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| Presider: | Louis V. Gerstner, Former Chairman, IBM Corporation |
|---|---|
| Speakers: | Charlene Barshefsky, Senior International Partner, Wilmer, Cutler & Pickering; U.S. Trade Representative, 1997-2001 |
| Carla A. Hills, Chairman & CEO, Hills & Company; Vice Chairman, Council on Foreign Relations; U.S. Trade Representative, 1989-1993 | |
| Mickey Kantor, Partner, Mayer, Brown, Rowe & Maw LLP; U.S. Trade Representative, 1993-1997 |
January 12, 2004
Council on Foreign Relations
McKinsey Executive Roundtable Series in International Economics
Council on Foreign Relations
New York, New York
LOUIS GERSTNER: Good evening, everyone, and thank you for being here. It’s 6:00, and I think we want to get underway. My name is Lou Gerstner, and I am presiding at this meeting. I’d like to do a few housekeeping details to start off with, the first of which is to please, please turn off your cell phones, pagers and rims. (Laughter) We are delighted that this meeting is part of the McKenzie Executive Roundtable Series in International Economics, and we are grateful for McKenzie & Company in providing that sponsorship.
I want to tell all of you that this meeting is on the record—not our usual approach—it is on the record, and there are working press in the room. The format for this evening is that I will address a few questions to our three distinguished panelists. They will respond. We will do that for about 30 minutes, and then we will open up the discussion to your questions, and we’ll make a few comments about that process when we get to it.
You know who are speakers are. We have an extraordinarily distinguished group of speakers, in Carla Hills and Mickey Kantor and Charlene Barshefsky. You have received their background and know what they’re doing in their current affiliation, so I won’t take our time to go through that.
Instead I’d like to start right away with our first question which I think appropriately should deal with the Doha round, and ask our panelists what are the prospects for reviving the Doha round of the WTO talks, and in particular what concessions the U.S. may have to make to move discussions forward.
And, Carla, since you just happened to pick the seat next to me, I’m going to ask you to start, please.
CARLA HILLS: The Doha Round is in crisis, without a question, but I think Bob Zoellick today, when he sent a letter to the ministers to deal with agriculture, particularly to eliminate the export subsidies made a valiant step forward. We were in crisis in Brussels in 1990 in the Uruguay Round, and we brought it out. So it’s not that it cannot be brought out. But trade today has less support than a decade ago, and it’s going to take Bob Zoellick moving it forward. It’s going to take the business community working hard to talk about the merits of trade. And it’s going to take think tanks and groups like this to make a difference. But it faces a real challenge.
MR. GERSTNER: Mickey?
MICKEY KANTOR: Thanks, Lou. I notice Carla is on your left, and I’m trying to figure out how that happened. (Laughter.) I guess it’s not a political statement, is it?
MR. GERSTNER: I was seated by the staff. (Laughter.)
MR. KANTOR: I’m wondering what—
MR. GERSTNER: You’re already running away from—
MR. KANTOR:—I’m doing way over here on the right.
CHARLENE BARSHEFSKY:—is on my right. (Laughter)
MR. KANTOR: They’d have to put me off the stage, Charlene, to put me far—let me make a couple of comments.
Number one, the round is in trouble. I agree with that. I’m glad Bob wrote the letter to the 148 ministers, the members of the WTO. I think a couple of things are going to have to happen that is difficult, and we’ll come to a question later I think—I won’t get into it now. But if the Doha Round is going to get going, then the president of the United States is going to have to become personally engaged. It’s a very difficult year. It’s divisible by four. And therefore any president will have trouble getting engaged in these kinds of trade talks in an election year. It’s happened before. Other presidents have shown great courage in doing it. I would hope that this president would. But that’s going to make it difficult, number one.
Number two, agriculture is going to be the problem, there’s no doubt about it. And we’re going to have to make some concessions if it’s going to go forward—not just in calling for the elimination of export subsidies, of which about 70 to 80 percent in the world are European. Is that about right? Something like that.
MS. BARSHEFSKY: Yeah.
MR. KANTOR: Bob called for the elimination of export subsidies and of course by date certain. Easy for us to say, and certainly none of us—maybe at least up here I think would support the way the European cap program works in their export subsidies. But we have EEP programs, the export enhancement programs. We have all kinds of internal supports. If you look at cotton, if you look at sugar, if you look at other kinds of orange juice and so on, we have of course our own questions that we are going to have to deal with, if the developing countries of the world are going to respond. That’s going to be very difficult politically as well. It’s also going very difficult substantively, because of where agriculture is today.
There are other issues including trying to get rid of tariffs on a number of industrial items, as well as other issues that came out of Singapore I guess, which Charlene may or may not want to talk about. I see this as a real challenge. My guess is that it’s post-November ’04 when we’ll see a real engagement on the Doha Round. That is not to criticize anyone. All of us up here, and all of you out there—this is the most sophisticated audience you can imagine in trade—understand how difficult in a presidential election year trying to engage on this kind of issue will be.
MR. GERSTNER: Charlene, I’d ask you to comment on whatever you’d want to comment—but I would also ask you too Carla and Mickey did not mention the developing world in his comments. It was primarily a U.S.-European agricultural—obviously they’re on the other side of the agricultural issue. But perhaps you might comment on are they aggregating into a bloc here that is more significant than we might have seen before?
MS. BARSHEFSKY: I think the truth is that the developing countries were never ready for a round. They weren’t ready for a round in 1999, and they’re actually not ready for a round now, unless it can be absolutely on their terms. And “their terms” tends to mean on agriculture—elimination of agricultural export subsidies. That was the U.S. position from 1998 forward. Last year I think U.S. policy took a turn for the worse when the U.S. and Europe jointly got together on agriculture. Normally U.S.-European agreement signals a push forward. But on agriculture the U.S. ended up being colored largely with Europe’s brush. That was a mistake, and I’m glad to see that Bob is now coming forward, going back to the original policy, which was elimination of agriculture export subsidies, and leaving Europe where Europe belongs, which is very, very much a pariah in the international community, given the size of its agricultural export subsidies.
