Disturbing Trade Trends in Congress RevealedBy Daniel Griswold, Associate Director of the Cato Institute’s Center for Trade Policy Studies

Page Three

The Latin American Perspective on the FreeTrade Area of the Americas — Will It Derail the Deal?

By Professor James E. McConnell, Associate Director of the Canada-United States Trade Center

Page Six

Trade Promotion Authority Becomes Law —Now the United States Must Play Catch-Up

Page Eight

Globalization Provides the Means To Builda Better Life — Proving the Skeptics Wrong

Page Nine

U.S. Investment in Developing CountriesSpurs a Race to the Top — Not the Bottom

Page Ten

Unshackle U.S. Exporters or Risk Job Losses — The Battle WithEurope and the WTO Over the Extraterritorial Income Exclusion Act

Page Twelve

Distributed in association with The Exporter magazine and www.exporter.com

Trade WorksThe Publication that Reveals How International Trade Works for Companies, Workers and Communities

SM

Fall 2002/Win

ter 2003

Sponsored in part by The Business Roundtable

IN THIS ISSUE

Dear Friends:

Welcome to the Fall 2002/Winter 2003 issue of Trade Works, a publicationthat features current trade issues and provides an understanding of the fullimpact international trade has on our workers, companies and communities.

Trade Works offers valuable information to employees on how tradesupports their jobs and quality of life, to Members of Congress on theimportance of supporting trade policies, and to the media on the positiveimpact of international trade.

Trade has been a vital factor in U.S. economic and world growth. Andin addition to being a primary generator of business and job growth, tradealso affords consumers greater disposable income, improving their standard of living.

However, through a variety of sophisticated tactics, anti-trade groups are increasingly disseminat-ing misinformation. Consequently, a growing number of our Congressional Representatives are votingagainst important trade liberalization legislation. In this issue, Daniel Griswold, Associate Director ofthe Cato Institute’s Center for Trade Policy Studies, reveals three disturbing trends in Congress.

While those who oppose trade bombard Congress, the media and the public with their views, thereis little reader-friendly analysis on trade’s positive economic impact. In response, we offer you Trade

Works.

As our society struggles to make sense of our rapidly changing global environment, we believe thekey to understanding trade and globalization is through education. Trade Works is a valuable resourcethat makes sense of seemingly unconnected economic events and trends, and provides straightforwardanalysis of trade’s widely misunderstood impact.

I strongly encourage your comments. If you like this issue, tell me. If you don’t, tell me why. If youwish to be put on the Trade Works electronic distribution list, please email me.

Sincerely,

John L. ManzellaEditor and PublisherJohn@ManzellaTrade.comwww.ManzellaTrade.com

Opinions in this publication are not intended as specific advice or recommendations. All rightsreserved by Manzella Trade Communications, Inc. (© 2002/2003). PO Box 1188, Williamsville, NY 14231-1188

Phone 716.681.8880 ext. 239 • Fax 716.681.6888 • Info@ManzellaTrade.com • www.ManzellaTrade.com

Page 3

Disturbing Trade Trends in Congress RevealedBy Daniel Griswold

When voting on trade,members of Congressreflect the general ambiva-

lence of the American public. Inopinion polls, a majority of Americanstypically express unease with thedismantling of trade barriers and theresulting expansion of trade, but thatsame public shows no enthusiasm forretreating behind protectionist walls.

Not surprisingly, voter ambivalenceon trade finds expression in Congress,where passage of every major bill toexpand trade is a struggle, yet there isno momentum to raise tariff barriersin a major way.

For those who favor trade expansion,recent trends in congressional votingprovide some hope for progress —but they also sound a warning thatAmerica’s post-war commitment to amore open global trading system restson a fragile foundation.

The Good NewsThere is no trend in Congress toabandon America’s commitment totrade with the rest of the world.Nothing like the Smoot-Hawley tariffbill of 1930 can get a hearing inCongress. Even as recently as the late1980s, the House was debating andpassing such anti-trade legislation asthe Gephardt amendment, whichwould have imposed higher tariffsagainst goods from countries withwhich the United States ran persistentbilateral trade deficits.

A resolution in June 2000 to withdrawthe United States from the WorldTrade Organization mustered ameager 56 votes in the House. Annualresolutions to rescind normal traderelations with Mainland China wererejected decisively in the late 1990s byincreasing margins, and have now

been superseded by permanentnormal trade relations and China’smembership in the WTO. Similarefforts to repeal normal trade relationswith our one-time enemy Vietnamalso have gone nowhere.

Modest progress has even been madeagainst the sanctions fever thatcrested in the mid-1990s. Most mem-bers of Congress finally grasp thattrade sanctions are an ineffective toolof foreign policy, and that theysucceed only in hurting U.S. farmers,multinational companies and workers.

