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Trade Tensions: Challenges and Opportunities After the Midterm Elections

Speakers: Douglas A. Irwin, Robert E. Maxwell Professor of Arts and Sciences, Department Of Economics, Dartmouth College; Author, "Free Trade Under Fire", Charlene Barshefsky, Senior International Partner, Wilmerhale; Former U.S. Trade Representative, and Jagdish N. Bhagwati, Senior Fellow for International Economics, Council on Foreign Relations; Professor of Economics and Law, Columbia University
Presider: Edward Alden, Bernard L. Schwartz Senior Fellow, Council on Foreign Relations
November 17, 2010
Council on Foreign Relations

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EDWARD ALDEN: (In progress) -- bilateral trade agreements which have been sitting out there for several years now. He set a deadline for trying to get the outstanding issues resolved with Korea. I must admit, I was a bit surprised. And our panelists may be able to shed some light on this, on why the administration would set a deadline and then failed to get a deal and even looked like they failed to make really serious efforts to get a deal. But the Korea deal, as a result, is still out there.

And then, finally, of course, we had a midterm election, which appears to have strengthened congressional support for trade liberalization, at least in the House, which is historically where trade has been most problematic. Trade is being talked about as an area where the administration and a Republican House might find some common ground.

So I want to start with you, Doug.

Doug has been working on two books about trade policy in the Great Depression, which are out next year, and wrote a fine intellectual history of free trade which a number of you may have seen.

Doug, to start, how would you assess the current state of the U.S. trade policy? If we, say, have it at a positive extreme, the leadership that led to the inclusion of the Uruguay Round -- at the other extreme, Smoot-Hawley and the various other Depression-era measures -- where do we stand currently?

DOUGLAS A. IRWIN: Well, currently I'd say that U.S. trade policy is sort of in hibernation. And I think one of the consolations of history is that that's actually normal. So we tend to think about sort of the history of post-World War II liberalization as being this very linear process where you have GATT round after successful GATT round, that's beating down the barriers to trade. But I think when you look at the history, it's much more punctuated than that.

So I think about the postwar liberalization as being sort of the founding of the GATT in 1947, then a 20-year hiatus, then the Kennedy round in the '60s, not finishing up till 20 years after that; that's '67; then another hiatus, and with due respect to anyone who negotiated the Tokyo Round, wasn't all that consequential a round; and then the Uruguay Round.

So these are three big initiatives, but they're sort of filled with this period of relative inactivity, no big initiatives. Then you have to ask the question, so we're in one of those periods where we're sort of waiting what the next step is.

What generated those three sort of bursts of U.S. trade activism? Why did the U.S. sort of become much more of leader in just those three instances? And I think one common element is that the U.S. was reacting to perceived discrimination against its exports on the part of foreign countries. So in 1947, the major concern of policymakers was imperial preferences and breaking into the British colonial trade bloc, including Canada and other countries.

In 1962, the reason why President Kennedy pushed for the Trade Expansion Act is because of the formation of the European Economic Community and the perception that that would lead to diversion of exports away from the United States; and then, in the Uruguay Round, the importance of the sort of fortress Europe, the 1992 initiative in Europe, and expansion of the European community. That was one factor that the U.S. wanted to overcome.

So I think if we're looking for another big U.S. trade initiative, we have to think about where will U.S. commercial interests have a stake in trying to open up markets in a big way, as against some sort of perceived discrimination against us? And I think that's an open question at the moment.

ALDEN: And how would you assess on the protectionist side? We've seen some measures around the world to try to protect markets in the face of the economic downturn, but certainly nothing like we saw in the Great Depression. How would you assess the levels of protectionist response we've seen in the face of the crisis?

IRWIN: Well, there's a very interesting comparison between sort of the 1930s response and the current response in terms of trade policy. And I think the major change there has been that policymakers have so many more policy instruments with which they can address the economic downturn now as opposed to the 1930s.

So the problem in the 1930s was most governments were on -- countries were on the gold standard, so they didn't have an independent monetary policy. Most of them had what was known as the treasury view of fiscal orthodoxy; you should balance budgets even in downturns, so if receipts go down, you have to cut expenditures to keep the budget balanced. So fiscal policy was off the table. And so that naturally led policymakers to turn to trade-policy measures.

