total of $120 million over the 2006-2014 period, with no effect thereafter because the authority to collect merchandise processing fees expires at the end of 2014.

Trade Adjustment Assistance. Implementing CAFTA-DR could have a negligible effect on the Trade Adjustment Assistance program (TAA). TAA provides extended unemployment compensation, job training, and health insurance tax credits for individuals who lose their job due to increases in imports. Based on information from the International Trade Commission regarding projected employment losses in various industries, CBO estimates that the added costs to TAA would be less than $5 million over the 2006-2015 period, and less than $500,000 in each year over that period.

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B. BACKGROUND

I. The United States-Dominican Republic-Central America Free Trade Agreement

The Committee believes that the Agreement meets the objectives and priorities set forth in the Bipartisan Trade Promotion Authority Act of 2002 (TPA). The Agreement covers all agricultural and industrial sectors, opens DR-CAFTA markets to U.S. services, contains robust protections for U.S. investors and intellectual property rights holders, and includes strong labor and environment provisions. In addition to the new commercial opportunities, DR-CAFTA will help cement many of the recent democratic, legal, and economic reforms in the DR-CAFTA countries.

Consumer and industrial goods- More than 80 percent of U.S. exports of consumer and industrial products to the DR-CAFTA countries will be duty-free immediately upon entry into force of the Agreement, with remaining tariffs phased out over ten years. Key U.S. exports, such as information technology products, agricultural and construction equipment, chemicals, and medical and scientific equipment will gain immediate duty-free access to Central America and the Dominican Republic.

Agriculture- More than half of U.S. agricultural exports to DR-CAFTA countries will immediately receive duty-free treatment, and most other tariffs will be phased out within twenty years. The current average Central American and Dominican Republic tariff on agriculture goods ranges from 35-60 percent. Nearly every major U.S. agricultural sector will benefit from expanded market access under CAFTA-DR, with gains in such sectors as feed grains, wheat, rice, soybeans, poultry, pork, beef, dairy, fruits, vegetables, and processed products. The American Farm Bureau estimates that the Agreement will increase U.S. farm exports by $1.5 billion per year.

With respect to sugar, the United States will provide increased market access for DR-CAFTA countries of only about 1.2 percent of current U.S. sugar consumption in the first year, incrementally growing over 15 years to about 1.7 percent of current consumption.

Textiles and apparel- The Agreement contains a general yarn-forward rule of origin for textiles that is already met by over 90 percent of existing textile trade. Goods satisfying the yarn-forward rule will receive duty-free treatment retroactive to January 1, 2004. Limited exceptions to the yarn-forward rule include a tariff preference level of 100 million square meter equivalents (SMEs) for Nicaragua, and cumulation of inputs from Mexico and Canada for certain woven apparel subject to a 100 million SMEs annual cap. This cumulation cap can grow to 200 million SMEs, as long as CAFTA trade grows. This cumulation provision benefits American companies with investments in Mexico and Canada and helps to integrate production in the region. The Committee requests semiannual reports for the first three years on the operation of the textile and apparel provisions in the Agreement, including any recommendations on how these provisions can be improved.

Services- The Agreement will provide broader market access and greater regulatory transparency in most services industries. The Agreement utilizes a negative list for coverage with very few reservations, which means that all services are covered unless specifically excluded. The Agreement offers new access in sectors such as telecommunications, express delivery, computer and related services, tourism, energy, transport, construction and engineering, financial services, insurance, audio/visual and entertainment, professional, environmental, and other sectors. The Agreement also mandates transparency and non-discriminatory application in the regulation of service industries.

Intellectual Property Rights- Because the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) contains minimum international standards for intellectual property protection, bilateral free trade agreements (FTAs) are an important means of raising international practices to higher U.S. standards. Specifically, U.S. authors, performers, inventors, and other producers of creative material will benefit from the improved standards the FTA requires for protecting intellectual property rights such as copyrights, patents, trademarks, and other intellectual property and the enhanced means for enforcing those rights. The Agreement lengthens terms for copyright protection, covering electronic and digital media, and strengthens enforcement obligations. Each party is obliged to provide appropriate civil and criminal remedies, and parties must provide legal incentives for service providers to cooperate with rights holders, including limitations on liability.

Investment- The Agreement contains an investor-state dispute settlement provision, which allows investors alleging a breach in investment obligations to seek binding arbitration with the country. These investor protections give U.S. investors in these developing countries access to objective arbitration. These provisions level the playing field for U.S. investors by giving them legal protections in Central America and

the Dominican Republic comparable to the protections that foreign investors already receive in the United States.

The Committee believes that there have been significant misrepresentations about investment protection provisions in this and other free trade agreements. Nothing in the Agreement or any other free trade agreement or bilateral investment treaty interferes with a state or local government's right to regulate. An investor cannot enjoin regulatory action through arbitration, nor can arbitral tribunals. Also, the Agreement makes improvements over former FTAs by incorporating standards in the expropriation provisions drawn directly from U.S. Supreme Court decisions and by taking regulatory interests fully into account. Consistent with U.S. law, for example, the DR-CAFTA specifies that nondiscriminatory regulatory actions designed and applied to protect the public welfare do not constitute indirect expropriations `except in rare circumstances.' Moreover, the arbitration process under the Agreement is more open and transparent, and hearings and documents would be public, and amicus curiae submissions are expressly authorized.