Second, developing countries have always said no bloated agenda—no competition policy, no investment, no procurement, no trade facilitation. Particularly acute are the issues of competition policy and investment, where the developing countries since 1996 when Leon Brittan enunciated this agenda for the European Union, have been entirely consistent on this point. And only now—so this is now eight years later—the European Commission is finally recognized that its very, very bloated agenda does not have the support of the developing countries.
Third, and I think this is most problematic, the advanced developing countries don’t really want to undertake obligation. Their view is they were created in the Uruguay Round. They never got the benefit of the bargain. They never understood fully what they had agreed to. And in any event, developed countries never did what they said they were going to do. So the view of the more advanced developing countries in particular is: Now it’s our turn. You open your agriculture markets. Get rid of the bloated agenda. Make, as Mickey said, some other changes. And we will go along.
And the problem with that is not that they are entirely wrong. The problem is what it doesn’t tell you. So, for example, India is very quick to criticize the closed U.S. market in for example textiles. But India doesn’t buy from Bangladesh. So to say that the U.S. is a problem when there is no interregional trade in South Asia is a little bit disingenuous, and the result I think is that an aggressive developed country agricultural proposal, paring down the agenda, the trade for that it seems to me is on the part of the advanced developing countries to undertake obligations, the more significantly open their markets; and, in addition, advanced developing nations need to be somewhat more generous to the poorest of nations.
MR. GERSTNER: Please, Carla.
MS. HILLS: Let me just say a word on behalf of the developing countries, because what Charlene says is right, but the trading system is tilted against poor countries. The fact is if you look at our market, which has an average tariff of below 2 percent, that on the things that poor countries produce, it’s between 40 and 100 percent—fruit juices, vegetables, low manufactured. On sugar it’s 274 percent. On peanuts it’s over 150 percent. And so they are legitimate when they say in the last round we didn’t get much of a market opening. And I think the United States has to play on their need—no round, none of the eight rounds that we have completed, as ever been successfully concluded without the U.S. taking the high road. And I think there was a perception that we didn’t, because of steel tariffs, our farm bill, and the pharmaceutical dispute that occurred in December. And I think that Bob with his letter did wonderful thing about reaching out. And I think that we have to do more of that to bring the developing world.
And let me quickly say that when we say the “developing world,” there are only about 30 countries that aren’t developing. This is a big problem. We have got 49 countries that the U.N. says are desperately poor. And I think any of us would agree that for them we could have a period of a transition that would give open markets, rather like the Europeans have on anything but arms. But what do you do about the advanced developing country—the Brazils, the Indias, the growing export capacity of China? There they have to contribute. And since 70 percent of the trade of poor countries is with other poor countries, Charlene is right on. If Bangladesh and India deal themselves out, then they are not going to get the prosperity that we dream of as a result of our opening our markets.
But we’ve got a lot to do too. Our trade picture is not a happy one from the point of view of poor countries.
MR. GERSTNER: Having once been the biggest buyer of sugar and peanuts in the United States—(laughter)—I feel your pain.
Let me move on to the issue of bilateral and regional trade agreements. This is an old chestnut now that has been around for a long time. Many trade experts think that they are highly inefficient, they are a diversion, they distort international trade flows, they complicate a multilateral WTO environment. Obviously on the other side there are people who say in the absence of progress they certainly advance the ball in a limited way, and they push the multilateral agreements because of the presence of the regionals.
Mickey, I’ll start with you. You make a comment on not so much the history of it, because this is a very erudite audience; but how do you see the evolution of these regionals in the context of what you three just talked about as we go forward?
MR. KANTOR: First of all, all of the above is correct. (Laughter) Well, it really is. They do make it more complicated. They do take energy away in negotiating multilateral agreements. They can be difficult in terms of how countries react to any bilateral or regional agreement, and make it more difficult then to engage in a multilateral discussion where people hold back their concessions.
On the other hand, it’s sometimes easy to move a regional agreement forward—because you have less countries involved, less complicated. You make more progress. And that becomes incorporated in the multilateral framework. So you have got both going on at the same time. I think you have to be careful though to set your priorities in a way that make it clear where you are going. And let me explain that. If you put all your energy into apparently trying to use bilateral agreements, as Bob has to some degree—and I’m not really being critical—in order to try to push these countries in the Doha Round. You get yourself so caught up in these negotiations with only a staff of a very—-- the smallest trade staff probably of any developed country in the world. You can’t move forward as well on the Doha Round—just a practical matter you can’t move forward as well as you should.
The second thing is that you don’t develop the credibility on the Doha Round showing the leadership that maybe you should. I’m glad he wrote the letter. I think it’s a terrific step forward.
So I see regional agreements as being helpful—can in fact move the trading system forward. Some bilateral agreements could be justified, but not if they are only based on foreign policy considerations, not on trade considerations. But we can’t lose the target that we are after.
Without the Doha Round we’d be just fine. Remember when we did the Uruguay Round we thought Geneva was going to be a permanent negotiating forum, and we didn’t need any more rounds, because of the Europeans pushing in and some egos at the European Commission involved. We got ourselves unfortunately tied into this round. Now we have to make it a success. The difficulty is if this thing falls of its weight—not just because of ’04, but beyond, and we can’t get it done, I think it’s very difficult for the WTO and its credibility, and very difficult for international economic scenes. So I am deeply concerned at this point. So I would hope that Bob can move forward. This letter begins to open up new opportunities for us. But I’m deeply concerned, as I said before.