Congress has even begun to dismantlethe embargo the U.S. has imposedagainst Cuba for 40 years. Last year,Congress approved cash sales of farmgoods to Cuba, and this year the Housevoted by wide margins to lift the travelban and the cap on remittances to Cuba.

An amendment by Rep. CharlesRangel (D-N.Y.) to eliminate fundingused to enforce the embargo entirelyreached a new high-water mark of 204votes in favor. Plus, export controls onhigh-technology items such as supercomputers have been relaxed.

The Bad NewsThree disturbing trends have emergedin the past few sessions of Congressthat could stymie progress toward amore open global economy. None ofthe trends point to a dramatic, Smoot-Hawley-style repudiation of freetrade, but rather a gradual erosion ofsupport for trade liberalization or ahardening of positions against it.

Disturbing Trend No. 1Congress has displayed an increasingwillingness to abandon U.S. leadership

“Trend No. 1” continued on page 4

Page 4

in world trade under pressure fromdomestic special interests, mostnotably in agriculture.

In 1996, Congress made a seriousattempt to wean U.S. agriculture fromits perennial dependence on federalsubsidies. Passage of the “Freedom ofFarm” act that year decoupled subsi-dies from production and repealedmost controls on what farmers couldplant, with the promise that U.S. tradepolicy would open export marketsabroad.

In the aftermath of the Asian financialcrisis in 1997-1998, however, worlddemand for U.S. farm exportsplunged along with global prices.Congress reacted by passing a seriesof emergency farm bills, culminatingin the 2002 Farm Bill, which locked insubsidies at a level 80 percent higherthan the 1996 law. The ratcheting upof trade-distorting subsidies won theapproval of bipartisan, 2-1 majoritiesin both the House and the Senate.

The new farm bill has been universallydecried by our trading partners abroad,both rich and poor countries alike, whorightly charged that the United Stateshypocritically preaches free trade andfree markets in trade negotiations butpractices subsidies and protectionism athome. Not surprisingly, America’sability to lead in the upcoming WTOnegotiations on agriculture has beenvisibly compromised.

Agricultural trade is especially impor-tant to less-developed countries, wherelarge shares of their populations stilleek out a living on the farm. U.S.companies cannot expect poor countriesto agree to reduce barriers to manufac-turing and service exports in the newWTO round if the United States andother advanced countries maintaintheir higher barriers and subsidies toagricultural trade.

Yet the U.S. Congress cannot say no tothe small but politically powerfulfarm lobby.

Disturbing Trend No. 2Support in Congress for America’s“unfair trade” laws has solidified.America’s administrative trade laws,in particular its antidumping code,

are themselves unfair. They targetforeign producers for engaging inpractices, such as price discriminationand selling at below average cost, thatare routine, legal and perfectlyrational among domestic producers.

Our antidumping law has become thelast refuge for naked protectionism. Itallows certain domestic producers tocripple their foreign competitors withantidumping duties while cloaking

their anticompetitive behavior inrhetoric about “fair trade.”

In a series of decisions, WTO disputesettlement panels have found that theU.S. government has applied ourantidumping law in ways that violateWTO rules designed to limit abuses.The ongoing abuse of U.S. antidumping

law, especially by the steel industry,has driven up costs for consumersand producers alike while encourag-ing the proliferation and abuse ofantidumping laws abroad at theexpense of U.S. exporters.

Instead of reforming and restrictingU.S. antidumping law, Congress hasaffirmed the status quo. In November

“Trend No. 1” continued from page 3

“Trend No. 2” continued on page 5

U.S. companies cannot expect poor countries to

agree to reduce barriers to manufacturing and

service exports in the new WTO round if the United

States and other advanced countries maintain their

higher barriers and subsidies to agricultural trade.

Page 5

2001, on the eve of the WTO ministerialmeeting in Doha, Qatar, the Housepassed a resolution by a vote of 410-4demanding that any new WTOagreement “preserve the ability of theUnited States to enforce rigorously itstrade laws, including the antidumpingand countervailing duty laws, andavoid agreements which lessen theeffectiveness of domestic and interna-tional disciplines on unfair trade.”

In May 2002, the Senate approved bya 61-38 margin the Dayton-Craigamendment to the Trade PromotionAuthority bill (TPA).The amendment,which was laterdropped in confer-ence committee,would have requireda separate vote onany trade agreementprovision “thatmodifies or amends, or requires amodification of, or an amendment to,”any U.S. antidumping or other “unfairtrade” law.

Like the farm bill, the refusal ofCongress to consider reforming ourunfair and self-damaging traderemedy laws could be a major obstacleto opening markets abroad throughany new WTO agreement.

Disturbing Trend No. 3House Democrats have abandonedthe party’s traditional commitment totrade expansion.

