Trade Liberalization: Western Hemisphere Trade Issues Confronting the United States

Published by the Government Accountability Office on 1997-07-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United States General Accounting Office

GAO                Report to the Chairman, Subcommittee
                   on Trade, Committee on Ways and
                   Means, House of Representatives

July 1997
                   Western Hemisphere
                   Trade Issues
                   Confronting the United

             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division


             July 21, 1997

             The Honorable Philip M. Crane
             Chairman, Subcommittee on Trade
             Committee on Ways and Means
             House of Representatives

             Dear Mr. Chairman:

             As you requested, we are providing information on efforts to liberalize
             trade among the countries of the Western Hemisphere. The United States
             and other Western Hemisphere countries have been moving forward in
             various ways to liberalize trade. Almost all countries in the hemisphere,
             including the United States, are proceeding with discussions aimed at
             creating a Free Trade Area of the Americas (FTAA) while at the same time
             various subregional agreements and arrangements have been formed.

             Specifically, this report (1) describes the principal existing subregional
             trade arrangements in the Western Hemisphere; (2) outlines the current
             status of FTAA discussions; and (3) identifies certain recent developments
             in regional trade liberalization outside the FTAA process since “fast track”
             authority1 lapsed in December 1994, and possible implications of these
             developments for the United States. Executive branch officials have
             indicated that the President will seek fast track authority this fall, but the
             administration has not yet submitted a fast track legislative proposal.

             The U.S. economy has become increasingly oriented toward international
Background   trade, with exports and imports together representing about one-quarter of
             U.S. gross domestic product (GDP) in 1996. As the largest regional market
             for U.S. products, accounting for approximately $242 billion or 40 percent
             of U.S. exports in 1996, the Western Hemisphere is of growing importance
             to U.S. commercial interests. Canada and Mexico are by far the largest
             U.S. trade partners in the hemisphere, accounting for approximately
             two-thirds of total U.S. exports of goods to the region. Countries in the
             Western Hemisphere also constitute about 30 percent of total U.S. foreign
             direct investment.

              In the past, the Congress has enacted fast track authority to implement trade agreements with other
             countries. Fast track authority provides for a congressional vote within a limited period of time to
             accept or reject the implementing legislation for a negotiated agreement without making any changes
             to it.

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                   During the 1960s and 1970s, most countries in Latin America and the
                   Caribbean experimented with various arrangements to promote
                   subregional economic integration and free trade. These initiatives were
                   generally frustrated by trade and investment restrictions characteristic of
                   these countries’ protective economic development strategies. By the late
                   1980s, faced with stagnant economies and mounting external debt,
                   countries in the region began to move away from these restrictive policies
                   and initiated market-oriented reforms to stimulate economic growth.
                   Although these reforms were primarily intended to address domestic
                   economic problems, they also facilitated trade liberalization efforts.
                   Moreover, the U.S.-Canada Free Trade Agreement in 1988 signaled a new
                   commitment on the part of North American countries to regional trade
                   liberalization. By the early 1990s, almost all countries in the hemisphere
                   were engaged in multilateral or bilateral efforts to liberalize trade. After a
                   decade of economic decline, Latin American economies have rebounded
                   in the 1990s, and the region now represents the second fastest growing
                   area in the world after Southeast Asia.

                   The 1994 Miami Summit of the Americas gave new impetus to trade
                   liberalization efforts in the region. At Miami, the 34 democratically elected
                   leaders of countries in the Western Hemisphere agreed to conclude a free
                   trade agreement no later than 2005, with concrete progress by the turn of
                   the century.2 The summit declaration committed participating
                   governments to negotiate, among other things, the elimination of barriers
                   to trade in goods and services as well as investment and to provide rules in
                   such areas as intellectual property rights and government procurement.
                   The plan of action adopted at Miami called for two meetings of trade
                   ministers (“ministerials”) to reach agreement on the key principles upon
                   which to base the FTAA. These two ministerials, held in Denver, Colorado
                   (1995), and Cartagena, Colombia (1996), established a series of working
                   groups to gather data and make recommendations to the ministers in
                   preparation for FTAA negotiations. A third ministerial took place in Belo
                   Horizonte, Brazil, earlier this year.

                   Almost all countries in the region participate in at least one subregional
Results in Brief   trade grouping. There are now six major subregional multilateral trade
                   groupings among countries in the hemisphere. The two most significant
                   trade blocs, the North American Free Trade Agreement (NAFTA) and the
                   Common Market of the South, known as Mercosur, were both established

                   Since the Miami Summit was limited to democratically elected governments in the Western
                   Hemisphere, Cuba was the only country in the region that did not participate.

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during the 1990s. NAFTA, the only one of these arrangements to which the
United States is a party, created the world’s largest free trade area and is
the most comprehensive trade agreement in the region. Mercosur has
followed a different approach than NAFTA to economic integration through
the creation of a customs union.3 In addition to the major multilateral
trade groupings, there are more than 20 smaller trade agreements in the
region; most of these have been concluded during the 1990s.

U.S. Trade Representative (USTR), Organization of American States (OAS),
and Inter-American Development Bank (IDB) officials note that the FTAA
working groups have made significant progress to support the launching
of formal negotiations. According to these observers, progress in the FTAA
process thus far exceeds what had been achieved during the first
2 to 3 years of the Uruguay Round negotiations that led to the
establishment of the World Trade Organization (WTO).4 Substantial
agreement has been reached on several key issues. For example, at the
latest ministerial meeting in Belo Horizonte in May 1997, participating
countries agreed on the right to negotiate independently or, if members of
subregional trade groupings, as a unit. They also agreed on the
establishment of a Preparatory Committee at the vice ministerial level to
complete recommendations on the FTAA negotiations. At Belo Horizonte,
the ministers further agreed to recommend that formal FTAA negotiations
be launched by the Western Hemisphere leaders at their next summit
scheduled to take place in Santiago, Chile, in April 1998, and reiterated the
commitment to conclude a trade agreement encompassing the entire
hemisphere by 2005. Disagreement remains, however, regarding the pace
and direction of negotiations. The United States and most other countries
favor immediate negotiations on all issues. In contrast, Mercosur proposes
that negotiations on certain issues such as market access, which is a
priority for the United States, be delayed until 2003.

