National Cotton Council Testimony on International Trade Policy Impact on U.S. Cotton Before the House Agriculture Committee

Bobby Greene, Chairman, National Cotton Council

Washington, DC

Mr. Chairman, thank you for having this hearing today. My name is Bobby Greene. I am a cotton ginner from Courtland, Alabama, and currently serve as the Chairman of the National Cotton Council of America.

Introduction

The National Cotton Council is the central organization of the United States cotton industry. Its members include producers, ginners, oilseed crushers, merchants, cooperatives, warehousemen, and textile manufacturers. While a majority of the industry is concentrated in 17 cotton producing states, stretching from the Carolinas to California, the downstream manufacturers of cotton apparel and homefurnishings are located in virtually every state.

The industry and its suppliers, together with the cotton product manufacturers, account for one job of every thirteen in the U.S. Annual cotton production is valued at more than $5 billion at the farm gate. In addition to the fiber, cottonseed products are used for livestock feed, and cottonseed oil is used for food products ranging from margarine to salad dressing. While cotton's farm gate value is significant, a more meaningful measure of cotton's value to the U.S. economy is its retail value. Taken collectively, the business revenue generated by cotton and its products in the U.S. economy is estimated to be in excess of $120 billion annually. Cotton stands above all other crops in its creation of jobs and its contribution to the U.S. economy.

Trade and Cotton

Any review of the impact of international trade policy on cotton must be undertaken with the understanding that cotton is a raw, industrial product with a food component (seed) that adds important value. The economics of cotton production are inextricably linked to textile policy and production, both in the United States and around the world.

The last two years have seen fundamental changes in the U.S. cotton industry. Domestic mill use of cotton has declined from 11.4 million bales annually to less than 7.5 million bales. The U.S. crop of approximately 18-19 million bales has increasingly looked to export markets as domestic textile manufacturers have been driven out of business by cheap textile imports, many of which enter our market illegally. As a result, the cotton industry needs to increase raw cotton exports significantly to help make up for the loss in domestic mill use. If this growth is not achieved, or if the U.S. textile industry cannot be revitalized, the U.S. cotton industry will shrink.

The U.S. cotton industry has a significant stake in WTO agreements on agriculture, textiles and apparel, phytosanitary rules, export subsidies and other areas, as well as virtually all the many free trade agreements being negotiated by the Administration. Carefully crafted trade agreements can be of significant benefit, but poor agreements can put our industry out of business. It is imperative that negotiations under the WTO ensure the US cotton industry greater market access and an enhanced ability to combat the unfair trade practices of competitors. It is also crucial that free trade agreements contain workable and effective rules of origin, be based upon the fundamental principal of reciprocity and disallow benefits to third countries that are not parties to the agreements.

Doha Round of WTO Negotiations

The Administration has proposed broad, far-reaching reforms in international trade. The proposals would require significant adjustments both around the world and in the United States. The U.S. proposal is fair and should be the focal point for the agricultural negotiations.

WTO Objectives for the U.S. Cotton Industry

The primary negotiating objectives of the National Cotton Council of America with respect to the Doha Round of Trade Negotiations are as follows:

1. Provide timely, effective and reciprocal access to foreign markets for U.S. cotton fiber, U.S. manufactured textiles, and U.S. cottonseed and products.

2. Bound rates of tariffs should be made equivalent with applied rates and then made comparable to US rates;

   Non-tariff barriers, which are being increasingly erected to block imports, should be eliminated; and

   U.S. textile and apparel exports should enjoy the same level of market access that textile exporting countries enjoy in the U.S. market.

3. Stop the erection of non-tariff trade barriers against agricultural biotechnology products.

4. The fundamental aspects of the Sanitary and Phytosanitary Agreement (SPS) should continue to apply to trade in agricultural biotechnology products.

5. Improve disciplines applicable to the state trading of agricultural commodities.
6. Maintain the provisions of the WTO Agreement on Textiles and Clothing, do not speed up the phase-out of textile quotas provided under that agreement, and do not reduce tariffs on textile imports into the United States.
7. Improve rules restricting the use of export subsidies, including rules with respect to downstream subsidization of agricultural products, use of export taxes to reduce prices of processed products, content requirements for exports and exemptions from taxes for exported products.

