For Immediate Release April 13, 2005 Coalition of Service Industries Written Submission for the Senate Committee on Finance The U.S. - Central America - Dominican Republic Free Trade Agreement INTRODUCTION The Coalition of Service Industries (CSI) is pleased to have this opportunity to submit comments for the record on the US-DR-CAFTA Free Trade Agreement. CSI strongly supports the US-DR-CAFTA trade agreement, and we hope that Congress will approve it promptly. The Agreement provides for meaningful liberalization of trade and investment in services between the United States and the DR-CAFTA countries, and will open up new markets and opportunities for U.S. companies across a range of service industries. It will also demonstrate to other developing countries, in this hemisphere and elsewhere, that commitments to liberalization and internal economic reform are necessary for economic development, higher standards of living, and global competitiveness. The Agreement does not meet industry objectives in all respects; for example, the lack of temporary entry provisions. Notwithstanding, both the United States and the Central American nations stand to gain significantly from this Agreement, and it unquestionably merits Congressional approval. BACKGROUND: THE IMPORTANCE OF SERVICES TO THE US ECONOMY The DR-CAFTA Agreement and its merits should be viewed against the role services play in the US economy. Services account for the overwhelming share of US employment and economic output, and a large and growing share of our foreign trade. As Congressmen Kolbe and Cardin pointed out in a March 18, 2005 Dear Colleague letter, services “are key to the future growth of the American Economy.” Services jobs represent approximately 80% of all non-farm, non-government workers in the US. Between 1993 and the 2003, the service sector added 17 million new US jobs, and of the 19.2 million new American jobs forecast to be created by 2012, 90% will be in the service sector. Moreover, the service sector generates 78% of US private sector GDP. Efficient, high-quality services are crucial inputs into the production of virtually all products. The price and quality of services influences the costs and productivity of all sectors, including manufacturing and agriculture. The magnitude of US services trade is under-appreciated. Last year, U.S. crossborder exports of services were $338 billion, up from $307 billion the previous year, and represented about 40% of the value of U.S. merchandise exports. The $49 billion services trade surplus that the U.S. ran last year partially offset our merchandise trade deficit. An even larger share of U.S. services trade is delivered through the foreign affiliates of U.S. parent companies. In 2002, the services sales of U.S. foreign affiliates worldwide reached slightly over $400 billion. These foreign operations are crucial to U.S. companies' competitiveness in global markets. Thus, expanded market access under DR-CAFTA will help U.S. companies become even more competitive in the global marketplace. The U.S. is extremely competitive across the range of services sectors, from banking and financial services to insurance, computer and related services, entertainment and audio visual services, express delivery, architecture and engineering, and others. The liberalization of these areas, as provided for in the Agreement, thus plays to a U.S. strong suit. During negotiations, every effort was made to ensure that CAFTA’s services coverage was comprehensive, with minimal reservations taken. Under CAFTA, services trade and investment will be liberalized on a "negative list" basis, which requires that a country list in detail the activities which will be excluded from liberalization. This approach is absolutely crucial to ensuring truly comprehensive coverage. The negative list has the further major advantage that new services are automatically free, which is particularly important in the services sector where new services are regularly being created. This was a significant achievement on the part of U.S. negotiators, given the reluctance of the CAFTA countries to negotiate on that basis at the outset of the talks. Moreover, important concessions have been obtained in the context of political controversy in some of the CAFTA countries. For example, the liberalization of insurance and telecommunications services in Costa Rica were particularly sensitive issues in that country. The agreement contains important provisions for services-related investment, regulatory transparency, and for trade in key service sectors. These are discussed below. CSI represents the interests of the dynamic American service economy, which employs 80% of the U.S. workforce and generates a similar proportion of national economic output. CSI was formed in 1982 to ensure that US trade in services, once considered outside the scope of U.S. trade negotiations, would become a central goal of future trade liberalization initiatives. CSI has been actively engaged in, and a strong supporter of, services negotiations in the WTO, as well as in our regional and bilateral free trade agreements, including the DR-CAFTA Agreement. The broad range and diversity of the U.S. service economy is reflected in CSI’s membership, which includes major