Statement of John Dillon, Chairman
and Chief Executive Officer,
International Paper Company, Purchase, New York,
on behalf of the American Forest & Paper Association

Mr. Chairman, Members of the Committee:

I am John Dillon, Chairman and CEO of International Paper, and I am pleased to be here today representing the American Forest and Paper Association. International Paper is the largest forest products company in the world with $24 billion in annual sales, operations in nearly 50 countries and close to 100,000 employees. In addition, International Paper owns and manages nearly 7.5 million acres of forest land in the United States.

The U. S. forest products industry, which accounts for $230 billion in annual sales and employs 1.5 million American workers, comprises seven percent of manufacturing shipments. To put this in perspective, the U.S. forest products industry employs about as many people as the data processing and computer services industry. While Internet-based advertising totaled $1.9 billion in 1998, print-based advertising generated $111 billion in revenues. Basically, wood and paper products are essential elements of our standard of living -- from paper for daily information to textbooks to decorative products; from packaging to keep products safe and prevent spoilage; and from lumber and panel materials used in over 90 percent of American homes to wood-based furniture and cabinetry. These products are derived from a unique renewable resource which the U.S. forest products industry is committed to managing on a sustainable basis.

For our industry, the World Trade Organization (WTO) Ministerial meeting in Seattle represents the most significant, and possibly the last, opportunity to secure our ability to participate in fast-growing global markets from a U.S. manufacturing base. For too many years, the U.S. market has provided an open door to our foreign competitors, while U.S. producers have had to scale high tariff walls and other barriers to compete in foreign markets. Our foreign competitors have used those years and those barriers to create a substantial global advantage by increasing their productive capacity and exploiting our market while denying us equivalent market opportunities.

For the last decade, beginning with the Uruguay Round, we have sought to level the playing field by pursuing a global free trade sector in forest products through reciprocal tariff elimination agreements. That objective was only partially realized in the Uruguay Round Agreement, as Japan blocked an agreement in wood products, and Europe delayed the phase-out on paper tariffs to ten years. These actions provided another decade of protection to some of our strongest competitors in global markets.

As a consequence, we have actually seen the global trade balance in the forest products sector decline since the conclusion of the Uruguay Round Agreement. In total, between 1994 and 1998 the trade deficit in our sector jumped from $3 billion to $9.4 billion, a tripling in this short time period.

On the solid wood side of the industry, global production of lumber and panel products grew about 5 percent between 1994 and 1998, while U.S. production increased only about 3 percent. Thus, the U.S. share of global lumber production has declined by 1-2 percent since 1994. At the same time, U.S. exports of wood products have dropped from $7.2 billion to $5.8 billion, or a 20 percent decline; whereas imports of lumber and wood products have grown from $10 billion to $13.3 billion, or a 33 percent increase.

On the paper side, global production of paper and paperboard has increased about 12 percent since 1994, while U.S. production has increased just 6 percent. The U.S. share of world production of paper and paperboard has declined from 30.1 percent to 28.5 percent. On a tonnage basis, U.S. exports of pulp, paper and paperboard grew 8.6 percent from 1994-1998, but dropped 9.3 percent in 1997-98, while imports increased 12 percent.

Just as we saw strong growth in European capacity in the early 1990s, we are now looking at explosive growth in forest products capacity in emerging economies such as Indonesia, China, Korea, and Brazil. And while these countries may claim to be developing economies, the capacity they are building is world-class -- we are not talking about backyard paper and saw mills, but some of the largest, state-of-the-art mills in the world.

The situation has become more acute in the last two years as a consequence of the Asian financial crisis. As Asian economic growth collapsed, the rapid buildup in capacity that was anticipated to serve the rapidly growing Asian economies has resulted in increased shipments to the U.S. market. Imports of paper from Indonesia, for example, increased by 1800 percent during 1998. Imports from all Asian countries have increased 73 percent. At the same time, the reduction in demand in Asia, and lack of strong growth in the rest of the world, has resulted in diversions of products from other regions to the U.S. market -- European imports are up 12 percent; Canadian imports are up 5.3 percent. In total, U.S. imports of paper and paperboard have increased by more than $1 billion in 1998, while U.S. exports have declined by $335 million.

The result has been a significant erosion in prices and profitability for U.S. producers, and consequently a reduction in U.S. production. Since the beginning of 1998, the U.S. forest products industry has indefinitely or permanently shuttered 1.4 million metric tons of market pulp and 2.1 million metric tons of paper and paperboard capacity.