8. The refund of special value-added-taxes (VAT) on processed products that are exported is commonly used in many textile exporting countries to help subsidize textile and apparel exports. This activity should be classified as an export subsidy, and its use should be prohibited.

9. Reduce trade distorting agricultural subsidies worldwide, but preserve important U.S. domestic and export programs as long as necessary to compete with the treasuries of our competitors, including the export credit guarantee program.

10. The National Cotton Council supports the recently agreed-upon farm bill, urges its enactment, and believes the policies contained in that bill are consistent with U.S. WTO obligations.

11. Maintain strong U.S. rules to protect against unfair trade practices.

12. The National Cotton Council is opposed to any weakening of U.S. countervailing duty and anti-dumping laws.

13. Maintain the ability of the United States to enter into beneficial regional trading arrangements.
14. Improve the ability of the WTO to address managed and/or manipulated exchange rates.
15. Ensure that developing countries that are competitive in international markets with respect to certain commodities or products are made to conform to trade disciplines that are equivalent to those adhered to by developed countries.

Harbinson Proposal

The agricultural negotiations came to a screeching halt when Chairman Harbinson introduced his draft modalities text in March. Suddenly, the significant differences that existed within the agricultural negotiating group were clearly exposed. No one has been able to find anything resembling a middle ground.

While the Chairman should be commended for his bold efforts to plot a meaningful course for the agricultural negotiations, the course reflected in the draft modalities text is, in many ways, misguided.

The Harbinson text is deficient in the area of market access. It offers little, if any, increase in market access for U.S. exports of cotton or cotton products. Unless tariff reductions are made from applied rates of duty, there is little chance a WTO agreement concerning tariffs will increase market access for U.S. cotton. Countries like Brazil that maintain a 55% bound duty on cotton fiber, but apply a rate of around 9%, would not have to provide any real increase in market access under the draft modalities text.

Further, the method chosen to provide for increases in tariff-rate quotas for cotton fiber would allow the People’s Republic of China, the most significant cotton market and cotton producer in the world, to forego any increase its tariff-rate quota for cotton fiber. The Council believes increases in tariff-rate quotas should be made on a percentage basis starting from current access levels, with every country required to meet specified minimum access requirements.

Special and differential treatment offered to developing countries with respect to market access, domestic support and other areas covered by the agreement is excessive and will prove to be detrimental to the U.S. cotton industry. The provisions relaxing tariff reductions for developing countries exacerbate existing inequities and will result in no meaningful increase in market access for U.S. cotton or cotton products. The U.S. should oppose the creation of a category of strategic products, as contained in the draft modalities text, that would face virtually no tariff reduction.

While the cotton industry is pleased that the text continues the green box category of support for domestic programs, it must be noted that a reduction in amber box commitments from the current $19 billion level to about $7.6 billion will require significant adjustments in current farm programs.

This adjustment cannot be justified given that the modalities text leaves current inequities in spending between the EU and the U.S. in place. The Council strongly opposes the reduction in the de miminis category for developed countries, cannot support structuring an AMS ceiling for individual products, and again believes the special and differential treatment provided with respect to domestic measures is excessive.

The Harbinson text contained a 2-year delay for implementation by "newly acceded members." The Council strongly opposes any such delay. Those members would not accept a 2-year delay in receiving benefits from other countries under the WTO. There is no justification for a 2-year reprieve from their corresponding commitments.

The modalities text contains an explicit set of rules that would discipline the use of export credit guarantee programs like the GSM 102 program. The U.S. should work to ensure:

• That the tenor for export credit guarantees for developing countries is not less than 30 months and that principal is to be repaid not more frequently than annually;
• That countries eligible for Special and Differential Treatment with respect to export credit programs include all countries that were considered developing countries in the Uruguay Round;
• That premiums required to be charged do not make the program cost-prohibitive to U.S. exporters and that premiums be allowed to be financed. The current level of premiums covers all of the commercial risks incurred by the GSM program and no increase is necessary to cover designated risks; and
• That the starting point for commercial export credit be the shipment date. The use of "not later than the date of arrival" as provided in the modalities draft may provide an opportunity for our competitors to circumvent the rules.
• That no advance cash payment be required for credits where risk is shared.

