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Globalization, Trade, and Development

November 8, 2002
Council on Foreign Relations

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Speaker: Pascal Lamy and Robert Zoellick

Interviewer: Lionel Barber, Presiding

November 8, 2002
New York, NY


Nancy Bodurtha [NB]: Good afternoon. Can I have your attention please? I'm Nancy Bodurtha. I'm the deputy director of the Council's New York meetings program. On behalf of the Council I welcome you all. Before I turn the program over to our presider, Lionel Barber of the Financial Times, I have a couple of announcements. First, I'd like to ask everyone to please take a moment and check your cell phones and make sure they have been turned off. Thank you. I would also like to draw your attention to a new feature on the Council's website, www.cfr.org. We are quite fortunate to have former New York Times editor Bernard Gwertzman with us as a consultant, and he has just started a terrific series of interviews with Council experts on very timely subjects. If you logon to the site now, you'll see an interview with Henry Seigman on the Israeli-Palestinian conflict. There are also some terrific interviews with Rachel Bronson on Iraq and Morta Bromowitz on North Korea.

Finally, I would like to draw your attention to an upcoming event. Next Tuesday, Nov. 12, we will be having a panel discussion on business and foreign policy in the post-9/11, post-Enron era with Jeff Garten of Yale, Michael Armstrong of a AT&T, John Thornton of Goldman Sachs, Paul Steiger of the Wall Street Journal. There is an announcement with details and a response form on the back to the roster or you can register via the Council's website. I hope you will join us. Thank you.

Lionel Barber [LB]: Good afternoon. My name is Lionel Barber. I am the U.S. Managing Editor of the Financial Times. I would like to say welcome to everyone to the inaugural meeting of the McKinsey Executive Roundtable series on International Economics. I'd like to offer a special thanks to Dick Foster in this respect. This meeting is on the record. I just like to make a couple of remarks in the beginning. I have known both these gentlemen for more than ten years. I can remember very well the first time I met both of them because they are the type of individuals who say things that stimulate, and make you think. I remember meeting Bob Zoellick, Ambassador Zoellick, when he was counselor to James Baker and we had a long conversation several months before German unification. At that time the administration was trying to get a sensible message across about its foreign policy, plus change, but particularly its policy towards Europe. Over the next few months and years I very much appreciated Bob's guidance in understanding American foreign policy.

Similarly, with Pascal. I can remember Pascal arriving in Washington shortly after German unification and speaking to a very small group journalists and saying, we have an answer now, it will be political union and economic union in Europe. It will be interesting to see how far we've come in our conversation on that matter. Well, this is meant to be a very informal discussion. If I succeed, we might even get a sense of what it is like for these two individuals to negotiate with each other, how much that personal chemistry or the lack of it actually exceeds results.

So, I'm going to ask everybody, including the two gentlemen, who are going to speak briefly in their answers, to go back a year and just very succinctly tell the audience what it was like on the last night in Dohar, the meeting that many people thought to might not happen after 9/11 and the Anthrax scare, etcetera, what it was liked on that last night of negotiations and how they came to a deal. Bob, do you want to lead off?

Robert Zoellick [RZ]: Pascal is our guest. Let him start first.

LB: I think that was a unilateral comment but there we are. Let's go the Pascal.

Pascal Lamy [PL]: I have related this night in a book, which unfortunately has only been introduced in Portuguese, Chinese, Japanese and Greek, so I have a sort of fixed record of my own remembrance of that. Basically, it was the story of the Holy Ghost. It's true that the beginning of this evening with 20, 25 ministers around the table was not that promising. It is also true that at five o'clock in the morning we were very near to an agreement, except for an Indian problem, which we had until quite late on the following day. But what happened in this box, and you really have to put people in boxes of this kind so that they can feel the heat, the circumstances and the pressure, is the discovery that the best option for us was get out of the room with a deal than for each of us to fight our corner to the risk of not getting a deal. It just worked.

It sometimes works, sometimes it doesn't work. It depends on temperature, pressure, the time, the day, the year, and it depends on people, a lot on people. Bob can agree or disagree with me on this one but I have attended a number of sessions of this kind in my professional life. The critical mass of people around the table who wanted this chemistry to work was there. Bob was one of them, no doubt about that, and I often pay that tribute to him and I want to do that today. I won't quote all the names because that would not be nice to the people I don't quote. But Alec Irwin was clearly one, the South African trade Minister. George Yeo, the Singaporean trade minister, clearly was one. Heraldo Munoz, who was then the Chilean trade minister, played a big role in this. It's a good dynamic.

At some stage the people, and the sort of confidence you have in what they say, where they come from, their track record, the judgment you have on where their tactics of the moment are, so it worked. But I mean we all knew that especially at the time of Dohar, which was two months after 9/11, we had something on our shoulders. As politicians accountable to a number of constituencies and citizens, we basically agreed on the idea that we had to discharge our responsibilities this way, and that is what happened.

LB: So critical mass and personality.

RZ: Before I begin I just want to thank Les Gelb, who I haven't had a chance to see since I assumed this post and who has done so much for the Council and left it in fantastic shape, so I just wanting to say that point, talking about leadership and individuals. Just to build on what Pascal said.

Remember, there were 142 members of the WTO at that point, now 144 because China and Taiwan have come in, and one of the changes in the GATT-WTO system over the past 10 or 15 years is, how do you get a consensus among 142, 144 players? Or, as I've described it, it's like doing a business deal at the UN. One of the lessons that I think both Pascal and I drew early on was you had to create some networks and have people who play some leadership role in those networks, because as you said there are 24, 25, 30 people in a room and they're going to have to be to able to sell something to another 110 people out there. So the night really started long before because we had used a series of many ministerials to not only build personal relationships but a point that George Yeo emphasized a lot, actually at a meeting I was at at APEC recently, Looking to the Future, was trust, and a sense of trying to see this as a common enterprise to work out problems together, as opposed to just seeing this as a zero sum calculation. As Pascal's comments suggested, while I think the US-EU role was critical, it couldn't have been done if the US and EU weren't seen as trying to get this done together. This is no longer a world where we can do it alone. So we needed some strong African voices, some Latin American voices, representing different groups.