MR. GERSTNER: Charlene? And I would ask you to address in your remarks the specific issue of would you, if you were the USTR today, would you effectively shut down bilaterals now and focus entirely on the WTO, and the Doha Round?
MS. BARSHEFSKY: Probably not. I think because everything you said is true, as Mickey said. There are pros and there are cons to doing bilaterals, particularly bilateral FTAs, which frankly tend to be trade diversionary, particularly when you’re dealing with little countries. You know, if you’re not buying from one little country, and you do a preferential agreement with another little country, the first little country has gotten nowhere to go. So there’s a real problem with that.
I think that the key on the issue of bilateral and regional FTAs in Doha is that in my view you shouldn’t do them unless you have a very balanced trade agenda with a very active multilateralist side. And here’s the reason. Let’s take textiles. You have in the world about 70 or 80 countries that have zero tariffs on textiles coming into the United States. And these are the CBI countries and the Andean countries and all sorts of countries, and of course Mexico because of NAFTA, Israel and so on. They bring their stuff in zero tariffs. So what happens to Egypt, and Pakistan, and every other Muslim country? They have no preferential arrangement with the U.S., they have no FTAs with the U.S., they have no prospects of FTAs with the U.S. for the most part. The discrimination is so great, especially if China comes into being—and in the textile world China is going to wipe out many of these producers, absolutely without question. So if you are going to have this kind of discriminatory—the potential for this kind of discrimination, what you want to do is couple those programs with a very activist multilateral agenda that will reduce tariffs for everyone globally. That reduces the value of the FTA, to be sure, because most FTAs are really tariff-focused; reduces the value of the FTA. On the other hand, you get an initial bump out of the FTA in terms of foreign direct investment into poor countries, which is a good thing typically. They have the right infrastructure for investment. And you get some stabilizing effects, and that’s a good thing. But you really want to complement those agreements and the potential for that kind of discrimination with a very, very activist multilateral agenda. On balance, I’m probably a multilateralist, though 10 years ago I probably wouldn’t have said that. But I’m probably a multilateralist more than a bilateral regional man.
MR. GERSTNER: Carla?
MS. HILLS: We’re all multilateralists. That is our objective. But I talk from the experience of having negotiated the North American Free Trade Agreement, and let me tell you when we started that negotiation the Uruguay Round was in very big trouble. And what the North American Free Trade Agreement did was not only stabilize Mexico and lock in the liberalizations that had occurred to that point, and encourage further liberalization which I can tell you has greatly made the North American region more globally competitive. But it created a competitive pressure to move on the Uruguay Round, and that is how it got completed. Asia and Europe were frantic. I must have heard from ambassadors around the world that they were worried about this North American behemoth being created.
It also had a very positive effect on the Asia-Pacific Economic Cooperation, the APEC nations, for it was within just—(inaudible)—that they entered into their deal that their 21 members would open up their trade within the region. And it led to the Miami summit agreement that we would negotiate with the 34 democratically-elected leaders, a Free Trade Agreement for the Americas. That wouldn’t have occurred without the North American Free Trade Agreement.
So when you have a big agreement that creates more trade than it diverts, and it worries the rest of the world, it moves on. But the Trade Representative doesn’t always have that choice. And I think what the current—what Ambassador Zoellick is trying to do is to create interest in different regions, so that these countries will move on. And that’s one benefit.
And then we ought not to overlook the fact that trade agreements do more than lower trade barriers and enhance prosperity. They help generate rule of law, and they help create a respect for property. And that’s really important today in my point of view. So it’s a mixed picture. We would all prefer to have the Doha Round be a stunning success as rapidly as possible. But I think some of these bilateral free trade agreements will have very definite dividends.
MR. GERSTNER: All right, let’s move to that political environment. We are in that quadrangle now of people redefining the priorities of America, and people standing up and saying they’re going to be the education president, and they are going to be the trade president, and they are going to be the president for strength, and whatever else they decide. What role do you see trade playing in the political environment of the next nine or ten months? And I’d like you to get as specific—one of you at least—on if you were advising the president or an opposition candidate, what would you tell them in terms of the priority they should give to trade in this election versus other issues? Would you say to them, Just be careful—don’t bring this issue up now? Or how would you phrase the issue? Would you phrase it in terms of the jobs issue? Would you phrase it in terms of globalization? So not just what you think is going to happen, but how do you think people are going to use trade for political advantage or—maybe that’s a nasty way to describe it—but to foster their views and their electability? I guess you’re first, Charlene, since we’re moving that way.
MS. BARSHEFSKY: First rule of politics: Get elected. So you look at the polling data, and you see how people look at trade generally. People tend to like choice—that is to say more choice—even more than they like lower prices. They like choice. But imports generally in the public mind are associated with three things: job loss, wage suppression and income inequality. And that in turn, when you look at some of the recent polling data, translates into a view on the part of people—and it’s an increasing view—that U.S. society is divided between the haves and the have-nots, and there are many more have-nots than haves, and the have-nots are growing at a more rapid pace. So that’s sort of the perception that’s out there—put aside the unfortunate sort of nature of some of that perception. But that’s a perception.
It seems to me that certainly—and this is true—Mickey knows this better than anybody on Earth—but it seems to me that particularly in the Democratic Party, given its roots and given the nature of its constituency, what you are hearing out of most candidates’ mouths is actually a reflection of what’s in the minds of their constituents, and is supported generally speaking by quite a bit of polling data now on perceptions of imports and the effect of imports on the U.S. economy. Couple that with the outsourcing phenomenon that’s going on now, right? We told people who lost manufacturing jobs—Well, we’ll train you. You’ll be an IT kind of person, computers. Next wave—well, next wave just wove over to India. So coupled with that kind of movement I think creates a very concerned and growingly nervous public, and that in turn affects the debate and the rhetoric.
