Senate Banking, Housing and Urban Affairs Committee

Subcommittee on International Trade and Finance


Oversight Hearing on the International Monetary Fund (IMF)


Prepared Testimony of the Honorable Patrick A. Mulloy
Assistant Secretary for Market Access and Compliance
Unites States Commerce Department


10:30 a.m., Tuesday, March 9, 1999

Mr. Chairman, I am very pleased to be here before this Subcommittee today for two reasons. First, because the subject of today's hearing is extremely important. The IMF programs for the four countries we are discussing today -- Brazil, Indonesia, Korea, and Thailand -- can have an important bearing on our exports and American jobs. Second, I must say that it is a rewarding experience to appear before the Committee for which I worked for 14 years. I am very pleased at the Subcommittee's interest in this area, and I hope we can ensure our exporters obtain improved access to markets in countries that benefit from IMF programs.

The IMF and Treasury have the principal responsibility for monitoring and analyzing the countries' IMF programs and their performance under those programs. The Department of Commerce is principally concerned with these countries' trade actions, particularly from the perspective of encouraging further liberalization but also seeking compliance where there are violations of our trading rights. In the latter we work closely with USTR.

COMMERCE'S MONITORING ROLE

I think it would be useful for the committee to know what we monitor in the Commerce Department and what we don't, for we concentrate our role in specific areas. First, we closely monitor country implementation of specific trade liberalization commitments they undertook as part of their IMF programs. Second, through our subsidies enforcement program we look for government directed lending and financial assistance that may represent market-distorting subsidies. Third, we seek to promote further trade and investment liberalization generally on the part of these and other countries, even though such liberalization may not be specifically called for in the IMF programs. Finally, we monitor compliance with the various bilateral and multilateral agreements that provide our firms and workers with market access and trading rights in these countries.

To ensure that the various trade- and investment-related commitments are fulfilled the Clinton Administration has established an interagency monitoring agenda to support the monitoring and implementation efforts of the IFIs. A framework for moving forward with this important agenda was established not long after the crisis spread from Thailand to Korea and Indonesia. Through the Treasury representative to these institutions, the Administration is providing the information it collects and analyzes on recipient countries' implementation of their respective commitments to the Boards to make it clear that the Administration is serious about the fulfillment of these obligations.

The Commerce Department's Market Access and Compliance Unit (MAC), Trade Development sector (TD), and Import Administration (IA) offices charged with monitoring and ensuring compliance with trade agreements are monitoring the trade- and investment -related commitments under the IMF programs.

In general, our approach to monitoring the trade-related commitments entail MAC's Trade Compliance Center and MAC's country desks working with Trade Development industry desks and with other U.S. government agencies to develop specific approaches for ensuring that the fulfillment of the commitments meet our market access concerns, analyzing foreign government legislation and regulations and reviewing embassy reporting from affected countries. Perhaps the most important part of these plans is outreach to key industry associations. We consult with trade associations and other industry contacts such as the Department's Industry Sector Advisory Committees to obtain, as well as communicate, valuable information on potential compliance problems. We also review company complaints received via the TCC's Internet site (www.mac.doc.gov/tcc) home page. Talking to U.S. companies who are actively attempting to pursue business in these countries helps us get an accurate readout on how the IMF reforms are being implemented.

Commerce industry sector experts analyze how government policies may affect U.S. participation in a range of strategic markets including autos, aerospace, energy, environmental technologies, information technology, and shipping. They are also working to identify specific products and industries most vulnerable to import penetration.

When the financial crisis began to spread last year, a number of U.S. industries, particularly the steel and semiconductor industries, expressed concern that foreign governments would resort to subsidies in an attempt to export their way out of the crisis. They were also concerned that funds from the International Monetary Fund (IMF) stabilization packages would be used to subsidize producers and exporters in the recipient. In an effort to address these concerns, Commerce's Subsidies Enforcement Office (SEO) established two monitoring programs -- (1) a subsidies monitoring program to ensure that exports to the United States were not unfairly increased through export or production-related subsidy programs and (2) an import monitoring program to alert the Administration to potential import surges and falling prices.