Just one little piece of insight that might be useful not only for that day but going forward: the EU had a slightly broader agenda than the United States did. Our focus was more traditional, what trade people call market access: agriculture, services, manufactured goods. What that really meant was my job was easier than Pascal's because Pascal had other points that he wanted to add. Since I remember Pascal was sitting to my right, while he is a very calm and collected individual, he was his nervousness as I've ever seen him. I could tell because his leg was going up all day. But part of the dynamic that was created was that we, those of us who had listened closely to Pascal in the mini ministerials, knew that if we were going to put this together, we were going to have to bring something together for everybody.

A day before, frankly, the US had moved on very sensitive issue of rules -- I can't even be the begin to say the words anti-dumping countervailing duty -- and we had surprised the world, including US newspapers, about the fact that we had put together these trips in medicine declaration. So we had some momentum coming in but it put Pascal in a challenging area, along with the Japanese and Koreans, because the question is, where would you go on agriculture? But I think having listened to Pascal closely, which is part of the challenge, it is that you could see he would try, he and Franz Fisher would try, if others could move on other topics.

Just to give you a sense of the dynamics, it is not only discussion because there was a critical point where we needed to try to work something out on environment to help Europe move, and frankly the US team went off and put something together on environment that we thought would fly about three or four AM, and the catch on this also gives a little insight on the trust level. Because the United States was seen as an agricultural country and sensitive to how environment could be used against agriculture, we tried to come up with a plan that built some trust with the Korean group. So, as Pascal and I go off to a meeting that will be held in Sydney in about a week, the first of these mini-ministerials held after the launch of Dohar, we have some different players, but it will be again challenge of begin building a trust, listening to other people about how you solve their problems, and seeing whether you can then get an overlap on those sets.

LB: Are things better since that tour or worse a year on? Just dwell for a moment on what to think in retrospect was a little disappointing at Dohar?

PL: The overall result at Dohar was a good one, as any compromise. I would have liked for it to be more in line with my own mandate, and the council of ministers and the European Parliament would also have agreed with that. A compromise is a compromise. Let's all remember that it's a compromise on what? It's a compromise on a program of negotiations. It's a compromise on a shopping list and the only important thing is that once you have agreed on the shopping list you cannot add nor subtract topics from the shopping lists for the next three years until under this single undertaking you agree on everything or on nothing. There are areas where, for instance, in the relationship between the Word Trade Organization and the International Labor Organization, my mandate was to get more than I got. I nevertheless got the agreement of my constituency, even the council of ministers who were sitting in Dohar to accept the deal. I believe that the momentum which we created in Dohar has not been lost. I know and not to be for the press that it's like a baseball game. The time, you have the ball in the game, compared to the whole duration of the event, is pretty disappointing. You don't have sort of spasms every week. You don't have scoops every day. It's a three-year negotiation with 143 or 144 members with a bit of Yugoslavia joining and about 20 or 25 topics. It can't be that fun every day. It can be that lively every day. But it's a maturing process. It's along gestation with a lot of substance, a lot of tactics, a lot of soundings, a lot of trying, and that is what we are on.

My own benchmark, and probably Bob's own benchmark, is the previous one, was the Uruguay Round, which we sort of lived together in different positions, which lasted seven years and was a pretty dreadful process in terms of drugging things together. We decided that we would try to do this again in three years. It just happens that these three years end in 2004, which is to my knowledge the end of Bob's present mandate, unless he gets special promotion sometime ahead from now, and the end of my own mandate. I don't expect to get special promotion before the end of my mandate.

The U.S. has tabled a very aggressive proposal on agriculture and they have been trumpeting to the rest of a world that now all agricultural markets will be free and that the EU had better watch its legs because this is going to be very offensive. We today tabled an extremely offensive industrial tariffs proposal with extremely bold what we call compression mechanisms on tariffs, notably for developing countries, textiles, footwear, and the rest, and Bob will probably tell you that agriculture is very important. I agree with this. I will tell him that 70 percent of developing countries' exports are now manufactured goods and that we had better start addressing this. So there is a lot of this happening.

I don't agree with what I sense in the press, including the Financial Times, by the way, not only the Financial Times, that nothing is happening, that the thing is just running in the standpoint. That is not true. It cannot happen unless lots of people are committed to very complex negotiations, and it is our role to sort of energize the whole thing.

LB: Right. Very briefly, what do you think, if anything, was disappointing?

RZ: Can I give an answer to this?

LB: Aggressive, aggressive, toi?

RZ: You said you wanted to be part of the negotiations. You've got to play Lionel, you've got to play.

LB: I am feeling a bit like Romano Prodi, the commissioner. What about the constraints that you face in your position? What about the constraints that you face in your position when you're negotiating? You can think about the European Parliament, and let's hear about the domestic constraints and particularly the Congress, including the new Congress.

RZ: Okay. I'm going to link these two together because I think they deserve to be linked together. First, because I want emphasize a point that Pascal made that I definitely agree with, which is that each negotiation takes on its own dynamic, and its natural that everybody is using the Uruguay Round as a reference point, but I think it can be extremely misleading, and frankly it's up to the players to determine the dynamics. Pascal mentioned part of this, and another key part is obviously one of the things after Dohar was the fact that with President Bush's effort we got our trade promotion authority, which we didn't have for eight years. That extends to 2005. The whole world knows that. It can be extended for another two years but that actually strengthens our hand as we go forward.