Following the Miami Summit, the 1995 Mexican financial crisis raised
concerns in the United States about pursuing further regional trade
liberalization efforts. In the meantime, other countries have moved
forward with their own trade liberalization efforts. For example, Canada

 A free trade agreement, such as NAFTA, entails, among other things, the elimination of tariffs among
member countries. A customs union calls for not only the elimination of tariffs, but also the
establishment of a common external tariff; that is, a common tariff applied to imports from third
 All countries involved in the FTAA process, except the Bahamas, are members of WTO. WTO,
established by the 1994 Uruguay Round agreements of the General Agreement on Tariffs and Trade
(GATT), is a multinational organization that serves as a forum for international trade negotiations and
oversees the administration of the Uruguay Round agreements. GATT, created in 1947, is the primary
multilateral agreement governing international trade in goods.

Page 3                                                     GAO/NSIAD-97-119 Trade Liberalization

                     and Chile recently reached a free trade agreement. Also, Mercosur has
                     strengthened its position, concluding free trade arrangements with Chile
                     and Bolivia, and is beginning trade negotiations with Mexico and the
                     European Union (EU). These agreements have created disadvantages for
                     some U.S. exporters’ access to markets in the region. For example, the
                     agreement between Chile and Canada grants tariff preferences to
                     Canadian exporters that are not available to their U.S. counterparts. In
                     fact, U.S. companies recently lost a bid for a telecommunications
                     equipment contract in Chile to a Canadian competitor due in part to the
                     tariff differential. Similarly, Mercosur is in the process of adopting product
                     safety standards that may impair U.S. firms’ access to markets in member
                     countries. Representatives of several countries in the region generally
                     agree that their countries will continue to advance their own regional free
                     trade initiatives regardless of whether the United States participates in
                     further regional trade liberalization. A complete understanding of the
                     impact of these initiatives on the United States requires a consideration of
                     their impact on U.S. import-competing as well as export sectors.

                     The six major multilateral trading arrangements5 among countries of the
Western Hemisphere   Western Hemisphere are NAFTA, Mercosur, the Andean Community, the
Trade Arrangements   Caribbean Community, the Central American Common Market, and the
                     Latin American Integration Association (LAIA). (See figs. 1 and 2.) The
                     United States is a party only to NAFTA. There are also over 20 smaller
                     multilateral and bilateral free trade accords among countries in the region.

                      The appendix provides a general profile of each of the major Western Hemisphere trade
                     arrangements, including membership, population, and GDP figures.

                     Page 4                                                  GAO/NSIAD-97-119 Trade Liberalization

Figure 1: Members of NAFTA, Mercosur, the Andean Community, and LAIA


                                                        U. S. A.


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                                                                         AAAA  AA AAAA
                                                                               AA  AAAAAAA
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                                                                                       AAA   AAAA
                                                                         AAAA  AAAA
                                                                               AA AAAA
                                                                                  AAAA AAA
                                                                         AAAA  AA
                                                                                    AAAA           Brazil
                                                                         AAAA          AAAA AAAAAAA
                                                                        Peru   AAAAAAAAAAAA
                                                                                    AAAA    AAAAAAA
                                                                         AAAA  AAAA AAAA
                                                                         AAAAAAAAAAAA  AAAA AAAA AAA
                                                                         AAAA          AAAAAAAAAAA
                                                                                       AAAA AAAA
                                                                                        Bolivia  AAA
                                                                                            AAAA AAAParaguay

                           AAAA AAA Andean Community

                                  Underlined country names
                                  indicate members of LAIA.

                                          Sources: GAO and OAS.

                                          Page 5                                                    GAO/NSIAD-97-119 Trade Liberalization

Figure 2: Members of the Caribbean Community and the Central American Common Market


                   AAAAAAAAAAA                          Jamaica                               Antigua & Barbuda
                            AAA Belize
                   AAAA AAAAAAA                                          St. Kitts &Nevis
                   AAAA                                                                          Dominica
                            AAA Honduras
                           AAAA AAAAAAAA
                   AAAA AAAA
                           AAAA AAAA AAAA AAAA
                   AAAA AAAA
                            AAA  AAAA
                                           AAA                                          Montserrat
                   AAAA AAAA
                         AAAA   AAAA
           Guatemala    AAAA
                                           AAA                                                        St. Lucia
                 El Salvador     AAAAAAAA
                                           AAANicaragua                   St. Vincent & Grenadines
                                      AAAA AAA
                                      AAAA AAA
                                 AAAA AAAA
                                 AAAAAAAA  AAA
                                      AAAA                                                                   Trinidad & Tobago
                                      AAAA AAAAA
                             Costa Rica    AAAAA


           AA Central American Common Market
      AAAA                                                                                                                   Suriname

             Caribbean Community

                                               Sources: GAO and OAS.

                                               NAFTA, the most comprehensive trade arrangement in the region, was
NAFTA                                          concluded in 1992 by Canada, Mexico, and the United States and became
                                               effective in January 1994. NAFTA created the world’s largest free trade area,

                                               Page 6                                            GAO/NSIAD-97-119 Trade Liberalization

                           with a combined population of nearly 400 million and a combined GDP of
                           almost $8 trillion. NAFTA provides for the gradual elimination of tariff
                           barriers on most goods over a 10-year period. It covers trade in services,
                           provides protection for investment and intellectual property rights, applies
                           rules to government procurement, and contains a dispute settlement
                           system. A distinct feature of NAFTA is the two side agreements on labor and
                           the environment, designed to institutionalize efforts to (1) improve
                           working conditions and living standards in each country and (2) address
                           and resolve environmental issues that may arise between the parties.

Mercosur                   Mercosur was created in March 1991 by Argentina, Brazil, Paraguay, and
                           Uruguay. Comprising a population of approximately 200 million and with a
                           combined GDP of about $851 billion, Mercosur is the world’s third largest
                           integrated multinational market, after NAFTA and the EU. Mercosur
                           currently functions as a customs union, providing not only for a free trade
                           area but also for the establishment of a common external tariff.6 The
                           external tariff instituted in 1995 is not to exceed 20 percent for most
                           imports. Today, approximately 85 percent of imports from outside the bloc
                           enter under the common external tariff, and about 90 percent of all
                           intra-Mercosur trade is duty free. Mercosur includes a commitment by
                           member countries to coordinate more disciplined macroeconomic
                           policies. Also, Mercosur countries are committed to agree on a common
                           foreign trade policy. Unlike NAFTA, Mercosur lacks agreements on
                           intellectual property rights7 and government procurement. Further, while
                           Mercosur calls for coordination on trade in services, the U.S. International
                           Trade Commission reports that there is no fixed schedule for liberalization
                           in this area.