The Council urges the United States to continue to support the export credit guarantee program, which is minimally trade distorting and fully consistent with the principles of the WTO. NCC also urges continued support for programs such as the Market Access Program and Foreign Market Development program which help promote exports of U.S. agricultural products. Programs such as these are not trade distorting and fully comply with WTO principles.

The modalities text contains positive language with respect to tariff rate quota administration and takes a very positive approach to the reduction of export subsidies. Despite these commendable provisions, the tariff reduction proposals and the domestic support proposal either leave intact or aggravate current inequities. These inequities are not counterbalanced at all by increased market access for U.S. agricultural exports. Far from leveling the international playing field, several aspects of the modalities text would worsen the competitive situation faced by U.S. agriculture.

The United States faces a difficult negotiation if the March 18 modalities text is to be transformed into an agreement that is beneficial to the U.S. cotton industry and to U.S. agriculture in general.

Reciprocity – Market Access

Turning back briefly to the subject of market access, the United States should make trade reciprocity within sectors its foremost priority in this negotiation. The lack of reciprocity within world textile trade has helped undermine the economic health of the U.S. textile sector.

As a result of the Textile Agreement concluded in the Uruguay Round, the United States will lift all quotas on textile imports from WTO member countries in 2005. The phase-out of these quotas has already begun in earnest. However, promised reciprocal increases in market access from our major textile competitors has not occurred. Many of the world’s largest textile exporters have not provided timely, effective and reciprocal access to U.S. textile exports. The accession of China to the WTO has resulted in even greater increases in textile imports into the United States than could ever have been expected. This imbalance must be corrected.

The Doha Declaration contains language on market access for manufactured goods that suggests that developing countries will not have to make the same type of tariff concessions that the United States will be asked to deliver. Many of the world’s developing countries continue to push for increased access to the U.S. textile market along with significant reductions in U.S. textile tariffs, while not providing timely, effective and reciprocal access to U.S. textiles. We urge our negotiators to require reciprocity in textile trade. The existing imbalance must be corrected – not exacerbated.

We urge our negotiators to work for an agreement that will maintain the provisions of the WTO Agreement on Textiles and Clothing and not reduce tariffs on textile imports into the United States. The strength of the U.S. dollar has made imported textiles and apparel extremely competitive in the United States, while pricing U.S. products out of domestic and world markets. This is especially true in the case of Chinese textiles because the Chinese Renimbi is undervalued by an estimated 40% and is pegged to the dollar at that level. Any reductions in U.S. textile tariffs would further weaken an already weak U.S. textile sector.

Export Subsidies

In clarifying policies that can act to circumvent export subsidy disciplines, the negotiations need to establish disciplines on the activities of state trading enterprises and end the use of export taxes. Our negotiators should also explore the link in certain economies between agricultural and processed product subsidization, including content requirements for exports and special exemptions from normal taxes for exported products. The Council supports better rules with respect to downstream subsidization of agricultural products, use of export taxes to reduce prices of processed products, content requirements for exports and exemptions from taxes for exported products.

Agricultural Programs

The Council also supports the efforts of the WTO to bring excessive spending on domestic agricultural policies under control, provided the reductions are reciprocal and fair.

The Doha Round began with most of agriculture worldwide in an economic quagmire. Abnormally low prices have many countries scrambling to shore up the fragile economic circumstances of their commodity production sector. The precipitous decline in prices has also called into question the effectiveness of the decoupled approach to farm policy -- it has been criticized as providing too much assistance when it is not needed, and not nearly enough help when it is needed.

After years of cutting agricultural spending far more than any of its competitors, the United States enacted a farm bill in 2002 that stopped spending cuts and instituted additional protections against falling prices. Most of the rest of the world cried foul. The United States was accused of reneging on its WTO commitments.