I also think it's natural that there is a process. Remember, to get Dohar done, people had to stretch. Pascal didn't get everything he wanted, and we had to come up with some things that were a little questionable, for which we were criticized. So I think it's totally natural there is a little bit of the period after that where there is a pause and kind of an assessment and people have to work some of their domestic audiences. The real challenge is, where do we go from here now and do we create that dynamic of moving forward? Part of that in terms of that congressional audience, just to come back, is that I think it's a question of the different proposals we put forward. Like, and this was a good example of negotiation, you see I just lured Pascal in because probably later in the year we will also come forward with a very aggressive proposal on non-ag market access. I'll say now that by the time we have come forward it'll be time for you come on agrico, as Martin Wolf recommended in the Financial Times today. But the key point will be, going back to your first question, we have to bring everybody along. One of the key things as we go to these meetings is we are going to have to redo some of the question at a more detailed level, the things that we talked about on the night of Dohar, which is that there has to be movement on some other things that the EU and Japan are interested and if we are going to get movement on others. So how to recreate that dynamic?

On the home front we are obviously a lot stronger because we have trade promotion authority. I feel better today that I did yesterday because we now have strength in the Republican House as well as a Republican Senate. But the reality is that if you look at most of the voting patterns which past most of the trade promotion authority or frankly the same is true the Clinton Administration, primarily Republican votes, but you have protectionist on the Republican side just like you have them on the Democratic side. So part of the reason why these trade negotiations are a particular challenge is it's partly economics and business and what your theorists write on the op-ed pages about what we are supposed to do, but we have politics to manage as well. So the question is, how do you put together coalition within your own country, just like your putting together coalitions around a world, to sort of move together for openness and liberalization, and then how do you look across the seas to say what does Pascal need for his coalition to go forward?

In the case of the United States political dynamic is undoubtedly a little different that it is in Europe, in that you probably have much more active interest groups. Interest groups are just starting to be more active in the European authorizing process than ours, and that can be good and bad. We have manage to get the agricultural groups to support this very aggressive proposal, even though some of them on the margin aren't going to be so keen about it but they see the benefit of moving it forward. It also means it can hurt you as interest groups.

So, for example, there are some that are afraid of competition and there are some that are frankly just protectionists, and some of those can work their way through their congressional system. So I think part of the challenge for our job is having a sense of managing your own politics while moving ahead a trade agenda, but also trying to keep some sense of the other guy's needs because the key point is that trade is not a zero some effort. It can be a win-win effort but it does require compromise.

LB: So you're saying that steel tariffs were the necessary price to pay for TPA?

RZ: I believe so, yeah, and I have told people that over and over again. I could go into a long rendition of why it is there, but I think, look, Fred Burgsten wrote a piece in Foreign Affairs if people want to look at it.

PL: It's a very good piece for you, yeah.

RZ: Many people write good pieces for me. I don't object.

PL: I don't read them all. But this one I read.

RZ: But here is the key point. Look, without casting aspersions, the United States was in a position where if we didn't get negotiating authority again I personally think it would have been a very dangerous posture. Pascal and others have commented on this.

PL: I agree with that.

RZ: This had roots that go back to the 1930s and up until the 1930s Congress controlled trade policy by passing individual tariffs. So the 1934 reciprocal trade act, moving on to the whole notion of fast track in the '70s, was the fact that it allows Congress to complain, represent individual interests, give us guidance, but at the end the executive has to put back a package. Look, we lost that in 1994. There were many people out there, very reputable people, who said you'll never get it back. Many newspapers said you'll never get it back. Many people even started to say, don't even try, that is too much to do.

Frankly, President Bush, not surprising in my view, deserves a lot of credit by making this a big push and effort, but we knew it wasn't going to be easy. So, yes, you have to make compromises to be able together. We won by one vote once and by three votes another time in the House of Representatives, and frankly, given the Senate procedures, you never would have been able to work that through unless you got some of the steel state senators to at least be in a neutral position. Yeah, we wouldn't have gotten it.

LB: What about the constraints that you feel? What do you worry most? Which constituencies do you most worry about?

PL: Well, it's changing. I think the big difference between our job and our predecessors 10 or 20 years ago is that we have to spend much more time than they had to spend constituency-building because of the diversity of the interests at stake in trade policy, the sort of classical vested interests -- steel, farm, and the rest -- which are still there. We all know that international division of labor is a painful process, plus the sort of new groups -- sort of civil society, GMOs, hormones, environment, health, social issues -- which are now part of the picture, and it clearly makes our lives much more difficult than the lives of our predecessors. I happen to think also that it makes things more interesting but it's more difficult so we have to spend a lot of time constituency-building, and I totally agree with Bob when he says that we also have to keep an eye on the radar of our neighbor.

If I don't know what is happening in Congress and who is doing what and who is going in which direction and who is lobbying whom, I can't do my job. If he doesn't know what my member states believe on such and such an issue, he can't do his job well, even if part of his job is to try and bypassed me and lobbying some of my member states in a direction. I happen sometimes to try, although it's more difficult to do the same with the Senate or with Congress. It's a constituency game and we have to watch them permanently and we all have.

I have a big constituency, which is the council of ministers, which is my member states, and I need a qualified majority with my member states. If I don't have the qualified majority, I don't have the authority. If I have it, I have the authority. It needs careful gardening especially in a federal system like the one we are in trade because all these guys have huge egos and you had better sort of do that as cleverly as possible and consult them and put them in the picture and let them speak and let them have been the good ideas and the whole spot. I have the European Parliament, which doesn't have a big say constitutionally in our present constitution in the European Union but who is of growing importance, not the least because it can vote a motion of non-confidence and the commission which then sends the commission home. It creates some sort of links with the people of who were able to do that with your own fate.