Building on experience under the North American Free Trade Agreement (NAFTA), the DR-CAFTA investment chapter includes checks to help ensure that investors cannot abuse the arbitration process. The Agreement includes a special provision (based on U.S. court rules) that allows tribunals to dismiss frivolous claims at an early stage of the proceedings, and it expressly authorizes awards of attorneys' fees and costs if a claim is found to be frivolous.

The Committee believes that the allegations and anti-trade rhetoric surrounding NAFTA Chapter 11 investor-state cases are exaggerated. The United States has never lost a single case under NAFTA or any other FTA or bilateral investment treaty (BIT), nor has the United States ever paid to settle such a case.

Labor and environment- The Agreement contains obligations under which each government commits to effectively enforce its domestic labor and environmental laws, as required by TPA. The Agreement also provides that parties shall strive to continue to improve their domestic labor and environmental laws. The Agreement makes clear that it is inappropriate to weaken or reduce labor or environmental protections to encourage trade or investment. The Environment Chapter provides for a public participation mechanism whereby civil society may submit information relating to concerns or specific problems with enforcement of environmental laws. Civil society will be able to make submissions to an independent secretariat concerning effective enforcement of environmental laws in Central America and the Dominican Republic. DR-CAFTA is the first FTA to include such a mechanism within the Agreement. The Agreement also reinforces efforts to promote transparency and public participation in government decision-making by including a specific obligation for each party to convene a new or consult existing national consultative or advisory committees to provide views on matters related to the implementation of the Environment Chapter.

The DR-CAFTA countries and the United States negotiated an Environmental Cooperation Agreement (ECA) in parallel with the FTA. The ECA's main objectives are to protect, improve, and conserve the environment, including natural resources, in Central America and the Dominican Republic.

The Agreement also contains a cooperative mechanism to promote respect for the principles embodied in the International Labor Organization (ILO) Declaration on Fundamental Principles and Rights at Work, and compliance with ILO Convention 182 on the Worst Forms of Child Labor.

Almost all of the DR-CAFTA countries have ratified the ILO Fundamental Conventions on forced labor, freedom of association and right to organize, right to organize and collective bargaining, equal remuneration, abolition of forced labor, discrimination, minimum work age, and worst forms of child labor. The only exception is El Salvador, which has not ratified the two ILO Conventions related to freedom of association and collective bargaining because of a constitutional ruling by its Supreme Court limiting unions in the public sector. Nonetheless, El Salvador remains subject to the scrutiny of ILO's Committee on Freedom of Association, which issues reports, findings, and recommendations on any complaints with regard to these rights. Moreover, under the Constitutions of all of the DR-CAFTA countries, the core conventions of the ILO, once ratified, become part of the body of national law and provide a basis for workers to challenge labor law provisions that might otherwise conflict with the country's ILO obligations.

The Committee believes that concern that labor provisions are weaker than in other free trade agreements such as the United States-Jordan Free Trade Agreement (Jordan FTA) is unfounded. The Jordan FTA, for example, which passed the House by voice vote in 2001, contains the same labor obligations as DR-CAFTA, uses a weaker dispute settlement mechanism than DR-CAFTA, and does not include the vigorous capacity building provisions of DR-CAFTA. DR-CAFTA clarifies what was implicit in the Jordan FTA: the only provision subject to dispute settlement is the requirement that a party enforce its own laws. Indeed, President Clinton, when he transmitted the Jordan agreement to Congress, stated, `It is important to note that the FTA does not require either country to adopt any new laws in these [labor and environment] areas, but rather includes commitments that each country enforce its own labor and environmental laws.' DR-CAFTA explicitly incorporates President Clinton's statement, as do all other FTAs under TPA in the past several years.

Moreover, DR-CAFTA has a more developed and conclusive dispute settlement mechanism than the Jordan FTA. The Jordan FTA's dispute settlement mechanism is underdeveloped, lacks strict time limits, and allows complaints to be blocked in perpetuity. By contrast, DR-CAFTA contains detailed and developed procedures. DR-CAFTA's dispute settlement leads to monetary assessments and the possible suspension of tariff benefits, while side letters to the Jordan FTA state that the parties do not intend or expect to use trade sanctions. DR-CAFTA contains a more robust capacity-building

mechanism than the Jordan FTA, including the establishment of a Labor Affairs Council that will oversee a Labor Cooperation and Capacity-Building Mechanism.

Labor under DR-CAFTA as compared with preference programs- The labor provisions of the Agreement are superior to those applicable to these countries under the Generalized System of Preferences (GSP) and the Caribbean Basin Economic Recovery Act (CBERA) preference programs in three ways. First, DR-CAFTA contains stronger obligations on worker rights. Under DR-CAFTA, Central American countries publicly commit to effectively enforce their laws that recognize and protect internationally recognized labor rights. The labor laws a country is obligated to effectively enforce under DR-CAFTA cover all of the internationally recognized worker rights used as eligibility criteria for GSP and CBERA. While the DR-CAFTA requires countries to effectively enforce their labor laws, the eligibility requirements for GSP and CBERA in contrast require a country only to be `taking steps' to afford internationally recognized worker rights. This is a far weaker obligation than under DR-CAFTA.