I think, you know much as I love the Democratic Party, the Democratic Party would tend to be on the anti-trade side in any event. But I think the reasons now for it are probably more justifiable, if you will—I’m not talking policy now, I’m talking politics—more justifiable than they were, for example, in 1995.
MR. GERSTNER: Carla?
MS. HILLS: Well, I’m afraid that Charlene is right about the polls, and polls do drive politics. But if I were to advise my president, I would say you’ve really got to galvanize the American people with the facts. And the facts are that trade creates growth and prosperity. We have 50 years of experience. And that goes back to World War II. And in addition reach out—not only to those who would sell more corn and computers; but reach out to those who care about the have-nots, those in the Democratic Party who worry about the humane problem that we face of those that are living on less than $2 a day, because the best tool we have to alleviate poverty is through trade, and eliminating the barriers to the Bangladeshes, Nepals, the Bolivias, and the Ecuadors. And reach out on the other side to those who care about security, because it is true that the terrorists have been in many instances well educated middle-income folk. But where do they recruit? They recruit from the lands where there is no hope and there is despair, and trade makes a whole lot of difference there. Which brings me back to the bilaterals, because we’ve got a lot of countries that are not in the WTO, and that occasions reason why you should reach out, and why trade agreements can’t just be in the multilateral round.
But, you know, all governments have to do more about trade, but they can’t do it alone. You know, the businesses have done so little. I was in Seattle with Charlene, and I watched the Boeing engineers march against trade—now if ever there was a company that is reliant on overseas sales, that’s it. But, you know, I think every CEO that runs a company, whether it’s five employees or 50,000 employees, ought to reach out and make understanding of trade as equal to boosting productivity. There ought to be a card in every paycheck that says what’s the percentage of this paycheck that comes from overseas activity? In the W-2 it ought to be again. And it ought not to be delegated to group vice president X. The CEO ought to go into the cafeteria and talk about trade. It ought to be on the company’s intranet. It ought to be everywhere you can reach, because Charlene is right: appreciation of trade is declining since 1974. You can track it. But if we want to see a country that’s governed by polls, we’re going to be a very unattractive country to the most of us. And the only way a democracy works in my view is through education. And so the think tanks, the Council on Foreign Relations—but basically businesses—if businesses could educate all of their employees, wow, that would really make a
MR. GERSTNER: Mickey? (Laughter)
MR. KANTOR: I don’t suddenly disagree with one thing Carla just said, except politically I think she’s dead wrong. Other than that’s, that’s—this is not about—
MS. HILLS: That’s why we’re in different parties.
MR. KANTOR: Right. Well, it’s not just poll driven. U.S. citizens in the Second World War, even before that, have been terribly cynical—not just skeptical—cynical about trade. We did give away our markets to Japan and Europe, as we should have, after the Second World War, and people believed that trade agreements reached—not by Carla or Charlene—but trade agreements reached were not fair, were not in their favor—
MS. HILLS: Those reached by me.
MR. KANTOR: Right, those behind—right. (Laughter) The fact is that if I were advising a candidate, I would say a couple of things: One, the last thing you’re going to be is running for office being the trade president. It may be a critical element, but you’ll get slaughtered. Number two, you have to understand—and this is without articulating it—that we are interdependent, we are globalized. We are going to be that if we like it or not. We have got to move trade forward. It is critical to our standard of living, and then critical to the stability of the world. And we all agree—everyone in this room agrees.
But you have got to build some credibility for trade. In order to do that, you have got to show you are going to stand up what the American people believe is wrong with trade in a way that is responsible—not irresponsible.
You asked me to be specific. I would say the new president, if it’s a Democrat, should say, If I come into office, I will audit every trade agreement that we have. We will renegotiate the ones that aren’t working. And we are going to enforce our trade laws, environment and labor agreements in every trade agreement we negotiate. We are going to put a dispute settlement mechanism in every trade agreement we negotiate, with sanctions in them. And we are going to make sure we move this forward in a way that not only serves the American people, but makes sure we have a system of tough, no-nonsense rules-based trade where everyone wins.
We have got in this country right now in the outsourcing or off-shoring problem is a critical part of it. We are in a jobless recovery. We all hope that will change. We all hope in the next few months, regardless of the political implications, that millions of jobs come back to this country. Most people believe that’s not going to happen.
The problem with that is people then look at what’s happening with not only manufacturing jobs, which are being lost around the world mostly to, frankly, technological improvements, but they blame trade for it. But now we see white-collar jobs—all kinds of jobs—moving to India, to the Philippines, into the Caribbean and so on, and in the face of nine million people being unemployed it’s a difficult problem. So in addition to that, believe we ought to look at our tax laws, and we ought to say to corporate America, if you are going to create new jobs, you can take the ordinary and necessary tax deduction for new jobs wherever you create them. But if you are going to eliminate a job here and create one overseas, no more tax deduction for it. We ought to just go ahead and do that.
Now, some people here are going to say, My God, that’s radical. We have got to begin to say to the American people, we understand what you’re saying and we hear you. Our off-shoring, and some trade agreements in the short run are killers. If you’re 52-years-old with two young kids in college, and you lose your job because it’s been sent to India, you don’t really care about the theory of free trade. What you care about is what’s going to happen to your family and where you’re going to find a job that’s even close to paying the kind of remuneration that you’re used to getting, that you need. We have got to understand this is real. This is not phony. The American people don’t just sit around an say, Well, theoretically I think I’m a protectionist. I’m not a free trader. What they think about is what’s happening in their community and so on.