Through most of America’s history upuntil the 1960s, the Democratic Partychampioned the cause of expandedtrade, while Republicans traditionallycarried water for big businessesseeking protection at the expense ofconsumers and workers. ProminentDemocrats such as Woodrow Wilson,Franklin Roosevelt and John F.Kennedy understood that trade not

only benefited the U.S. economy butalso served as a tool of foreign policyto spread American values andcement our post-war alliances.

In what may be the most disturbingtrade trend of all, support for tradeexpansion among Democrats in theHouse has shriveled to a small knot ofNew Democrats.

As recently as a decade ago, Demo-crats were far more willing to vote formajor trade bills than they are today.In 1993, 102 House Democrats, or 40percent of the caucus, voted in favorof the North American Free Trade

Agreement, and in 1994, 167, or morethan 60 percent, voted in favor of theUruguay Round Agreements Act. Butby 1997, fewer than a quarter of themembers of the caucus were willingto give President Clinton “Fast Track”Trade Promotion Authority, and whenthe House finally approved TPA lastDecember, a mere 21 Democrats votedin favor.

TPA managed to pass by one voteonly because of overwhelmingsupport from Republicans. Thebipartisan approach to trade thatmarked most of the post-war era hasall but disappeared—a truly disturb-ing trend.

It would be unfair to say HouseDemocrats are reflexively against allpro-trade legislation. A majorityconsistently voted against repealingnormal trade relations with China(although only 35 percent supportedmaking NTR permanent). More than60 percent voted for the African

“Trend No. 2” continued from page 4 Growth and Opportunity Act in 2000(AGOA), which lowered tariffs onimports from certain Caribbean Basinand sub-Saharan African countries. Anda solid majority of House Democratsfavor lifting the Cuban trade embargo.

But affirming normal trade relationswith China involved no reduction inU.S. trade barriers, the AGOA liberal-ization was modest and riddled withexceptions, and the Cuban embargovotes were at least as much aboutforeign policy and domestic politics astrade liberalization. Those scatteredvotes do not change the fact that alarge and growing majority of House

Democrats remainskeptical of thebenefits of tradeexpansion.

With strongpresidentialleadership, theright arguments

and the active support of U.S. multi-national companies, progress can bemade in advancing the cause of freetrade. Despite the disturbing trends ofrecent years, Congress has managedto grudgingly open our markets a bitmore to some goods important to theworld’s poorest countries, to clear theway for China’s historic entry into theWTO, and to grant the president theauthority he needs to negotiate newbilateral, regional and WTO tradeagreements.

If the three disturbing trends are notreversed or at least halted, America’spost-war commitment to a more openglobal economy will be at risk.

Daniel T. Griswold is associate director ofthe Center for Trade Policy Studies at theCato Institute in Washington, D.C. He isauthor of “Free Trade, Free Markets,” thecenter’s biannual analysis of congres-sional voting on trade issues available atwww.freetrade.org. Readers may contacthim at dgriswold@cato.org.

If the three disturbing trends are not reversed or

at least halted, America’s post-war commitment

to a more open global economy will be at risk.

Page 6

The Latin American Perspective on the FTAAWill It Derail the Deal?

By Professor James E. McConnell

Now that President Bush andU.S. Trade RepresentativeRobert Zoellick have been

given Trade Promotion Authority byCongress, how successful will they bein extending the North American FreeTrade Area (NAFTA) southward? Theanswer may involve how well U.S.negotiators understand LatinAmerica’s perspective.

Latin America’s Alternative ChoicesWith many Latin American countriesfacing financial crises, uncertainpolitical futures and new NorthAmerican trade barriers, many ofthem are questioning if it is prudentto formally ally themselves withNAFTA countries. Plus, with the U.S.government preoccupied with home-land security and fading business andconsumer confidence, Latin Americansalso are wondering how much attentionthe U.S. will give to creating a FreeTrade Area of the Americas (FTAA).

From their perspective, they haveseveral alternatives, including forgingcloser ties with the European Union(EU), or perhaps creating their ownSouth American Free Trade Area.

Much Progress Has Been MadeOver the past decade, NAFTA countriesand 34 other democratically electedgovernments in the Western Hemi-sphere have entered into formaldiscussions designed to create a singletrade zone by 2005. Trade summitshave been held in Miami (1994),Santiago (1998), Quebec City (2001),and Quito, Ecuador (November, 2002).

The breadth of these negotiations isunprecedented, even by the standardsof the Uruguay Round. For example,nine negotiating groups are addressingissues related to agriculture, services

and investments, subsidies, antidump-ing and countervailing duties, andvery importantly, how smaller countrieswithin the hemisphere will be able tobenefit equally with the larger onesonce trade liberalization has occurred.(See http://www.ftaa-alca.org).