Second, DR-CAFTA offers a better enforcement mechanism for the United States to consider labor law reforms in the Agreement countries. Under DR-CAFTA, if a country is found to not adequately enforce its labor laws, the government would pay a significant fine until the situation is remedied, with trade sanctions as a last resort. In contrast, the only option under our trade preference programs is to suspend or withdraw trade benefits offered through the programs. This has never occurred. Withdrawal of GSP/CBERA benefits is a blunt instrument, which could harm the very workers whose rights the United States seeks to protect.

Third, CAFTA offers a more constructive way to solve labor problems by ensuring access to fair, equitable, and transparent tribunals for labor law enforcement, and to promote public awareness. Unlike DR-CAFTA, the GSP/CBERA programs contain no options other than trade sanctions to address the situation: no formal consultation mechanism, no fines, and no capacity-building assistance. DR-CAFTA offers various ways to solve labor problems by working together, including consultation provisions. If fines are imposed, funds would be spent on initiatives aimed at improving enforcement of labor laws in the Central American country.

Government procurement- The government procurement commitments in the DR-CAFTA are significant because none of the Central American countries is a party to the WTO Agreement on Government Procurement, and the DR-CAFTA provides comparable benefits to U.S. interests. Specifically, the Agreement grants non-discriminatory rights to bid on most contracts offered by Central American ministries, agencies, and departments. It calls for transparent and fair procurement procedures including clear, advance notice of purchases and effective review. As with government procurement commitments at the state level in all prior U.S. trade agreements, DR-CAFTA state commitments cover only those states which agreed to be covered before the Agreement was signed.

Dispute settlement- The Agreement sets out detailed procedures for the resolution of disputes, with high standards of openness and transparency. Dispute settlement procedures promote compliance through consultation and trade-enhancing remedies, rather than relying solely on trade sanctions. The Agreement's dispute settlement procedures also provide for `equivalent' remedies for commercial and labor or environmental disputes. In addition to the use of trade sanctions in commercial disputes, the Agreement provides the parties the option of using monetary assessments to enforce commercial, labor, and environmental obligations of the Agreement, with the possibility that assessments from labor or environmental cases may be used to fund labor or environmental initiatives. If a party does not pay its annual assessment in a labor or environmental dispute, the complaining party may suspend tariff benefits, while bearing in mind the objective of eliminating barriers to trade and while seeking not to unduly affect parties or interests not party to the dispute.

Access to medicines- The Agreement provides protections for developers and manufacturers of innovative pharmaceutical drugs consistent with U.S. law and recent trade agreements. Consistent with the WTO TRIPs Agreement, countries must provide that a drug innovator's data submitted for the purpose of obtaining marketing approval must be protected from unfair commercial use by competitors. The Agreement expressly states that nothing in the intellectual property chapter affects the countries' ability to protect public health by promoting access to medicines for all. Nor will the Agreement prevent effective utilization of the recent WTO consensus allowing developing countries that lack pharmaceutical manufacturing capacity to import drugs under compulsory licenses.

Stronger patent and data protection increases the willingness of companies to release innovative drugs in free trade partners' markets, potentially increasing, rather than decreasing, the availability of medicines. For example, the Jordan FTA, signed in 2000, contained an intellectual property chapter that covered data protection. Since 2000, there have been over 40 new innovative product launches in Jordan, a substantial increase in the rate of approval of innovative drugs, helping facilitate Jordanian consumers' access to medicines. Since enactment of the FTA, the Jordanian drug industry has begun to flourish. The Committee emphasizes that this is an example of how strong intellectual property protection can bring substantial benefits to developing countries.

Democracy, freedom, security, and rule of law- The Committee notes that as recently as the 1980s, Central America was plagued by civil war and Communist insurgencies and today remains vulnerable from anti-reform forces. Moreover, U.S. security is connected to development in the region because criminal gangs, drug trafficking, and trafficking in persons create dangerous transnational networks that focus on breaches of U.S. borders. Poverty remains a powerful incentive for people in the region to leave their homes to come to the United States illegally. DR-CAFTA offers a way to address the sources of these problems.

The democratically elected Presidents of Central America and Dominican Republic have repeatedly emphasized that economic liberalization through the

Agreement will strengthen the foundations of democracy by promoting growth and cutting poverty, creating equality of opportunity, fighting crime, and reducing corruption. It will help in accomplishing these broad social goals by securing concrete benefits through economic freedom, i.e., tangible improvements in people's daily life. Given the relatively few trade liberalizing steps required of the United States through the Agreement (over and beyond what the United States currently gives these countries through trade preference laws), the Agreement represents a remarkable opportunity to stabilize the region for the benefit of the United States as well as other countries and also assist people in all economic levels.

Conclusion- DR-CAFTA is a marked improvement over existing law for both the economies of Central America, the Dominican Republic, and the United States. The existing preference programs garnered large support in the House on May 4, 2000, when 309 House Members voted to support the DR-CAFTA countries, among others, in the CBTPA, by enhancing the Caribbean Basin Initiative preference program and unilaterally opening the U.S. market to goods from Central America and the Caribbean Basin. DR-CAFTA would enhance benefits for these Central American countries and the Dominican Republic because the current CBTPA program is temporary (ending in 2008), excludes many products, restricts use of regional inputs, and requires burdensome documentation procedures on beneficiaries. In contrast, DR-CAFTA makes trade benefits permanent, covers all products that meet the rule of origin, allows regional inputs, and permits use of simple electronic documentation procedures. DR-CAFTA also changes the current unilateral nature of benefits to these CBTPA beneficiaries into mutually reciprocal trade benefits for Americans under DR-CAFTA. While the current unilateral program makes 80% of exports from these countries to the United States duty-free, DR-CAFTA provides U.S. exporters with equal treatment by granting immediate duty free access to 80% of U.S. exports. The remainder of trade is liberalized over 15-20 years.