And now, of course, we have fiscal and monetary policy, as well as many other instruments, to address a downturn. And then, therefore, trade policy is less important as a mechanism of trying to get the economy moving again.

ALDEN: So you would say that some of these other tools have enabled us to avoid the traditional protectionist response.

IRWIN: Absolutely.

ALDEN: Interesting.

Charlene, I want to talk to you a bit about the politics of trade. You know, I've watched this as a reporter through that period of great activity with NAFTA and the Uruguay Round negotiations that brought China into the WTO, and have also watched it in a great period of inactivity, as Doug described. And some of that certainly has to do with the domestic politics of the issue in the United States.

Why has it become so hard for any administration, Democrat or Republican, to carry out an ambitious trade policy of the sort we've seen in the past?

CHARLENE BARSHEFSKY: Well, I think there are four factors in particular that weigh very heavily now on the politics of trade and globalization. And you can see these factors creeping along from NAFTA forward. So the first has to do with the pace of globalization, particularly since 1950, and then again almost immediately post-NAFTA, where you have, because of a variety of -- for a variety of reasons, whether capital flows or financial flows, whether trade flows, the advent of technology and so on, you have a global economy that is larger. It is growing faster, at least pre-crisis, under the pressures of financial flows and technology than ever before. And the result is competition is extremely intense. That'd be the first factor.

I think the second that bears on the politics is the re-emergence of China, the integration of Asia around China as a productive hub, China's growth rate, its increasing muscularity, which countries perceive and read differently, and a China that has conducted a trade policy that is heavily export-oriented and a currency policy that is largely linked to the dollar. And the result is massive imbalances.

I think the third factor has to do with the period that the United States finds itself in, and that is a profound period of weakness as the global economy is more integrated and as China has re-emerged. That weakness was evident before the financial crisis. But with the financial crisis came an extraordinary synchronous contraction, with the result that consumer confidence plummeted, demand plummeted in the developed world. These large imbalances became more and more a target of apprehension, all while our competition has gotten tougher.

And the last factor, I think, is jobs -- jobs, jobs, jobs. We've been losing manufacturing jobs since the 1950s. We have not been losing white-collar jobs until more recently. That's one area of concern. The other, of course, is with the financial crisis came a crash to job growth, obviously extraordinary layoffs. And job growth today is tepid.

So all of those factors bear now on the politics of what will go forward, plus the fact that you have a more populist Congress. I think the jury's still very much out on what the House will be able to do. The jury is less out than on -- with respect to the Senate. You have, in general, a declining popularity in trade agreements since NAFTA. It's a clear trend; agreements pass by fewer and fewer votes with each iteration. The one exception was PNTR for China, which passed by a pretty comfortable margin in the House.

And I think, last, you have this overall concern about the position of the United States making all of the anxieties that I've already mentioned all the greater. So those are the politics that I think will bear heavily on this next push by the administration with respect to trade.

ALDEN: Just to bring in Doug's larger historical scope, do you see any of this as immutable? I mean, if you look back to the early 1980s, some similarities: High unemployment, challenge from Japan, worries about U.S. weakness and decline, and yet a remarkable resurgence from that.

BARSHEFSKY: Right. I don't think it's immutable. And whatever the perceived or real decline of the U.S., I don't think that's immutable either. And I don't think China's re-emergence is immutable -- an immutable fact necessarily; certainly not linear, necessarily.

But I do think that there is increased sensitivity now, in part greater than at the NAFTA junction, simply because of the flow of information, the awareness the public has of a world that seems to be much smaller, an awareness of job dislocation in a manner that is quite pointed.

And I think, with that and with the rhetoric that's gotten worse and worse every year about trade imbalances and unfairness, as though trade deficits were a function entirely of unfairness, which, of course, is not at all right, I think you have a tougher environment now.

ALDEN: I want to turn to Jagdish, who has recently been named by Angela Merkel and David Cameron to co-lead an experts' group, along with former WTO Director General Peter Sutherland, that will look at, among other things, ways of reviving the stalled Doha Round of trade talks.