Other Major Multilateral   Besides NAFTA and Mercosur, there are four older subregional multilateral
Agreements                 trade groupings in the Western Hemisphere. Three of these groupings—the
                           Andean Community, the Caribbean Community, and the Central American
                           Common Market—are customs unions at varying stages of
                           implementation. They have all recently taken steps to further liberalize

                            According to a USTR official, the WTO’s Committee on Regional Trade Agreements is currently
                           reviewing Mercosur to ensure that it conforms with article 24 of the GATT. Article 24 lays out
                           conditions under which member countries may form preferential trading arrangements, such as
                           customs unions and free trade areas. This official noted, however, that without detailed information on
                           Mercosur’s implementation and schedule for liberalization, it is difficult to fully evaluate the
                           agreement under the criteria set forth by article 24.
                            An August 1995 protocol among Mercosur countries, however, provides limited common terms of
                           reference on intellectual property rights.

                           Page 7                                                    GAO/NSIAD-97-119 Trade Liberalization

                             trade and promote economic integration. The fourth subregional trade
                             arrangement, LAIA, is a network of agreements granting tariff preferences
                             for certain product categories to member countries.

Smaller Trade                In addition to the larger trade blocs previously discussed, there are more
Arrangements Involving       than 20 smaller multilateral and bilateral trade accords among the
NAFTA Partners               countries of the Western Hemisphere. Many of these were established
                             during the 1990s. Five of these arrangements involve our NAFTA partners
                             Canada and Mexico.

                         •   Mexico-Chile Free Trade Accord (1992). This agreement calls for a phased
                             tariff elimination between the parties. It excludes many product categories
                             such as agricultural commodities. Mexico and Chile are currently in the
                             process of renegotiating their 1992 agreement in an effort to broaden its
                         •   Mexico-Costa Rica Free Trade Agreement (1995). This agreement is
                             generally modeled on NAFTA but excludes many agriculture and energy
                         •   Mexico-Bolivia Free Trade Agreement (1995). This is similar to the
                             Mexican agreement with Costa Rica.
                         •   Group of Three Agreement—Mexico, Colombia, and Venezuela (1995). The
                             Group of Three Agreement calls for the total elimination of tariffs over a
                             10-year period with some exceptions in the textile, petrochemical, and
                             agricultural sectors. In addition, the arrangement includes agreements on
                             services, intellectual property rights, government procurement, and
                         •   Canada-Chile Free Trade Agreement (1996). The Canada-Chile Free Trade
                             Agreement provides for tariff elimination and contains side agreements on
                             labor and the environment. However, it excludes, among other items,
                             financial services and intellectual property rights.

                             At the FTAA ministerial meetings in Denver, Cartagena, and Belo Horizonte,
Status of FTAA               12 working groups were established for the purpose of collecting
Discussions                  information in preparation for FTAA negotiations.8 At Belo Horizonte, trade
                             ministers issued a declaration calling for formal FTAA negotiations to be

                              The FTAA working groups formed in Denver were (1) Market Access; (2) Customs Procedures and
                             Rules of Origin; (3) Investment; (4) Standards and Technical Barriers to Trade; (5) Sanitary and
                             Phyto-sanitary Measures; (6) Subsidies, Antidumping, and Countervailing Duties; and (7) Smaller
                             Economies. The following groups were formed at the second ministerial in Cartagena: (8) Government
                             Procurement, (9) Intellectual Property Rights, (10) Services, and (11) Competition Policy. At Belo
                             Horizonte a group was established to deal with (12) Dispute Settlement.

                             Page 8                                                 GAO/NSIAD-97-119 Trade Liberalization

                      launched by Western Hemisphere leaders at their next summit in
                      April 1998. While the ministers agreed on several other key issues, there is
                      still disagreement among participating countries on the approach formal
                      negotiations should follow.

FTAA Working Groups   The areas of responsibility assigned to the 12 FTAA working groups reflect
                      some of the priorities of the United States and other countries in the
                      hemisphere (see table 1). For example, there are working groups on
                      intellectual property rights and government procurement, issues of key
                      interest to the United States; on subsidies, antidumping, and
                      countervailing duties, areas of special concern to Argentina; and on
                      smaller economies, a priority for Caribbean countries. The United States
                      chairs the Working Group on Government Procurement. According to
                      administration officials, there are also some issues of particular U.S.
                      interest, such as labor and the environment,9 that are not fully addressed
                      by any of the existing working groups. USTR officials noted that the United
                      States has participated in all of the meetings and other activities of each
                      working group.

                       The original Miami Summit declaration included commitments to convene specific high-level
                      meetings to address, among others, topics such as labor and sustainable development—that is, the

                      Page 9                                                  GAO/NSIAD-97-119 Trade Liberalization