The protests are not about the WTO. Their real goal is to convince the United States it should unilaterally concede part or all of certain economic sectors to the rest of the world. The protests are designed to divert attention from the central thrust of the United States proposal -- all participating countries should make real cuts in agricultural distortions, they should provide real improvements in market access, and these changes should be made in such a way that they significantly decrease existing inequities.

We should never let protestations by those who only want to take our markets cause us significant concern. The 2002 farm bill did not break any WTO commitment. Its expected spending levels are well within WTO ceilings.

Given that subsidies still exist and that many countries remain heavily involved in their agricultural sectors, the United States should preserve important U.S. domestic and export programs as long as they are necessary to compete with the treasuries of our competitors. Support should be as minimally trade distorting as possible, but must be sufficient to provide a meaningful economic safety net for the country’s commodity production sector.

The United States has tabled the most ambitious set of agricultural subsidy reforms in history, with the support of the entire U.S. agricultural community, only to see those reform proposals watered down, littered with exceptions and rejected by the majority of the members of the World Trade Organization. Instead of joining with the United States to continue to move the world toward agricultural reform, some countries are choosing to turn the World Trade Organization into an organization that cannot reach workable, consensus decisions because the political objectives of too many countries prevent rational and equitable policies from being adopted.

The latest target for this strategy is the U.S. cotton industry. A few days ago, the head of state of an African country delivered an unprecedented personal plea to the WTO to end the U.S. cotton program. Several African countries have stated that U.S. cotton subsidies must be ended.

I have three brief points. The first is that the perception being fostered by several self-serving international organizations, that U.S. agricultural policies drive the world agricultural economy, is simply ludicrous. The attempt to blame the ills of the world's developing countries on the U.S. cotton program is naive, at best. It is based on seriously flawed economics. It is misleading the leaders of many African countries.

Second, we must not be misled. If the bait were taken and another U.S. economic sector handed over in these negotiations, there would be no equivalent set of concessions. The United States has already proposed the most equivalent, fair, dramatic trade liberalization proposal the WTO has ever seen, yet I have missed the chorus of countries urging its acceptance. The problem is that the U.S. proposal requires concessions by all parties - not just the United States.

Third, I just implied that the U.S. had already handed over certain economic sectors through WTO negotiations - and it has. I have already alluded to the decimation of the U.S. textile industry by textile imports, with the lion's share of the most recent import surge attributable to China. Yet, China does not open its agricultural markets; China imposes unreasonable phytosanitary restrictions on U.S. agricultural imports; and China threatens the United States with new trade barriers should the U.S. implement textile safeguard provisions that China specifically and directly agreed to only a few short years ago.

Again, Mr. Chairman, I must sadly reiterate that trade negotiations and trade rhetoric are not about achieving fairness or some perfect worldwide free trade zone. These negotiations are about markets. If our competitors can convince the U.S. to give up industries unilaterally, then that is one less item they need to contend with during the real give-and-take of a negotiation.

The United States drove the Uruguay Round Agricultural Agreement reform process. It has steadily adhered to ambitious proposals for multilateral, broad-based reform in the Doha Round. We urge the United States to reject the policies of division being fomented by various countries and certain international organizations and continue to support meaningful, fair agricultural reform within the WTO.

Compliance issues

Mr. Chairman, in addition to the Doha Round, the United States has embarked on an unprecedented number of trade negotiations. The FTAA itself is a monumental undertaking involving dozens of countries and thousands of individual issues and decisions. In order to be successful, the United States must devote adequate resources both to these negotiations and to compliance, once agreements are reached.

We are concerned, however, that the resources being devoted to ensuring compliance with already negotiated agreements is woefully inadequate. The U.S. cotton industry is facing the most comprehensive, wide-ranging WTO challenge ever faced by U.S. agriculture in a case brought by Brazil against our agricultural programs that clearly comply with the Uruguay Round rules. Yet, the U.S. cotton industry has tried for over a year to get the U.S. government to move forward in some forum to make China comply with the terms of the U.S. - China WTO accession agreement - to no avail. U.S. trade officials acknowledge a clear violation of that agreement and WTO rules in general by China in its implementation of tariff rate quotas on agricultural imports and they have been supportive of the cotton industry's position. We are hopeful that Ambassador Johnson's latest discussions with Chinese officials will bring about a change in their import policies. If not, then it would seem the U.S. needs to press this case in the WTO.