II. TPA process

As noted above, this legislation is being considered by Congress under TPA procedures. As such, the Agreement has been negotiated by the President in close consultation with Congress, and it can be approved and implemented through legislation using streamlined procedures. Pursuant to TPA requirements, the President is required to provide written notice to Congress of the President's intention to enter into the negotiations. Throughout the negotiating process, and prior to entering into an agreement, the President is required to consult with Congress regarding the ongoing negotiations.

The President must notify Congress of his intent to enter into a trade agreement at least 90 calendar days before the agreement is signed. Within 60 days after entering in the Agreement, the President must submit to Congress a description of those changes to existing laws that the President considers would be required to bring the United States into compliance with the Agreement. After entering into the Agreement, the President must also submit to Congress the formal legal text of the agreement, draft implementing legislation, a statement of administrative action proposed to implement the Agreement, and other related supporting information as required under section 2105(a) of TPA. Following submission of these documents, the implementing bill is introduced, by request, by the Majority Leader in each chamber. The House then has up to 60 days to consider implementing legislation for the Agreement (the Senate has up to an additional 30 days). No amendments to the legislation are allowed under TPA requirements.

III. Status of implementation by DR-CAFTA countries

Three out of the six DR-CAFTA partner countries have ratified the Agreement: El Salvador, Guatemala, and Honduras. Nicaragua and the Dominican Republic have both introduced legislation to implement the Agreement. The Costa Rican president has said that Costa Rica will introduce legislation to ratify the Agreement.

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ADDITIONAL VIEWS

ADDITIONAL VIEWS OF REPRESENTATIVE JEFFERSON

As a Democrat with a firm commitment to eliminate poverty and to improve the lives of workers both here and abroad, I believe it is important to discuss the important policy implications contained in the proposed U.S.-FTA with the Dominican Republic and the countries of Central America (DR-CAFTA). In supporting the DR-CAFTA, I have determined the United States can best promote improvements both to working conditions and labor standards in those countries with the commitments and the supporting capacity-building provisions of this Agreement.

For years Democrats have promoted democracy in Central America and have spoken about the need to secure commitments from developing countries on core international labor standards and labor enforcement; we have sought U.S. commitments to substantive and comprehensive labor capacity-building programs; and we have sought to ensure a role for the International Labor Organization (ILO) in these efforts. With this unprecedented Agreement, we have all of these things.

There are many important reasons why Democrats should vote for greater economic integration with our Central American friends and neighbors:

First, DR-CAFTA promotes economic opportunity for the workers of the region who are facing massive competition from Asia and elsewhere in the most significant formal source of economic livelihood--textile and apparel production. With nearly half the population of these countries living in severe poverty without formal employment, the continued competitiveness of the textile and apparel industry and other industries DR-CAFTA can promote is critical. I've heard my colleagues suggest that the DR-CAFTA textile and apparel rules remain too strict to really make a difference. But the countries and the companies who invest and purchase from the region believe differently. Many of us had hoped for more flexibility, but those whose livelihoods depend on these issues believe that the new flexibilities DR-CAFTA provides are critical to support an industry that provides some of the best-paying jobs in the region (and that also purchases significant U.S. inputs). Without DR-CAFTA, these jobs will ebb away, as many have already started to do, since the elimination of global textile and apparel quotas at the beginning of the year.

Equally important are the strong investment ties that can be bolstered by this agreement that are critical to support much-needed economic growth. We all know that investment flows around the world far out-value bilateral or even multilateral aid. Helping these countries improve their investment climate through a more permanent relationship with the United States and many of the provisions of the DR-CAFTA--including increased transparency, curbs on corruption, and provisions that promote the rule of law--could in fact be the single most important driver to improve the lives of our neighbors in Central America and the Dominican Republic.

And finally, there are the Agreement's labor provisions--both the commitments made by each country in the labor chapter to enforce domestic laws (provided for in their constitutions and ratified treaties, such as the core ILO conventions these countries have largely ratified) and the capacity-building program built in to the DR-CAFTA, which the six governments recently relied upon in undertaking an unprecedented commitment to improve labor standards and enforcement in each of their countries in very concrete ways. These provisions are also strengthened by the DR-CAFTA countries' commitments to the Inter-American Development Bank (IDB) and the ILO outlined in the `White Paper'.

But, despite all of these provisions and commitments, it is argued that the DR-CAFTA's labor provisions are a backwards step and that the DR-CAFTA should not be supported because of the DR-CAFTA countries' history of weak labor laws and suppressing worker rights.