Table 1: FTAA Working Groups
                                          Country           held to
Working group                             chair                date           Work completed
Market Access                             El Salvador               5         A comprehensive data base on market access barriers
                                                                              in the Western Hemisphere has not yet been fully
Customs Procedures & Rules of Origin      Bolivia                   7         A “Guide to Customs Procedures in the Western
                                                                              Hemisphere” is in draft form
Investment                                Costa Rica                7         Published two inventories: (1) “Investment Agreements
                                                                              in the Western Hemisphere” and (2) “Investment
                                                                              Regimes in the Americas: A Compendium”
Standards & Technical Barriers to Trade   Canada                    6         Published an inventory detailing national practices on
(SPS)                                                                         standards, technical regulations, and conformity
                                                                              assessment in the Western Hemisphere
Sanitary & Phytosanitary Measures         Mexico                    4         A mandated inventory of all SPS agreements in the
                                                                              Western Hemisphere and other technical work is
                                                                              progressing but not yet complete
Subsidies, Antidumping & Countervailing   Argentina                 6         Published the inventory titled “A Compendium of
Duties                                                                        Antidumping and Countervailing Duty Laws in the
                                                                              Western Hemisphere”
Smaller Economies                         Jamaica                   6         Received paper presentations from the Tripartite
                                                                              Committeea and the World Bank on topics of importance
                                                                              to smaller economies
Government Procurement                    United States             4         Published an inventory titled “Government Procurement
                                                                              Rules in Integration Arrangements in the Americas”
Intellectual Property Rights (IPR)        Honduras                  3         An inventory is in draft form on all conventions and
                                                                              agreements on IPR to which Western Hemisphere
                                                                              countries are a party, as well as the main IPR provisions
                                                                              of these trade arrangements
Services                                  Chile                     3         Published the report “Provisions on Trade in Services in
                                                                              Trade and Integration Agreements in the Western
Competition Policy                        Peru                      3         Group meetings have encouraged networking and
                                                                              better understanding of competition policy
Dispute Settlement                        Uruguay                   0         First meeting scheduled for Montevideo (July 1997).
                                                                              OAS has prepared a draft compendium on regional
                                                                              dispute settlement mechanisms
                                          See following section for an explanation of the Tripartite Committee.

                                          Sources: GAO and OAS.

                                          The working groups were established to collect basic information on key
                                          issues in preparation for FTAA negotiations. U.S. and OAS officials explained

                                          Page 10                                                  GAO/NSIAD-97-119 Trade Liberalization

                           that the working groups have been the mechanism for accelerating
                           progress on the priorities of participating countries. Progress in meeting
                           the information mandates set forth at the ministerials differs for each of
                           the 12 working groups.10 For example, the Working Group on Investment
                           is particularly advanced, having prepared a comprehensive technical
                           compendium on investment treaties in the region. This compendium was
                           published at the Belo Horizonte ministerial in May 1997. According to both
                           U.S. and OAS officials, the Working Group on Investment has also made
                           considerable progress, exchanging views on elements that could be
                           included in a FTAA investment chapter, including investor protection,
                           national treatment, and dispute settlement.

                           Progress in other working groups has been more modest. For example, the
                           Working Group on Market Access reported in February 1997 that many
                           countries had yet to submit the schedules and statistics required to
                           prepare a hemispheric data base on tariff structures and nontariff
                           measures. Moreover, the Working Group on Dispute Settlement, which
                           was only established in May 1997, has not yet met.

                           A Tripartite Committee, made up of the OAS, the IDB, and the United
                           Nations Economic Commission on Latin America and the Caribbean, was
                           formed after the first ministerial in Denver to provide analytical support to
                           the working groups as requested. Each organization in the Tripartite
                           Committee is responsible for providing technical support to the FTAA
                           process through the working groups. For example, the IDB is collecting
                           trade statistics to assist the Working Group on Market Access, while the
                           OAS has provided support to other groups on trade policy issues, such as
                           subsidies and competition policy. At this time, the Tripartite Committee’s
                           role in support of the FTAA is anticipated to be transitory. The countries are
                           considering the possibility of establishing a temporary FTAA secretariat
                           during the negotiations. At the Belo Horizonte meeting, ministers directed
                           the Tripartite Committee to conduct a feasibility study based on the
                           agreed functions of a temporary secretariat. This study is to be reported to
                           the vice ministers at their meeting scheduled to take place in
                           October 1997.

Different Strategies for   In preparation for the ministerial meeting in Belo Horizonte, various
Pursuing FTAA              countries and subregional blocs involved in the FTAA process submitted
Negotiations               proposals for the overall strategy they would like to see pursued in formal

                            Generally, each working group was instructed to compile a basic inventory of data and identify
                           possible approaches to negotiations for its area of responsibility. However, there is disagreement
                           among countries involved in the FTAA process on whether working groups have been empowered to
                           make recommendations on the content of the FTAA in their subject areas.

                           Page 11                                                 GAO/NSIAD-97-119 Trade Liberalization

FTAA negotiations. At the ministerial, consensus was reached on several
key issues advanced in these proposals. A joint declaration issued at Belo
Horizonte called for formal FTAA negotiations to be launched by the next
summit of Western Hemisphere leaders scheduled to take place in Chile in
April 1998. In the declaration, countries agreed that the FTAA would be
consistent with member countries’ commitments under the WTO and the
FTAA. Moreover, countries agreed that the FTAA would coexist with, rather
than supplant, existing subregional trade arrangements, such as NAFTA or
Mercosur, to the extent that rights and obligations under these agreements
are not covered or go beyond rights and obligations under the FTAA. The
declaration also recognized the right of participating countries to negotiate
independently or as members of subregional trade groupings,11 and the
need to establish a temporary administrative secretariat to support future
negotiations. Finally, the declaration reiterated the commitment of
participating countries to conclude a trade agreement encompassing the
entire hemisphere by 2005 at the latest.

At the Belo Horizonte ministerial, participating countries also agreed to set
up a Preparatory Committee at the vice ministerial level that will make
recommendations for FTAA negotiations. The establishment of a
Preparatory Committee signals a new level in the FTAA process. It indicates
participating countries expect concrete results in preparing for
negotiations. The Preparatory Committee is supposed to meet at least
three times between May 1997 and February 1998, when the next FTAA
ministerial is scheduled to take place in San José, Costa Rica. At the San
José ministerial, trade ministers are committed to reach agreement on the
objectives, approaches, structure, and location of the FTAA negotiations,
based on the recommendations of the Preparatory Committee.

Still, there is disagreement among participating countries on the pace and
direction of formal negotiations. Most countries, including the United
States, would prefer that formal FTAA negotiations on all issues commence
during the next summit of regional leaders in 1998 and conclude no later
than 2005. The members of Mercosur, however, have proposed that
negotiations proceed in three phases: (1) in 1998 and 1999, countries
would agree on and begin to implement “business facilitation” measures,
such as adopting common customs documents or harmonized plant and
animal health certificates; (2) from the year 2000 to 2002, work would
begin on “standards and disciplines,” including antidumping and
countervailing duty rules, and market access for services; and (3) from

 According to USTR, it appears at this time that most countries will negotiate individually, although
Mercosur may negotiate as a bloc.