Likewise, it has taken repeated efforts by the textile industry to persuade the Administration to comply with the law and establish a safeguard mechanism for textiles being imported from China.

We applaud the long-anticipated decision by the Administration to move forward with a WTO case against the European Union's rules prohibiting importation of biotech agricultural commodities. But we are troubled that each of these decisions has been "long-anticipated." Every delay costs U.S. agriculture. If agriculture is to continue to support progressive trade policy as adopted by the Administration, we must be assured that our government will force our trading partners to adhere to their agreements.

Free Trade Negotiations

Trade policy is of great importance to the U.S. cotton industry. In the last two years, U.S. cotton fiber exports have increased from an average of 7 million bales to 11 million bales annually. This increase occurred mainly due to a dramatic drop in domestic production of cotton textiles together with benefits of increased trade in the Western Hemisphere. Domestic annual mill use of cotton has dropped from almost 11.4 million bales in 1997 to less than 7.5 in 2003.

Mr. Chairman, the U.S. cotton industry believes that increased trade in the Western Hemisphere is one of the few options available to help combat the ever-rising tide of Asian apparel imports into the United States. In this vein, the National Cotton Council supported the North American Free Trade Agreement - and that agreement has been beneficial to our sector. We are supportive of the recently concluded Chile free trade agreement.

The cotton industry supports the negotiations for a Central America Free Trade Agreement and is working to gain a better appreciation of the economic impact it can expect from a Free Trade Agreement of the Americas.

Likewise, regional preferential trading arrangements with the Caribbean Basin countries and the Andean countries are beneficial to the U.S. cotton industry. These arrangements have also enhanced the ability of the U.S. textile industry to compete with imported Asian-produced textiles and increased demand in this hemisphere for U.S.-produced cotton fiber.

Without question, the economic impact of trade in the western hemisphere is far more significant to the United States than it was 20 years ago when so much of our focus was on Europe and on Asia.

I would like to quickly summarize the main areas of concern to the U.S. cotton industry and then explore some of these areas in greater detail.

I will discuss three of these points in general before turning to a more detailed discussion of our negotiating objectives.

Multilateral negotiations on agricultural programs

Domestic agricultural policy should not be negotiated within the context of hemispheric free trade negotiations. The WTO negotiations are the correct and most effective forum in which to engage all countries of the world in agreements that improve disciplines governing world agricultural trade.

We are increasingly alarmed that several countries in South America and in Africa are using every forum and every media outlet available to attack the United States' agricultural programs. These attacks are unwarranted and misguided. The United States drove the Uruguay Round Agricultural Agreement reform process. It has steadily adhered to ambitious proposals for multilateral, broad-based reform in the Doha Round. The United States has fully complied with its Uruguay Round commitments, including those applicable to the U.S. cotton program.

The United States has again proposed far reaching, substantive reform for agricultural policy within the Doha Round trade negotiations. The WTO is the only proper forum for obtaining multilateral disciplines on agricultural programs. The United States will place its producers at an extreme disadvantage in world agricultural markets should it agree to changes in its domestic agricultural programs in order to secure free trade agreements.

Phytosanitary rules

Increasingly, countries around the world appear to be using phytosanitary rules to restrict imports of agricultural commodities. The United States must address this tendency directly and with determination. It stretches the resources of individual commodity organizations to their limit and greatly distorts trade when new phytosanitary barriers are constantly being erected without justification. In this hemisphere, we have most recently noticed Brazil changing phytosanitary requirements in an unpredictable fashion, threatening U.S. exports to that country. The EU's ban on biotech agriculture is finally being properly addressed. China has also shown a tendency to rely on phytosanitary concerns when it is convenient to do so.

Instead of having to respond to each new rule or edict individually, the United States should reserve the right within trade agreements to broadly withdraw trade concessions when its trading partners begin erecting barrier after barrier after barrier citing unfounded phytosanitary concerns.