I have civil society. I spend more and more time with NGOs, which my predecessor didn't. I'm not a critic, he just didn't have to do it. Well, I have to do it, whether it's in Brussels, whether it's in other areas of this planet, including by the way in the US or in India or in Africa. I have trade unions, and of course I have the whole business lobbies, whether it's services or banking, insurance, chemicals, audio visual, and the rest. It's at least 10 of these small radar screens which we have to watch permanently, the most important one remains my member states, although it's a very oily system now.

I used to say 10 years ago my predecessors would spend two-thirds of their time getting an agreement for the member states and one-third negotiating with the rest of a world. It's sort of 75 percent negotiating with the rest the world and 25 percent getting their agreement now, and I hope that enlargement won't change this pattern.

LB: And now, seeing as how you and I are real friends, you can tell us how you play that other constituency in Paris.

PL: It's one among the constituencies for its weight in the European system, which is smaller than Germany and bigger than the Netherlands. It happens to be the country I know best which gives me some insight which others may not have. It happens to be traditionally not that trade-prone, which also makes life more interesting for me. It happens to be a country that has a rather strong agricultural focus, especially when the president of the French Republic has himself a very strong agricultural focus, not to say bias, as compared to the average French citizen, which is really a very strong bias, which of course also doesn't make life easy every day. But I was sworn in before the European court justice swearing that I would abide no instructions from any member state whatsoever and that I had taken careful notice that the member states had taken the same commitment.

LB: I should interject here that one of the first conversations I had with Pascal when I went to Brussels from Washington was at the height of the real strains inside Europe on the Uruguay Agreement, or lack of agreement, I should say, and I remember Pascal saying to me, this is a very difficult situation but we cannot have an economic Maginot line in Europe, least of all of France. Of course later on perhaps there were other senior members of the commission, including one particular member, who understood that message perhaps. Let me ask you very briefly to comment on the developing world, and then I would like to broaden the debates and the conversation out. How do you make good on your compact to help Africa and the developing world in the Dohar round? Bob.

RZ: Well, there are number of elements. One, this dynamic that we describe where you have more countries actively involved has a key component of developing world countries. While there were a few that were active in prior trade rounds, now you have a set that is much more engaging at the table. Depending on their background and abilities they may or may not know exactly what their objectives are, but they definitely want to be heard. So part of it is again expanding the network and the listening and learning the Pascal and I were talking about, and that is why he is talking about the heading off to Africa. I am going to be in Southeast Asia after we are both in Sydney. I have just had three trips to Latin America in the past three weeks, and part of this is going there and listening to people trying to meet their concerns.

For a number of countries they have a real serious problem having the capacity to take part in the negotiations or implement them, and so we have been aggressive bilaterally. The European Union has tried to do the same thing. We are trying to get the multilateral development banks involved to make the point that that aid and trade are different but show how you interconnect them. So this year the United States is spending $638 million on trade capacity building. A good example of how some of these international financial institutions could help is the Inter-American development bank led by Enrique Iglesias has been a critical partner in moving ahead the free-trade area of the Americans.

Frankly, the World Bank, for all its talk about the importance of trade, does good studies but they are way behind the IDB in this, and Pascal and I have tried to talk to some of the senior leadership. It's a big ship, but it's going to take a while to turn, but I always am interested in their guidance for us and wish maybe they could pitch in and help a little bit too. Same goes for the IMF, I might add. This is not only to actually help them build the teams but take some of complex things we are dealing with: intellectual property or some of the new issues like the environment and others, some of these countries are just afraid to engage in these because they are just not familiar. They don't know what will be the effect of them. When it comes time to do the implementation, they need some help in the implementation.

To give you an example, when I was down in the Caribbean, two of the Caribbean countries said to me, look, over 50 percent of our revenue comes from tariffs, just as it did in the United States up until 1900. So if were going to cut tariffs, were going to need to have some other revenue system which we brought the IDB in to do. The third, it's addressing their issues. Now, obviously, I'll argue this is agriculture. Others will argue its apparel, and of course it is. The good news in apparel will be that one of the great achievements of the Uruguay Round is all those quotas come off in 2004. Frankly, if you look at U.S. apparel tariffs, probably in the range of 10-12 percent, which is higher than our average tariff of about 1.2 percent, it's much lower than the Indians, the Pakistanis and the Egyptians and others, and this goes to the coalition building. I can think I can try to take on our apparel industry to work with us if we can get some reciprocal treatment by others. That's why you'll see some of our proposals of the developed world say we can cut if others can cut. But then frankly there is another point that many people are kind of afraid to mention but I think it's important. If you increasingly look at the possibilities for South-South trade, they are enormous. You are starting to get some discussions among developing countries, which obviously run a huge span.

I mean the difference between poor African country and the growing Southeast Asia country or a Latin American country is quite enormous. So the question is, they are also going to have to reduce barriers to help their own trade and frankly to help their own beneficiaries or their own people because if you do look at some of the World Bank analyses, when you see the benefits from eliminating tariffs, for example, about three quarters of the benefits for developing countries comes from lowering their own tariffs. Because remember, it's cheaper food, it's cheaper clothes, it's cheaper components, it adds competition. Part of the challenge with the developing world will be to build the trust, listen to some of the concerns, help them with the capacity, pay attention to issues, but also prod them that the goal is not mercantilism. The goal is not just to say developed countries are supposed to open their markets and they are supposed to stay closed because that will not be good for developing countries or the system as a whole.