Page 12                                                   GAO/NSIAD-97-119 Trade Liberalization

                           2003 to 2005, other disciplines and market access issues would be
                           negotiated, including tariff reductions, a key concern of the United States.
                           No other countries appear to support Mercosur’s phased approach to

                           Adverse economic developments in Mexico in the months immediately
Recent Developments        following the 1994 Miami Summit raised U.S. concerns about pursuing
in Regional Trade          further free trade initiatives in the region. While U.S. officials were
Liberalization Outside     debating the future course of U.S. involvement in regional trade efforts,
                           other countries in the hemisphere began pursuing their own agenda, both
the FTAA Process           deepening commitments under existing trade blocs and establishing new
                           bilateral agreements. In principle, these efforts may be consistent with
                           U.S. goals to promote free trade. In practical terms, lack of U.S.
                           participation in shaping these agreements has created disadvantages for
                           some U.S. exporters’ access to markets in the region. These disadvantages
                           are beginning to be felt in various sectors, including agriculture,
                           telecommunications, pharmaceuticals, and the automotive industry.
                           According to representatives of several Western Hemisphere countries,
                           regardless of whether the United States resumes a more active role in
                           shaping regional trade liberalization efforts, their countries will continue
                           their own initiatives toward free trade and economic integration, even if
                           these efforts do not coincide with U.S. interests. Moreover, these officials
                           noted that it is essential for the U.S. administration to obtain fast track
                           authority in order to make meaningful progress toward achieving the FTAA.

U.S. Reconsiders Further   In launching the FTAA at the Miami Summit, the United States was building
Regional Trade             on the momentum for free trade generated by the passage of NAFTA a year
Liberalization             earlier. NAFTA was more comprehensive than any other agreement in the
                           Western Hemisphere. It not only covered traditional tariff and nontariff
                           issues but also placed important obligations on member countries in
                           matters such as investment, government procurement practices, customs
                           procedures, and trade in services. At the time, NAFTA was generally
                           regarded as a blueprint for further trade liberalization in the region.
                           Moreover, U.S. leadership was evident in its support of negotiations on
                           Chile’s accession to NAFTA. Only days after the summit, however, Mexico
                           was hit by a serious financial crisis, with spillover effects in other Latin
                           American economies. The commitment by the U.S. government of
                           significant resources to stem and resolve the crisis raised concerns in the
                           United States about further regional trade liberalization efforts. In the
                           intervening period, fast track authority lapsed. Although U.S. participation

                           Page 13                                    GAO/NSIAD-97-119 Trade Liberalization

                           in the FTAA preparatory process continued, the executive branch has been
                           constrained from pursuing other tariff liberalization negotiations in the
                           region. Formal negotiations on Chilean accession to NAFTA, for example,
                           were suspended in 1995.

Other Countries Have       While debate continues in the United States regarding further regional
Moved Forward With Their   trade liberalization efforts, other countries in the region have proceeded to
Own Trade Initiatives      negotiate new trade agreements and deepen their participation in existing
                           arrangements. Chile has been at the forefront of this trend; it has
                           negotiated a network of free trade agreements with several countries in
                           the region, including Venezuela and Colombia. In 1996, Chile also
                           concluded a free trade arrangement with Mercosur, becoming in effect an
                           associate member of that trade bloc. Under this arrangement, Chile and
                           the Mercosur countries will phase out tariffs on products traded among
                           them, but Chile will not adopt Mercosur’s common external tariff.

                           Chile’s pursuit of free trade is not limited to South America. The
                           Canada-Chile Free Trade Agreement, which became effective on July 1,
                           1997, is modeled on NAFTA and is intended as a provisional agreement to
                           facilitate Chilean accession to NAFTA. Nevertheless, as noted earlier, there
                           are some differences between this bilateral agreement and NAFTA,
                           reflecting some of the areas where Chilean and Canadian interests differ
                           significantly from those of the United States. For example, under their
                           bilateral agreement, Chile and Canada are committed to forgo imposing
                           antidumping and countervailing duties within 6 years after the agreement
                           goes into effect. NAFTA, on the other hand, does not affect member
                           countries’ ability to unilaterally impose antidumping measures and
                           countervailing duties. In addition to its trade negotiations with Canada,
                           Chile has cultivated close commercial relations with Mexico, our other
                           NAFTA partner. Currently, Chile and Mexico are renegotiating their 1992
                           free trade agreement to make it more compatible with NAFTA.

                           Mexico, in turn, has been extending its own web of bilateral trade
                           agreements throughout the hemisphere. As noted earlier, Mexico has
                           concluded bilateral free trade agreements with Costa Rica and Bolivia and
                           has a trilateral arrangement with Colombia and Venezuela. Mexico is also
                           negotiating free trade agreements with Ecuador, El Salvador, Guatemala,
                           Honduras, Panama, and Peru. In addition, Mexico plans to negotiate a
                           transitional agreement with Mercosur that will cover key areas, such as
                           market access, government procurement, intellectual property rights, and

                           Page 14                                    GAO/NSIAD-97-119 Trade Liberalization

Mercosur has been another focus of subregional trade initiatives since the
Miami Summit. In addition to the arrangement with Chile, Mercosur has
concluded a free trade agreement with Bolivia and is engaged in
negotiations to widen its reach to other Andean Group countries.
Mercosur and Mexico are also scheduled to begin trade negotiations later
this year. Beyond the Western Hemisphere, Mercosur has concluded a
framework agreement on trade with the EU and there are discussions
aimed at establishing a free trade area encompassing the two trade blocs
(see fig. 3).