Jagdish, with the U.S. hampered politically and weaker economically, as we've heard from Charlene, can you see trade leadership emerging from elsewhere in the world? Are the Chinas or the Indias or the Brazils or the other emerging market countries prepared to play a bigger role than they have in the past in fostering liberalization or are we still in a situation where there's no real alternative to U.S., and to a lesser extent European, leadership of the trading system?

JAGDISH N. BHAGWATI: That is a good question but I think we are still -- the United States is still the biggest Rottweiler on the block. It is true that these other countries have risen, but please look at President Obama's visit to India. Because the sensitivity by the president, because of reasons mentioned by Charlene, the Indians were strictly under, you know, instruction not to raise the trade issue at all except to talk about jobs in the United States. So we were a bit like the Japanese who don't provide leadership, even now. They used to be strong, silent men. Now they're weak, silent men. (Laughs.) But I think this is basically a kind of (blighting ?) us. And apropos of that, let me also say that when, after the Indian election and after the American presidential election, the situation changed dramatically for the U.S. and for India.

In India, the communists were put out of the coalition. So the Indian prime minister was much freer to actually move to his trade liberalization than before because the communists were hostile to trade. But in our case, it went the other way because our unions basically financed a whole lot of Democrats for the election. So people like Sherrod Brown and really lots and lots of others were elected by the unions that were fearful of trade. And here I actually have a point which I could probably be lynched by Democrats, my fellow Democrats. But just as the president -- our president, Obama is hamstrung by the fact that George W. Bush left behind an enormous debt burden and a flow deficit that was an act of commission, I think he also faces from President Clinton an act of omission, meaning President Clinton never really -- you know, personally to the unions.

I don't remember a single one ever being asked to go sit down with George Meany and his troops and say, look, is your fear of trade justified. Maybe there were a few others but all the other Democrats I know, including Paul Krugman at the time, none of us were ever asked to do that. It was all a political issue. We're getting pollsters and so on and so forth. But basically President Clinton found religion and he vanquished the unions -- right ? -- over the NAFTA vote and the Uruguay Round vote. But he did convert them. Now, it was assumed that there were finished, right? Now, they've come back and they've become a huge problem for the United States and you can't expect -- I mean, how much time does poor old President Obama have. So if only President Clinton had done the job, it would have been somewhat easier for President Obama to placate them.

So I think the point I want to make is that basically if the rest of the countries have to do the job, then we have a problem. They are still not large enough to be able to say, look, to President Obama, look, we're going to play this. I think when this group was appointed, also, which you mentioned, the attention of everybody was not to isolate, embarrass the United States but basically to compliment them and say, look, you can't play right now. (Laughs.) But the work has to be done because in the end, the U.S. cannot -- (inaudible) -- for trade. Right? This is the biggest open economy in the world. So that is where I think the idea is to try and see (that homework has been done ?) in terms of how you extend incentives against protectionism, because there are loopholes we have discovered, you know, things to fix. And then what are the different ways in which we can move forward? And there are ideas which are -- you know, which can be put forward. But I think this is important.

One thing which Charlene touched on, which I think is important, and I think this is where the China-U.S. situation, which really is also playing a big role, comes in. China basically I think we have provoked unnecessarily. I mean, it is true we were first focused on the exchange rate and as, you know, anybody who has studied macroeconomics knows, to a large extent it's the hands on the clock, it's the underlying fundamentals that are important. Like if Greece suddenly became totally -- you know, left the euro. It would still not -- it would still have the same problems, no matter what the exchange rate was, as long as there was excess spending. It would just simply, you know, make a little difference but not a great deal; same thing for China.

China was moving to its internal spending on infrastructure and so on. We should have simply said -- well, talked behind the scenes and said, look, here, do more of it, we need you to do this. Instead, we -- you know, Schumer and all these people and continuously bashing China is bound to put their back up, okay? So I think that has really been part of the problem. What we are doing now is basically essentially doing QE2 which is actually, you know, in a way we could say correctly that there's a lack of world demand. We've asked you to spend more. You're not doing it. So we're having to do it ourselves. One is sensitive to this as the exchange rate goes down, which is very different from changing the exchange rate down, which we allege China is doing, with a view to diverting a certain amount of inadequate world demand to your own goods. So there's no parallel. But why do they talk as if there is a parallel between the two? Because we really put their backs up, I think.