PL: To sort of add, and I agree with the substance of what Bob just said, the main challenge that I see, especially for this Dohar Round, the name of which is the Development Round, is to increase the confidence of developing countries that a multilateral, open, rules-based system can work for them. I think we still have, of course, it's sometimes in tactics, it's sometimes in substance. Many of the critics of the way, for instance, of the Uruguay Round didn't work for developing countries, in all good faith and the numbers are there, it worked but there remains that there is a political reality that for many of these countries the view still is that it works sort of more North-wise than South-wise, and we have to rebalance this, not the least because we care about the system and we know that if developing countries did not have this multilateral trading system, they would be faced only with sort of bilateral trade relations in which their own position and strengths of course is very different. So that is how I see the big challenge. How can we do that? First, be serious about market access. South-North, South-South, and I totally agree with what Bob said in that the South-South dimension of trade liberalization is often in the shadow as compared to the North-South dimension. We can do that multilaterally. We will do it in this Dohar Round. We can do this unilaterally. We can do it with various systems of preferences. We did it with everything but in arms in the European Union for the least developed countries. That's the theoretical, legal, visible political part of it.

Then of course comes, as always about developing countries, not only this theory, not only the legality, not only the politics of that, but their ability to implement, take profit. Once they have a market access, do they export? In many cases the answer is simply no. The real issue is not about the theory of it but the practicalities. Why don't they export? Often because they are facing non-tariff barriers in sanitary or fighting sanitary standards, which we have, which the US has, even if they're not always the same, which we won't reduce for the sake of helping developing countries export because our parliaments will sack us. So we won't do that. So the only solution is to refocus, redirect our technical assistance or our development assistance so that they can translate the theoretical possibilities and real possibilities.

It's a hell of the job because, and I'll be as blunt as Bob was on this one, the developing world constituency, IFIs, Bretton Woods institutions, development, donors, and the rest, love concepts like poverty alleviation, raising education, building infrastructures. But when you have to come to the nitty gritty of expressing a bottleneck of whether Kenya can meet the minimum pesticide residues which we have, and it cost two million dollars or euros to do that, these big things simply can't do that. They can spend two billion. Sure, they can. They can't spend two million because their fingers are too thick for that. We have to work a lot on this, which is a sort of new area where I personally believe it needs leadership in the system. Otherwise good old habits will prevail and we will spend nights about agreeing on rules but they won't be implemented. That is an absolutely crucial issue as I see it.

LB: Before I invite the audience to offer questions, Pascal was talking earlier about how Bob occasionally comes over and makes a night raid into Europe and works a constituent and flies back, and in that spirit I was going to ask both Bob and Pascal to comment on each other's constituency-working arrangements. Let's start with Bob. There is a European convention going on where we are told that Europe is going to get its act together and perhaps one day soon become something to rival the United States. What you think will and what you think should come out of this convention?

BZ: It always troubles me a little bit when a European -- you're both a Britain and a European -- phrases it as something to rival the United States because again I know this is often the concept in Europe but it's a troubling one because as you take the topics we've discussed here in trade but you could expand them more broadly economics and security is that we need some partners. We here in the United States actually do listen to what Europeans say now and then, and it constantly comes across as we need to do this to deal with the American threat or to rival United States, we can scratch our head and look around say, gee, in the Gulf, in the Middle East, other parts of a world, can't we work together a little bit more on these issues? My first caution would be that.

In that spirit I can't resist pointing out the comments by the Swedish Foreign Minister about the predator being an unfair way of attacking terrorists, just ring with a little dissonance to American ears, particularly in the city. So there are some different perspectives if you actually are a country that it feels that it has the larger security responsibility in the system than those in Sweden. On the way up I was trying to figure out the last time Sweden fought a major conflict. I do know; I was back to Gustavus' office.

Frankly this is going to be a little bit of the challenge as we go forward. I think the reality is that Europe is a combination of institutional structures. It's an intergovernmental system where at some areas you have an important role for the member states. I think this particularly remains so in the security area and even more so in the defense area. So as the EU enlarges I don't think that will change but there will be different mixes of those. I think that in the European central bank, obviously it is a more recent example of Europe coming together in one institution, from a slightly jaundiced US perspective. I'm concerned that, unlike our Federal Reserve, although I can understand why this happened, it was created almost detached from a political structure. Again, telling this to trade, I honestly believe that our predecessors have been able to open markets that some central banks around a world to have realized the downward price pressure that open markets create.

So I personally believe in some areas there is a bit of a deflationary movement globally. You can certainly see it in Japan, some parts of China, and maybe even in Europe, and I'm not sure that central banks have totally factored that in. I think I'll ours has factored that in. But to be fare to the European central bank, they are operating under this old mandate but it's not really restructuring a political system. Then you take an area like trade where the European competency has been resting with the commission for the longest period of time so Europe can operate more effectively in a trade area, but going back to Pascal's little teasing comment about working with the member states, I have to because take the agricultural issue. Obviously this is not any comment on Pascal or his colleagues in Franz Fisher, who tried to come up with a constructive proposal, we wake up one morning and the French and the Germans meet.

There is a new common agricultural policy structure, at least as best as we can tell, and that affects the European commission, it affects us, it affects the whole world. So we have to pay little attention to those member states at the same time as we do to commission structure. Really, what makes it more challenging for the United States is to recognize the reality that Europe is moving at differential speeds at the same time to it's enlarging its institutional structures, and frankly we have to be increasingly adept at working with European institutions, member states, how they interact, and that is often hard for the United States because frankly, I mean, unless you spend a lot of time dealing with Europe or take to view of the US Congress, we still tend to look things into more of a state-centered model and a state-centered model that might work with intergovernmental institutions globally. But a lot of the things that Europeans spend endless hours writing and talking about frankly are little confusing to Americans as well as other Europeans.

LB: Pascal, I won't ask you to defend the Swedes.

PL: Of course I will.

LB: But is Bob Kagan right in his famous essay or infamous essay when he says that essentially if you want to understand the world today it is about American power and European weakness?