So I would give some specific advice. I would make it clear to the candidate my view is we are going to move forward with trade, whether we like it or not, and you can’t be in a position where you’re so anti-trade that you have no credibility if you happen to win. But you have to be in a position to be able to say, I am going to be tough, focused, no-nonsense, understand the concern and the insecurity of the American people on this issue.
MR. GERSTNER: We’re really getting mixed up here—we’re really mixing it up. And I know that my other panelists want to comment, but I’m not going to let them. I mean, they’ll get—they’ll find a way to comment in another moment in another form—I mean, another part of this discussion. But it is now time to move to the Q&A session. I want to give you equal time to ask questions. There will be microphones. Can somebody wave? There will be microphones. Please raise your hand. Wait for a microphone. You know that the council practice is that you stand, state your name and affiliation. And this is a question-and-answer session—(laughter)—it is not the place to test the theses for a new book or to suggest that you belong on the stage and you were missed, and answer all the questions that I asked.
MR. KANTOR: But they’re welcome to it.
MR. GERSTNER: So please keep your questions brief, so that we can get as much participation from the people here tonight as we can. So can I take a question, please? Right here, please, with the yellow paper. It’s very hard for me to see here with these lights in my face. I’m sorry if I know you and I’m not recognizing you.
Audience: Herbert Levin—Lou, you know me.
MR. GERSTNER: Yes, I do.
Audience: Bob Zoellick’s letter—is that a summary of many positive things that have been on the table for some time to try to get things moving again, or is there something new in it?
MR. GERSTNER: I’m not going to direct the question. Somebody grab it and answer it. That’s a fairly factual question.
MR. KANTOR: Yeah, I think the letter as I read it, but maybe I’m wrong—but Charlene cited before the fact that Bob and Pascal Lamy had joined forces at Cancun, unfortunately, with a broad agreement on agriculture. And I think Bob has—I think rightly, and in an impressive way—backed away from that, and started talking about export subsidies and getting rid of them on a date certain. I think that’s a brand—at least it’s a new position as opposed to Cancun, which fell apart in September.
I think he also—I think it has some subtle hints that we are willing to, as again Charlene suggested—
MS. BARSHEFSKY: Drop out.
MR. KANTOR:—take less—yeah, take less of an agreement, get into less subjects, and try to make this agreement work. I agree with both of those, frankly, on Bob’s part.
MS. HILLS: The whole picture was a year prior to Cancun he had a stunning agriculture proposal on behalf of the United States—to eliminate export subsidies, to sharply reduce internal supports that distort trade, and open up our markets vis-a-vis tariffs. And a year later, in order to bring Europe to the table, he compromised those positions. He’s gone back to the U.S. position. I think it’s absolutely necessary in order to get a completion of the round, and I heartily applaud it.
MR. GERSTNER: This lady right here, right behind Paul.
Audience: I’m Adam Meister. Addressing it to anyone on the panel, besides the letter that you just discussed, in the manufacturing sector what would you do differently today if you were in the shoes of Mr. Zoellick?
MS. BARSHEFSKY: Well, the truth is we’ve been on a manufacturing sector job decline for 25 years. Probably 80 percent of that loss is IT. It’s technology. Increases in productivity: output in the ’90s went up by a third, and in a number of industries in which output went up that radically employment actually fell, even though employment overall rose quite considerably in the 1990s, but largely on the services side. So you have a productivity—sort of the productivity track, many call it, because you want productivity to increase. Typically wage rates are linked to productivity. The higher the productivity, the higher wage rate problem is. The higher the productivity, the less workers you need. But you have the productivity effect.
You have certainly in some sectors of manufacturing a disproportionately negative impact because of trade—textiles is an example, steel is an example. And on that what’s the answer? There’s probably not a satisfactory answer, certainly not for the textile workers and the steel workers. I support tax policy, I suppose is just like pension portability. I suppose controlling health care costs, ways to keep employers keeping Americans employed in certain occupations—kinds of things perhaps Mickey was talking about. But I think this is an almost inexorable trend, the idea of jobs that sort of fall off, and then new jobs that are created. It’s simply the normal turning. And I’m not sure there’s really much of a policy matter that will make a massive, massive dent in that reality. Certainly for the last 25 years we haven’t found it.
MS. HILLS: The fact is although jobs are going down, there are things that can be done. I disagree with Mickey’s suggestion that we have to reopen all of our trade agreements. You know what I would try to do with respect to manufacturing is to have a lengthy transition in these areas that we’re opening up. But then I would hit hard on education to raise the skill level of our work force, and to think very hard about better programs to help the displaced. We now have a trade adjustment program, but tin my view we could do a lot better. And there have been some elegant studies about wage insurance. So when someone is in an industry that is dying the death of a thousand of slashes, and they lose their job, and they go but they become an entry-level person on your hypothetical—what do you do about the 50-year-old person who gets a pink slip? But that person has shown up and shown that they have good working skills. Well, if they could be an entry-level in a new sector, and you would insure the difference between the $50,000 that person was making and the $30,000 they are now going to make, and then they get the training in a new area, that’s far better than to try to protect our markets. When you protect our markets you destroy the whole economy. Better to take the gains from open trade, and devote them to education and to aid for those who are displaced.
MR. KANTOR: Just one, Lou, so—
MR. GERSTNER: I knew that the rebuttal would appear—
MR. KANTOR: No, it’s not a rebuttal, no, no. I think that Carla—I said it inarticulately, which would not surprise anyone, or I don’t want it misinterpreted. I said we should audit every trade agreement we have. There’s no such thing as a perfect trade agreement. And those which are not working in the way that we expected them to work—not perfectly—but the way that they should be looked at in terms of what we can do to make them operate better.