DR-CAFTA'S LABOR COMMITMENTS ARE STRONG AND ENFORCEABLE

The DR-CAFTA commits each of the countries to enforce domestic labor laws, subject to binding, time-limited dispute settlement and monetary fines of up to $15 million per occurrence, per year, that the United States and Labor Affairs Council must decide how the country will spend to improve labor law enforcement. If the offending country does not provide the funds, the United States can impose trade sanctions. Chapter 16.8 of the DR-CAFTA defines `Labor Law' to be a Party's statutes or regulations, or provisions thereof, which are directly related to the following internationally recognized labor rights:

The right of association;

The right to organize and bargain collectively;

A prohibition on the use of any form of forced or compulsory labor;

A minimum age for the employment of children and the prohibition and elimination of the worst forms of child labor; and

Acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

A careful reading of the 1998 ILO Declaration on Fundamental Rights and Principles at Work, which promotes the observance of the ILO's core labor principles, demonstrates that this definition adequately incorporates the ILO core principles into the DR-CAFTA. 1

[Footnote]

[Footnote 1: The 1988 ILO Declaration defines the core labor principles as:]

Freedom of association and the right to collective bargaining;

The elimination of forced and compulsory labour;

The abolition of child labour, and;

The elimination of discrimination in the workplace.

The DR-CAFTA's labor provisions are stronger than those of the NAFTA, which has labor protections in a side agreement and does not provide dispute settlement subject to monetary fines or trade sanctions for violations of core labor laws. The Agreement's labor provisions are also stronger than the Jordan FTA, which does not have binding dispute settlement and under which the offending country can block even the formation of an objective panel to review its labor laws. Finally, these labor provisions are indeed stronger than current preference programs, such as CBI, which requires the President to deny all preferential benefits if the country `has not [taken] or is not taking steps to afford internationally recognized worker rights'. Such a standard does not even require the enforcement of existing labor laws.

Critics have argued that the DR-CAFTA countries can weaken their laws since the DR-CAFTA commitment not to weaken labor laws is explicitly made not subject to dispute settlement. DR-CAFTA and the Jordan FTA contain almost identical language on this Issue, stating:

each Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces adherence to the internationally recognized labor rights referred to an Article 16.8 as an encouragement for trade with the another Party, or as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory. (Italicized language is only found in DR-CAFTA, not in the Jordan FTA)

This obligation was not explicitly exempt from dispute settlement in the Jordan FTA, although the hortatory nature of the commitment undercuts the notion that this is a standard justiciable by formal dispute settlement. The Parties agreed to `strive to ensure' not to weaken law, a far different type of commitment than the `enforce your own laws' standard found in both DR-CAFTA and Jordan. In fact, this type of hortatory standard in Jordan, DR-CAFTA and all the other recent FTAs, is one of political will, not a justiciable standard that is subject to dispute settlement. But political will remains an extremely potent force.

Much more importantly, these countries' labor standards are embedded in their democratic systems in a manner that makes them not subject to precipitate change. Consider that for most of the six countries, all of the core ILO protections are explicitly, albeit generally, included in their Constitutions--obviously not subject to change at whim. 2

[Footnote]

[Footnote 2: All but one of the DR-CAFTA countries has already ratified all eight of the core ILO conventions (EI Salvador has ratified two), which are in fact incorporated into their domestic laws. All of the countries have extensive labor codes and a tripartite process (including the government, labor and business) that must work together in proposing any changes to those laws.]

As we know from our own democratic system, labor law issues are complex and subject to many factors. They simply are not and cannot be changed overnight.

The structure of the monetary fines for labor (and environmental) violations in the DR-CAFTA is quite innovative and will provide more than adequate incentives for countries to enforce their laws and improve upon their ability to afford internationally recognized worker rights. Consider:

The fines (up to $15 million per occurrence) are fairly significant given these governments' annual budgets;

The fines can be applied annually if the problem is not fixed; and

Most significantly, the fines collected will be re-invested and focused on addressing the failure of enforcement, which is oftentimes due to insufficient resources or lack of capacity, which the fines can more effectively address than trade sanctions.

Trade sanctions in the form of revoking trade benefits often cause disruptions in investment flows and hurt U.S. importers working with these trading partners. For us, the greater concern is the uncertainty and dislocation that would come from the revocation of trade benefits that will negatively impact the workers in the DR-CAFTA countries.

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DISSENTING VIEWS

DISSENTING VIEWS

The Dominican Republic-Central America-United States Free Trade Agreement Implementation Act, H.R. 3045, considered by the Committee on June 30, 2005, represents a missed opportunity. The Administration had an opportunity to negotiate and submit to Congress for approval an agreement that would have ensured that the benefits of trade flow broadly to working people, small farmers and society at large, as well as to larger businesses. The Administration had an opportunity to submit a world class, cutting edge agreement that would have helped to close the widening gap between the rich and poor, and lead to the development of a middle class in the Central American countries and the Dominican Republic, which can afford to purchase U.S. goods and services. The Administration had an opportunity to craft a lasting, bipartisan approach to U.S. trade policy. Instead, the Administration negotiated a free trade agreement with Central America and the Dominican Republic (CAFTA) and submitted a bill to Congress that does little to ensure that our trade policy raises living standards in the United States and abroad, and that exacerbates, rather than bridges, differences in views among the Members of this Committee.