Subsidies Monitoring: The focus of the subsidies monitoring program is to ensure compliance with the subsidy-related conditions of the IMF stabilization packages and to uncover potential subsidy practices that may be actionable under U.S. CVD law or the WTO Subsidies Agreement. Concern was expressed by several U.S. industries that unless the IMF stabilization packages were carefully monitored, IMF beneficiaries would continue to use government subsidy programs and their banking sectors as instruments of industrial policy -- practices which, when they occur, result in subsidizing excess capacity in industries that compete directly with products produced in the United States.

There are a number of positive conditions in the stabilization programs for crisis-affected countries that discipline subsidies, including the removal of government-directed financing, export subsidies and special tax exemptions.

These conditions address a wide range of practices that may confer unfair subsidies that are actionable under the WTO, including many which have been found to be subsidies in past countervailing duty cases. The SEO has shared information and worked closely with the interagency group charged with reviewing the reforms to which recipient countries have committed in the context of their stabilization programs.

In addition to monitoring activities from Washington, SEO staff trained personnel in U.S. diplomatic posts overseas to identify potential subsidies that could lead to unfair trade. At different times throughout the last year, SEO staff traveled to Asia to coordinate our monitoring efforts with U.S. and Foreign Commercial Service (US&FCS) officers and State Department economic officers and to provide an overview of the Subsidies Agreement, applicable U.S. trade laws and practical information that could be used to monitor government practices and determine whether they may constitute actionable subsidies. SEO staff also examined the resources available at the posts and evaluated the available information regarding potential subsidies that had been collected.

As a result of these activities, the U.S. government has actively engaged countries before they implement new programs to seek changes to them to address subsidy concerns. We will continue to press our trading partners not to subsidize.

Import Monitoring: In anticipation of potential trade problems arising out of the global financial crises, the SEO, in conjunction with other units in Commerce, began an import monitoring program that closely tracks imports and prices in key import-sensitive sectors. This program was designed to provide an early warning system that the Administration could use to formulate a swift response to potential import surges.

Countervailing Duty Investigations: Commerce has specific authority to enforce the countervailing duty law that protects U.S. industries and workers from subsidized imports. We also work to ensure that U.S. exports are not adversely affected by unfairly subsidized competition in export markets. Over the years, the trade laws have proven to be extremely effective in addressing unfair trade practices involving a wide array of goods, including steel products, semiconductors, capital goods, and agricultural products. There are currently six on-going countervailing duty investigations examining subsidy practices of Korea, Indonesia and Brazil. As always, Commerce will vigorously enforce the U.S. trade laws, which sends an important signal to our trading partners that we will not tolerate the subsidization of imports that harm our industries and workers.

THE SITUATION IN THE FOUR COUNTRIES

Turning now to the four countries of specific interest to the Subcommittee, and the question of what effect the IMF programs have had on these countries' economic and trade prospects and on trade liberalization, I want to stress that these countries are of major importance to the U.S. trade position and had a very significant effect on our trade last year. In fact, the three Asian countries -- Thailand, Korea, and Indonesia now rank as the 9th, 10th, and 11th largest country deficits in our trade, and together they accounted for $23 billion of our trade deficit last year. In 1997 they accounted for $8 billion of our deficit, so in one year our trade deficit with them worsened by $15 billion -- about one-third of the total deterioration in our trade position.

It was overwhelmingly the loss of our exports to these countries that led to the deficit rise, not an increase in imports, as I shall explain as I discuss the individual countries in turn. Given this situation, what happens to these countries' economies, and the extent of further trade liberalization, is extremely important to our trade position and export prospects. It is particularly important that they keep their markets open.

In examining the situation country by country, I think it is important to note that there are two types of trade effects stemming from the IMF programs. The first is the direct effect of implementation of the specific trade opening commitments, when these exist, made by the individual countries. The Korean program contains a small number of these specific commitments.

The second type of effect is indirect and stems from the general implementation of the transparency, structural, and other steps required by the IMF to bring these countries' fiscal and monetary houses back in order. As the countries' economies begin improving, their imports begin to rise which serves to restore prospects for our export growth. The IMF program requirements that result in deregulation and greater market openness benefit our exports, giving U.S. firms a more level playing field on which to compete.

Korea -- The financial crisis that rocked Asia, and then ricocheted around the world, has taken a tremendous toll on U.S. exports to Korea. In 1998 our exports to Korea fell 34%, dropping to $16.5 billion. U.S. imports from Korea were up 3%, to nearly $24 billion, leaving a bilateral deficit of $7.4 billion compared to a surplus of $1.9 billion in 1997.

