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Trade Issues Relating To The "Buy American" Provision In The Stimulus Bill

Speaker: Jagdish N. Bhagwati, Senior Fellow For International Economics, Council On Foreign Relations
Presider: Edward Alden, Bernard L. Schwartz Senior Fellow, Council On Foreign Relations
February 5, 2009
Council on Foreign Relations


OPERATOR:  Excuse me, everyone.  We now have our speakers in conference.  Please be aware that each of your lines is in a listen-only mode.  At the conclusion of the presentation, we will open the floor for questions.  And at that time, instructions will be given if you'd like to ask a question.

I'd now like to turn the conference over to Edward Alden.  You may begin.

EDWARD ALDEN:  Good morning, everyone.  This is Ted Alden.  I'm a senior fellow at the Council on Foreign Relations.  Thank you very much for joining us this morning to talk about the Buy American provisions or Buy America, depending on how you want to word it, in the stimulus bill that has been a source of such controversy over the past week or so.

I am delighted to be joined by our speaker, Jagdish Bhagwati, a senior fellow for international economics at the Council on Foreign Relations, professor at Columbia University and clearly one of the world's foremost experts on the entire range of trade issues, particularly in the World Trade Organization.  He was advising Arthur Dunkel and the GATT back when I was a journalist like all of you on the call, trying to follow them in Yushayev (ph), the Uruguay round negotiations.

Professor Bhagwati has written numerous articles on trade issues in publications all over the world.  He's the author most recently of "Termites in the Trading System" which argues that the proliferation of bilateral trade agreements has not been a positive thing for the world trading system.  And many of you have probably seen his recent articles in The Financial Times on the Obama trade policy, most notably this morning.

So I'm going to ask Jagdish a couple of questions, and then we will open it up for questions from all of you.  And that will take up the majority of the time.

So good morning, Jagdish.  Welcome.

JAGDISH BHAGWATI:  Good morning.  Thank you.

ALDEN:  I wanted to start off with the latest developments.  We all saw that the Senate last night, by voice vote responding to President Obama's stated concerns, passed by voice vote an amendment which states that nothing in the buy American provisions in the Senate bill will violate United States international trade obligations.  How significant a development do you think this is?

BHAGWATI:  I think it's a terribly important development because so far many of us have been worried about President Obama not really stepping up to the plate at all while a variety of things like bailouts which are actually technically inconsistent with the WTO unless very, very properly formulated and so on, you know, that he's really not been like Gordon Brown or (Zong ?).  This is the first time that he's really moved forward.  I think some of us can take credit for having questioned him in that direction by comparing him with the other world leaders and so on and saying, you can't just wait and wait and wait, things could get out of hand.

And so I think he really understood finally that if we go in for the, you know, buy America provisions, it could lead technically to retaliation.  And in fact, a lot of countries which are members of the agreement on government procurement, AGP.  That -- those signatories -- it's a -- (audio break) -- lateral agreement meaning everybody has not signed onto it.  It's like the offshore protocol at the U.N. on civil rights and human rights and so on.

ALDEN:  Jagdish, maybe you could quickly describe that because I'm sure, you know, some of the people on the call aren't familiar with all the ins and outs of the WTO system.  The legal framework here is the agreement on government procurement.  Maybe just describe briefly what that is and who started it.

BHAGWATI:  Yeah.  Because what it does is to -- largely at our own insistence, actually.  For years, we've been trying to get government procurement to be part of the rules under which we conduct trade because, you know, you could easily buy American, others could buy French and so on and so forth.  And therefore, you would not be able to compete on level terms and in a nondiscriminatory fashion.  So that is really why in '95 we had this agreement.  And it's actually optional in the sense that it applies only to those who agree.

But there's one other feature which is important, which is that it consists of a positive list.  So during the negotiations overall for, like, Uruguay round and for Doha round and so on, you really can't say these sectors will be excluded.  Therefore, it's not a negative list but it's a positive list.  You specify the sectors where you will apply, you know, the agreement.  And then you will have to then, you know, have open tendors and so on.

ALDEN:  So a positive list in this case means that countries are only obliged to open to foreign competition the sectors that they specify --

BHAGWATI:  Exactly, exactly.  So one of the problems has been that many people here say, oh, the European Union doesn't do it on water and, you know, other sectors.  But the point is that's what -- you know, they've agreed to exclude certain sectors just like we have several exclusions also.  And once you reach an agreement, then you've got to go by the rules by which you agree.

So I may have agreed to exclude certain sectors, you know, from the French, for example.  You know, I put up with it because I get another set of concessions in something else from the European Union.  So I can't start unraveling the rules just because, you know, because I said, oh, you're excluding certain sectors and, you know, I should be allowed to exclude everything.

And that's one of the problems with the labor movement.  They are usually citing this and saying, look, everybody else excludes, so why shouldn't we exclude when we've taken our exclusions?  And so we cannot violate the sectors and the rules we have agreed to because that's what leads to the tariff trade war.  And that's why others are agitated with us.


ALDEN:  So in terms of the signal that the United States is sending and whether there's likely to be any sort of retaliation, would you argue then that the most important thing is for the Obama administration to make clear that it will operate within the bounds of its WTO obligation?