ALDEN: I mean, a number of issues raised here that I actually want to give Charlene and Doug a chance to respond to it. With respect to China, Charlene, do you agree with the assessment that the U.S. has been overly provocative in various ways? Is China moving in the directions we want it to move on its own or does it need more of a push and a shove?

BARSHEFSKY: I think China will do first and foremost what's in China's interest to do. This is one of the -- of its most fundamental facts. That's point one. Point two, I think the U.S. doesn't actually have a strategy with respect to China. Or if it does, it's not entirely clear to me what it is. Number three, I don't see any reason the U.S. should be shy about insisting that China play by the rules. China insists that of us all the time. I think we should return the favor. And fourth, I do think, however, that if you want to make progress with China, sometimes quieter is better and sometimes discussion of a reasonable sort is better than over very heated rhetoric.

So I think the administration now needs to sort out how it wants to deal with China. I think eventually China will move on the exchange rate because it's going to have to. This is absolutely clear. The only issue is when and by how much. And my own view, and I've said this for a long time, but for various financial crises and the European crisis, China would have already moved. It was already at that point, I believe. So it'll get there and I think the U.S., because China will get there on its own terms regardless, I think the U.S. ought to be looking at other areas where Chinese trade behavior ought to come under some greater scrutiny and focus on those areas, at least as much, if not more now more than the exchange rate per se.

ALDEN: Doug, let me ask you because Jagdish mentioned the QE2 at the end, which certainly in terms of the optics of the G20 put the U.S. very much on the back foot, to use my old British expression from my days at the FT. It's a cricket expression I learned. But if we read the fine piece you had in The Wall Street Journal a while back, which is out there for members here to pick up, you seem to indicate in that that to some extent the alternative to monetary easing and devaluation well be trade protection, and if that's your choice, you would prefer monetary easing and devaluation. Talk about that a little more. How do you see the interplay of currency and trade tools in the sort of economic situation we find ourselves?

IRWIN: Well, I think I certainly agree with what's been said about China's exchange rate and how it's sort of been overplayed as (sort of being an ?) important (goal ?). And I think I'd come back to what Larry Summers said, that it's much more important to get China to improve its domestic demand. With consumption being 35 percent of GDP, very clearly a huge outlier, emphasizing potential domestic change that they can make there rather than the exchange rate per se is very important.

But I think in terms of what the U.S. can do, I mean, there's a huge debate, obviously, about whether QE2 is, you know, the right thing to do or not, including domestically. It's not just the international ramifications. Of course, it comes back to other countries not wanting their currencies to appreciate and potentially put a dent into their export growth because of that.

But I think one of the benefits -- potential benefits of QE2 is if it can restart the U.S. economy, we'll actually start growing again and we'll actually be able to bring in imports. So one of the things we saw in the 1930s, for example, is those countries that went off the gold standard and devalued, they actually were more imports rather than fewer, because they got domestic growth going.

And I think the danger is that if we don't do something like QE2, then we're going to face a Japan-type scenario. And I know a lot of people say, well, we ought to have a hard -- strong currency. Well, Japan has a very strong currency and they're not growing and they still have financial problems.

So I think that it's sort of insurance for the U.S. in terms of trying to move in that direction. The alternative, once again, is if we don't act and the U.S. economy continues to stagnate, I think there's going to be a tendency to blame foreign countries.

And I think that's -- that's from the -- it's monetary stimulus versus trade protectionism. If we do nothing, then I think we just lend ourselves open -- open to the door to blame the other countries for our problems.

ALDEN: Jagdish, let me ask you, in the -- along the same line, in effect, to explain not the surplus of protectionism we've seen in the last couple of years, but actually the lack of it. I mean, if you look at the WTO studies that have been done, there have been new protectionist measures, but they've been pretty small, certainly compared to the size of the crisis.

I would have anticipated that in a crisis like this we would have seen far more trade protectionism than we have. Doug points to one factor -- the variety of economic tools that governments have that I think does a lot of explaining that.