Throughout the 1990s, NAFTAcountry leaders provided strongsupport for these negotiations. Anduntil very recently, dramatic reformsin Latin America began to transformthe region from autocratic rule andfinancial mismanagement into one ofnascent democracy and economicpromise. Furthermore, the success thatthe U.S. and Canada have achieved inintegrating the less economicallypowerful Mexico into NAFTA hassent positive signals throughout thehemisphere that a workable andbeneficial FTAA can be realized.

Unfortunately, the situation haschanged. Since the millennium began,political and economic conditionswithin the Western Hemisphere havedeteriorated, and short-term pros-pects for an expanded NAFTA appearless optimistic.

Perceptions and Realities DifferOne of the basic tenets of regionaleconomic integration theory says: thegreater the trade relationship amongprospective member countries, andthe higher their average tariffs levels,the greater likelihood that furtherspecialization and trade creation willoccur after an economic union takesplace.

Based on this, an initial examinationof the patterns of commodity tradeamong the Western Hemispherecountries suggests they are promisingcandidates for region-wide economic

integration. For example, approxi-mately 58 percent of Western Hemi-sphere exports in 2000 were shippedwithin the Americas.

However, upon closer examination, itis revealed that the three NAFTApartners are the major recipients andoriginators of this trade. Moreover,intra-regional trade among the non-NAFTA members accounts for only 29percent of total exports and 23 percentof imports. Equally revealing, only 7percent of NAFTA country exports aredestined for Latin America.

Surprising to many, Latin America’sinterest in entering into a tradeagreement with NAFTA countries isnot as compelling as it might, at first,seem. Current trade patterns revealthat NAFTA countries form a largelyself-contained block while the otherhemispheric nations have varyingdegrees of trade dependency uponNAFTA. In fact, non-NAFTA Latinnations are more dependent on the EUand themselves for both their exportsand imports than on NAFTA countries.

Closer Ties With EuropeGiven these trade realities, LatinAmerica may choose to develop evenstronger ties with the EU. Chile andMercosur (the Southern Cone alliance

“Perspective” continued on page 7

Page 7

of Argentina, Brazil, Paraguay, andUruguay), already have strong linkswith the European block, which hasrecently broadened the scope of itsfree trade talks to include the stickyissue of trade in agricultural products— an issue of paramount importanceto most Latin American countries.

From the EU’s perspective, culturaland linguistic ties, and even someshared values already exist withArgentina, Brazil and several moreCentral American and Caribbeannations. Plus, the EU likely wouldbenefit from the new Doha Round ofWTO tradetalks with theUnited States ifthe LatinAmericannations are notformally tied toNAFTA.

A South American Free Trade AreaThe dream of a South American FreeTrade Area (SAFTA) is an alternativefor southern non-NAFTA nations —especially Brazil. Intra-hemisphericcommodity trade patterns suggest thatthe effect of an FTAA on many of thenon-NAFTA nations’ manufacturingsectors, including Brazil’s, would notcome from creating more formal tiesto NAFTA, but from the liberalizationof trade among themselves.

Most Latin American non-NAFTAnations continue to be quite protec-tionist. If these impediments to tradecan be reduced under the auspices ofa SAFTA, Brazil’s dream of leading acommon Latin American front toextract better terms from the U.S. andthe EU might be realized.

Brazil’s ProtestsBrazil’s ambassador to the U.S. claimsthat America levies an average tariffof 46 percent on Brazil’s top 15 world

exports, whereas Brazil’s averagetariff on their American equivalents isjust 14 percent. To protest this discrep-ancy, Brazil has opened cases at theWTO against American barriers to itsorange juice, U.S. subsidies to soyaand cotton growers, and most recentlyU.S. tariffs on Brazilian steel.

Such confrontations do not bode wellfor hemispheric integration, especiallysince Brazil and the United States willco-chair the final round of FTAAnegotiations!

Role of Foreign Direct InvestmentIn these times of Latin Americaneconomic and political uncertainty, it

is important for the U.S. to givecareful attention to major weaknessesthat plague many Latin Americannations, namely their dependenceupon foreign capital and their vulner-ability to outside events.

For many of these nations, the mostimportant advantage of NAFTAmembership would not be tariffreductions, important as they wouldbe, but rather, the “rules of origin”provision that would grant preferen-tial access to the U.S. market. Thiswould make direct investments inLatin America by multinationals fromthe rest of the world very attractive.

The U.S. Challenge AheadGiven the Latin American alternativesof developing more formal ties withthe EU or creating a broader allianceamong themselves, the major U.S.challenge is to give very high priorityto completing the FTAA on schedule,while seriously addressing LatinAmerican concerns.

This will not be an easy task as otherpressing issues, such as nationalsecurity and the newly launchedDoha Round of trade negotiations,likely will be distractions. Nevertheless,it is important for American leaders torealize that most Latin Americannations are looking for signals regard-ing the predisposition of the U.S.toward the Western Hemisphere.