Page 15                                   GAO/NSIAD-97-119 Trade Liberalization

Figure 3: Countries Engaged in Trade Negotiations With Mercosur

                                                                                                                         AAAAAAA AAAAAA
                                                                                                                         AAAAAAA AAAAAA
                                                                                                                         AAAAAAA AAAA
                                                                                                                         AAAAAAA AAAAAA
                                                                                                                         AAAA   AAA
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                                                                                                         AAAAA AAAAAA           AAA
                                                                                                         AAAA  AA AAAAAAAA
                                                                                                                           AA AAA
                                                                                                         AAAA AAA
                                                                                                         AAAAAAAA   A
                                                                                                         AAAA              AAAA
                                                                                                         AAAAAAAA    AAAA
                                                                                                                     AAA   AAA
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                                                                                                                      AA   AAA
                                                                                                                           AAA  AAAAAA
                                                                                                      AAAA AAA
                                                                                                      AAA AAA        AAAA
                                                                                                                      AA AAA
                                              AAAA AAAAAAAA AAAAAA
                                                            AAAAA                                        European Union
                                                   AAAAAAAA AAAAAA
                                              AAAA AAAA
                                          M e AAAA
                                              x i cAAAA
                                                    o AAAA
                                                   AAAAAAAA AAAAAA  AAAAAAAA
                                                                           AAAAA AA
                                                                    AAAA   AAAAAAAA
                                                                                  AA AAVenezuela
                                                                           AAAAAAAAA AA
                                                                                   AA AA
                                                            ColombiaAAAA   AAAAAAAA
                                                                                  AAAA AA
                                                                                    AA AA
                                                                   AAAA    AAAA   AAAA AA
                                                                    AAAAAAAAAAAAA    A AA
                                                                   AAAA  A
                                                                           AAAA A    A
                                                                   AAAA                    Brazil
                                                                   AAAA   AAAA
                                                                   AAAAAAAAA    A
                        Mercosur                                     Chile

                        Countries with Free Trade Agreements                              Uruguay
                        with Mercosur

                AAAAA                                                             Argentina
                AAAAA   Countries at various stages of trade
                    A   discussions with Mercosur

                                                 Source: GAO and Governments of Brazil and Mexico.

                                                 Page 16                                                  GAO/NSIAD-97-119 Trade Liberalization

                         Mercosur has not only been broadening its network of agreements with
                         other countries, it has also been deepening the level of economic
                         integration among the four original member countries. As noted earlier, in
                         1995 Mercosur countries instituted the common external tariff, which is
                         currently applied to about 85 percent of imports from outside the bloc.
                         Trade among Mercosur member countries has almost tripled, from
                         approximately $5 billion in 1991 to $14.5 billion in 1995—the last year for
                         which figures were available.

Some U.S. Sectors Feel   Lack of U.S. participation in shaping emerging Western Hemisphere trade
Impact of Other          agreements has created disadvantages for some U.S. exporters’ access to
Subregional Trade        these markets.12 By lowering or eliminating tariffs among participating
                         countries, subregional free trade agreements that exclude the United
Agreements               States result in comparatively higher duties for U.S. exports. For example,
                         Chile’s network of bilateral trade agreements has given Chilean
                         agricultural products an edge over U.S. exports in South America. Thus,
                         while Chilean apples enter many South American markets duty free,
                         Washington State apples face 10 to 25 percent tariffs. In recent years,
                         Washington growers have seen their share of these markets dwindle as
                         Chile capitalizes on its tariff preferences.

                         Like Chile’s arrangements with other South American countries, the
                         Canada-Chile agreement has already yielded benefits for Canadian firms
                         not enjoyed by U.S. companies. Recently, Canada’s Northern Telecom won
                         a nearly $200-million telecommunications equipment contract in Chile.
                         According to the State Department, the choice of Northern Telecom over
                         U.S. companies was at least in part due to the fact that buying from a U.S.
                         producer would have meant an additional $20 million cost in duties
                         relative to purchasing from Canada.

                         While U.S. exports to Mercosur countries have been growing, U.S.
                         exporters will likely face increasing difficulties in penetrating markets in
                         Mercosur countries as commitment to common bloc trade policies
                         deepens. For example, a USTR official noted that Mercosur is currently
                         considering adopting product safety standards that are quite different from
                         U.S. standards. This official explained that if these standards are adopted,

                           These examples of select sectors illustrate cases where U.S. export opportunities have been
                         adversely affected by subregional trade agreements. A broader evaluation of the costs and benefits of
                         increased trade and specific trade agreements requires a consideration of both U.S. export and
                         import-competing sectors. While trade liberalization has historically created net benefits to the
                         aggregate economy through improvements in efficiency, it creates costs that fall more directly on
                         certain sectors of the economy and labor force.

                         Page 17                                                   GAO/NSIAD-97-119 Trade Liberalization

                           U.S. auto manufacturers could be at a disadvantage in accessing the
                           growing markets of Mercosur member countries.

                           Mercosur’s position on the recent WTO Information Technology Agreement
                           also provides an indication of how the bloc’s common foreign trade policy
                           will complicate U.S. efforts to promote its economic interests in the
                           region. The Information Technology Agreement, which was signed by 28
                           WTO members in Singapore in December 1996, provides important tariff
                           concessions in an industry in which the United States enjoys a
                           considerable competitive advantage. Brazil did not join in the Information
                           Technology Agreement, seeking to protect its own emerging information
                           technologies industry. Brazil’s position on the agreement has now been
                           adopted as an element of Mercosur’s common external trade policy, while
                           other partners like Argentina, if acting individually, might have taken a
                           different position.

                           The difficulties faced by the U.S. pharmaceutical industry in the Argentine
                           market also illustrate some of the drawbacks encountered by U.S. firms as
                           countries in the region drift away from the long-standing U.S. concern
                           regarding intellectual property protection. In a recent statement before the
                           Trade Subcommittee of the House Ways and Means Committee,13 the
                           President of the Pharmaceutical Research and Manufacturers of America
                           estimated that annual losses by member companies due to patent
                           infringement in Argentina amount to several hundred million dollars. He
                           noted that NAFTA has the strongest safeguards for intellectual property
                           rights of any trade agreement, and concluded that if Argentina had been
                           brought into NAFTA, that government would have had to seek to curtail
                           patent infringement more decisively than it does now. It is worth noting
                           that Argentina’s former Finance Minister favored joining NAFTA rather than
                           integrating further within Mercosur. However, after NAFTA negotiations
                           with Chile were suspended, it became clear that prospects for Argentine
                           accession to NAFTA were rather distant, and Argentina proceeded to
                           cement its position within Mercosur.