The real significance of these numbers is the effect on U.S. jobs. In 1998, total paper and allied products industry employment declined by 17,800 jobs, or 2.6% -- the largest single year decline since 1983. These are higher paying jobs than the manufacturing average and are most often located in rural communities that are heavily dependent on the forest products industry. At an average wage of $20.41 per hour, paper mill workers earn nearly $7.00 an hour more than all other private sector production workers, whose average hourly wage is $13.14.

Future growth opportunities for our products are highest in foreign markets where demand is expected to grow more rapidly than in the more mature markets in the U.S. and Europe. However, if we are unable to secure a market position in Asian and Latin American countries in the near future because of prohibitive market access barriers, those markets will be locked up by emerging competitors and our natural competitive advantage in this sector will have been sacrificed to unequal terms of trade set by governments.

It is for this reason that we have been so insistent on accelerating and expanding the reciprocal tariff elimination agreement from the Uruguay Round and why we are so determined to see a global agreement reached at the Seattle Ministerial. Immediate action is essential to the future success and growth of the U.S. forest products industry.

Six years ago, Fortune magazine evaluated U.S. industries on their ability to compete globally and gave only two "A" ratings: pharmaceuticals and forest products. Today, that competitive edge in the forest products sector is eroding as a consequence of public policy impacts on our domestic industry and because of the rapid expansion of foreign competitors, often with the active support of their governments.

During the 1980s and early 1990s, our industry made substantial capital investments to modernize and upgrade our equipment and operations to ensure that we would be able to compete on a global scale. In fact, in terms of net value of plant and equipment per dollar of sales, the paper industry is more than twice as capital intensive as the all-manufacturing average.

However, also during that time, our relative cost position changed, in part due to public policy actions. The 75 percent reduction in timber from public lands has resulted in increased fiber costs, which make up 30-70 percent of our production costs. At the same time, our foreign competitors often enjoy government-supplied timber concessions at below-market rates, or benefit from export restrictions which artificially reduce their cost of fiber.

Environmental compliance costs have increased significantly, both for forest management and for manufacturing processes. Last year, the Environmental Protection Agency (EPA) imposed the most costly regulation ever on a single industry -- the Cluster rule -- which will increase capital costs for the industry by nearly $3 billion. Costs for International Paper alone will exceed $500 million. Additional regulations which EPA is now considering for our industry could add another $10 billion in capital costs over the next 10 years. AF&PA estimates that environmental expenses accounted for 13 percent of capital spending in the last decade, and will account for as much as 28 percent of capital spending in the next five years. Unfortunately, in many cases these expenditures produce little or no significant environmental improvement and certainly do not contribute to increased productivity or production. In addition, these costs are not shared equally by many of our foreign competitors, which face neither the scope of direct regulatory costs, nor the strict enforcement regime that exists in the U.S. We are proud of our environmental record, but there must be a reasonable balance between environmental costs and benefits, and we need to ensure that U.S. producers are not left at a competitive disadvantage because of disparate environmental requirements.

We also face a cost disadvantage as a consequence of tax policy. A recent study of comparative tax rates revealed that the U.S. forest products industry has the second highest effective tax rate on corporate forestry and timber investment when compared with any of our major foreign competitors: The U.S. tax rate is 55 percent vs. Japan at 36 percent; Finland at 22 percent; and Indonesia at 7 percent. Similarly, the effective tax rate on paper manufacturing in the U.S., at 62 percent, compares unfavorably to Japan at 57 percent; Finland at 36 percent; and Indonesia at 33 percent. In both Finland and Indonesia, almost all reforestation and silvicultural costs currently may be deducted. In the U.S., most reforestation costs must be capitalized until harvesting begins. The tax bill that the House recently approved will help somewhat, but what would really help level the competitive field for us would be a significant reduction in the corporate capital gains rate applied to timber and a permanent lifting of the cap on the amortization of reforestation expenses.

Of immediate interest to this committee and this hearing is the impact of trade policies on our industry and the opportunity presented by the upcoming ministerial to improve our competitive position. With our natural advantages in abundant fiber supply, developed infrastructure, skilled workforce, capital investments, and world-scale operations, we should enjoy a comparative, competitive advantage in world markets for our wood and paper products. However, while the U.S. market has been open to the rest of the world, the maintenance of foreign barriers to our products has significantly eroded our competitive position and threatens the future growth and success of this industry.