Signals from the United StatesDuring the campaign trail in 2000,former Governor Bush said that LatinAmerica often remains an after-thought of American foreign policy.Since then, the Bush Administrationhas made a visible and significant

commitment toan FTAA andhas begun toaddress thespecific needs ofLatin Americancountries.

Recent signs are encouraging. Con-gress recently passed the Trade Act of2002, which expands trade benefits fordeveloping countries by more than$1.2 billion. In September, the U.S.renewed and expanded the Andeantrade preference program withColombia, Bolivia and Peru, and inOctober, the USTR notified Congressthat negotiations are underway tocreate free trade agreements withChile and five Central Americannations.

At a time when the region is vulnerableto internal and external disruptions,these are the kinds of actions that arelikely to convince Latin Americancountries that the U.S. government issensitive to their needs, and thatstrengthening their ties to NAFTA isin their best long-term interest.

James E. McConnell is associate directorof the Canada-U.S. Trade Center at theUniversity at Buffalo. Readers may contacthim at geojem@acsu.buffalo.edu.

“Perspective” continued from page 6

The most important advantage of NAFTA membership

would be the “rules of origin” provision. This would

make direct investments in Latin America very attractive.

Page 8

Trade Promotion Authority Becomes LawNow the United States Must Play Catch-Up

Whoever said “If it ain’tbroke, don’t fix it,” probablylived in a simpler time. In

today’s rapidly changing globalenvironment, the United States needsto be proactive and anticipate problems.

The U.S. Has Fallen BehindCurrently, the U.S. is behind thecurve. We are a party to only three outof 150 free trade agreements in forcearound the world. Many of theseagreements have evolved into tradeblocs, such as the Association ofSoutheast Asian Nations (ASEAN)and the European Union (EU). Andseveral blocs plan to expand.

For example, EU accession negotiationsare underway to admit 13 EasternEuropean countries — a move thatwill make the EU’s consumer basetwice as large as the United States’.

Mercosur, the South American bloc, isnegotiating with the EU to establish atrans-Atlantic free trade zone. Andrecently, ASEAN and China agreed toconsider establishing a trade bloc thatwould represent a market of 1.7billion consumers.

It’s Time To Play Catch-UpAs our competitors establish largertrade blocs that eliminate importbarriers among member countries,U.S. exports — which still incur duties— are placed at a competitive disad-vantage. To remedy this, the U.S.needs to forge new trade agreementsthat level the playing field.

Unfortunately, from 1994 throughSeptember 2002, our ability to estab-lish new trade agreements wascompromised. This recently changed.Trade Promotion Authority (TPA),previously known as Fast Track,

expired in 1994. But after severalattempts, it was renewed in August2002, thanks to those who advocatedthe importance of trade to theircompanies, jobs and communities. Butnevertheless, the United States hasfallen behind our global competitorsand needs to play catch-up.

What Is Trade Promotion Authority?TPA requires Congress to pass orreject trade agreements “as is.”Without TPA, foreign governmentshave been reluctant to negotiate treatiesthat Congress could later change.

On December 6, 2001, the Trade Promo-tion Authority bill (HR 3005) passed inthe House of Representatives by onevote (215 to 214). But because the Senateadded amendments that effectivelychanged the bill, and passed it onMay 23, 2002 (66 to 30), the legislationwent to Conference where one versionwas hammered out.

The final version was passed in theHouse on July 27, 2002 (215 to 212)and in the Senate on August 1, 2002(64 to 34). President Bush signed thelegislation into law on August 6, 2002.

International Trade Supports JobsTPA is key because exports supportmore than 12 million higher-payingU.S. jobs, strengthen companies andfarms, and improve our tax base,while sending export revenue to localcommunities through restaurants,retail stores, etc.

In 1950, trade accounted for less than5.5% of U.S. economic growth. Today,it has become an integral part ofeveryday life, accounting for almostone-third of our economic growth. Infact, one in three acres of U.S. agricul-tural production is now exported.

The “Luddites” Are Back in ForceSome blame trade for job losses andindustry restructuring. In reality, lessthan 2% of non-farm workers are atrisk from imports. Technology, notimports, is the real displacer of jobs.Would we stop technological ad-vancement because a small number ofjobs will become obsolete?

In the early 19th century, the EnglishLuddites attempted to destroy textilemachines because they replacedweavers. Today, modern-day“Luddites” want to essentially do thesame — but have mistaken the impactof technology for trade.

Entering the 19th Century... AgainEntering the 21st Century is in manyways similar to entering the 19thCentury. The shift from an agrarian toan industrial economy compelledworkers to leave farms in search offactory jobs. Industrialization createdfear and demanded that workers learnnew skills.