BHAGWATI:  Exactly.

ALDEN:  As long as that's clear, the dangers of retaliation escalation would seem to be fairly limited.

BHAGWATI:  Yeah.  So the most important thing is to say, we will abide by these rules.  And I think that's a major step forward for President Obama to have taken.  And I'm delighted that the Senate has actually gone along with it because there was this problem about Senator Biden, for example -- Vice President Biden, kind of making noises that, you know, we should be able to not have WTO-consistent behavior.

But I think everybody has now sort of, more or less, fallen in line except for a few lobbyists which, unfortunately, include the AFL-CIO.  But it's not enough.  This is about, I would say, 60 (percent) to 70 percent of the job.  But we also -- you see, because it's a national protocol, meaning, you know, only those who have signed onto it enjoy the benefits of it and suffer the obligations of it, but there are lots of countries, particularly developing countries which were not expected to sign this and which did not sign this agreement at the end of 1995 when the WTO came into existence.  So India, China, Brazil, masses of developing countries have not signed onto it.

Now, the problem is, therefore, if we now go with only WTO consistency -- and technically we are free to go and say, look, India, China, all of you, you know, cannot tender for our governmental contracts.  Now, we haven't done that so far.  And suddenly, we are now going to move into that mode.  The problem there is that since these countries have not signed onto anything and they also have a whole lot of possibilities of raising tariffs because, you know, the WTO binds the ceiling tariffs, the ones beyond which if you go there are all kinds of obstacles and so on, which I laid down --

ALDEN:  Again -- sorry, this may just be a -- I think that some people on the call don't understand clearly, which is that many countries -- India prominently among them, Brazil to a lesser extent -- the actual tariffs that they charge on imported goods are quite a bit lower than what they're legally allowed to charge under current WTO rules.

BHAGWATI:  Exactly.

ALDEN:  So there is the potential for these countries to retaliate without violating their WTO obligation.

BHAGWATI:  Exactly.  So just as we can take them to task by saying, we will exclude you because this isn't WTO consistent, you guys haven't signed onto the procurement agreement, so they also have possibilities of retaliation against us, you know, starting now because they can go up all the way to very high ceilings, or at least some.  And they can do that on products of export interest to the United States.

Now, if they start doing that -- and, too, there are a whole lot of contracts which they can have, which they're not regulated for, like they can shift from Boeing to Airbus.  And now, you know, one of the reasons why the Indian nuclear agreement with the United States went through was partly, of course, commercial reasons.  Because if India started, you know, buying huge numbers of nuclear reactors for nuclear energy for civilian purposes, we, including GE in particular, have a possibility of masses of contracts.  But supposing if we start playing this game with our procurement code, India could easily, you know, divert its purchases to French reactors which are pretty good.

So I think we'll be opening up possibilities of retaliation within WTO consistency.

ALDEN:  So you would argue that speaking to the letter of the WTO rules in this case might in fact not be good enough, that a lot of damage could be done, even within the letter of WTO rules.

BHAGWATI:  Exactly.  And these are very big markets, remember?  And if they start doing this -- and remember, many of them feel that the United States was responsible, and to some extent it is arguable -- I mean, it is true to some extent, that, you know, the financial crisis and then the related, you know, Main Street crisis has really originated this time, in a big way, from the United States.  Therefore, the feeling of warmth for the United States or indulgence towards what we might do is far less, you see, right now.

So I would bet my -- you know, everything I have on a trade war breaking out within WTO-consistent rules because there are leakages of this kind which permit you to behave in that way.  So I think it would be a dangerous way for us to go.

But I'm delighted President Obama has at least said, and the senators agreed, that WTO consistency is required.  But the next step which, you know, the outsiders like me, you know, who write for the public domain have to sort of point to is that, look, this is not enough and, you know, please don't go down the game of really opening up WTO warfare.

ALDEN:  Okay.  Let's stop there and open it up to questions from the journalists on the phone.  Please identify yourself, and I'll turn it over to the operator to get you in queue here.

OPERATOR:  At this time, we will open the floor for questions.  If you'd like to ask a question, please press the * key followed by the 1 key on your touch-tone phone now.  Questions will be taken in the order they are received.  Once again, that's the * key followed by the 1 key.

Our first question comes from Maurizio Molinari.

ALDEN:  From which organization?

QUESTIONER:  From La Stampa Daily News.

ALDEN:  Great, thanks.

QUESTIONER:  Professor Bhagwati, I would like you to discuss the approach of this administration and the Democratic Party to the issue of protectionism.  There was this amendment that started in the House then was changed in the Senate.  What's happening?  What is your impression?

BHAGWATI:  Well, I think that the Democratic Party, unfortunately, has been moving away from free trade over a number of years.  This will draw a charge of the vote by Democrats for trade-related bills.  You see a downward curve, very much like the Dow Jones average in the last few years.  And I think there are several reasons for this.  The main one, I think, is that the major constituencies, the labor unions, are desperately worried about international trade being the cause of the stagnation in their wages.

In my view, there's very little empirical evidence for that hypothesis.  But they desperately believe that.  And so they really don't want any international trade to -- you know, continuing or further trade liberalization, you know, accentuating the problems which they see as coming from globalization.