Goals for Western Hemisphere Free Trade Agreements

Trading arrangements under NAFTA and CBTPA have created substantial two-way trade in textiles and apparel. The U.S. exports about 4 million bale-equivalents of cotton textiles to NAFTA and CBI. At the same time, the US imports more than 6 million bale-equivalents of cotton textile products from NAFTA and CBI countries However, to date, trade between the US and South American countries is still relatively small. Future trade agreements should seek to expand trade in a manner that can be beneficial to the textile industries of signatory countries only.

Trade policy in the Western Hemisphere should be designed to enhance the ability of the textile industry to compete with the onslaught of textile products coming from Asia, in general, and China, in particular. Since 1999, the share of U.S. cotton textile imports supplied by Western Hemisphere countries has steadily declined while Asia’s share has increased. The decline was quite pronounced in 2002 as imports from China surged.

For the United States cotton and textile industries, enhanced trade within this hemisphere provides the greatest opportunity to produce apparel products that are competitive with Asian imports.

The one-way trade preferences currently being provided to Caribbean and Andean countries have been constructed to increase the competitiveness of U.S. textiles. These preferences have led to increased consumption of U.S. cotton and U.S. cotton textiles.

In general, trade preference legislation breaks down textile and apparel preferences into the following categories:

1. Apparel that is sewn or otherwise assembled in one of the beneficiary countries from fabric that is wholly formed in the United States from U.S. yarns (U.S. fabric); and
2. Apparel that is sewn or otherwise assembled and cut in one or more of the beneficiary countries or the United States from fabric that was wholly formed in the United States or one or more beneficiary countries from U.S. or beneficiary country yarns (regional fabric).

The legislation places ceilings on trade preferences for the so-called regional fabrics. Only a certain quantity of apparel articles that are regionally produced may take advantage of the preference in any particular year. That amount tends to increase over time. The Trade Act of 2002 clarified that dyeing and finishing of U.S. fabric qualifying for these preferences must be done in the U.S.

With the final revisions made to these preferential arrangements in the Trade Act of 2002, the U.S. cotton and textile industries are fully committed to developing more trade with the Caribbean and Andean countries. It would be detrimental to those economies if a free trade arrangement with Central America or South America undermined the preferences already in place in this hemisphere.

The cotton industry, primarily through the efforts of Cotton Council International, has already sponsored several trade fairs in this hemisphere and aggressively promotes the sale of U.S. cotton and cotton products in the Caribbean, Central and South America.

Central America Free Trade Agreement

As noted above, the U.S. cotton industry must evaluate all possible trade agreements based on their likely impact on U.S. cotton producers and U.S. textile manufacturers. As this Committee evaluates the economic impact of a potential FTA with Central America, we urge you to be aware of the very strong economic link between the U.S. cotton production sector and the U.S. textile manufacturing sector.

Cotton production in the five countries of the Central American Economic Integration System (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) was approximately 19,000 bales in 2002, while imports of cotton were 265,000 bales and total mill use of cotton approximately 275,000 bales. Without question, a free trade agreement with Central America will provide opportunities for U.S. cotton fiber exports into the region as textile and apparel products produced in the region will be more competitive in the U.S. market.

However, that same opportunity could result in a negative impact on the U.S. textile sector unless effective rules-of-origin are in place. It is also important that a separate textile negotiating group be established with respect to the Central America FTA negotiation.

The NCC strongly urges that any FTA with Central America contain rules-of-origin applicable to textiles that are no less restrictive than those in the North American Free Trade Agreement. Anything less will open the U.S. cotton and textile industries to unfair, unbridled competition from countries that will transship textile products through Central America in order to take advantage of quota-free, duty-free access to the U.S. This would have a detrimental economic impact on the United States.

A rule-of-origin based on NAFTA-type rules ensures that workers and companies in the United States and Central America are the beneficiaries of the agreement, not entities in third countries. With an effective rule-of-origin, the increased trade that occurs as tariffs are reduced and trade barriers removed will mean increased opportunities for workers and consumers in each trading area.