I have two reasons for that: one, because the assumption is all trade agreements do not operate perfectly all the time. But the second is just as important: it will give a sense to the American people that either whoever is elected, whether it’s President Bush or the Democratic opponent, actually is connected to, concerned about and reacting to the concerns of the American people. I think it would make—it would go a long way to hoping in terms of restoring some credibility, along with the other things. So that’s what I was saying—not that every one should be real—
MS. HILLS: I guess I disagree with that even more, but I will abide by the Gerstner rule. (Laughter.)
MR. KANTOR: But at least it’s more articulately put. (Laughter)
MR. GERSTNER: I—this gentleman here who has got the racing form in his hands. (Laughter) Whatever that is.
Audience: Alan Neuwirth, Morgan, Lewis & Bockius. How would you each respond to Chuck Schumer’s op-ed piece questioning the relevance of Ricardo’s theory of comparative advantage in today’s global economy?
MS. HILLS: I’d send him back to school—(laughter)—and teach him the difference between comparative advantage and absolute advantage. I’ve never seen a piece that was so wrong economically, and I really scold the New York Times—I hope they’re in the room for running a sheet that was anti-trade—at least it should be 50/50.
MR. KANTOR: Do you have a strong view on this, Carla?
MR. GERSTNER: Do either of you—
MS. HILLS: I’m known as a wishy-washy individual.
MS. BARSHEFSKY: I put aside the issues of Ricardo and comparative advantage. My problem with the piece, apart from the economics—(laughter)—was the policy prescription. I don’t think outsourcing is a trade issue. I don’t think trade agreements fix outsourcing, because outsourcing is something actually rather different, and that is the global demand for high-skill labor, and the way in which that demand is expressed.
Look, you have a confluence of three things. You have global telecom overcapacity in the mid ’90s—right? The whole world is fibered or satellited—driving down costs, making it cheaper, much easier to interconnect, and people realizing these data blips now don’t send anything to send. So that’s the first thing that happens. The second thing that happens is the emergence of China and India, which have very high rates of literacy, and at the higher end very high skills. And at this juncture some measure of political stability, which is unusual for the more modern history of each. And you have, third, globalization, and this compression that it creates in sectors for increasing cost competitiveness.
You have that confluence of things all happening roughly at the same time. And the effect is—you know, Stephen Roach has written a lot about this in a really very interesting way. He calls it the global arbitrage of labor. That is to say what we used to think was non-tradable, like the most personal things—health care, education, customer service—is tradable, and that’s because in part because of in part the confluence of these various factors.
So to me the policy prescription has nothing really to do with trade and trade agreements—maybe I shouldn’t say “nothing,” but only in very minor respects. The policy prescription is in much more sort of—well, there are some short-term things—investment, tax credits—this of that sort. But medium- and longer-term things, most particularly—and Lou of course is expert here on this—education. You know, we graduate 7 percent of the world’s baccalaureate-level engineers. Seven. So last year we graduated about 60,000 B.S.-level engineers. In India, 260,000. In China, 190,000. And Korea similar numbers. And then there are a lot of other nations that have really smart people. So we are in a very, very different world, with potentially very disturbing consequences on our competitiveness.
If I were advising a presidential candidate—just to round off from the last question—I’d make trade a competitiveness issue, not a trade-qua-trade issue, but it’s a competitiveness issue: the question whether we will continue to lead the world in innovation, and what do you have to do to make sure that happens.
MR. GERSTNER: Mickey, do you want to comment on Senator Schumer’s article, or do you think it’s been covered?
MR. KANTOR: I think it’s been covered—(laughter)—and I agree with—
MR. GERSTNER: Okay, there’s a question in the front, over here, please?
Audience: John Baker, Baker Capital. I was interested in the panelists, any comments you might have in the intellectual property area and trade.
MS. BARSHEFSKY: We like it.
MR. KANTOR: A critical area to—I’ll just make a couple of—critical area to cover. We made great progress due to Carla’s good work, and hopefully we are finishing it up in the Uruguay Round and making it part of that. It’s increasingly critical in our lives. You know, every product we can think of has some sort of intellectual property aspect to it. We have a problem of course, continuing problem, among the developing countries in terms of their ability not only to pass laws and regulations; to implement them and enforce them, and to provide the forums where you can litigate your concerns, if you have a problem with that. It’s better than it was. It’s far from perfect—that we know—China being one of the more difficult places in the world right now. The Chinese have thousands and thousands of regulations. They are now implementing them in the intellectual property area since their accession, due to Charlene’s good work, to the WTO. But enforcement is spotty at best, and certainly at the provincial level almost non-existent—better in Beijing. And so we are going to have to do more work in that area.
That’s part of what I’d like to see as some trade-off—I’m not sure of all the details in this round, if we could get it.
I agree with both Charlene and Carla in terms of using this round to open up and the U.S. even unilaterally open up to the developing countries to develop confidence in them in the U.S. and in our leadership. Frankly, as a tactical matter we ought to be joining forces with them, and the trade-offs would be, of course, some of the things we think are important, like intellectual property protection, which would be increasingly important to China and India.
India is about to pass a very strong intellectual property law. It’s very interesting. They wouldn’t have done this five, eight years ago. But this is now in their economic interests to do so. And so we need to make it in the economic interests of a majority of countries. It would make a difference in trade if they do such a thing. It will be increasingly in China’s interests as well, I predict. And I believe this leadership team is moving in that direction. But I think that’s part of the trade-off we’re going to have to make, and it’s going to be painful because we’re going to have to open up agriculture, we are going to do some things with our subsidies as we talk both internal supports and other programs that we have in order to get there, in order to make that kind of agreement.