PL: Well, he doesn't only say that. He basically says the US lives in the world of Hobbs and the European lived in the world of Kant, which is a good point, a very good point, and the resonance of his paper was a tribute to the very right cord he touched on this. Yes, Europe is about building rules and believing that morals through rules is the good thing against war and violence, and it's not the American culture.

Basically the US cares about Europe, apart from a few well-educated Eastern coast intellectuals, probably filling this room today, the rest doesn't care a lot about Europe except when Europe punches its weight. But they care about what the European central bank does. They care about what the trade commissioner does because we have a federalized system. They don't care a lot about what our foreign ministers say unless they have the seat on the Security Council, which is an inheritance of past times.

The lesson of that is pretty clear in my view. Either we punch our weight and we can live in a sort of balanced world with a partnership, cooperative but sovereign in relationship with the US, or we don't have that and the thing will remain unbalanced. I don't think, and I know Bob's views on that and he has always been a sort of strong promoter of European integration, including at times where it was not that fashionable in Washington basically. I remember conversations we had 15 years ago about defense, for instance. We wouldn't dare discusses this today in our present positions but he basically was making the point, well, get your act together. He's got the right point. That is the way it works.

I think the lessons from that for the convention, which is working on the sort of reshaping of our constitutional arrangements, is very simple. Either we get our act together and we move in the right direction or we don't and we shouldn't complain. Now, the question is, how do we do that? What sort of checks and balances, institutional arrangements? How much of the sovereignty of our member states, or pseudo-sovereignty of our member states? How do we arrange all this? It is a clear case for clever constitutional arrangements. It's like Airbus and Boeing. We started with an engine, an institutional engine, with a European Community of six members states. We stretched the plane to 15 member states, still have the same engine. We're going to stretch the plane to 25 member states. Clearly we can't stay with the same engine. It's as simple as that.

LB: Except the Airbus is just going to build a 500 seater.

PL: Yeah, but with a bigger engine.

LB: And plenty of (Inaudible, noise). I'd now like to throw the conversation open to the audience. Could you please identify yourself when you stand up. Raise your hand now, please. Ambassador Gardner.

Richard Gardner [RG]: Richard Gardner, Columbia Law School. Two issues that have not yet been touched: labor standards, the environment. What do our two speakers want to achieve in the final text that comes out of the Dohar Round on these two subjects and what are the chances of getting the developing countries on board that kind of outcome?

LB: Pascal.

PL: Labor standards, not much, and it is one of the areas where we clearly didn't score what we ought to have scored in Dohar, thanks to the simultaneous resistance of the US with a new administration and the developing countries not to step into this difficult political realm, of how much you can link the respect of core labor standards which have been ratified by every country of this planet or nearly with the implementation of WT0 rules. It is an area where we Europeans believe things should be more visible, more connected. The previous US administration rocked the boat on the left side and missed it. The new one rocked it on the right side, as could be expected, didn't rock it, but left the developing countries resist this, and that the end of the day we couldn't make our point prevail and we had to retreat. So there will be much of that in the result of the negotiations because it is not seriously in the single undertaking, and as I said not being on the shopping list I can't come back at the last moment and say, hey man, please think about this. No, it doesn't work.

Differences about the environment. The environment is one that, although the developing countries and the US were not that keen in linking more trade rules with environmental rules and they have only accepted to do that in certain portions, but we have succeeded in putting within this negotiation a hope of better articulation between trade rules and environmental rules. Why? Because we Europeans feel that these two things should be on the same footing at least. Probably, if it was only a European view I would say that environmental rules have to trump trade rules. Because I know we are not single on this planet, I take the sort of retreat position that trade rules and environmental rules should be on the same footing, which still deserves a bit of clarification, a bit of beefing up the system, a bit of more clear legislation in international terms of how, for instance, multilateral environmental agreements and WTO agreements work. This is an area of where I needed to score in Dohar.

There was reluctance on the side of developing countries for obvious reasons of principle that they fear about green protectionism substituting. With some conditionality, it's an area, and I think Bob rightly mentioned this a moment ago, he was quite instrumental in helping me to get this, not that he caved in sort of a rather strict US position that environment is not as important for the US as it is for Europe, which is an obvious thing to say, but that he has carved out a careful compromise. So environment is in the picture and there will be a better articulation between WTO environmental rules. There won't be much of that about social issues within the Round but I will retake the thing elsewhere than in this multilateral negotiation. I can bet you that on finishing with this one that the day Bob talked about when textile quotas will have totally disappeared, that is that the end of 2004, the position of India and Pakistan about co-labor standards and notably the problems of forced labor and child labor in China will no doubt resurface.

RZ: I have to go to longer on this because it's a very important topic and I actually have a slight disagreement with Pascal's presentations. We all know that this is an extremely sensitive issue in developing countries. There fearful of it being used as a new form of protectionism. It's a concern for many free traders in the United States. It's concern on the environment side for many agricultural exporters including the United States how European environmental policies sometimes have a look of being anti-agricultural, whatever their motivation. So frankly we all new coming out of Seattle where this became an extremely divisive issue that we had to calm the waters and try to pull people together to try to move something on this. Frankly, at least in some ways there may not be a huge difference on some of these aspects.

Pascal's goal, what he was trying to get in the WTO linked to the ILO, was frankly my goal too. But I knew we weren't going to be able to get it because I would like to have a network where these issues are dealt with in the ILO and have some interconnection with the WTO. But the second observation on this is that in the US context, since the talk about authorizing environments, we just went through a battle royal over the past five or 10 years and one of the benefits of fighting for the trade promotion authority is we now have guidance on that. We have guidance from the Congress on us, and in the past three weeks I had to operationalize that guidance by coming up with language for Chile and Singapore. This is an interesting observation from me because I believe we can get the Chileans and the Singaporeans to agree, and we will have environmental and labor objectives backed by dispute settlement with also a cooperative action, where my colleagues in Europe who talk about this don't have theirs in any bilateral agreement. Then to come back to the WTO context, how does this affect it? This actually shows why some of these bilateral agreements are important.