While imports from Korea are up only 3% in dollar terms, imports in certain sectors have grown sharply. Despite these changes, Korea remains our ninth largest export market, and our exports to Korea exceed our sales to such major markets as Australia, Brazil, China, and Italy.

Prospects for U.S. exports to Korea are improving as the Korean economy improves and reforms. The Korean won has appreciated 59% from its low of late 1997, although it is still 27% below pre-crisis levels. Foreign exchange reserves are growing and foreign investment is now more welcome. While the Korean economy is still in a recession, a number of economic forecasters expect a return to positive growth this year. These changes, coupled with broader structural changes, point to a steadily improving climate for U.S. exporters.

The IMF program for Korea, and for other countries, was designed to address the underlying structural weaknesses that lead to the crisis in the first place. Under the nearly $60 billion stabilization package, Korea has begun to implement economic reforms on a scale unimaginable before the crisis and the arrival of the Kim Dae Jung administration. The Fund conditions fall into five categories: macroeconomic policy; financial sector restructuring; prudential regulations and supervision; trade and capital account liberalization; and transparency, monitoring, and data reporting. If reforms in all five areas are carried out fully, together with genuine corporate restructuring that reduces capacity and increases transparency, Korea should succeed in moving the economy away from a system of government direction toward one of much greater openness and market orientation. This will serve to increase opportunities for U.S. firms in the Korean market.

MAC staff have worked closely with Treasury and USTR in monitoring Korea's compliance with the trade-related reform commitments in Korea's IMF stabilization package. The Korean government continues to move forward with implementing those commitments. We have seen progress on the phase out of the import diversification program (IDP), with the final items scheduled to be removed from the IDP list as of June 30. (This program bans certain Japanese products, but it has affected some U.S. products with high Japanese content.) We have also seen progress on simplifying or removing import certification procedures, and in opening some services (such as maritime transport) to foreign participants. Our MAC Korea desk was instrumental in seeing that the U.S. private sector had an opportunity to provide input to the Korean government on this process. We continue to hold discussions with the Korean government on this topic.

Our Market Access and Compliance work extends far beyond monitoring IMF programs, and includes other bilateral trade issues such as pharmaceuticals, automobiles, and intellectual property rights. A prime example of a problem relates to construction of the new $6 billion Inchon International airport -- the largest in Asia. When our Commercial Office in Seoul notified MAC's Trade Compliance Center (TCC) that a U.S. firm -- a world technological leader in elevators and escalators -- had been told by the Koreans it was ineligible to bid for business at the new airport, MAC initiated compliance activities. Korea has imposed discriminatory licensing requirements, joint venturing requirements and does not provide access to bid challenge procedures, requirements that are inconsistent with its WTO commitments in the Government Procurement Agreement (GPA).

We have initiated numerous attempts to seek compliance without having to resort to dispute settlement. Unfortunately, Korea denies that it has obligations to us and has not responded favorably to our repeated requests that it comply. Consequently, we turned to working with USTR on a WTO dispute settlement case, and last month the United States submitted a request in Geneva for consultations under the GPA's dispute settlement provisions. We remain hopeful that these consultations will result in a market opening settlement that affirms our rights.

Additionally, our Subsidies Enforcement staff are closely monitoring subsidy programs. The type of subsidy practices being monitored on a daily basis include government-directed lending, government incentives to ensure conglomerate restructuring, debt restructuring and/or debt assumption for both viable and non-viable firms, and export financing. The Administration has engaged in a dialogue with the Korean government over concerns about these practices.

One area of particular importance to the steel industry where these efforts have made a difference has been Hanbo Steel. In response to a complaint from U.S. steel producers alleging that Hanbo Steel, a Korean mini-mill, had been provided government subsidies, Secretary Daley and Ambassador Barshefsky engaged the Korean Government in substantive and detailed consultations on this issue. In addition, President Clinton raised concerns about Hanbo in his meeting with Korean President Kim Dae Jung here in Washington. Through these efforts, the Administration obtained written assurances from the Korean Government that it will not support or direct others to support Hanbo. Hanbo has now temporarily shut down production of hot-rolled sheet.