And I think the -- that is -- you know, the AFL-CIO basically supported huge numbers of Democratic candidates.  So today, in the current Congress, you have a whole lot of congressmen, Democratic congressmen who are actually indebted to the unions and, therefore, do not have the freedom of maneuver.  Like for instance, I mean, even Vice President Biden, his chief economist is someone from the Economic Policy Institute which is a decent institution but it is basically a pro-labor, pro-union point of view body.  So there you have right inside the system people who are actually now reflecting the union points of view.

So I think it is something which I worry about, which a lot of us are worried about, that it has become more difficult for someone who really believes in trade, which I think President Obama does, to function.  And he will have to step up to the plate increasingly to try and contain this element of protectionism.

ALDEN:  Thank you.  Next question, please.

OPERATOR:  Our next question comes from Chris Sermack (ph) with DPA.

QUESTIONER:  Hi, Professor.  I was wondering if you could go into a little bit what kind of effects the buy American provisions have on the U.S. economy.  Obviously, many of the senators argue these are necessary for the economic stimulus to have its greatest affect on jobs in the U.S.  What's your opinion of that?

BHAGWATI:  Yeah, but you see, I mean, the economists usually distinguish between primary impact and the total impact.  Immediately it is true that compared to not having buy America provisions, if I spend, you know, $10 million on something, then I'm going to have immediately beneficial effect relative to not doing it.  On the other hand, if this leads, as it's certain to, to tariff retaliation, you'll have GE, Caterpillar, all kinds of sales being compromised.  And so they will lose jobs, right, in those sectors.  So we need to look at both sides of the equation.

If it was just simply us doing it and no possibility of retaliation, then I think we would be right.  And then you could put numbers on it.  I'm told the Institute of International Economics in Washington, just looking at steel, has looked at some numbers, although you -- we've got to see these as more or less tentative and, you know, approximate.  And they say we will, on balance, lose jobs.  I haven't read the report, I've just seen the press reports.

But I think essentially the point is it's not just us acting with the rest of the world just sitting in a supine position and then we manage to say, look, it's good for us.

ALDEN:  The IIE report, their estimate of job gains in the United States -- and you always have to take these estimates with a bit of a grain of salt -- but it's pretty minimal.  It's about 1,000 jobs in the steel industry.  That's according to the House bill which is focused on iron and steel.  So we're not talking about a great number of jobs here, partly because steel is such a capital-intensive industry.

BHAGWATI:  Yeah.  But you see, you have to make a lot of assumptions.  I'm generally -- it's not just the IIE, but you work with these kinds of numbers, huge numbers of assumptions you make.  I would say qualitatively, the problem is essentially retaliation.  And nobody can tell you it's going to be done in a fine-tuned fashion.  You're going to get a number of retaliatory measures around the world.  And you know, we really can't quantify it in a meaningful way.

I would simply say this is not the road to go down.  We know from the '30s that these kinds of wars are very difficult to contain.

ALDEN:  Next question, please.

OPERATOR:  Thank you.  Our next question from Brian Milton with the International Herald.

QUESTIONER:  Thanks.  Actually, it's the International Herald Tribune.  Yeah, first of all, I just wanted to clarify.  Professor Bhagwati said, quote, "I would bet everything I have on a trade war breaking out within WTO-consistent rules."  I wasn't quite clear whether he was conditioning that saying that's what he thought might have happened had the Senate not backed away from the buy American rules or whether he still expects that.

BHAGWATI:  No.  What I'm saying is that the major danger which was a trade war breaking out, you know, with us breaking the WTO consistency requirement.  That has been averted, and I think that's something to celebrate.

But we still have a lot of people still arguing that because others have not, like India, China, Brazil, have not signed onto the agreement on government procurement, therefore, we should feel free to, you know, to go ahead and start excluding them from contracts altogether.  And I think that would be WTO consistent.  But the only problem with that is that if we start doing that on an international basis, I think it is going to lead to the kinds of retaliation within WTO-consistent rules by other countries.

And I think this is, you know, it's not the road to go down, in my opinion.  And I think it will depend on our good will and understanding.  And I think that's where, you know, President Obama's who are pro trade will have to educate people because even respectable journalists in Washington, you know -- I won't name them -- have been arguing that this would be okay, that as long as it's WTO consistent, we don't need to worry.  I think we do need to worry.

QUESTIONER:  May I just follow up, please?

ALDEN:  Go ahead.

QUESTIONER:  I'm just wondering, Professor Bhagwati, if you could give us sort of a really rough, gut sense for what portion of the work to be done under the stimulus programs might be potentially winnable by foreign firms.  And also, do you recommend that the stimulus plan, as it stands now, is large enough to do the trick, or perhaps not large enough?

BHAGWATI:  I think on the latter, I'm with most of the liberal economists because I'm one myself, and I'm a (Cajun ?) as well.  So I personally feel, looking at the numbers which have been coming out, that we are going to almost certainly need more stimulus down the road.  But where I disagree with my fellow Democratic economists is that I don't think we want to start with massive numbers, you know, even more than what we have really.  Simply because supposing the economy does turn around, then if you have already said that you're going to spend a lot more, politically it may be very difficult to bend back.