How important has the WTO been? How important has the rule system been? And in that regard, how important is it to keep moving forward on the WTO front to keep that system alive and healthy and not just have a series of, you know, proliferating bilateral agreements, which you've been quite critical of.

But what role has the WTO, you think, played here?

BHAGWATI: Well, I mean, there are three "I"s which I talk about, which have really prevented protectionism from breaking out in a big way: ideas, interests and institutions.

The institutions is the WTO. I mean, when the GATT came up, it put up a whole lot of roadblocks so you couldn't have a free-for-all raising of trade barriers like in the 1930s. And that has really helped, because you could freely just -- you know, there loopholes, which are going to be fixed, which we are aware of now and more so, but that has certainly helped a bit.

The idea that somehow you could use trade barriers with the view to diverting demand from other people to your own goods -- the sort of thing we think the Chinese are doing -- that is subject to retaliation and all sorts of things.

So I think the idea has -- the ideas of change also. And the interests of change, meaning interests with -- political scientists call lobbies interest, basically. And those interests -- today, many more people are involved in international trade. I think one of the things which I'm working on is to see how from each state you have -- not just people like Caterpillar, G.E., et cetera, but all kinds of little people who are involved in export business. So if you take their input, there's large numbers of people actually in the country in different states who are actually interested in international trade. They provide the counterweight and the pulse, basically, to people who want to close markets in a more traditional -- so all three have played a role.

But WTO is essential. That's why a lot of us are worried that if Doha really doesn't get concluded in some way or the other, that in fact it'll weaken the WTO and we need that -- WTO is a functioning discipline. And you know, we really ought to look upon it as as precious as the example of Smoot-Hawley, which is a negative example to show that trade is important.

ALDEN: Just so the audience and members and guests don't think we did a bait and switch, I want to talk a bit about the midterm elections. The topic here was supposed to focus very much on challenges and opportunities after the midterms.

Charlene, what do you see as the prospects? Did the outcome of the midterm change anything fundamental in terms of the likelihood of positive progress on the trade agenda going forward?

BARSHEFSKY: I think it's a question mark. The concern on trade agreements is almost never the Senate. The concern, since NAFTA -- including NAFTA -- is the House.

And the House is a little bit hard to divine at the moment. From the Democratic side, the caucus that took the hardest hit in the midterms were the blue dogs who are pro-trade, fiscally conservative Democrat. They took the hardest hit.

On the Republican side, the big winners were the tea partiers, who in terms of campaign rhetoric, there's a question mark there -- and we have to wait and see -- could not be viewed to be globalist in temperament.

So if you look at any given trade agreement, trade agreements since NAFTA have been passed by Republican votes, largely. On the Democratic side that means you usually need between 50 and 65 votes. That's a tall order when you don't have half the blue dogs anymore and when those who were elected were elected on a further-left, more populist basis.

On the Republican side, because of the question mark about the tea partiers, the traditional reliance on Republican votes in high numbers is also a question mark.

My own view is that the Korea FTA, for example, were to be concluded substantively, thought to be doable still, but I think there are two factors that are a must. And without either one of them, don't even start. One is presidential leadership and constant support. And this is -- this is a heavy lift. And if the president wants the Korea agreement or Colombia or Panama -- but it looks he'll go for Korea first, that seems to be the preference -- it's going to take a lot of political capital on his personal part to get it.

And the second factor is exceptionally strong business community support. The rhetoric today is we're going to support this agreement, but the proof is boots on the ground and we'll have to see.

Without those two elements, I don't believe trade agreements' passage will be possible for the next two years.

ALDEN: And I want to press just a little more on the Korea FTA, because it was -- it was quite an interesting set of developments leading up to the G-20. I mean, the U.S. appears to have demanded some pretty fundamental changes to an agreement that was concluded. I mean, you know, not to get too much in the weeds, but in effect, it's a violation of it's U.S. commitment under fast track to its trading partners.

The idea was that you negotiate deals, they would come back to Congress for an up or down vote. Now, we've gone back to -- Korea demanded some pretty significant changes in the auto provisions of that agreement. And the U.S. clearly failed to get a deal at the summit. And what was the response from Congress? The incoming chairman on the Ways and Means Committee, Dave Camp, Republican of Michigan, and the outgoing chairman, Sander Levin, Democrat of Michigan -- some of them said, hurrah! Hooray for you! Way to stand up for the auto industry.