We have to demonstrate to some of these developing countries that this isn't the end of the earth; that we can work on them cooperatively. We have to build trust, we have to build confidence. Frankly, coming back to the environment text in the WTO, I kind of positioned the United States on this where I was very content with the text but I knew that Europe was seen as a threat to the developing world and the way that frankly the United States conducted itself allowed us to get the language. If I had been out there or Pascal would have we would have had two with us and 142 against us. So as we look forward on this, this will be a little lesson for Europe. If they keep pushing things in the environmental area that look very frightening to the developing country agriculture, we're not going to be able to get this going forward.

It also shows a little bit how the different stages of negotiations, whether it be preferential agreements, bilateral agreements, other things can kind of fit and move the object forward. In terms of conclusion, I agree that in this round frankly what these countries were afraid of with labor was an indication of their fear because all we were trying to do was get an ILO connection, which would be sensible to try to do. In environment a lot of it will depend on what the EU does, because we've got some good things going forward in terms of adding to the network but the sensitive area will be the overlap between multilateral environmental agreements and the WTO when those agreements use trade sanctions. One of the things I'm the things I'm going to be talking about with Pascal later today is if we're going to move that forward in some constructive way we can't scare the living daylights out of the developing world.

LB: I'm going to collect four questions so that we can get everybody a chance. The gentlemen in the front row first.

Audience: Yes, the US Council for International Business. Back to constraints, to Pascal, to what extent are your negotiations with new members going to be a constraint on your negotiations in Dohar, and to Bob to what extent are the changes in Latin America and in internal policy, the resistance to structural adjustment, going to be a constraint on moving forward in the FTAA and WTO?

LB: The lady in the front.

Audience: I would like to invite you to comment on the reforms to the dispute settlement system that you would like to see undertaken. I note, for example, that the US has put forward some proposals on transparency and the European Union has put forward some proposals on professionalization of panels. I wonder if you would comment on the others and the other reforms that are systemically needed.

LB: The gentleman at the back.

Audience: Thank you. A question for Ambassador Zoellick. I noticed that you are in negotiations for the creation of a free trade area in Southern Africa based on the southern African customs union. Would you let us know how far ahead they are and whether or not the South Africans are fully on board? To Commissioner Lamy, I'm wondering in the context of rivalry, what is the reaction of your members to the thrust of the United States into this heavy involvement in trade with Africa, Southern Africa and other countries, given the traditional market for Europe that that represented?

LB: Could you just identify yourself please?

Frank Ferrari [FF]: Frank Ferrari (Question Inaudible).

LB: Thank you. The lady in the third row.

Anne-Marie Slaughter [AMS]: Anne Marie Slaughter, the Woodrow Wilson School. A question for Ambassador Lamy. I want to return to the linkage between the security area and the economic area. Many of us in the same East Coast educated group that you referred to are very worried about the state of US-EU relations generally, and obviously specifically in the security area. My question is to what extent that overall climate affects your job and your positions, or whether normal national interests quickly assert themselves.

LB: I'll just take one more question.

Paula Stern: Paula Stern, the Stern Group. My question is to you, Mr. Lamy, regarding services. There was reference to services with banking, insurance. My question is to what extent is there interest in Europe to extending the service coverages to retail and distribution and wholesale? You have a lot of mass merchandisers who go around the world and I wonder if they have spoken up in interest in making sure that services cover that area too.

LB: Okay, we're going to wrap up all these questions up into an omnibus. Five minutes each. Who wants to go first? Actually, that's a terrible thing to ask these gentlemen. You can go first.

RZ: Okay. Latin America. As everybody in this room knows, this is a time of great uncertainty in Latin America. It's not only the economic situation and the slow global growth. It's also changing political dynamics. The old political leaders are moving out. The question is who is going to succeed them? What I am encountering is there is still an extremely strong interest by individual countries about trying to employ free trade with the United States to buttress their reform program and to help them with growth. So, as I've said on a couple of occasions, since we have trade promotion authority, in addition to the Central America economies we'll move forward with free trade, and I have had Panama, Dominican Republic, Peru, Columbia, Bolivia, Uruguay. Where we have tried to balance is moving forward with special arrangements. We were very pleased we got the Indian trade preference act done for the Andean countries, moving ahead with the Chile free-trade agreement, moving ahead with Central America, moving ahead with the overall goal of the free trade area of the Americas.

The big player there is Brazil. We just had an election in Brazil. I had some good meetings with the outgoing government when I just came back from Quito. If you look carefully, you look at what President-elect Lula's statements are, there are sort of moderating the tone. Time will tell, but it's in our interest to try and work with them. So what we are trying to do is move forward again in terms of the region but also bilaterally if necessary to show support for those who are willing to take on the difficult challenges. In terms of the DSU merit on transparency, I will leave that question for Pascal. Obviously we support it, we're pushing it.

The professional panels is a very intriguing one, which probably requires a longer answer. It's a subject we were actually going to talk about later today. Here is my caution about professional panels. It's a little bit like my answer on the European Central Bank in that all the experts like the idea of having experts, and we have people who are professional panelists on and so forth. But remember we run a danger when we create a system of rules we have a set of interpreters of those rules but they're not linked into any political legitimacy. There is no political review process. There was an article written in the Harvard Law Review about that in 2000 you'll probably have a tendency as you would in most bureaucracies if you create a professional group that they will start to take upon themselves the rule writing role. We have this in the United States where we have courts, but the courts are part of a constitutional structure. There is even some checks on that and there is an advise and consent process. So I personally am extremely cautious about the further bureaucratization about the empowerment of an unelected set of "experts" that would take finely negotiated rules and start to read into them what they want to read into them.