So I would rather say, look, I'm turning on the spigot in a very substantial way.  And if it's not enough it drowns Rosemary's baby in the bathtub, you know, this crisis, then I'm going to turn it on more, then I'm going to be prepared to do that.  So I think President Obama has to convey to the people not that he's going to spend double the amount which we are agreed to now, just under 1 trillion (dollars), you know, and double it.

I would say, no, we're going to start with this which is quite substantial.  And if we see that the economy isn't really picking up in a sufficient way, then I will go ahead and spend another trillion (dollars) or something.  So I would go in -- you know, you have to monitor.

I guess frequently, economists do tend to get carried away and seem to think that they can quantify everything, they can define when the corner was turned and so on.  And the world is full of uncertainty in this regard.  And macroeconomics, as Walter Heller pointed out and President Kennedy (signed ?), you can't fine tune it.  I mean, everything depends on expectations and, you know, what people will do which nobody can really figure out with great certainty.

And so I think all you need to do is just be vigilant and be prepared to spend more rather than say, I'm going to spend a specific amount which is double the amount which we have now.

ALDEN:  I guess the only danger is that Rosemary's baby grows in the meantime and you need more water at that time.  But we'll hope that doesn't happen.  (Laughter.)  Let's go to the next question.

OPERATOR:  Our next question comes from Dean Karam (ph) with Canadian Broadcasting Cooperation (sic).

QUESTIONER:  Hi, Professor Bhagwati.


QUESTIONER:  Hi.  I read your article in the FT, and this is more of a sort of a question not based on what you've been talking about but on sort of the president's communication of where he stands on trade.


QUESTIONER:  You know, here in Canada we did really notice what he said about the free trade agreement during the primary part of his campaign.  Do you think that he stands quite sort of muddy in his sort of his approach, his philosophy to trade and that's created part of the problem that we're facing, no one really knows where he stands and that he might sort of, you know, be fighting the buy America plan now but he may be for some kinds of protectionism in a different area?  Is he clear?  Are you finding it a bit confusing on your end?

BHAGWATI:  No.  I think he -- I mean, that was true of President Clinton when he came in in '92.  And I don't think he had convinced himself one way or the other about the advantages of free trade because he had come in on Japan bashing, as you remember, and Silicon Valley had been a major supporter, and everybody was worried, certainly over there, and, in large part, the rest of the United States about Japan taking over, being a wicked trader and so on, an unfair trader, et cetera.

So I think for a year he was kind of uncertain exactly the way you say Obama might be right now.  And you know, as I said, if the problem with President Bush was that you could read his lips, the problem with President Clinton in the first year was that you didn't know whether to read his upper lip or his lower lip.  (Laughs.)  You just couldn't make out -- but then he became a roaring lion on NAFTA and on Uruguay round, to give him full credit.

Now, I think there is a difference with President Obama in the sense that, you see, he has a -- I mean, he's been in Chicago at the university.  That's a staunch free trading community of scholars.  And you know, as one knows from people who have kept company with him, like Austan Goolsbee and so on, that he really believes in free trade.  But he's now stepped up to the plate on this important issue right in the middle of the crisis, which I think is a very good thing on this buy America provision.

My view, even on NAFTA, was that essentially no Democratic president or candidate could have ever won if they made free trade noises.  And you know, in an earlier article in the FT comparing with Hillary Clinton, I said that, you know, looking at Democratic candidates you have to worry about -- (inaudible) -- much like the Russian proverb, you know, which says if you're looking for a son-in-law in Russia, you never inquire whether he drinks because that's Utopian.  Everybody drinks.  But you only inquire how he behaves when he's drunk.

And the same way, you know, a Democratic candidate has to make some protectionist noises.  I saw his response on NAFTA as basically a cynical one, you know, in the sense that he said he would reopen to NAFTA, but what would that mean really?  It would simply that all three of them will get together, you know, maybe in Yucatan and, you know, eat burritos and drink margaritas and he'll come back because nobody is going to be able to unravel NAFTA any more than we can send in immigration -- 12 million illegal immigrants back.  I mean, everything is so interwoven now.

So the only thing that he's asked Calderon which actually, I -- is to try and tighten the labor and environmental standards, which I think he's got to do.  But this was a rather innocuous thing to say that, I'm going to reopen NAFTA, to throw to the protectionists, because it really would not cost us much.  So I think the Canadians were a little unnecessarily excited, in my view, about it.

But on the other hand, it is always important to convey your fears and displeasures because otherwise things could get out of line.  I mean, politics is always a business of balancing different interests.

ALDEN:  Very good.  Next question.

OPERATOR:  Our next question comes from Irnil Mitra (ph) with the News India Times.

QUESTIONER:  Hi, Dr. Bhagwati.  My question has to do with unemployment in the United States.  At what point in the unemployment curve would you say that the pressure of protectionism would become a reality and would change things in terms of WTO?  I also ask this question because there's a wide impression that the economic health of other countries also depends on the health of the U.S.

BHAGWATI:  Yeah.  That's what we call the coupling issue.  But I would say that we are all really, I mean, with the level of unemployment accelerating actually recently and being already substantial, we are already in that situation.  I don't think we've got to wait for further unemployment and so on.