Regional Trade             Western Hemisphere leaders have indicated their countries will continue
Liberalization Likely to   their own initiatives toward free trade and economic integration. For
Continue Regardless of     example, in statements during his recent visit to the United States, the
                           President of Chile said that his country shares the U.S. interest in
U.S. Participation         promoting free trade. Elaborating on his President’s remarks, a Chilean
                           government spokesman on trade issues explained that, like the United

                             March 18, 1997.

                           Page 18                                    GAO/NSIAD-97-119 Trade Liberalization

States, Chile would like to see the widest and most comprehensive
agreement possible on free trade for the Western Hemisphere. According
to this official, whether through NAFTA or the FTAA, with or without the
United States, Chile intends to continue to pursue trade liberalization
because it is seen as furthering Chile’s own interests. Chile still wants to
join NAFTA, but NAFTA is now less critical to Chile than it was in 1995.

Like Chile, Canadian interests in regional trade liberalization generally
coincide with those of the United States. However, the recent
Canada-Chile free trade agreement demonstrates that Canada is pursuing
its commercial interests in the region. Indeed, the Canadian Minister of
International Trade recently indicated that his government is considering
negotiating a trade agreement with Mercosur. According to a Canadian
government spokesman on trade policy, Canada’s free trade agreement
with Chile was not only meant to expedite Chilean accession to NAFTA, but
it was also intended to keep alive the momentum for free trade in
anticipation of FTAA negotiations. Canada would like to see decisive U.S.
participation in FTAA negotiations because the two countries share many
interests with regard to trade. This official explained that it would be
unfortunate if the United States lacked fast track authority by the time of
the 1998 Santiago Summit, as it would be at a distinct disadvantage in
shaping the FTAA.

It would appear that Mexico’s interests in regional trade liberalization
parallel those of Chile and Canada. However, some observers suggest that
Mexico may be reluctant to surrender the current advantage it enjoys in
terms of access to North American markets. Nevertheless, according to
Mexican government trade officials, all of Mexico’s agreements and
negotiations with other countries in the hemisphere have sought to
encourage the adoption of trade disciplines consistent with NAFTA. These
officials explained that Mexico has actively supported Chilean accession
to NAFTA and the concept of a free trade agreement that would encompass
the entire hemisphere. Moreover, they noted that Mexico is committed to
the principles of free trade and will continue to pursue free trade
arrangements with other countries in the hemisphere and other regions.

In contrast to the NAFTA partners and Chile, the Mercosur countries’ vision
of the FTAA differs significantly from that of the United States. As the
largest member of Mercosur, Brazil has sought to shape the FTAA process
to make it consistent with its distinct trade priorities. Since the FTAA would
entail broadening Brazil’s ongoing market-opening efforts, Brazil favors a
slower managed approach to hemispheric trade liberalization. This would

Page 19                                     GAO/NSIAD-97-119 Trade Liberalization

              give its industries more time to adjust to foreign competition.14 Thus,
              Brazil has proposed that FTAA negotiations on market access be deferred
              until 2003, while the United States would like to see this matter addressed
              as soon as negotiations begin in 1998. A Brazilian government spokesman
              noted that if U.S. negotiators lack fast track authority in 1998, FTAA
              negotiations would still be able to reach agreement on business facilitation
              measures. These include items such as common customs documents,
              which would not require legislative approval. In this case, discussions on
              market access would be deferred, as favored by Mercosur in general and
              by Brazil in particular.

              In preparing this report, we relied on our past and ongoing work on
Scope and     Western Hemisphere trade issues.15 Our description of existing
Methodology   subregional and bilateral trade arrangements is based primarily on a
              review of documents on these arrangements from academic and technical
              publications. For our discussion on the status of FTAA negotiations and
              recent trade developments in the region outside the FTAA process, we
              interviewed officials from the OAS, IDB, USTR, the U.S. International Trade
              Commission, and the U.S. Department of State; representatives from five
              other Western Hemisphere nations at the forefront of regional trade
              negotiations; and academicians and other experts on the process of
              regional economic integration.

              We also reviewed documents on the FTAA prepared by the OAS Trade Unit
              and the FTAA working groups; declarations and supporting documentation
              from the Miami Summit and the three FTAA ministerial meetings that have
              taken place thus far; and reports from USTR, the U.S. Department of
              Commerce, the U.S. International Trade Commission and the
              Congressional Research Service. In addition, we attended several
              conferences and congressional hearings dealing with various aspects of
              the FTAA process.

              In order to provide some indication of the relative size of markets in the
              region, we prepared tables on the principal Western Hemisphere trade
              groupings presented in the appendix. These tables are based on data for
              individual countries in the region from the International Monetary Fund’s
              Publications International Financial Statistics and Direction of Trade

                Beginning in the 1990s, Brazil initiated a unilateral process of opening its markets to foreign
              competition. Subsequently, it has opened its markets further within the context of Mercosur. This
              process has put great pressure on Brazilian domestic producers, and the country has amassed sizable
              trade deficits in recent years.
                See the list of GAO reports related to this subject at the end of this report.

              Page 20                                                       GAO/NSIAD-97-119 Trade Liberalization

                  Statistics. We used 1994 figures for these tables because that is the latest
                  year for which information was available for most countries in the region.
                  For certain countries we used 1993 data, when 1994 data were not

                  We conducted our review from February to June 1997 in accordance with
                  generally accepted government auditing standards.

                  USTR provided technical comments on a draft of this report, and we have
Agency Comments   incorporated them in the text where appropriate. USTR did not provide any
                  evaluation of the overall thrust of the report.

                  We are sending copies of this report to USTR, the Secretaries of Commerce
                  and State, and interested congressional committees. We will make copies
                  available to others on request.

                  Please call me at (202) 512-8984 if you have any questions concerning this
                  report. Major contributors to this report were Elizabeth Sirois, Assistant
                  Director; Juan Gobel, Evaluator-in-Charge; Emil Friberg, Senior
                  Economist; and Patricia Cazares, Evaluator.