How do you get a Korea FTA through with that kind of political lineup?

BARSHEFSKY: I think it will depend what the agreement looks like and the reasons why an agreement wasn't concluded at the G-20. I don't know what those reasons were. One could take some guesses. I don't know what those reasons were.

But I do think that if the agreement will conclude substantively, it will conclude on the basis that the president believes he can sell it. If he believes he can't sell it, it either will stay unconcluded or will conclude, but he won't bring it to the Congress.

And I think on that basis, I would say it would remain an open series of issues.

ALDEN: Jagdish?

BHAGWATI: I'm not a political scientist. I'm an amateur observer of Washington. But it seems to me --

BARSHEFSKY: That's more than enough.

BHAGWATI: -- that in the auto industry, surely we've bailed out the wretched Detroit industry, right?

Chrysler has had two bailouts so this is for Chapter 22 rather than Chapter 11 -- (laughter) -- and they're doing well. So it should be possible for the person to lean on them, in my opinion, on this issue.

Beef is the harder one, okay? Because agriculture is always a hard one. But that's -- it's hard to think of that one thing holding it up.

As far as labor standards, environmental standards are concerned, I mean, those are issues which arise with other FTAs -- in particular -- (inaudible) -- recently Colombia. There's no such issues with South Korea. So if the president wants to make a -- you know, put his shoulder to the wheel, he could do it, I think. It's more doable than the Colombian one, because there, Human Rights Watch and everybody is geared up to fight like hell. And so that's going to be a tougher one.

So I think it was a good idea, if he wanted the FTAs, is to go first for -- for the South Korean one. And I think that might build up a little momentum. But we've got to -- you're absolutely right. You've got to lean on these --

ALDEN: I will --

BHAGWATI: -- friends.

ALDEN: I will say that the beef issue, though, shows how strange the politics of trade have become, because you had a beef industry that was saying, our sales have never been better in Korea; let's just finish this deal. And you had Max Baucus in the Senate Finance Committee saying, no. Unless you rewrite the rules to allow all American beef exports, I'm not going to support the deal.

So trade has been even stranger than it used to be in Washington, which is saying something.

At this time, I'd like to open it up and invite our members and their guests to join our conversation with their questions. As usual, please wait for the microphone and speak directly into it. Stand and state your name and affiliation and keep your questions short so we have lots of time for everyone.

Laurie, why don't we start up here at the front.

QUESTIONER: Hi. It's Laurie Garrett from the council. Thank you very much for your wisdom.

I'm having a very, very hard time grappling with what 21st century protectionism would actually look like concretely, absent the politics. Just, how does it play out?

Pre-World War II protectionism, American cars were made in America, steel beams were made in America, so you had control of your resources. But now with globalization, name an industry that isn't multinational in its production chain or its distribution chain or what have you. So protectionism looks sort of suicidal industrially. I don't understand, concretely, how it could play out.

The only example I see of it that helps me a little bit to understand this is how China responded with the rare earth elements, but that's an extraction industry, essentially.

So help me understand: What is 21st century protectionism?

ALDEN: Doug, do you want to take that one?

IRWIN: Actually, you're putting finger on something very important, which is I'm a relative pessimist on whether we're going to have future liberalization or -- this can be difficult to achieve, but I'm very optimistic that we can maintain the system we have.

And one of the main reasons is because of multinational investment, cross-ownership across borders and what have you.

The trade politics in the United States have changed dramatically from the 1980s. So once again, early 1980s, we had a recession, high unemployment, not a financial crisis, but very difficult times.

We had a domestic auto industry, a domestic semiconductor industry, a domestic steel industry, all wanting protection against imports. And now those industries are multinational. U.S. industry have ownership stakes abroad; foreign producers are here. And so there's not that domestic constituency in favor of raising the barriers at the border anymore. And it becomes much more subtle what protectionism is from specific bailouts or tax policy or what have you.

So I think globalization is good in the sense that it will help keep borders open, because there are fewer domestic producer interests that are in favor of raising trade barriers.

And when you add in supply chains and all of the others, that just reinforces it.