In previous trade negotiations, U.S. tariffs on wood and paper products have been traded away for concessions in other sectors leaving us with a big market open to foreign competition and little leverage to gain equivalent access to foreign markets.

During the Uruguay Round, we initiated and led the Zero-for-Zero Tariff Initiative, designed to provide comparable global market access opportunities in several globally competitive sectors. As noted earlier, that initiative was not fully achieved in our sector: Japan blocked agreement on reciprocal tariff elimination in wood products and Europe delayed achievement of zero tariffs on paper products for 10 years. Importantly, developing countries did not participate in the Zero-for-Zero Initiative. These countries represent the most rapidly growing markets for our products and have become significant competitors in our industry.

The situation we faced then is now compounded. In short, the distortions in market access around the world and differences in government policies affecting forest products industries are leading immediately and directly to the transfer of U.S. production and jobs to other countries. If this situation is not reversed in the near term, the opportunity for our industry to export from the U.S. to growing economies in Asia and Latin America will be lost for good as those markets are claimed by low-cost, protected competitors.

The Congress has authorized the Administration to continue to pursue acceleration and expansion of reciprocal tariff elimination in the zero-for-zero sectors as a priority matter. The Administration has worked with our trading partners in APEC to advance an accelerated tariff liberalization package for 8 sectors -- including forest products -- first through the Asia Pacific Economic Cooperation (APEC) forum and now through the WTO. Last November, and again last month, APEC ministers agreed to work toward an agreement by the time of the WTO Ministerial in Seattle. The Accelerated Tariff Liberalization (ATL) proposal for forest products would eliminate tariffs on paper products between 2000 and 2002 and on wood products between 2002 and 2004, with limited flexibility on end dates and end rates. In addition to forest products, the ATL package includes fish, chemicals, medical equipment, energy, toys, gems and jewelry, and environmental goods and services.

It is significant that the APEC economies agreed on the importance of advancing liberalization in these sectors. It is also important to note that China, in the WTO accession negotiations, would significantly reduce tariffs on paper and wood products and, on acceding to the WTO, would participate in a WTO agreement on tariff elimination.

An agreement in Seattle on the ATL sectors could produce a significant boost to global trade, benefiting producers and consumers around the world. However, that objective is threatened by the continued refusal of the Japanese government to agree to tariff elimination on wood products, and by European resistance to conclude any sectoral agreement in advance of launching a new round of multilateral trade negotiations.

Delaying results in our sector until the conclusion of a new round, at best within three years and likely to be much longer than that, will mean continued erosion of our competitive position in world markets and continued transfer of forest products jobs to other countries. This is an unacceptable outcome. It is comparable to allowing a healthy patient with a flesh wound to bleed to death because the doctors cannot agree on whether to apply a tourniquet or suture the wound.

We cannot allow the Japanese and Europeans to continue to defer results in sectors like forest products, where there is strong global competition. Both Europe and Japan have well developed forest products industries and world-class production is being built in emerging countries.

There will be some vocal opposition from groups in Seattle about the impact of globalization and world trade on people's lives. We cannot stop globalization of the world economy; we have to recognize it and adapt to it to survive and prosper. We can, however, work to ensure that the terms under which globalization occurs are at least fair for American companies and workers and that domestic and foreign barriers to production, trade, and economic growth are eliminated.

Artificial barriers that distort trade and economic development stifle not only competition, but also innovation and economically-sustainable growth, and lead to reciprocal barriers which further distort and stifle economic development and growth.

Negotiations should be based on a recognition that reciprocal open markets create economic growth and new market and job opportunities for all participants. That is the challenge and the opportunity facing the trade ministers in Seattle.

The WTO must demonstrate that it is capable of continuous progress in eliminating barriers to trade. The most tangible demonstration of that capability would be to conclude an ATL agreement at the Ministerial which would produce immediate benefits for producers and consumers around the world in these eight sectors. That would serve as a model and provide some important momentum for the launch of a new round of trade liberalization negotiations.

Conversely, failure to conclude the ATL agreement in Seattle could lead to further loss of growth opportunities in important sectors of the U.S. economy and further erosion in public support for efforts to achieve a more open world trading system.

I hope the trade ministers seize this opportunity to demonstrate the vitality and value of the World Trade Organization as a body which can and does produce meaningful economic results through eliminating trade barriers, beginning with an agreement in Seattle on the Accelerated Tariff Liberalization package.

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