The vote earlier this month on U.S. participation in the World Trade Organization (`WTO') demonstrates clearly that issues of international trade can be, and traditionally have been, in the main, broadly bipartisan. This conclusion is only buttressed by previous votes on free trade agreements with Jordan (2001), Chile (2003), Singapore (2003), Australia, (2004), and Morocco (2004); the enhanced Caribbean Basin Initiative and Africa Growth and Opportunity Act (2000); and, legislation granting Permanent Normal Trade Relations (PNTR) to China (2000). These votes demonstrate that the opposition to CAFTA of virtually every Democrat is not based on a rejection of the view that trade holds the potential for generating economic growth and increased standards of living.

To the contrary, most Democratic Members of the Committee continue to support that view, and strongly support a CAFTA--the right CAFTA. We believe in the power of trade as a tool for promoting economic growth and enhancing bilateral relationships between the United States and its trading partners. We believe that a trade agreement, drafted correctly, would benefit the United States on the one hand, and the countries of Central America and the Dominican Republic, on the other.

I. CAFTA LACKS BASIC, INTERNATIONALLY-RECOGNIZED LABOR STANDARDS

A. The Right CAFTA Would Include Basic Labor Standards

The right CAFTA would ensure that Central American workers have the ability to bargain for better working conditions and wages, so that they can raise themselves and their families out of poverty and so that they can earn enough to become consumers of U.S. goods. The right CAFTA would ensure that U.S. firms and workers are not asked to compete against companies in Central America that gain a competitive advantage by suppressing their workers. The right CAFTA would not promote a race to the bottom.

The changes that would be necessary to make the CAFTA an agreement that a broad majority of Democratic Committee Members could support are few, but significant. The amendment introduced by Ranking Member Rangel during the informal markup on June 15, 2005, set forth these changes. First, the right CAFTA would require each party to the agreement to commit to (1) bring its labor laws into compliance with the basic standards of the International Labor Organization (ILO) within 3 years; and (2) subject this commitment to meet ILO labor standards and other obligations set forth in the CAFTA Chapter on Labor to the regular dispute settlement mechanisms that apply to all other commercial provisions in the agreement.

In addition, Democrats have consistently called on the Administration to provide meaningful technical assistance to assist the CAFTA countries to meet these goals. In that regard, it is particularly disappointing that the Administration continues to cut foreign aid rather than increase it. For example, even as the Administration this week promised in a letter to Congress to provide additional technical assistance of $40 million for `labor and environmental' goals, the House of Representatives passed in the Labor-HHS Appropriations bill the Administration's proposal to cut the budget of the principal agency that supports foreign labor standards technical assistance by $82 billion.

B. CAFTA Represents a Step Backward From Current U.S. Law

These changes would ensure that U.S. trade policy moves forward--rather than backward--to build upon existing U.S. trade preference programs (e.g., the Generalized System of Preferences, Caribbean Basin Initiative (CBI), and Caribbean Basin Trade Partnership Act (CBPTA)). These preferential trade programs have for more than 20 years conditioned trade benefits to countries in Central America and the Caribbean on the countries' making steady progress toward achieving basic ILO standards. More recently, over the last five years, the CBTPA program has conditioned its more ambitious trade benefits on the countries actually achieving those standards.

Notably, U.S. law further authorizes the President to deny trade benefits to countries that are not in compliance with these basic labor standards. The United States has the programs to deny trade benefits. Since 1984, the United States has made effective use of the labor criteria in GSP/CBI/CBPTA programs to improve labor standards in CAFTA countries. The track record is as follows.

First, the United States U.S. has `suspended trade benefits' 19 times since 1984: 4 times for intellectual property issues, 1 time for drug trafficking issues, and 14 times for labor issues. Second, the United States has suspended benefits to CAFTA countries twice: (1) in 1987, President Reagan suspended benefits to Nicaragua, for failure to meet the labor rights eligibility criteria; and (2) in 1998, President Clinton suspended benefits to Honduras for failure to meet the intellectual property eligibility criteria.

Third, the United States has repeatedly used the potential for suspension of benefits as leverage to promote improvements in CAFTA countries' labor laws. Examples described below involve Costa Rica, El Salvador and Guatemala. Reliance on potential suspension of benefits is (1) good trade policy (achieve goal without disruption of trade), and (2) parallels use of GATT/WTO dispute settlement, in which vast majority of cases are resolved without need for formal adjudication and even higher percentage of such cases are resolved without the use of trade sanctions.

The CAFTA is a major step backwards from 20 years of U.S. law and enforcement efforts. As currently negotiated, the CAFTA does not require that CAFTA countries continue to improve their labor laws to conform with basic international labor standards--in fact, it does not require that the countries' laws meet any standard, or even that the countries have a law relating to the basic standards. The only enforceable provision in the CAFTA Chapter on Labor requires that member countries `enforce their own laws,' no matter how weak. This provision is substantially weaker than current U.S. law.

The CAFTA countries currently receive unilateral trade benefits under

three preference programs: (1) the Caribbean Basin Initiative (CBI) enacted in 1984; (2) the Generalized System of Preferences (GSP), enacted in 1976, and modified in 1984 to include a labor condition; and (3) the Caribbean Basin Trade Preferences Act (CBTPA) enacted in 2000. Approximately 50% of all imports from the CAFTA countries already enter duty-free under these three programs. (An additional 30% of products enter duty-free under regular U.S. tariff rates.)