ALDEN: Can I ask along the same line to any of our speakers, should we abolish from the press the use of the term "trade war?" You know, every time there's a trade action now we talk about, is this going to trigger a trade war? And I honestly don't know what that means anymore. And has it become a completely meaningless phrase?

BARSHEFSKY: I think it's meaningless phrase, it's a silly phrase.

BHAGWATI: It's a trade skirmish. (Laughter.)

ALDEN: Because "trade war" does imply this sort of 1930-style tit-for-tat retaliation and we all go down the road to Armageddon. And it's not clear that that's --

BARSHEFSKY: I think what you have is a world where governments tolerate trade friction much better than they used to. And that's in part because there are a lot of mechanisms to resolving trade frictions, which keep those frictions, if you will, compartmentalized from other areas, typically, of international relations. So countries go well along being quite friendly, but having all sorts of lawsuits pending on trade-related issues, and most countries are perfectly happy to have it just that way.

So I think the notion of a war every time such an action is filed, when countries fully expect such actions to be filed, is kind of a silly use of the phrase.

BHAGWATI: There's one qualification or supplement to what Doug said, which is that, while producers are not going to be very keen to be wanting protection, the fact of intensified competition which you have today, which Charlene had referred to, that creates need for adjustment assistance in a very big way. Because when workers get laid off -- because workers are here. They're now. I mean, you know, for them, this argument doesn't apply.

And that's where I think China is important. I mean, we've been focused so much on imbalances and so on, but they come and go. I mean, look at how the dollar was a scarce currency, and, you know, it soon disappears.

So I think this whole focus has been terribly counterproductive. The really important thing, I think, which is about China, is that it's such a large country and such an open country -- (inaudible) -- reliant on trade that we have essentially -- it's like the image I use of Gulliver in a Lilliputian world economy. It creates tsunami waves for lots of special industries, just the way the Japanese did in the 1930s when you had $1 blouses and lots of labor-intensive goods coming out, and then we wound up worrying. That's when the phrase "yellow peril" came in.

So I think what you need to do is worry about China actually creating waves, not overall waves for us, but for specific sectors where they happen to be competitive. They're also creating waves on the import side because they use raw materials which then become scarce and affect our user industries. So it's like double Gulliver compared to the one Gulliver in the 1930s of Japan.

And I think the main thing, which is going to stay for a while, is the need for adjustment assistance to (accomodate ?) China in the world economy.

ALDEN: So it's interesting that a colleague of mine has been working on a paper about one hard-hit region in the Midwest, and the major form of adjustments is not trade adjustments, it's disability insurance. People ending up -- you know, claiming disability because it's the only program they can find that -- support them.

Further question, we'll go right to the back here and then we'll --

QUESTIONER: I'd like to go back to the question of the prospects of the FTAs in the new Congress. Charlene, you said what's always been the orthodoxy, which is, you can only get this done when you have strong presidential leadership. And we certainly saw that in the Clinton administration.

But in the situation we're going to be faced next year, where you have a new Congress, the Republicans have already said their number-one objective is to defeat the president every time they can, doesn't his standing up and making this a really important thing lessen its prospects? And is there another way to get this done? (Laughter.)

BARSHEFSKY: Well, it would lessen its prospects if you thought Republicans did not have an independent interest to see something get done. But Republicans, I would argue, have an independent interest for seeing trade agreements pass, and that is to shore up business support in the face of an insurgent tea party and concerns the business community has about that and the sway of the tea party within the Republican Party.

So I think for the Republicans who are traditionally open-trade-oriented, and who traditionally have wanted to distinguish their brand of economic growth and theory from that of trade unions, have an independent interest for seeing something get done. I think that's one of the reasons you see people saying that trade may be, ironically, one of the areas which the administration and a Republican-dominated House might be able to agree on.

Look, I still think it's a very, very heavy lift, and the way the Republicans will play this, in part, is to insist that a number of Democrats walk the plank, on the theory that, come two years from now, that walking of the plank will hurt the Democrats more than it will ever hurt a Republican.

And so that's why I say the number of Democratic votes, you know, somewhere between 50 to 65, at a minimum, because part of the price of moving forward will be, I think, Republican insistence for more Democratic votes than they reasonably believe exists.