We also have received assurances that the Hanbo creditors and the independent agent managing the sale of Hanbo will take all steps necessary to ensure a market-driven sale. We continue to monitor these assurances. These Korean Government undertakings constitute the most timely, direct, and commercially meaningful means to address our industry's concerns about Hanbo.

The Administration recently expanded the steel dialogue to encompass broader concerns about the Korean steel industry ­ in particular, regarding the privatization of POSCO, the world's largest steel producer. Our goal is to ensure that this company is fully and expeditiously privatized. Effective privatization of POSCO would help ensure that its pricing, production, and other business decisions are made at arm's length from the Korean government, thereby addressing industry concerns about POSCO's operations. During his trip to Korea, President Clinton urged President Kim Dae Jung to ensure that subsidies are not being provided to the steel and semiconductor industries. Through all these efforts, the Administration is working to ensure that U.S. firms are able to compete fairly in U.S. and overseas markets and that U.S. workers get a fair shake.

Indonesia -- The regional financial hurricane that hit Indonesia's economy starting in late 1997 seems to have abated. Although the Indonesian government predicts that 1999 will be a better year than 1998, it foresees no real economic growth, reduced but still double-digit inflation, and slow recovery of export earnings. In preliminary estimates, GDP shrank in calendar year 1998 by 13.7% over 1997. The inflation rate for 1998 was 77.6%, and the revised 1998/1999 budget estimate assumes inflation of 66% for the fiscal year, beginning April 1.

Given this economic backdrop, it is not surprising that U.S. exports to Indonesia dropped precipitously last year. While Indonesia was our 28th largest export market in 1997 on the strength of $4.5 billion in U.S. exports, it dropped to 40th place last year on $2.3 billion in U.S. sales, a dollar decline of nearly 50%. We are hopeful that a special $1 billion U.S. Export-Import Bank fund, patterned after a similar effort set up last year for South Korea, will be of some help in reversing this trend. U.S. imports from Indonesia were up only 1.6%, to $9.3 billion, during the same time period.

As with Korea, our MAC country desk and TCC staff have worked with other USG agencies to monitor Indonesia's compliance with the trade related commitments of the IMF program. Indonesia has implemented or made progress in many of its trade-related commitments, including eliminating some monopolies and cartels, embarking on a program to privatize state enterprises, reducing export taxes and dismantling of joint marketing boards, liberalizing the distribution sector, reducing tariffs across the board, and phasing out licensing restrictions. Indeed, we have been satisfied with the Indonesian government's efforts to this date in reforming their trade regime. However, the true test of these reforms will come when increased trade flows resume, and we will continue to work with our private sector contacts to track the full and complete implementation of these commitments

Something that we had been particularly interested in, and continue to monitor closely, is the automotive sector in Indonesia. One of Indonesia's IMF commitments was to dismantle its national car program, and indeed the program was officially canceled in January of last year.

A WTO panel decision in July of last year that parts of the program had indeed been inconsistent with the Agreement on Trade-Related Investment Measures (TRIMs) would have appeared to have closed the matter once and for all. However, the Indonesian government has recently announced its intention to develop a new automotive policy to further its long-held goal of building an indigenous automotive industry. While we welcome the Indonesian government's assurances that any new policy initiatives will be fully WTO consistent, we are monitoring the situation with the approach of trust, but verify.

Thailand -- The IMF supported economic reform program in Thailand has been broadly successful in stabilizing the economy. Success in stabilizing its currency has allowed Thailand to substantially lower interest rates in recent months. Fiscal policies have also been eased substantially to promote economic growth and to allow more room for augmenting social safety net programs in conjunction with substantial assistance from the Multilateral Development Banks. Thailand is now concentrating on the more difficult challenge of reforming the financial sector and facilitating corporate restructuring, which are essential for resumption of strong economic growth.

The 8 percent contraction in the Thai economy in 1998 hit U.S. exports hard. U.S. exports to Thailand were down by almost 29 percent last year, to $5 billion. U.S. imports from Thailand rose 6 percent to $13.4 billion. Thailand is the 26th largest export market for the United States and our 13th largest supplier. The U.S. trade deficit with Thailand increased by 56 percent in 1998, to $8.3 billion -- our ninth largest trade deficit overall.