The CBI, CBTPA and GSP programs each condition a country's eligibility for trade benefits (i.e., duty-free access to the U.S. market) on, among other things, whether the country is making progress toward implementing basic international labor standards. More specifically, when determining whether a country should be designated a beneficiary country or maintain its eligibility for benefits, the President must make the following determinations under each program. For CBI and GSP, the President must determine that the country is `taking steps to afford internationally recognized worker rights.' For CBTPA, the President must take into account `the extent to which the country provides internationally recognized worker rights.'

CAFTA would drop even these minimum requirements. Unlike current U.S. law, CAFTA does not contain any condition requiring a country to achieve--or even move towards achieving--a basic level of worker rights.

Although the GSP, CBI and CBTPA programs all condition the eligibility of countries for trade benefits on their progress on worker rights, the formalized process for the public to petition the Administration for withdrawal of benefits is contained in the umbrella program (GSP). Accordingly, the United States has utilized the labor rights condition under the GSP program more than the conditions in the Caribbean-specific programs.

The United States has suspended GSP benefits 19 times since 1984. Fourteen of those suspensions were tied to the failure of the beneficiary country to meet the program's eligibility criteria on worker rights. Four suspensions were due to a country's failure to comply with the program's eligibility requirements regarding intellectual property rights, and one suspension was due to a failure to comply with the eligibility criteria regarding drug trafficking.

Among the CAFTA countries, Nicaragua and Honduras have had their benefits curtailed for failure to meet eligibility criteria. In the case of Nicaragua, President Reagan terminated the country's eligibility for the program in 1987, due to worker rights issues, and the country remains ineligible for the program today. In the case of Honduras, President Clinton suspended benefits under both the GSP and CBI programs in 1998, due to the country's failure to meet the programs' eligibility criteria regarding the protection of intellectual property rights.

Typically, the United States has used the potential for suspension of GSP/CBI/CBTPA benefits to promote improvements in our trading partners' labor laws. In fact, most of the labor law reforms of the past twenty years in the CAFTA countries has been due to the leverage of the workers rights conditionality under GSP/CBI/CBPTA. The following examples illustrate this fact.

In June 1993, a GSP petition against Costa Rica led to reform of its Labor Code in October 1993, to provide protections for union organizers and prohibiting solidarity associations from engaging in collective bargaining. Similarly, in June 1992, a petition against Guatemala resulted in recognition of a maquila union for the first time in six years in August 1992. During the period 1993-1997 when Guatemala was under GSP review, the government raised the minimum wage, established new labor courts and streamlined the legal recognition process.

In 2000, Guatemala's status under GSP was reopened due to the firing of banana plantation workers at a Del Monte company. In April 2001, Guatemala passed a labor reform bill that granted new rights to farm workers. Finally, in 1992, EI Salvador was put on continuing GSP review for workers rights violations. In 1994, El Salvador changed its laws to make it easier for unions to be recognized without employer interference.

The changes proposed by Ranking Member Rangel would eliminate both the backsliding as compared with current U.S. law and the double standard created under the CAFTA with regard to the enforcement of the agreement's labor provisions versus other commercial provisions. As negotiated, the CAFTA provides that labor provisions are enforceable primarily through a weak system of fines, which the offending country effectively pays to itself. In comparison, the agreement's other commercial provisions are enforceable using trade sanctions. Mr. Rangel's amendment would correct this imbalance to ensure that the rights of workers receive the same protection as the rights of corporations under the agreement.

As stated, we consider that meaningful technical assistance must be an integral part of U.S. trade policy with the CAFTA countries, and others. In Central America, such assistance needs to be used to improve existing laws (so that they meet ILO standards) as well as to strengthen enforcement.

`Unfortunately, the technical assistance prosed by the Administration--whatever its other weaknesses--requires only that countries enforce the laws they have on their books--even if the law on the books is weak or there is no existing law. Even the best enforcement of inadequate laws can never yield acceptable results. Indeed, Congress would never approve an agreement that requires merely that our trading partners enforce their existing laws in other areas, such as intellectual property rights. Would any Administration ever provide technical assistance for countries to enforce laws that allow or promote piracy of American patents, copyrights or trademarks? Requiring only that countries `enforce their own laws' with regard to labor standards is equally inappropriate.

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PHARMACEUTICAL IMPORT RESTRICTIONS IN THE BILL

II. CAFTA COULD DEFEAT COUNTRIES' ABILITY TO RESPOND TO PUBLIC HEALTH EMERGENCIES

We also continue to have reservations about sections of the CAFTA (as well as other recently negotiated U.S. free trade agreements (FTAs)) that affect the availability of affordable drugs in developing countries. In particular, we are concerned about test data requirements in the CAFTA, which could prevent the CAFTA countries from addressing public health problems and delay the introduction of generic pharmaceuticals into the Central American market, thereby making pharmaceuticals less affordable in the region.

In particular, Article 15.10.1 of the CAFTA requires parties to protect certain test data submitted to obtain regulatory marketing approval of a drug. The provisions operate as follows: if a government requires submission of test data in order to obtain marketing approval for a drug (e.g., FDA approval), the government may not allow any other company to use these test data as the basis of obtaining marketing approval for a similar drug for a period of 5 years. The company first submitting the data has the right to prevent anyone else from using those data to enter the market for that period. Test data rights are separate and distinct from patent rights, and can exist for drugs not covered by a patent.