MR. GERSTNER: I’ve been avoiding the presider, making that horrible sin of thinking he’s a panelist. But if you would allow me, I would simply say that the intellectual property issue, much like the outsourcing issue, has dimensions to it that go way beyond traditional trade issues. It introduces very, very emotional issues of cultural pollution, of privacy, of access to fundamental knowledge that people feel should not be in a sense—should not belong to somebody, and somebody shouldn’t be able to extract a price for it. I mean, the IT issue to me—these three—I’ve worked with all three of these people on this subject—we’ve made a lot of progress, but we haven’t begun to really understand how sensitive this issue is going to be. You just have to look at the issue of access to AIDS drugs in Africa to get at the issue of who has the right to own knowledge that is very important to people who can’t afford it.
So I think we’ve got a long way to go, and I apologize to the audience for answering a question rather than asking for one.
In the back here, please? Ma’am? Yes?
Audience: Michelle Baute, Council on Foreign Relations. In your earlier discussion there was mention of the Miami summit and the launching of the hemispheric trade talks, but little discussion of today’s Monterrey summit, and where FTA is but a footnote. And I was wondering your opinion on what actually derailed the regional talks.
MR. GERSTNER: Jump in. I’m not—
MS. HILLS: I think you’re right that trade was not a big sign on the Monterrey talks, although the president gave a very good speech today about trade. It wasn’t a big agenda item, probably because the Free Trade Agreement of the Americas has slowed down, as it is hooked to agriculture, and it is impossible to really solve one of the big problems of agriculture without Europe at the table.
But I think that the Monterrey summit did address the U.S. focus on trying to open up trade, and it would be—this would be competitive liberalization. If this hemisphere could get its act together and begin to open market, this would have a galvanizing effect upon those who are hanging back, particularly on the agricultural subject, because the desire to open agricultural markets can be handled here, but for the internal supports of Europe. It’s very tough.
MR. KANTOR: I think there are grave concerns, as exhibited by the last meeting of the ministers, which came up with an agreement—I think I am not mistaken—the FTAA—which literally allows anyone to opt out on any provision they want to opt out on—created great concern, even some cynicism among the 34 participants in the FTAA that this is not going anywhere very quickly. Part of it of course has been Brazil’s recalcitrance. Part of it is of course South America has been—many countries in South America are in a difficult economic period. And when you’re in a difficult economic period you tend to have problems internally in terms of trade issues, as we have found out. The combination I think makes it a difficult subject for leaders to get together and discuss if you are not going to come up with some sort of direction or even movement—God knows, any kind of agreement. So I believe that is probably what underlies the lack of emphasis on the issue. I’m delighted to hear the president made a strong speech on trade. I think it’s necessary, not only for the U.S., but for the hemisphere. But I think we’ve got a ways to go before we can reengage on a practical basis on the FTAA.
MR. GERSTNER: Other questions? Yes, ma’am?
Audience: Sarah Sievers from Columbia University. I do a lot of work with developing countries, and work with a number of trade ministers, and they would dearly love to see the openings that we’ve sort of discussed in the U.S. market, and have significant questions about how to accomplish that politically: Which tactics are most useful for them? What strategies might be employed?—so that we can take what we all sort of know what is right from an economic point of view and from a fair-trade point of view and translate it into actual political change in the tariff levels which you have discussed, which are, as we all sort of noted, disproportionately targeted to the very few industries where you could make an argument that the 100 poorest countries actually have some natural competitive advantage. So how do we actually accomplish that politically here in the Congress, and what strategies would you recommend for trade ministers in developing countries?
MS. BARSHEFSKY: I think trade ministers in developing countries, and developing countries in general, have been reasonably effective in putting forward their views. I think the Group of 22—which is now 21 or 20 or 19, depending on how you count—that formed in Cancun, was actually a positive development. The first time I can recall that that number of developing countries really did say, No—here’s what we need. Here’s what you’re not doing. And until something happens to change that equation, we are not going to go forward. I actually thought that was a positive development in the sense that they are finally aggregating their power, because individually these countries, except for a few of the very biggest, and opinion leaders, have no power at all, to be frank. They aggregated their power, and they made, I think, an important statement.
I think that what you saw on HIV/AIDS in sub-Saharan Africa and around the world is a product of a combination of developing countries saying, this is not fair—and they said it in unison—coupled with any number of groups from developed countries saying they are absolutely right: there is something wrong with this picture. So I think part of the equation is that they ought to keep doing what it is they are doing, and articulate what it is they see as the fundamental unfairness in the trading system. That’s one element.
With respect here to the Congress and the administration, this is a tough year. This is a really tough year to do anything terribly exciting. I think Mickey made the point that he thought the Uruguay Round—or the Doha Round probably wouldn’t move in a significant way until after November, and that’s probably right.
But I think that the most important thing for developing countries to do is to keep doing exactly what it is they are doing.
MR. GERSTNER: Carla?
MS. HILLS: I would tell the developing countries to—if I were advising them—to develop a trade strategy. One of the reasons they are in the predicament they are in today is because they spent far more time trying to get special and differential treatment—then to sit at the table and bargain. And that is why France, when they sell us a Baccarat crystal, only pays 3 percent. But when a poor country sells us a heavy glass that you buy at Wal-Mart, they pay 30 percent. And that’s because they are always wanting the ambient trade agreement, which comes and goes, because when a new Congress comes in, maybe they won’t extend. That’s what happened one of the times.