And the only thing which the president has to be continuously saying is that it's not trade which is causing all this.  These are macroeconomic difficulties.  It's the macroeconomic difficulties which will be accentuated if we go in for trade protectionism because of the retaliation possibilities.  That's what happened.  You see, we have already repeated 1929 in terms of the crash coming in.  On the other hand, we don't want to repeat 1930, '31, '32, '33 and so on where tariff wars broke out.  We want to be able to spare ourselves that further anguish.

ALDEN:  Jagdish, just to follow up on that question which I think is a very good one.

BHAGWATI:  Of course.

ALDEN:  So far, the WTO rules, and we've seen this in President Obama's response --


ALDEN:  -- have proved to be a real bulwark against protectionist moves.

BHAGWATI:  They have.

ALDEN:  Can you imagine a situation arising where unemployment in this country is high enough that the message out of Congress becomes actually we don't care about the WTO rules anymore, we are going to start doing things that blatantly violate WTO rules in order to try to protect our own unemployed and create jobs for them at home?

BHAGWATI:  No.  But that's where I think the history will be a bulwark, de facto institutional obstacles which we would actually have to violate, despite still continuing to be the major player in international trade.  So everything will depend on, at that stage, on President Obama really, you know, stepping up to the plate again.

I do think that the business lobbies will have to kick in, which they are already doing, saying this is really going to cost us jobs and this is no solution, that the only solution to this would have to be additional, as Brian from the International Tribune was saying, expanding the stimulus package and so on.  And I think that should combine to -- you know, should be able to lead to a sufficient antidote to the pressures that will arise from --

ALDEN:  So you see the WTO rules as a pretty strong bulwark, not --

BHAGWATI:  I think they are, because I think -- also remember, Ted, that we are a nation that prides itself on going by rules and the rule of law and so on.  And we are the ones who put in lots of these rules into the GATT before the WTO and into the WTO, because we always felt that the Europeans and Japanese, et cetera, were simply handling things politically in terms of trade disputes.  We wanted a clear set of rules because we are a legalistic country.

And you worked on this beautiful book on immigration and you know.  I mean, there's a tension between those who feel humane and -- you know, towards illegal immigrants and those who feel they've broken the law, and therefore they should be treated harshly.  So there's always that tension between what you need to do for a variety of reasons and whether, in fact, it is legal or not.

I think the United States is highly unlikely to go around violating rules.  And I think part of the reason why the Senate actually passed this resolution on things being WTO-consistent was not just the fear of retaliation, though that was palpable, and the pressure I'm sure President Obama brought to bear, but it was also the innate sense that we don't violate rules, which we've agreed to.

ALDEN:  Very good.

Next question.

OPERATOR:  Our next question comes from Yan Tai with the World Journal.

QUESTIONER:  Hi.  Professor, I want to ask you, what's your take on the possible spillover of the hire American becoming -- I mean, "Buy American" becoming "Hire American," like Senator Sanders is proposing, to limit H1B visa for legal workers and so on?  It looks like there is some kind of sentiment leading to protectionism in a broader sense, especially against immigrant workers.

BHAGWATI:  Yes, and I think Prime Minister Gordon Brown is also facing that, right, I mean, in terms of demands from workers to say, "We have to hire British workers first," and also in terms of firing -- "We should fire the foreign workers first."

I don't think it -- I mean, in terms of people who are already in, I don't think it's going to really work, because in the end, you know, we had this debate in immigration at the time of the 1988 Immigration Reform and Control Act, where we had employer sanctions brought in; actually at the insistence of the unions.  You know, people tend to forget that the unions themselves were actually highly reactionary from that point of view, and that turned around recently.

But the GAO study, which was the General Accounting Office study, showed that on employer sanctions, even in draconian, tough countries where you wouldn't want to violate the laws, like Germany and Switzerland, the judges were actually letting off people, because, you know, how do you -- you're dealing with human beings.  And so even on the guest worker programs, where the contract said that during times of macroeconomic crisis, you know, contracts would be terminated, actually even the -- nobody in the system could actually enforce that.  And the famous novelist, Swiss novelist, Max Frisch said, beautifully, he said, "We hired workers, but we got men instead."  So you're dealing with human beings.

So I don't think inside the system, with people who are already here, it is going to really result in this kind of protectionism.  But in terms of letting in more people, I think it will.  I mean, I don't think that's going to be avoidable.  So I think it is not what you want, actually, in terms of broader considerations like the people who are coming in on H1B visas -- they're frequently highly trained and talented people and, you know, a lot of our progress and our prosperity depend on having such people.  And many people do say, "Look, we already have unemployed engineers.  Why do we want people from the engines of technology in India, who are damn smart?"

But the point is, as any professor knows, like me, in the classroom you have superb students and you've got a whole tail of about 30 percent students who are just barely making it.  So they get the degrees, and they're likely to be the ones who are not getting jobs, and the people whom you're hiring from India and from, you know, China and from -- so on from the top universities, they're the smart lot, you see, so they're not really substitutes for the guys who can't get the jobs.