                  Sincerely yours,

                  JayEtta Z. Hecker, Associate Director
                  International Relations and Trade Issues

                  Page 21                                    GAO/NSIAD-97-119 Trade Liberalization

Letter                                                                                              1

Appendix I                                                                                         24
                        Andean Community                                                           24
Principal Economic      Caribbean Community                                                        24
Indicators by Trading   Central American Common Market                                             25
                        Common Market of the South (Mercosur)                                      25
Bloc, 1994              Latin American Integration Association                                     25
                        North American Free Trade Agreement                                        26

Related GAO Products                                                                               28

Table                   Table 1: FTAA Working Groups                                               10

Figures                 Figure 1: Members of NAFTA, Mercosur, the Andean Community,                 5
                          and LAIA
                        Figure 2: Members of the Caribbean Community and the Central                6
                          American Common Market
                        Figure 3: Countries Engaged in Trade Negotiations With                     16


                        EU        European Union
                        FTAA      Free Trade Area of Americas
                        GATT      General Agreement on Tariffs and Trade
                        GDP       gross domestic product
                        IDB       Inter-American Development Bank
                        IMF       International Monetary Fund’s
                        IPR       intellectual property rights
                        LAIA      Latin American Integration Association
                        NAFTA     North Atlantic Free Trade Agreement
                        OAS       Organization of American States
                        USTR      United States Trade Representative
                        WTO       World Trade Organization

                        Page 22                                  GAO/NSIAD-97-119 Trade Liberalization
Page 23   GAO/NSIAD-97-119 Trade Liberalization
Appendix I

Principal Economic Indicators by Trading
Bloc, 1994

                      Currently, there are six major multilateral trading blocs in the Western
                      Hemisphere. Following is a general profile of each of these blocs,
                      including information on membership, gross domestic product (GDP), per
                      capita gross domestic product, and the bloc’s total exports, using data
                      from 1994, except as noted.

                      Established in 1969 (formerly Andean Pact or Andean Group).
Andean Community
                      Members: Bolivia, Colombia, Ecuador, Peru, Venezuela
                      Population: 75 million1
                      Combined GDP: $149 billion
                      Per capita GDP: $1,987
                      Total imports: $26 billion
                      Imports from the United States: $10 billion
                      Total exports: $31 billion
                      Exports to the United States: $14 billion

                      Established in 1973 as successor to the Caribbean Free Trade Association
Caribbean Community   (CARIFTA, established in 1967).

                      Members: Antigua, Barbuda, Bahamas, Barbados, Belize, Dominica,
                      Grenada, Guyana, Jamaica, Montserrat,2 St. Kitts & Nevis, St. Lucia, St.
                      Vincent & the Grenadines, Suriname, Trinidad & Tobago
                      Population: 6 million3
                      Combined GDP: $20 billion4
                      Per capita GDP: $3,237
                      Total imports: $9 billion
                      Imports from the United States: $3 billion
                      Total exports: $6 billion
                      Exports to the United States: $2 billion

                       Calculated using 1993 population data for Bolivia.
                       No data were available for Montserrat.
                       Calculated using 1993 population data for Antigua & Barbuda and Suriname.
                       GDP data were not available for the Bahamas and St. Vincent & the Grenadines.

                      Page 24                                                 GAO/NSIAD-97-119 Trade Liberalization
                       Appendix I
                       Principal Economic Indicators by Trading
                       Bloc, 1994

                       Established in 1961.
Central American
Common Market          Members: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua
                       Population: 29 million
                       Combined GDP: $34 billion
                       Per capita GDP: $1,174
                       Total imports: $11 billion
                       Imports from the United States: $5 billion
                       Total exports: $7 billion
                       Exports to the United States: $3 billion

                       Established in 1991.
Common Market of
the South (Mercosur)   Members: Argentina, Brazil, Paraguay, Uruguay
                       Population: 196 million
                       Combined GDP: $852 billion
                       Per capita GDP: $4,346
                       Total imports: $61 billion
                       Imports from the United States: $12 billion
                       Total exports: $63 billion
                       Exports to the United States:$11 billion

                       Established in 1980 as a successor to the Latin American Free Trade
Latin American         Association (LAFTA, established in 1960).
Association            Members: Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico,
                       Paraguay, Peru, Uruguay, Venezuela
                       Population: 401 million5
                       Combined GDP: $1.5 trillion
                       Per capita GDP: $3,801
                       Total imports: $183 billion
                       Imports from the United States: $83 billion
                       Total exports: $171 billion
                       Exports to the United States: $79 billion

                        Calculated using 1993 population data for Bolivia.

                       Page 25                                               GAO/NSIAD-97-119 Trade Liberalization
                      Appendix I
                      Principal Economic Indicators by Trading
                      Bloc, 1994

                      Established in 1994.
North American Free
Trade Agreement       Members: Canada, Mexico, United States
                      Population: 383 million
                      Combined GDP: $7.9 trillion
                      Per capita GDP: $20,643
                      Total imports: $920 billion
                      Canadian & Mexican imports from the United States: $157 billion
                      Total exports: $735 billion
                      Canadian & Mexican exports to the United States: $185 billion

                      Sources: International Monetary Fund (IMF) International Financial Statistics, March 1997, for
                      population, GDP, and per capita GDP data; IMF Direction of Trade Statistics, April 1997, for
                      import and export data.

                      Page 26                                                  GAO/NSIAD-97-119 Trade Liberalization
Page 27   GAO/NSIAD-97-119 Trade Liberalization
Related GAO Products

              Budget Issues: Privatization Practices in Argentina (GAO/AIMD-96-55; Mar. 19,

              Mexico’s Financial Crisis: Origins, Awareness, Assistance, and Efforts to
              Recover (GAO/GGD-96-56; Feb. 23, 1996).

              NAFTA:Structure and Status of Implementing Organizations
              (GAO/GGD-95-10BR; Oct. 7, 1994).

              U.S.-Chilean Trade: Pesticide Standards and Concerns Regarding Chilean
              Sanitary Rules (GAO/GGD-94-198; Sept. 28, 1994).

              North American Free Trade Agreement: Assessment of Major Issues
              (GAO/GGD-93-137; Sept. 9, 1993; 2 vols.).

              U.S.-Chilean Trade: Developments in the Agriculture, Fisheries, and
              Forestry Sectors (GAO/GGD-93-88; Apr. 1, 1993).

              CFTA/NAFTA: Agricultural Safeguards (GAO/GGD-93-14R; Mar. 18, 1993).

(711252)      Page 28                                     GAO/NSIAD-97-119 Trade Liberalization
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