Today, with the advent of globalization,the U.S. is increasingly specializing inmore complex, value-added goods andservices. Consequently, new skills againare demanded. But for those whocan’t adapt, the expansion of tradeadjustment assistance that’s incorpo-rated in TPA legislation is welcomed.

Congress Needs To Forge New FTAsNew trade agreements that knockdown barriers will help U.S. companiesexport and create jobs. And companiesthat don’t export will also benefitbecause portions of their componentssold locally likely are incorporatedinto exported products. That’s whyCongress must negotiate new tradeagreements that will get the UnitedStates off the sidelines.

Page 9

The Chinese proverb: “Give aman a fish and you feed himfor a day, teach a man to fish

and you feed him for a lifetime,” hasnever been more relevant than today.

Globalization, the integration ofnational markets through interna-tional trade and investment, offersinfinite possibilities, greater freedom,and new hope for the world’s poor.

Developing Countries ProsperSince globalization emerged in the1970s, world infant mortality rateshave fallen by almost half, adultliteracy has increased more than athird, primary school enrollment hasrisen, and the average life span hasshot up 11 years. In the short span of1990 through 1998, the number ofpeople living in extreme poverty inEast Asia and the Pacific decreased41% — one of the largest and mostrapid reductions in history.

Due to successful efforts to lower globalbarriers, international trade andinvestment have become a primaryengine of world growth. And growth isresponsible for reducing poverty. Infact, studies indicate that developingcountries with open economies grew byapproximately 5% a year in the 1970sand 1980s, while those with closedeconomies grew less than 1% annually.

Today, 24 developing countriesrepresenting about 3 billion people,including China, India and Mexico,have adopted policies enabling theircitizens to take advantage of global-ization. The result: their economiesare catching up with rich ones. Theincomes of the least globalizedcountries, including Iran, Pakistanand North Korea, have dropped orremained static.

Globalization Provides the Means To Build a Better LifeProving the Skeptics Wrong

If remaining world merchandise tradebarriers are eliminated, potentialgains are estimated at $250 - $550billion annually. About two-thirds ofthis would accrue to developingcountries — more than twice theirannual level of aid.

Positioning for Greater GrowthHelping the world’s poorest countriesto become globally integrated willposition them for greater growth inthe 21st Century. And who wouldknow this better than former Mexicanpresident Ernesto Zedillo, who said,“In every case where a poor nationhas significantly overcome itspoverty, this has been achievedwhile engaging in production forexport markets and opening itself tothe influx of foreign goods, invest-ment and technology — that is, byparticipating in globalization.”

The Effect on the United StatesPowered by advances in telecommu-nications, transportation and finance,globalization empowers consumers topurchase the best the world has tooffer and gives producers the tools tofind buyers anywhere. Consequently,in the United States, resources haveshifted to sectors with competitiveadvantages, productivity has reachednew highs, and innovation hasflourished. Self-directed teams nowapply sophisticated skills to createand run new processes. This has

transformed U.S. manufacturing andboosted demand for more highly-skilled workers.

There Is a DownsideBut globalization has had negativeconsequences on some developingcountries that don’t have sound legalor financial systems. As a result, anti-globalists with good intentions butbad policy recommendations oftenbrand globalization as the scapegoatfor many of the world’s ills.

The challenges introduced by global-ization are similar to those introducedby the Industrial Revolution. Today,as the internet eliminates distance, werelive what the railroads and electricitybrought to an earlier age. But, withchange comes controversy. And just asthe Industrial Revolution’s detractorsspawned Marxism, it is essential tocorrect globalization’s defects beforecounter-forces destroy its promise.

Learning a New WayTo succeed in this highly technicalenvironment, seize the benefits ofglobalization and reduce the risks,American workers must continuallylearn new skills, developing countriesmust welcome global integration, andall nations must provide safety nets.By teaching people and their nationsto fish in the waters of globalization,billions will achieve the means toobtain a higher quality of life.

Page 10

U.S. Investment in Developing CountriesSpurs a Race to the Top — Not the Bottom

Anti-globalists protestingAmerican commercialinvestment in developing

nations have a notably heavy invest-ment of their own in misinformation.

They would have you believe, forinstance, that U.S. foreign directinvestment (FDI) in developing coun-tries is harmful to host country workersand the local environment. But acareful look at the record reveals thatnothing could be further from the truth.

Higher Wages and Better ConditionsAmerican manufacturers who investin developing countries typically offerhigher wages and better workingconditions. This makes jobs at U.S.facilities highly prized, and, overtime, leads to improved environmen-tal and worker protection at all levels.

A case in point, is Procter & Gamble,which since 1991, has invested$85 million in a Czech Republicconsumer products company thatproduces detergent and liquid clean-ers. By applying P & G’s worldwideenvironmental standards, the facilitywas able to reduce boiler emissions by99 percent and solid waste by nearly6,000 metric tons.