international companies from the banking, insurance, telecommunications, information technology, travel and tourism, transportation, and diversified management service sectors. CSI members conduct business in more than 100 countries, have global sales of about $800 billion, and employment of about 2.3 million. INVESTMENT The Agreement will help promote a secure and predictable legal framework for U.S. investors in Central America and the Dominican Republic. Such provisions are particularly important to service providers, for whom a local presence is often required to supply services. The Agreement reduces barriers to U.S. investment. It assures U.S. investors greater opportunities to establish, acquire and operate investments in each of the Central American countries in all sectors. Such investors are to be accorded equal treatment with local investors and may not be subjected to special or discriminatory requirements for the use of local inputs, export obligations, or to extend licenses to local companies. Rights to manage and direct such investments with personnel other than from the host country are also provided. The Agreement ensures the protection of U.S. investment. It includes a broad definition of investment, the guarantee of prompt, adequate and effective compensation for expropriation, fair and equitable treatment, full protection and security, the free transfer of capital, no performance requirements, as well as the national treatment and most-favored nation provisions. Very importantly, the Agreement includes the investor-state dispute settlement mechanism that is vital to afford U.S. investors the opportunity to ensure that their investments are protected against arbitrary, discriminatory and unfair government actions. At the same time, the Agreement protects the legitimate exercise of each government’s regulatory authority to protect “public welfare objectives, such as public health, safety, and the environment.” TRANSPARENCY The Agreement provides for a high standard of transparency in administrative, licensing, and adjudicatory proceedings. Transparency in regulatory processes is absolutely essential for services industries, because they generally are the most highly regulated. A government’s regulations governing financial services, energy services, and professional services, for example, can vitiate or nullify trade agreements that would otherwise provide full market access and national treatment. The overarching provisions in the introductory chapter on transparency require the essentials: the designation of a contact point for inquiries, the requirement for prompt publication; the requirement that “to the extent possible” measures that each Party proposes to adopt are published in advance, and that persons of both Parties have a reasonable opportunity to comment. Further, the chapter provides that parties at interest to proceedings receive reasonable notice of such proceedings, and that they are allowed to present their case prior to final administrative actions. Each Party must establish independent tribunals or procedures for prompt review of administrative actions, and has the right to a decision based on evidence. The provisions in the cross border services chapter provide further assurance that administrative decisions related to licensing are prompt and fair. This chapter also provides for the Parties to reach agreements mutually recognizing their qualifications and standards for professional practice. The transparency provisions set out in the financial services chapter are consistent with the other transparency provisions in the Agreement but are tailored to the needs of this sector. BENEFITS FOR KEY SERVICE SECTORS The CAFTA-DR Agreement is comprehensive and provides for new liberalization and market access across a broad range of service industries. Some of Agreement’s benefits for key sectors are listed below. Dealer Protection: The Agreement addresses restrictions on distribution in Central America created through restrictive dealer protection regimes. Such regimes have placed substantial burdens on the distribution of U.S. exports to the region by locking U.S. companies into inefficient, exclusive and effectively permanent relationships, oftentimes regardless of the performance of the local dealer. The Agreement will allow U.S. exporters and their dealers freedom to contract the terms of their relationships. These provisions will substantially help promote more efficient and improved distribution for U.S. companies within the region. Accounting Services: The Agreement provides for US accountants to obtain local qualifications and licenses on a reciprocal basis. Architecture: The Agreement’s provisions on the development of professional standards, and temporary licensing and review, provide for equity and reciprocity in this sector. Further provisions provide access to the Central American markets while promoting capacity building within the profession. Asset Management Services The Agreement provides legal certainty that US asset management firms will be afforded national treatment, non-discrimination and the right of establishment. It also permits cross-border provision of portfolio management services by asset managers of mutual funds. The financial services