Privatization is a key objective under Thailand's IMF supported economic reform program. Over time, U.S. exports to Thailand should benefit from the privatization planned for various state enterprises. The four priority sectors in the master privatization plan are telecommunications, water, energy, and transportation. Plans are being drafted to establish regulatory bodies and a framework for market competition in these sectors. The Thai Parliament is considering the State Enterprise Corporatization Act which will serve as a foundation for corporatizing state-owned enterprises.

While Thailand's IMF program does not include any trade-related commitments, the Thai government's efforts to pass economic reform legislation are of particular interest for our commercial relationship with Thailand. Eleven economic reform bills are at various stages in the Thai legislative process, with two bankruptcy-related bills having passed last week. Progress on bankruptcy reform and measures to streamline the foreclosure process will have the biggest effect in jump starting the Thai economy. These amendments to the legal regime should help facilitate much-needed corporate debt restructuring. The slow pace of corporate debt restructuring so far has contributed to the scarcity of new lending in the financial sector. The Bank of Thailand has identified almost $19 billion worth of debt in important firms that needs restructuring. Some major companies have rescheduled debt, but some have only made moderate progress. Nonperforming loans are estimated at 46 percent of all loans. Banks need to start lending again before Thailand's economy can return to growth.



Restructuring the financial sector has been the centerpiece of the government's effort to restructure the economy. A financial sector restructuring plan announced in August 1998, intervened with several additional institutions, outlined the disposition of all intervened institutions, and established a state-supported scheme to recapitalize the remaining financial institutions.

Brazil -- U.S. exports to Brazil fell 4.8 percent in 1998. On January 15, 1999, Brazil devalued its currency, and we expect this devaluation to result in a further drop in U.S. exports in 1999. Even so, it is worth noting that unlike the other three countries we are discussing today, our trade with Brazil is in substantial surplus. Our trade surplus with Brazil last year exceeded $5 billion, ranking Brazil 4th among countries with which the United States has a positive trade balance.

Last year, Brazil took several measures designed to help it weather the Asian crisis by discouraging imports, including raising its common external tariff by 3 percentage points, enacting restrictive import financing, and re-invigorating some previously dormant import licensing requirements. Although none of these actions appear to violate Brazil's WTO obligations, MAC has actively solicited U.S. industry views regarding their impact. Most U.S. companies we spoke to last year indicated that, although an inconvenience, the measures have had little effect on their exports. However, complaints from U.S. industry have been increasing this year, particularly from textile companies (whom we are assisting with Brazilian customs authorities). We are currently evaluating these new complaints.

A new IMF agreement was announced just yesterday. I do not have any details, but in its initial agreement last year, Brazil committed to continue its policies of trade liberalization and integration, both within Mercosur and the Free Trade Area of the Americas (FTAA). It also agreed not to impose trade restrictions that might be inconsistent with its WTO commitments.

Our monitoring of Brazil's compliance with the trade elements of its IMF package indicates that the Cardoso Administration is fulfilling these commitments. Importantly, the Brazilian Government has explicitly rejected tariff hikes as a way out of its present situation. In fact, it has even threatened local producers with tariff cuts if they do not show restraint in passing through the inflationary effect of the devaluation in their pricing.

Brazil also is pursuing continued economic reform by accelerating and extending the scope of its aggressive federal privatization program to include state and municipal entities. And in a development which would have been unthinkable just a few years ago, the Brazilian Government has put a minority block of PETROBRAS, the state oil company, up for sale, and has indicated that it has further liberalizations with respect to its state-owned oil monopoly and largest bank under review.

We also are paying close attention to Brazil's observance of its WTO commitments, particularly in the areas of intellectual property rights (IPR) and trade related investment measures (TRIMS). Brazil has taken important legislative and enforcement steps to strengthen its IPR regime, but piracy remains a serious concern.

Bilaterally, the U.S.-Brazil Automotive Agreement of 1998 effectively terminates Brazil's automotive program at the end of 1999 and ensures that MERCOSUR will not adopt a WTO TRIMs inconsistent regime as it moves toward a common automotive program by the year 2000.

The Department also is vigorously enforcing U.S. trade laws. Brazilian imports are included in the Department's current countervailing duty and antidumping investigations of hot-rolled steel products from several countries. We have preliminarily found positive dumping margins and subsidy rates for the two Brazilian companies involved. For its part, the GOB recently indicated its interest in negotiating a suspension agreement.