In addition to environmental im-provements, P & G introduced acompetitive compensation programand unique employee benefits, suchas loans to renovate apartments andhouses, supplementary incomepayments during illness, maternityleave, and language studies.

P & G also donates $120,000 annuallyto the development of local education,health care, environmental protection,and social institutions. So impressedwith these practices, Czech Republic

President Vaclav Havel recently saidP& G “could serve as a model forother investors.”

Other American corporations invest-ing in facilities abroad typicallypromote similar ethical and respon-sible behaviors.

Nike, the Oregon athletic attire andshoemaker, pays about double theprevailing wage at its contract facto-ries throughout Southeast Asia andscrupulously meets all local environ-mental and occupational safety andhealth laws.

To better serve the Chinese market,Eastman Kodak Co. built a state-of-artfilm and photo paper productionplant that exceeds Chinese environ-mental standards. The U.S. firm paysits Chinese workers more than twicethe state-owned company averagewage and works with Chinese banksto help make loans available to localentrepreneurs interested in openingtheir own photo-processing shops.

Agents of ChangeThrough their operating standards,business practices, values, and prin-ciples, U.S. companies serve as agentsof change, charting a path for otherforeign and domestic companies to

follow. And this strategy, which is goodfor business, results in greater employeeloyalty, less absenteeism, highermorale, and increased productivity.

Anti-Globalist Logic Is FlawedAlthough exceptions exist, anti-globalists promulgate the notion that,as a whole, U.S. manufacturersinvesting abroad seek low-costfacilities in order to cut labor andenvironmental costs. Although anti-globalists’ intentions are good, theirlogic is flawed.

Their argument is based on the notionthat weak environmental and workerstandards give producers in poorcountries a significant cost advantage.They also theorize that this putspressure on other countries to lowertheir standards in order to compete,prompting a “race to the bottom.”

If this were correct, investment wouldbe flowing to underdeveloped coun-tries with the poorest labor andenvironmental records. In reality, theopposite is true.

The Race to the TopDeveloping countries tend to attractonly a small portion of America’s

“Investment” continued on page 11

foreign direct investment. For example,in 1999, 87 percent of U.S. manufac-turing investment abroad was directedin high-wage countries. Politicalstability, education and productivitylevels, communications and transpor-tation infrastructure, the rule of law,proximity to market, and the ability torepatriate profits are the most impor-tant determinants of capital flows.

This is why developed countries, whichpay the highest wages and have thestrongest environmental laws, are thedestinations for the vast majority of FDI— promoting a “race to the top.”

Standards Go Up — Not DownWhen a major trading partner raisesstandards, its partners typicallyfollow. For example, when Germanyraised its auto emission standards,other European countries did too.Likewise, California’s aggressiveenvironmental regulations havepulled other states up as well.

“Investment” continued from page 10

In reality, little incentive exists toestablish facilities in countries withweak standards. Today, complyingwith environmental regulationstypically accounts for less than 1percent of production costs of indus-tries in Western countries.

Furthermore, research indicates thatcountries with weak standards do nothave a better global export performancethan countries with higher standards.

This is not to say that environmentalquality in some underdevelopedcountries has not deteriorated ... ithas. But studies show that after acountry’s per capita income reachesabout $5,000, environmental degrada-tion ceases, and then improves.

As living standards rise, an increasingpercentage of the population becomesbetter educated and more politicallyaware. In turn, these people put greaterpressure on government to establishand enforce stricter environmental

regulations and to allocate moreresources to environmental quality.

Educational levels also rise sharply.As incomes rise, families can moreeasily afford to send their children toschool, rather than to work. In fact,research indicates that child labordeclines sharply as the level ofeconomic development increases.

Investment Creates Opportunityand Improves Quality of LifeU.S. manufacturing investment indeveloping countries leads to higherwages, improved labor standards, andprovides millions of people withgreater opportunities.

But those who do break the rulesshould beware. In addition to account-ing concerns following the Enronscandal, institutional investors areincreasingly aware of the importanceof sound labor and environmentalrecords of companies to which theyprovide investment.

A STRATEGIC COMMUNICATIONS AGENCYPublishing • Public Affairs • Public Relations • Consulting

PO Box 1188, Williamsville, NY 14231-1188 USA • 716.681.8880 Ext. 239 • Fax 716.681.5678Info@ManzellaTrade.com • www.ManzellaTrade.com

Manzella Trade Communications Adds Public Relations Division

Manzella Trade Communications, a strategic communications agency, announces the formationof its new public relations division. The new division builds on the agency’s publishing and public/government affairs services, which have primarily focused on international trade and policy.