So I think, you know, there's this fallacy of thinking everybody is homogeneous, and I think it will be a sad day when we don't listen to people like Bill Gates, et cetera, on importing more -- making it easier for really talented people to come in on H1Bs.  But this is not the time when those kinds of considerations will play if the unemployment worsens.  And so I think we will forgo those advantages, unfortunately, during -- in the next two or three years.  But I'm sure we'll come back to a more sane policy after that.

ALDEN:  Jagdish, let me just make a quick comment as well.  I'm the project director on a Council task force on U.S. immigration policy, and we're going to be issuing a report later this spring, and that's one of the issues that we're going to be looking at.

I mean, if you look at the H1B numbers, you know, they've already reverted to a cap that was initially set in 1990 --

BHAGWATI:  Exactly.

ALDEN:  -- which is 65,000 a year.  So they were temporarily much higher, so they've already come back.


ALDEN:  I don't expect them to come back further unless we see the unemployment situation --


ALDEN:  -- worsen dramatically over, say, the next couple of years.

BHAGWATI:  It might even go down.

ALDEN:  It would require legislation.  Yeah, I mean, for the past couple of years, the demand from American companies has been about twice the cap.


ALDEN:  I think, in the current circumstances, you will see that fall back and companies will not be trying to exceed that quota.  So I'm not -- I worry about it some, but I think in the moment there's not a lot of scope --


ALDEN:  -- for cutting the quota back farther than it's already been cut.

BHAGWATI:  We agree on that, yeah.

ALDEN:  Next question, please.

OPERATOR:  Our next question comes from Ewan MacAskill at the Guardian newspaper.

QUESTIONER:  Hello, Professor.  This is Ewan MacAskill from the Guardian.


QUESTIONER:  I'm interested in your views of Tim Geithner and Larry Summers.  Do you regard them as protectionist appointments?

BHAGWATI:  No, they're not protectionist appointments.  I think they're both pro-trade.  But I -- my only worry was that they were -- you know, Summers has this baggage of the gender issues and environmental, you know, gaffes and so on.  And so he may be more prudential than he normally is in terms of, you know, countering what I think is some sort of invidious indirect protectionism, and so on and so forth.  So he may not be as effective as he probably could be.  But he's certainly a pro-free trade or pro-trade person.

And Geithner, I think, is -- I'm afraid, as I point out in the FT today, he's unfortunately flawed because of his -- not gaffe; I mean, he didn't pay his taxes, period.  And it's very hard to maintain that he didn't know, because, you know, it's just one sheet you get from the IMF and the World Bank and so on.  But I think that makes him more vulnerable.

And I think this is why, you know, President Obama, I think, made a mistake in taking him, simply because you could see that in the China-bashing which he had to indulge in, because a lot of the Senate is actually obsessed by China right now.  And given that, Geithner was -- you know, in his written testimony, which I'm sure was written by the White House folks, had to throw bones, protectionist bones, against China to satisfy the Schumers and other people who are obsessed by China.

So I think in that way you can slip into protectionism.  You might even cynically say, actually, that the Republicans voted for him, you know, despite their doubts on the tax issue, simply so they could have a hostage for the future.

ALDEN:  Excellent.

Next question, please.

OPERATOR:  The next question comes from Andrea Murta with Folha.

QUESTIONER:  Hi.  I'm from Folha in Sao Paulo in Brazil.  And I'd like to ask you to please comment on two aspects of trade that are particularly important to Brazil.  Considering the current environment of "Buy American" pressures, what are the chances of the Doha Round and of the lowering of the ethanol tariffs?

BHAGWATI:  The lowering of the what tariff, ma'am?

ALDEN:  Ethanol tariff.  The trade tariff on ethanol.  Yeah.

BHAGWATI:  Oh, yeah, yeah.  Well, I think, on all of it, I think certainly Brazil has a point.  And actually Brazil also is under the receiving end for pressures on labor and environmental standards, which are not -- which are largely dictated by fear of competition rather than by altruistic reasons, because if you were -- that being the case, you remember when Howard Dean went to Davos.  He started talking about labor and environmental standards for the WTO, and your foreign minister, Amorim, lost his cool, according to the newspaper reports.  So Brazil has been fighting on that front also.

I think the main -- you know, Brazil's problem is going to be the same as that of India and others, which is to -- in case the thing gets into -- in case we start trying to raise trade barriers on procurement against countries like Brazil and India, it'll force your country and India into options which are WTO consistent retaliations.  So I think this worries me much more than anything else.

I think on ethanol, et cetera, everything depends on balancing of different forces, because I think Brazil is rather safe from the worry about diverting food supplies into producing ethanol, because, you know, you produce it from sugar, whereas we produce it from corn, which then, you know, takes corn away from being available for food and so on.  So I think, in a way, Brazil is doing rather better on ethanol than we are over here.

ALDEN:  Next question.

OPERATOR:  Our next question comes from Jim Dingman with the INN World Report.

QUESTIONER:  Yes, good morning.


QUESTIONER:  I was curious to know what you think will be the impact if unemployment gets into the double-digit numbers and then erodes even further adherents to the free trade argument that we hear on Capitol Hill, and which you alluded to occurred yesterday in the debate on the "Buy American" issue.  And I have a follow-up after that.