CONCLUSION

Mr. Chairman, in summing up the Commerce Department's assessment of the progress that the four countries are making in implementing those aspects of their IMF programs that affect trade, we generally believe a good job is being done. The specific commitments made are being honored, and those steps should have a positive effect. The progress that is being made in the broader aspects of their programs that affect the overall recovery of their economies is encouraging as well. With the possible exception of Indonesia, the Asian countries appear to have turned the corner and be recovering, and we are seeing the first signs of this in our exports. As for Brazil, without a single month's data, it is far too early to assess the impact of Brazil's devaluation on our bilateral trade.

With the exception of Thailand these IMF programs have featured a greater trade focus than we have seen in prior programs for other countries in earlier years. I would have to say we are impressed with the effect of this focus on trade. These programs have demonstrated that countries take their commitments to the IMF seriously, and that they tend to implement IMF trade measures quickly. We think this is such a positive benefit that we would like to see trade and market opening steps become an even stronger aspect of future programs that may be necessary.

Market openness is good not only for our trade prospects and for our ability to sell in other countries, but it is also good for spurring the internal growth of these economies. The greater the market openness, the greater the degree of competition, lower prices, better product availability, reduced corruption, and the like. It is a win-win game, and we would like to see more of it.

Through the interagency framework we established at the beginning of the financial crisis, Commerce, State and USTR will continue to work with Treasury on IFI stabilization packages and new structural adjustment programs. For its part, Treasury has committed to advise Commerce and USTR of upcoming large country programs, at an early stage. This provides the trade agencies an opportunity to advise the Treasury on trade-related conditionality that might be appropriate. We also agreed to examine implementation of trade related conditions in advance of IFI reviews of these loan conditions. Should deficiencies in compliance, in our view, be noted, we will continue to inform our Treasury colleagues so that appropriate action can be taken through the appropriate channels.

Let me conclude, Mr. Chairman, by returning to the question of trade compliance, for it is vitally necessary that we not only reach trade agreements with other countries, but that we ensure that agreements are actually implemented and that they confer the benefits that we bargained for.

We face a problem, though, which I would like to bring to the Committee's attention, as this Committee is our authorizing committee. For several years, the Congress has tended to look at the Commerce Department's trade role as being principally export promotion, and has not yet given priority to funding the Commerce Department's Market Access and Compliance functions. For several years the Congress has provided substantially less funding for this function than has been requested in the President's budgets. In fact, since 1996, our Market Access and Compliance unit has been under funded by a total of $14 million from the Administration's requests -- or about 20 percent of the total resources spent on this important function. The consequence has been a shrinkage in the amount of staff we have been able to apply to market access, monitoring, and compliance.

Despite the need to monitor compliance with a large number of Japanese trade agreements and work on a growing number of market access complaints by U.S. companies, our Japan staff has fallen from 18 to 8 in the past eight years. Our China staff declined from 9 to 4. Our European Union office, which has just assumed the enormous new task of compliance with the $1.5 billion Mutual Recognition Agreement, is down from 11 to 6.

The President's budget proposal for FY 2000 seeks to remedy this situation and places a higher priority on compliance and enforcement of our trade agreements. The request for the Commerce Department includes $22.5 million for Market Access and Compliance -- a roughly $5 million increase over what was appropriated by the Congress for FY 1999. This increase would allow us to place more resources on market access and compliance initiatives, including the creation of a "strike force" that is intended to greatly compress the amount of time needed to solve compliance problems and would be oriented especially to concentrate on opening markets for small and medium-sized firms. I commend the market access and compliance budget initiative to your attention, for adequate funding for access and compliance will pay dividends in increased exports.

The Administration fully supports the IMF financial stabilization programs and other forms of assistance for these countries given that a stable financial architecture in Asia and throughout the world is our most important trade policy objective. At the same time, however, the Administration will ensure that the current state of affairs will not serve as an opportunity to backslide or renege on trade-related obligations made in other fora, and, that these evolving programs complement and reinforce our trade policy goals and are effectively implemented. For our part at Commerce, we will continue to actively monitor compliance with all our trade agreements and will be vigilant in ensuring U.S. businesses and workers get all the intended benefits from our agreements.

Thank you, Mr. Chairman.



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