The company has enjoyed a high degree of success managing the goTRADE New York advocacyprogram on behalf of The Business Roundtable and is a recognized leader in book publishing andstrategic communications among Fortune 500 clients.

The public relations division provides corporate, crisis, internal, marketing and othercommunications services, as well as community affairs and speech writing. These services, especiallycrisis prevention training, are exceptionally helpful to companies that plan to downsize, establishfacilities abroad, outsource overseas or deal with other economic-related matters.

Page 12

Unshackle U.S. Exporters or Risk Job LossesThe Battle With Europe and the WTO Over the Extraterritorial Income Exclusion Act

What do you get when youcontinually change andmanipulate tax codes? A

big mess! Now, throw convolutedsubsidies into the mix and you alsoend up with a lot of unintendedconsequences.

Thousands Could Lose JobsToday, that’s the situation in both theUnited States and European Union(EU). And as a result, thousands ofU.S. workers stand to lose their jobs ata time when the U.S. economicrecovery appears shaky.

What’s happening now is tied to actionsof the past. For decades, EU indus-tries, such as aerospace and telecom-munications, have been subsidized toboost their international strength or toshield them from global competition.Additionally, the EU has exempted andcontinues to exempt its exporters frompaying a substantial value added tax.

FSC and ETITo counter these unfair actions, in1984, the United States crafted theForeign Sales Corporation (FSC) taxcode so exporters could competefairly in global markets. This provedbeneficial, as evidenced by a NationalForeign Trade Council report that said3.5 million U.S. export-related jobsbenefited from FSC tax incentives in1999. Unfortunately, the EU challengedthe FSC rule through the World TradeOrganization, and won in 2000.

In an attempt to satisfy the globaltrade body, the U.S. repealed the lawand in its place created the Extraterri-torial Income Exclusion (ETI) Act of2000. However, the new law stilldidn’t satisfy the EU, who againchallenged the law, and won.

Consequently, the EU is now autho-

rized to impose sanctions of more than$4 billion annually on U.S. exports,which include steel, beef, sugar, woodand paper products, cotton, apparel,cosmetics, and electrical machinery.

Although Europe’s tax loopholes andsubsidies distort trade by artificiallyincreasing the attractiveness of itsgoods and services on world markets,its indirect tax system is technicallyWTO-compliant. WTO languagedoesn’t cover indirect taxes, onlydirect taxes like those used in the U.S.

Small Companies Are Impacted MostSo, what can the U.S. do? If Congressterminates ETI without establishing asuitable replacement, approximately6,000 U.S. exporters who rely on ETIto compete will be hurt. And themajority of these firms are small.

Hutchinson Technology, Inc., head-quartered in Minnesota, exports 90percent of its computer disk drivecomponents. If ETI is repealed,President and CEO Wayne Fortun,says “The company could be forced tomove production operations to the FarEast, resulting in the loss of 3,000 ofour 3,400 employees.”

Power Curbers, Inc., a manufacturerof concrete paving equipment, em-ploys 130 workers at its North Caro-lina, Iowa and Tennessee facilities.Company President and CEO, DwightMessinger, says “Without ETI, ourexports would decrease, especially toEurope. This could result in layoffs of5 to 10 percent of our workforce.”

Small companies, many of which arestruggling just to survive the eco-nomic downturn, aren’t the only onesthat stand to lose. Boeing aloneestimates that repealing ETI will resultin the loss of nearly 10,000 of its high-

tech jobs, as well as 23,000 more jobswith its suppliers.

Airbus, Boeing’s heavily subsidizedEuropean rival, has received morethan $30 billion in EU financialsupport. This gives Airbus an unfairadvantage, and affects the entire U.S.aerospace industry that employsnearly 800,000 highly-skilled workers.

The Mess Needs To Be Cleaned UpThere is no doubt that multiple layers ofloopholes and convoluted subsidiesartificially create winners and losersin international trade. That’s why thismess needs to be cleaned up. The U.S.response to the ETI challenge iscurrently being debated in Congress.And one thing remains certain: U.S.exporters need a mechanism thatcounters their EU rivals’ governmenthandouts. Small and medium-sizecompanies, which account for about 96percent of all U.S. exporters, and largecompanies, as well as farmers, all needa level playing field.

Exports Are Key to Our EconomyExports support more than 12 millionhigher-paying U.S. jobs, strengthencompanies and farms, and improve thetax base, while sending importantrevenue to local communities. Plus, onein three acres of U.S. agriculturalproduction is exported. In short,exports are a key piece of our economy.

Congress certainly has a difficult jobahead. In order to prevent the Euro-pean Union from implementing$4 billion worth of trade sanctionsagainst U.S. exports, our Congres-sional Representatives must actquickly. But they must do so in a waythat unshackles our exporters from asystem of unfair competition, does notforce them out of business or offshore,and protects U.S. jobs.