Mr. Chairman, we also strongly urge that there be no free rides in free trade negotiations. There should not be any tariff preference levels (TPL’s) and other exceptions that undermine the basic rule-of-origin. An effective rule-of-origin will also include a short supply mechanism similar to that contained in the Caribbean Basin Trade Preferences Act. Effective short-supply provisions eliminate the need for any special treatment for products that are not produced in the free trade region.

Any free trade agreement must offer reciprocal market access for both parties. Reductions in tariffs for textiles and agricultural products must be reciprocal and concurrent so that no country gains an unfair advantage as the agreement is implemented.

Imports of cotton fiber into the United States are subject to a tariff rate quota within the context of the World Trade Organization. The North American Free Trade Agreement phased out non-tariff barriers to cotton imports from Mexico into the United States over a period of years. The Chile agreement, which we support, phased out U.S. tariff-rate quotas over a period of 12 years. As long as the agreement contains effective rules of origin, the cotton industry will continue to support similar phase outs of the cotton fiber tariff-rate quota. It is, however, important that effective safeguard provisions be in place.

The NCC strongly urges that the textile and apparel customs enforcement measures in the NAFTA and AGOA agreements be included in a Central America Free Trade Agreement. These measures include the use of production verification teams and the ability for U.S. Customs to inspect factories without prior notice and the development of tracking systems, including a certificate of origin. In addition, the textile customs measures should require annual plant visits, records audits, and yearly certification requirements.

The U.S. Customs Service should also be required to file annual reports with the Congress and the President detailing its efforts in Central America to ensure that textile and apparel rules-of-origin are enforced.

While free trade agreements tend to contain provisions to bar companies that break the rules, they usually do not include provisions to bar countries that do not enforce the rules. The NCC therefore urges the U.S. to insist upon provisions in an FTA that allow the U.S., upon consultations, to remove textiles and apparel from trade preferences in the event that the foreign government repeatedly fails to enforce the textile rules in the agreement.

Mr. Chairman, we also are concerned that many countries do not do an adequate job of enforcing intellectual property rights. Free trade agreements should contain provisions that would establish effective rules to deal with intellectual property violations, including those relating to designs, copyrights, trademarks and patterns. The U.S. textile industry estimates that over $100 million are lost each year due to the worldwide pirating of protected textile designs.

Free Trade Negotiations with South America

Negotiations designed to lead to a Free Trade Agreement of the Americas would truly transform the economic structure of this hemisphere. Those negotiations offer growing markets in some areas and for some parts of our industry, but raise the prospect of significantly increased competition in others. The size and scope of the FTAA demand that each aspect of such an agreement be carefully considered. The National Cotton Council has requested that a separate negotiating group on textiles be established within the FTAA negotiations. We urgently renew that request. It is important to our industry that our negotiators consider the impact of textile negotiations in the FTAA on the overall U.S. cotton industry.

Given the size and scope of a free trade agreement with South America, the National Cotton Council is working with a consultant to develop a thorough economic analysis of the impact on the U.S. cotton industry of a Free Trade Agreement of the Americas (FTAA). That analysis is not complete but we will be happy to share it with the Committee when it is finalized.

South American Cotton Potential

Before I discuss specific negotiating objectives with respect to the FTAA, I would like to emphasize the dramatic difference between the South American cotton and textile sector and that sector in Mexico, the Caribbean, Central America and the Andean countries. Of all of these groups, only Mexico could compete on a size basis with the cotton economies of Brazil, Argentina and, at times, Paraguay. Brazil is of particular significance.

There have been significant shifts in Brazil’s cotton production during the past decade. Land has moved out of cotton in the traditional areas of the south and northeast and into cotton in the state of Mato Grosso. The climate is very favorable for cotton production, and land availability does not appear to be an issue. In fact, it has been estimated that there are 160 million acres of virgin grasslands that are suitable for crop production. An added benefit for cotton is that it provides a very good rotational crop with soybeans.

The expansion of cotton acreage in Mato Grosso came in response to the strong prices of the mid 1990’s. As I learned in a recent visit to Brazil, current prices do not provide strong incentives for additional production. However, if prices rise, Brazil has the potential to substantially increase cotton production.

I should add that increased production is not without its constraints and costs. Transportation infrastructure poses a considerable hindrance to future growth. New acres brought into crop production are further away from the source of demand and subsequently have greater transportation costs.