BHAGWATI:  Actually, I mean, to produce -- if I put it in a paradoxical argument, the more the unemployment situation intensifies, the more difficult it is, of course, for the United States -- you know, for the leadership to try and prevent some kind of protectionism from breaking out.

On the other hand, in terms of the demand for protection, if you get increasingly the macroeconomic stimulus not doing its job, it is going to be -- surely, I mean, if I am unemployed, I'm not going to think I'm unemployed simply because of international competition.  I'm going to say, "Look, here it is.  It's the financial sector.  It's the failure to pass the stimulus package.  It's all of these things which are really causing me to lose my job."  It's highly unlikely that I'll be thinking of international trade as a reason for it.

So that's a paradox, which I think, while I may try and hope to get some sort of job through protectionism, I'm also going to be also thinking, "Look, protection, free trade, is not really the problem that I really have to -- if I've got limited energy," which everybody has, and only 24 hours in the day, "I'm going to concentrate on getting that wretched stimulus package going, you know, into a larger numbers.  And, you know, the financial sector should be fixed.  And towards that end, things like Obama's package on compensation, et cetera, I'll vote for that, because, you know, I'll think that the financial sector is really responsible for what's happened," which is partly true.  So I think it's not a slam dunk in terms of my and other people are losing jobs, going out against free trade.

ALDEN:  And you had a quick follow-up?

QUESTIONER:  Yeah.  The other question is, what do you see in terms of the debate right now?  We have this fierce debate going on on Capitol Hill about the stimulus package.  And what do you make of this in terms of its impact in the 2010 elections?  What sort of lines of attack, defense, do you see coming out of the sort of debates we're seeing on these trade issues and other issues that we see in the stimulus debate?

BHAGWATI:  Well, I don't think -- I mean, Ted will probably agree with me -- that there's any chance that, before the end of the year, we'll see any kind of upturn at all, because we are still debating the stimulus package.  We still haven't agreed totally on which is the best way to cure the financial system.  I mean, we started with wanting to buy the toxic assets, and then we shifted, like Gordon Brown, to capitalization.  Now we're coming back to this one.

So I think there's lots of ideas and disagreements, I mean, within each party also.  And if you take the economists -- and they're living up to the reputation of the famous statement about Keynes and so on, which is that when there are six economists, there are seven opinions, of which two are those of Keynes.  (Laughs.)

And so I think, if you're a politician, also you would be a bit puzzled, wouldn't you, whether you're Republican or Democratic, as to what the optimum mix is?  So I think we're only going to be able to kind of move towards it and, you know, keep doing whatever we need to do, and in increasing amounts.  And I think -- I'm pessimistic about being able to fix the system that fast.  And so I think it's certainly going to be around definitely for next year.  And, you know, how the politics will work out is anybody's guess.

I only hope that the Republicans are not doing what we on the trade side fear that the Democrats might be tempted to do, which is the Democrats won't want to vote for Doha because it would give President Bush a victory, you know, and that might affect the electoral chances of the Democratic Party because you want to deprive the Republicans, and particularly President Bush, of any kind of victory at all.

I don't think the Republicans are going to go that far, because you can never fine-tune these things.  If they are seen as holding up a massive stimulus package and the situation deteriorates, I think the chickens could come home to roost.  And I think it's a very delicate balance, I think, between the two parties right now.

ALDEN:  I agree.  I'm afraid we don't know where the bottom of this whole --

BHAGWATI:  No.  Nobody knows, really.

ALDEN:  Let's take the next question.

OPERATOR:  Our next question comes from Jim Lobe with the Inter Press Service.

QUESTIONER:  Hi.  I just wanted to know if you would talk a bit about protectionist pressures in Europe, and particularly the debate over financial protectionism.

BHAGWATI:  Oh, I think in Europe you have deep, fundamental divisions.  You see that between the French and the English.  Gordon Brown from the beginning has been extremely pro-trade.  He and Milliband wrote to Hillary Clinton and Obama during the campaign saying, "Cool your rhetoric against free trade," and so on.  I mean, at G-20 and after, Gordon Brown has been absolutely fantastic.

But you might say, look, domestically he's also supporting hiring of British workers over others.  Well, but the rhetoric is -- all of you are journalists, so you know rhetoric is important.  That's half the game.  At least you know which way Gordon Brown would want to go.  And this is why I was so very keen that President Obama actually deploys rhetoric in favor of free trade, and I really feel that at some stage as the situation kind of founders and so on and we don't turn the corner, he's going to have to make a speech in favor of free trade like he had to make one on race to be able to provide that rhetoric in support or something which might otherwise be at great risk.

But I think if you take Sarkozy, Sarkozy was very different.  I mean, he's certainly in favor of reform as compared to -- (inaudible).  But on the other hand, he too has to play within his system.  And the first reaction to the crisis was actually to -- I think I saw a picture -- was it in the Guardian?  I forget now -- his reading "Das Kapital."  (Laughs.)  And so he's got to play to that constituency.