And you see it, when I said earlier that our trade system is tilted against poor countries—part of the reason is the emphasis on special and differential and they are not bargaining, so that for example Bangladesh pays us the same amount in tariffs as does France—France, on $30 billion worth of goods, and Bangladesh on only $2 billion. So they’ve got to get a trade strategy. They’re right: I think the NGOs have helped them in saying what they won’t accept. They won’t accept a failure to deal with agriculture. They won’t accept some of these things. But now they’ve got to sit at the table and say what would they accept.
And I think they pulled the string so tight it broke at Cancun—believe me, there was enough blame to go around. But they could have made a deal on the so-called Singapore issues that Europe wants so keenly—the competition policy, the investment policy, trade facilitation and transparency and procurement. My heart goes out to them on competition policy—that’s antitrust. We can’t even agree with Europe. Take it off the table for now, for poor countries. Investment policy: We quarrel about that with Mexico. Take that off the table. But they could have agreed to transparency in government procurement and trade facilitation which would actually help them. Had they done those two things, we wouldn’t have had a collapse perhaps at Cancun. Now, of course if Europe had been a little more—a little less miserly on agriculture, we might not have had a collapse too. But you’re saying, What would you do to advise the poor countries?—and those are the kinds of things I’d concentrate on.
MR. GERSTNER: Mickey, you have anything you want to add?
MR. KANTOR: Well, some of it is technical. I think you’re both right. I believe also there’s a burden on the United States, frankly, not just to open our markets, because 80 percent of the poor people in the world live on farms and are dependent upon agriculture, and live in developing countries, which makes it a huge problem. It’s a problem of hunger and disease and terrorism and all kinds of things that come out of that.
But we have a—it’s in our interests, both technically and substantively, to try to work with these countries. We have something they want, and they have something we want, and we could move forward in terms of some issues. You can’t—on the part of the developing countries, you can’t just ask for what you want without being willing to trade something else. That’s what Carla is talking about. You’ve got to be able to understand what the other parties need.
I believe there’s an enormous opportunity—and maybe Bob is moving in that direction with this letter and so on—for the U.S. to work with these developing countries and to isolate Europe in order to push Europe on their export subsidies, in order to break the Gordian knot here and to move forward. But it can’t happen unless the developing countries are willing, one, to cooperate; and, two, to really be willing to deal on some issues that are important to the United States.
MS. BARSHEFSKY: One last point, if I could.
MR. GERSTNER: Please.
MS. BARSHEFSKY: If I were the developing country, the one thing I would not compromise on is the elimination of agricultural export subsidies.
MS. HILLS: Mmm-hmm. (In agreement.)
MS. BARSHEFSKY: Reduction doesn’t do it. Europe’s agricultural export subsidies are $7 billion a year. Okay, cut it in half. These countries can’t compete against $3.5 billion, $3 billion, $2 billion, $1.5 billion. They ought to not compromise, in my view, on the absolute elimination of agricultural export subsidies.
MR. GERSTNER: Are there other questions? Yes, right here, please?
Audience: Eric Best from Morgan Stanley. I thought in some that was said earlier there was the implication in the reference to Egypt that there are certain Muslim, I think you said, Muslim countries, that really need help. So you provoke me to wonder if the president called you tomorrow and said, Look, we have to fashion a trade policy that is consistent with the war on terrorism, we accept the premise that poverty is a breeding ground, and in Muslim countries we think we could do certain things that would really be quite dramatic, clever, useful, constructive—what would you tell him to do?
MS. BARSHEFSKY: I would have an AGOA for the Middle East—the African Growth and Opportunity Act. That is to say you have a region of the world whose population has doubled since 1980, whose share in global trade has fallen 75 percent. You have very high levels of unemployment, but you have a reasonably well-educated population. And that breeds tremendous resentment and hostility, particularly with religious fundamentalism always in the background. This is a region whose per capita GDP has fallen 20 percentage points in 20 years. Part of that is because oil prices had been artificially high a number of years ago, but part of that is because even their light manufacturing has failed.
So, what do you do? Well, the administration is doing a few isolated free trade agreements. That’s okay as far as it goes. But by the time we finish that and come to a free trade area with the Middle East, which many of these countries don’t want, I think it’s going to be too late.
I think what you do is you do what we did with sub-Saharan Africa. You open their market to reforming countries that wish to undertake, either individually or with their neighbors, projects—light manufacturing is typically first, whether it’s textiles to luggage, all that kind of stuff—and you allow them to bring it all to the U.S. duty-free—including textiles, including all the import-sensitive products.
The program for Africa has worked remarkably well—remarkably well. We embarked on a similar program actually with Jordan, where we created a series of industrial zones between Israel and Jordan. Part of the investment is Israel, part of the investment is Jordan, and everything that comes out of the zone comes to the U.S. duty-free. And four years later, 40,000 Palestinian jobs were created working in those zones. So I think it’s very important that we have a comprehensive program, that we open our markets, that these countries have to reform—and we can talk about the various indices of reform, but I would suggest it would also include renouncing not only the charade, but de facto the boycott of Israel. And let’s see if we can’t make something happen economically.
And then if you want to do some individual agreements and so on, that may be fine, but those agreements alone are not going to do it, and they’re not going to be timely enough, given the acute economic situation in which the Middle East is in.
One last point if I may: It’s really a startling fact: If you take all the Muslim countries in the world—57 countries—last year attracted only slightly more investment than Sweden. So we are talking about the critical importance of economic growth as a means towards not only prosperity, but some form of political stability.
MR. GERSTNER: I’m going to exercise the responsibility of the chair, knowing that you all have been very good. You have all stayed a few minutes beyond our time. I want to thank our panelists. I think this was a very stimulating discussion. I think the three of them work extremely well together—that’s because they’re all so bright and capable. (Laughter) And I want to thank the audience, because this was one of the best sets of brief, to-the-point questions I’ve seen in 20 years in this. (Applause.) Thank you.
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