FTA Negotiating Objectives

The same principal issues discussed above concerning a Central America Free Trade agreement are no less applicable to negotiations with South America. Reciprocal market access, effective rules-of-origin, no tariff preference levels, strong Customs enforcement provisions and effective rules to protect intellectual property remain the cotton industry's priorities.

Effective rules-of-origin are even more important with respect to free trade negotiations with South America. The Council continues to support a consistent rule-of-origin for cotton, cotton textile and cotton apparel products that is consistent across all free trade agreements, namely that the rule-of-origin be no less restrictive than that applicable to NAFTA. As stated above, anything less would open the U.S. cotton and textile industries to unfair, unbridled competition from countries that will transship textile products in order to take advantage of quota-free, duty-free access to the U.S.

It is also very important that there be no tariff preference levels (TPL’s) and other exceptions that undermine the basic rule-of-origin. These exceptions cost U.S. jobs and they are completely out of context when we are discussing free trade arrangements with literally dozens of countries at the same time. These wide-open exceptions to the NAFTA rules of origin came into place ostensibly in recognition of the relatively limited scope of the three textile markets involved in the NAFTA negotiations - although we would not agree that these markets are limited in any way. Nevertheless, that same rationale simply does not hold in the context of a Free Trade Agreement for the Americas. Further, any rationale that might exist for tariff preference levels is undermined by the inclusion of a reasonable, workable short-supply provision, which we strongly support.

Other Free Trade Negotiations

The Administration is moving forward with several other free trade negotiations. Sometimes it is difficult to keep track. For the record, Mr. Chairman, the National Cotton Council supports the Chile FTA and has removed its objections to the Singapore agreement. The Singapore agreement contains exemplary provisions concerning Customs enforcement, which have tempered the concern of the cotton industry with that negotiation.

The Council continues to monitor the evolving Australia negotiation and the Moroccan negotiation. We have not yet completed our analysis of these two negotiations, but stress the same fundamentals that are outlined in this testimony - reciprocity and effective rules of origin.

Textile Crisis

Mr. Chairman, the U.S. textile industry is facing an economic crisis, attributable in part to dramatic increases in imports of textiles from China. During the past 15 months, textile imports from China to the U.S. rose by 140 percent. Last year, in 8 cotton-containing textile categories, imports surged a whopping 641 percent. From January 2001 through May 2003, the U.S. textile industry lost 267,700 jobs, and hundreds of factories shut their doors.

It has taken persistent efforts by the textile industry to persuade the Administration to publish rules for implementing a safeguard mechanism for this flood of Chinese imports. . Still no action has been taken to curb the flow.

Even though the long delay has permitted imports to grow in certain categories to levels where safeguard action will be far less meaningful, it is critical that it be done. Unless the administration demonstrates a willingness to use this safeguard tool established under law, our domestic textile industry will be decimated when all textile quotas are lifted on January 1, 2005.

Credit and other issues

Mr. Chairman, there are a few more general items I believe need to be discussed concerning cotton and textile trade. An inability of potential customers to obtain credit is hampering the growth of U.S. exports of yarn and fabric. We believe more needs to be done to ensure that competitive financing tools are available to U.S. exporters of yarn and fabric. Our industry supports -

Without improvements in financing and credit, the intended objective of boosting trade between the U.S. and the countries of the western hemisphere may not be realized and the expected economic benefits for all parties will be constrained.

While we encourage the Administration to seek positive trade agreements, particularly within this hemisphere, the damage that can be done to the U.S. economy by poorly negotiated agreements is substantial. The recently implemented trade arrangement with Jordan, for example, contained a significant loophole in rules of origin for textiles that should have been avoided.

Further, the continued strength of the U.S. dollar has taken a significant toll on U.S. agricultural trade in general, and the U.S. textile sector in particular. All trade initiatives undertaken by the Administration should take this economic reality into account. The impact of currency valuations on trade should not be underestimated.

Mr. Chairman, thank you for the opportunity to provide this rather lengthy testimony on agricultural trade negotiations and trade issues. I would be happy to respond to any questions.