The key issue raised by the test data requirements in the CAFTA is

whether they can be waived if a CAFTA country wants to approve a producer other than the test data owner to produce and sell a drug in the CAFTA country during the test data protection period. The following example illustrates the issue:

Assume Guatemala decides that it needs to increase the supply of an HIV/AIDS drug in its market. Company A owns the patent on the HIV/AIDS drug, and also is the only producer to have obtained marketing approval for the drug in the Guatemalan market. If Guatemala is unable to convince Company A to produce more of the HIV/AIDS drug at a reasonable price, Guatemala could issue a compulsory license to another drug manufacturer, Company B. However, the compulsory license, which is allowed under the FTA, is an exception only for the patent rights related to the HIV/AIDS drug. The compulsory license does not affect Company A's right to prevent any other company from receiving marketing approval for the drug based on the data it submitted.

Obviously, if the United States invoked its right to test data protection as to the drug in question, the compulsory license would be useless--and Guatemala's right under specified circumstances pursuant to WTO rules to issue such a license would be defeated.

Notably, the above analysis applies even if the HIV/AIDS drug is not covered by a patent. The only difference is that Guatemala would not need to issue a compulsory license.

The Intellectual Property Chapter of the Agreement (Chapter 15) does not include any specific exception that would allow Guatemala or any other CAFTA countries to waive the test data requirements to address a public health need. As such, our concern is that the test data requirements could effectively undermine the CAFTA countries' ability to use compulsory licenses. As such, we believe that the CAFTA violates at a least the spirit of the November 2001 World Trade Organization Declaration on the TRIPS Agreement and Public Health (`Doha Declaration'), because the key flexibility identified in that Declaration was the ability of developing countries to use compulsory licensing to `protect public health' and `promote access to medicines for all.'

We were heartened by the comments of Ambassador Allgeier, the Deputy United States Trade Representative, at the mock markup held by the Committee on June 15. At the mock markup, Ambassador Allgeier stated that the `Understanding Regarding Certain Public Health Concerns,' which was adopted by the parties as a side agreement to the CAFTA, allows a country to waive test data requirements in order to market a drug produced under a compulsory license. The portion of the side agreement that Ambassador Allgeier apparently relied on for this interpretation states, in relevant part, that `[t]he obligations of [the Intellectual Property Chapter] do not affect a Party's ability to take necessary measures to protect public health by promoting access to medicines for all. * * *'

In our view, the side agreement is not sufficiently clear as to whether it provides an exception to the test data protection provisions. Accordingly, we urge USTR to ensure that Ambassador Allgeier's interpretation is given express legal effect in all future trade agreements, by making the exception explicit.

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IV. INVESTOR-STATE PROVISIONS COULD ALLOW FOREIGN INVESTORS TO HAVE GREATER RIGHTS THAN U.S. INVESTORS IN THE UNITED STATES

Another area of concern is the so-called `investor-state' dispute settlement mechanism provided for in the CAFTA Chapter on Investment. The investor-state mechanism can be a useful tool to ensure that U.S. investors overseas are protected against unfair treatment.

However, if not properly crafted to reflect current U.S. laws, the investor-state mechanism can provide foreign investors greater rights than U.S. investors in the U.S. market. Congress recognized the potential for this problem during debate over the Trade Act of 2002 (P.L. 107-210), and included a mandate to USTR that U.S. trade agreements ensure that `foreign investors

in the United States are not accorded greater substantive rights with respect to investment protections than [U.S.] investors in the United States.'

Unfortunately, the CAFTA still leaves out key elements of U.S. law, notwithstanding that it arguably is an improvement over the standard contained at Chapter 11 of the NAFTA. The result is to empower CAFTA panels to issue decisions that could go well beyond U.S. law--allowing foreign investors to receive greater rights than U.S. investors in the U.S. market. Given the aggressive reasoning of some arbitration panels that have considered claims brought under the NAFTA, it is particularly important that the investor-state provisions included in free trade agreements closely track U.S. constitutional and Supreme Court jurisprudence in order to ensure that legitimate U.S. laws and regulations are not threatened--and there is no chilling effect on local, state or federal authorities.

V. U.S. TRADE PRIORITIES

Finally, we believe that, in general, bilateral free trade agreements have a legitimate place in U.S. trade policy. If the agreements are properly negotiated and free trade partners are properly selected in coordination with Congress, these agreements can contain significant benefits for the United States in helping to set the global trade agenda and in other ways.

Nonetheless, we urge the Administration to recognize that the most important U.S. trade priorities should be the ongoing negotiations in the World Trade Organization and opening markets that achieve the largest gains for Americans. We are concerned that the Administration has focused too heavily on FTAs. In the case of CAFTA, we are concerned that Congress as well has had to dedicate enormous resources and attention to this agreement at the expense of other important trade priorities, largely because the CAFTA negotiated by the Administration could not attract broad, bipartisan support.
CHARLES B. RANGEL.
PETE STARK.
JIM MCDERMOTT.
RICHARD E. NEAL.
XAVIER BECERRA.
BENJAMIN CARDIN.
SANDER LEVIN.
JOHN LEWIS.
MICHAEL R. MCNULTY.
JOHN B. LARSON.