transparency commitments in the agreement also would benefit the asset management industry. Audiovisual Services: The Agreement provides for strong intellectual property protections, and strengthened enforcement. The FTA demonstrates that a trade agreement can harmonize two important objectives -- trade liberalization and the promotion of cultural diversity. It avoids the “cultural exceptions” approach, while demonstrating that a trade agreement has sufficient flexibility to take into account countries’ cultural promotion interests. The Agreement includes important provisions to ensure market access for US films and television programs over a variety of media including cable, satellite, and the Internet. It provides for zero tariffs on audio visual products, reaffirms that customs duties are based on the value of carrier media and not the value of the movie or other content. It provides commitments to non-discriminatory treatment of digital products including DVDs and CDs, and agreement not to impose customs duties on such products. Computer and Related Services: The Agreement ensures full market access and national treatment for computer and related services. The Agreement covers all modes of delivery, including electronic delivery. The “negative list” approach ensures that rapidly evolving computer services, driven by continual advances in technology, will automatically be covered by the Agreement. Electronic Commerce: The Agreement includes important language on electronic commerce. As with previous FTAs, the Agreement establishes the concept of "digital products"; prevents the application of customs duties on electronically-delivered digital products; assures the non-discriminatory treatment of digital products; addresses the valuation of physically delivered digital products; and provides commitments to cooperate on electronic commerce policy. Energy Services: The Agreement’s provisions on regulatory transparency and investment provide a framework that can provide opportunities for U.S. energy services firms and facilitate the provision of energy services between the United States and Central America. Express Delivery Services: The Agreement includes important provisions for the sector, including an appropriate definition of express delivery services (EDS). The Agreement recognizes EDS as a unique service sector and contains important commitments to maintain market access for the industry and to facilitate customs clearance, which is critical to the efficient operation of express carriers. The Agreement includes significant language proscribing monopoly abuse by postal administrations when they compete in the supply of express delivery services. Financial Services (other than insurance and asset management): The Agreement contains important provisions relating to branching, pension management and regulatory transparency. Healthcare Services: the Agreement breaks new ground concerning the temporary licensing of physicians and surgeons that will be helpful for US hospitals engaged in international medical care to gain market presence. Insurance: The Agreement’s insurance commitments are comprehensive and provide good treatment for insurance. While these countries already have fairly open insurance markets, in most cases these insurance commitments are significant improvements over current WTO obligations. Perhaps most significantly, Costa Rica's insurance sector, which is currently dominated by a monopoly, will be opened for the first time under this agreement. All major aspects of insurance are covered, including life, non-life, reinsurance, intermediation and services auxiliary to insurance. Similarly, key cross border insurance products and services are covered (marine, aviation and transport (MAT), reinsurance and intermediation). Legal Services: The Agreement preserves the ability of U.S. lawyers to serve as foreign legal consultants or otherwise to provide advice and assistance respecting the law they are authorized to practice in the United States. Telecommunications: The Agreement includes new international cost-oriented interconnection obligations for fixed traffic (although mobile services, unfortunately, are excluded from this obligation). The Agreement also contains commitments to provide access to and use of telecommunications networks, and commitments for fixed services, including competitive safeguards, interconnection, universal service, licensing, independent regulator, and allocation of scarce resources. "WTO-Plus" obligations are incurred for major suppliers with respect to resale, provisioning of leased circuits and collocation. The Agreement includes new market access commitments, including cross-border obligations. Vessel Repair: the Agreement provides for the elimination of the 50% U.S. tariff on vessel repairs performed in the Central American countries, thus eliminating a significant burden on U.S. shipping companies that require repair work when servicing foreign markets. CONCLUSION The DR-CAFTA Agreement provides for substantial new market access for a broad range of US services industries to a growing market of nearly 45 million consumers. It thus opens up significant new opportunities for U.S. services trade and investment, and deserves prompt approval by the Congress.