And the French have always been against freer trade.  We've always had difficulties with them.  And actually, if you go back to the repeal of the Corn Laws in 1848 by Prime Minister Robert Peel, I mean, he said, "I'm going in for unilateral free trade because I can't get the French ever to come on board on reciprocal free trade."  So I think the French have never been really for free trade, and today they're not.  And I think there is a division.  Angela Merkel is somewhere in between.  And so you can't talk about European protectionism quite because the major players are not on the same wavelength.

ALDEN:  Good.

Next question, please.  We've got time for a couple more, I think.

OPERATOR:  There are no more questions at this time.  If you'd like to ask a question, press the * key followed by the 1 key on your touchtone phone.

The next question comes from Ashfaque Swapan with the IndiaWest newspaper.



QUESTIONER:  Professor Bhagwati, you know, I'd like your comments on how do you see the global economic crisis imposing pressures on Indian policymakers, because, as you are aware, that there is a substantial domestic opposition to free trade, and the opponents of free trade feel somewhat vindicated by the crisis currently affecting the United States.  So I'd like your comments on that, please.

BHAGWATI:  Yeah.  I mean, again, in India, it's sort of bimodal.  I mean, there are some people who have never really bought into free trade, and they're still on the same bus as in the '60s and '70s, where we were just simply against any kind of international engagement on trade and incoming foreign investment and so on.  And then we changed those policies in a substantial way, and we've had massive impact on the growth rate and on poverty as a result.  Many more -- 200 million people have been pulled into more gainful employment.  So I think the -- and out of poverty.

So I think the evidence is clear, the middle classes are again in favor of not going back on the reforms.  So I don't see the government actually succumbing to calls for protectionism.  Whether they will go ahead and liberalize it is a different issue, because it's a matter of whether you go -- can you go forward?  I don't think you can in India any more than in the United States and elsewhere, simply because to liberalize is difficult when you have, you know, substantial economic difficulties.

But I don't see any great force -- in fact, the Indian position on Doha has not been particularly helpful, as we all know.  But on sliding back into protectionism, I just don't see that happening.  There's literally no evidence.  Alan Beattie, who's an FT correspondent, is particularly despondent about the prospects for Doha.  And, you know, but even he, in the end, cannot find any evidence also on protectionism.

You know, a couple of tariffs did go up, but they were being restored to original levels within the last two years because of the food crisis and so on.  Some of the tariffs had been reduced.  The actual reply tariffs, as we discussed earlier, had been reduced by the finance ministry.  And now that the food price situation has gone the other way, they're just being restored to original levels.  So it's not really -- there's no protectionism to speak of.

ALDEN:  Very good.

Operator, we have time for one last question if there's anybody else in line.  Otherwise we could wrap it up there.

OPERATOR:  We have one more question.  It's from Chris Sermack (ph) with the DPA.

ALDEN:  Great.  We'll make this the last one.

QUESTIONER:  Hi professor.  I just wanted to quickly ask you what you think of Obama's wider Cabinet, also the choice of Don Kirk (sic/Ron Kirk) and Judd Gregg this week.  What do you think of their views on trade?

BHAGWATI:  Yeah.  Well, Ron Kirk, of course, was a supporter of NAFTA.  But he's a mayor who doesn't have any national experience.  One of the things you need in USTR -- I mean, the most successful ones are those who have had extensive contacts with the Congress where, you know, a lot of this trade-expanding legislation has to go through.  And the other -- so Robert Portman was a fantastic guy from that point of view, but was taken away by the president because he needed him to handle his own crisis vis-a-vis the Congress on several things.  And before that it was Robert Strauss during the Kennedy run, who was a superb player.

So I don't see how Ron Kirk's appointment makes any sense from that perspective.  I mean, will he be able to shepherd Doha Round when we get back to it?  I don't know.  He may have great gifts which are unrevealed.

And as far as the Commerce appointment, I think it's a good one.  Commerce doesn't really play a major role.  The economists usually call it the Department of Protection, because that's where all the lobbyists go and usually get their way.  The Commerce Secretary can play around a little bit and so on, but in the end he's going to be constrained by the fact that Commerce has been playing for domestic industry.

ALDEN:  All right, Jagdish, do you want to say any closing comments at all?

BHAGWATI:  No.  I think, in the end, I'm delighted, actually, that the president is moving in the right direction.  But what I would really like to see him do now in relation to, you know, the point I was making about trade wars or breaking out even consistently with the WTO agreements and rules, I think at some stage, I think, he's got to really look at all the different -- I mean, just say very clearly, in a short speech, you know, to the nation that, look, we must -- the problem is macroeconomic and financial, and we've got to do that.

All the sort of -- all the protectionist sentiments which are breaking out from time to time, that we really -- that can only make matters worse rather than better.  I mean, who else would be better than Obama to say that?  (Inaudible.)  When I hear him, I think of, you know, how he could have been really in a team of brilliant orators like -- (inaudible) -- Charles Fox and Edmund Burke in the British Parliament.  He could have held his own.  And he certainly is -- I mean, that's the kind of gift I would like to see him turn on to this problem.

ALDEN:  Very good.  We will all wait eagerly for the speech.  Thank you very much, Mr. Bhagwati.  Thank you, everyone on the call.  And we will do this again soon, I'm sure.

BHAGWATI:  It was most interesting.  Thank you.







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