Pascal has a different view of that given his sort of Hegelian view of the world and he is going to try to suggest that who we have a much rules-based system. I would on the other hand suggest that there are some areas in the world economy where the spontaneous of another good European, but in this case an Austrian, Von Hayak, might actually be more appropriate.

In the case of the Southern African countries. Again, the context of this is we have been absolutely delighted. One of the things we inherited was something called the African Growth and Opportunity Act, which now lets about 92 percent of Africa's exports come into the United States duty free. But that act encourages us to look toward free-trade agreements, and the exciting thing about this is you might ask, why do the Southern African countries want to have a free-trade agreement? They have pretty good access now. But what they see is this same point of how we can use the free-trade agreement to help their own regional integration of the five countries, help them with the reform process, and secure more certain trade benefits, because some of the Agoa provisions do expire, which will help them on the investment side.

On the European dimension of this, where we're in the wake of Europe, as is often the case, is that Europe negotiated a free-trade agreement with South Africa. This actually angered South Africa's neighbors in the Southern African Customs Union, which dates back to 1912. So we in the spirit of multilateralism agreed that we would do our negotiation with the five members of the Southern African Customs Union. You asked if they're supportive. They are keenly supportive. I just received a letter from Alex Irwin, on behalf of his colleagues. I sent up this week to the Congress under TPA, trade promotion authority, giving a 90-day notification, which we can't formally begin the negotiations, but we're looking forward to beginning those negotiations early next year. I will be in Mauritius and Africa at the start of that and we hope to develop a frame of reference. And this to me it's one of the extremely exciting things. I've been to both Botswana and South Africa and you can see the potential in much of Africa for countries that are now behind the post-colonial and even the post-apartheid generation trying to engage in the world and this is an agreement that can help them if we do the right things along with it.

LB: Pascal.

PL: Enlargement, which is our Latin America. No problem at all with enlargement about trade policy. It's been prepared for years. They know when they will join, the minute they will join, the whole thing will be plugged in. Not any problem but for the consequences it has on the common agricultural policy and the consequences this has on the WTO negotiations. Bob rapidly alluded to that a moment ago in mentioning this Chirac and Schroeder. Well, to my surprise and to the commission's surprise, it's a rather good decision. The method is not the right one. We prefer to have the meal first and the bill second. Chirac and Schroeder decided we should have the bill first and the meal second. Fine, they are the bosses. They agreed on a bill which is a capping of the agricultural expenditures in constant Euros for the next 10 years, which has never happened before.

No round of negotiations, nor the US, nor the Korean group, would ever have got this result, which is a strict discipline on agricultural expenditure within which we will have to finance the whole enlargement, which means real decrease, at least in terms of perform available monies, and we, Fisher and myself, will have to reshape our proposals so that they now can fit in a bid in a envelope which I am convinced is much smaller than what our previously tabled reforms will be. That's the consequences of the round. Not bad news. Now, go and ask Chirac whether he shares my view. I'm not sure about that. Go and ask Schroeder whether he shares my view. I'm not sure about that. But that is the miracle of Franco-German agreements that they always believe they have been cheating each other and it's been good for everybody.

On dispute settlement reform. Intellectually, politically, I agree with the US position that we should increase transparency. Whether we have to spend a lot of negotiating credit to get that from developing countries is a tactical option on which we may have different views. I'm not ready to spend a lot of credit on that. If Bob is, great. I like this idea.

On the professionalization of panels, which I'm not that happy he has immediately switched to the bureaucratization of panels, I know Europe is a heavy system but professionals are not always bureaucrats and the other way around. So there is a big advantage for this for an audience like this which is part of our constituency is that Bob, if you don't professionalize panels, you won't have any US or European experts in any panel for the rest of the century because we have too many disputes between ourselves and all these European or US panelists, as long as they are not professionals, would be ruled out by the system. Our lawyers are experts, our academics, are sort of big shots in trade matters, and there are some in this room, should favor the professionalization of panels.

On Africa, no rivalry. I'm glad Bob is taking the regional approach in the southern part of Africa because we signed a free-trade areas, which is a bilateral one with South Africa, he's right in saying that as a consequence of that he's been incentivized by South Africa's neighbor to regionalize the thing. Fine, because we also want it to be regionalized now and this is exactly the sort of thing we are negotiating within Africa with our economic partnership agreements, with regional integration caucuses within Africa. So we started. He is coming second. I will come third with the time comes(?), a regional EU South region of Africa, and if he can do the job of designing what exactly is the relevant region and caucus, I'm fine with that. It's too complex for me.

By the way, you switched very rapidly from Kant to Hegel about me. So next time I'm ready to be dragged from Hegel to Marx, nor farther. Not to Lenin or Trotsky, I stop at Marx. US-EU relations, of course it risks seriously affecting our job and the way we handle trade issues. There is a big risk. I think we both agree, either implicitly or explicitly, that we see as our responsibility to avoid this from happening and to resist temptations. We both are aware of that. We may share or not the same analysis but we both believe that it's discharging our responsibilities to sort of cluster these trade issues in an area which remains the arena where we have to find solutions, solvable areas. On retail distribution, yes indeed. It's already there in a large part of the GATT services liberalization. We need to move further. Both the US and EU have extremely good competitive positions, know our comparative advantages, and I don't think there will be any disagreement between both of us in the fact that if we can move this forward notably in a number of developing countries, as we did it, for instance, together in the case of China accession to the WTO where China had to make commitments which go beyond the average present WTO commitment. Fine with that.

LB: Well, we've come to the end. I've slightly run over but I think everyone would agree it's been fascinating conversation. It does not feel like a marathon, more like a middle-distance run, and to mix metaphors I think we should all move from Park Avenue to Broadway next time around. Thank you very much. (Applause)

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