ALDEN: Next question. Right here.

QUESTIONER: (Inaudible) -- from NIPFP. Many years ago when economists used to think about trade, the argument was that the bang for the buck in agricultural liberalization is relatively small because agriculture is a small part of world GDP and there are lots of workers. So the great focus was on manufacturing, trade liberalization.

Now, if you fast forward into 2010, services GDP has come to dominate world GDP. And in some sense, maybe we are fighting the wrong war. We're continuing to fight on problems of manufacturing liberalization. We're continuing to take interests in agriculture liberalization. But the real front here is services trade liberalization.

The Europeans have got some very interesting things going. You could be a German producer of mutual fund paper, and you could sell it anywhere in Europe, and so on. So the Europeans are trying to build a lab for globalization with an unprecedented level of competition and trade in services.

So I wonder where all this fits into our future thinking about the WTO.

BARSHEFSKY: If I could just start at least by saying that I agree with you fully. I think one of the reasons Doha holds almost no interest for the American business community is, first of all, it is heavily agriculture focused, again. Second, the manufacturing issues have not been sorted out. But in any event, there are very few businesses that will tell you manufacturing tariffs are of any concern whatsoever anymore. And third, that there's nothing in the deal on services that's meaningful, and that's where the growth of U.S. trade has been.

So certainly, I've said for some time that the next free trade agreement that the U.S. does should not be with a country, it should be cross-cutting, and that is, an FTA on services with other major services-supplying countries. And that would then be an agreement that could be taken to the WTO with the hope of further expansion by the addition of other members.

This is exactly how we did financial services liberalization in the '90s in the WTO and telecom liberalization and removed tariffs on technology goods. And that is, you start with a small core of the countries who actually trade heavily in the particular sector or area. You open up that core agreement to anyone who wants to join in under the auspices of the WTO. And in the case of telecom and financial services, you can't get in the WTO unless you join on.

So I agree with you. We're not fighting the last war. That wouldn't be so bad. We're fighting the war from a number of years ago.

On the other hand, agriculture liberalization is very critical to the developing countries. And in that regard, the U.S. and Europe ought to do the right thing. And inasmuch as we can't afford the subsidies we provide -- nor can Europe, to be frank -- those subsidies ought to be sharply, sharply reduced and curtailed.

ALDEN: Charlene, what would be part of such a negotiation on services? What would be the very sectors that would fall under that umbrella?

BARSHEFSKY: All. It would be a services negotiation.

ALDEN: So insurance, financial services --

BARSHEFSKY: You'd start with what you have in the GATTs. You'd throw in the telecom agreement and the financial services agreement, which has to be updated in any event. You sit down with Europe and Japan, one or two other countries, and you hammer out what would be a reasonable services agreement. Almost doing anything would be beyond what you're going to get out of the WTO.

ALDEN: Yeah. And you can certainly imagine the possibility of exciting business a bit more. I mean, the contrast would --

BARSHEFSKY: Oh, no, that would be very exciting.

ALDEN: -- with the end of the '80s when there were, you know, the pharmaceutical industry and the motion picture industry and financial services groups, Americans thought there was such interest in the trade liberalization agenda that you just don't see in the current agenda anymore.

Further questions? Right here. Sorry. Behind you first, and then --

QUESTIONER: (Inaudible.) I want to touch upon two disconnects that I see, given the effect of technology, number one, on the liberalization of global flow of technology, capital goods, free capital flow, it's in emerging markets, emerging countries, India, China and developing countries. The pace by which the price of commodities, raw materials and the currencies are going up and down and the volatility, on the one hand, and on the other hand, the pace by which policies are being decided by especially Democratic countries.

And to your points, comparing it to the pace by which China makes a decision, supposedly in a market economy, but three days ago, they come out with a decision, okay, we're going to cut down inflation. Raw materials collapse in three days; in four days dollar goes up like crazy. There is a bit of a disconnect of pace and timing between policy and market-driven pricing. Can you comment on how that affects their policies?

ALDEN: Jagdish, you want to tackle that one?

BHAGWATI: I mean, this is something which, outside of the trade policy framework, we all know that currency flows essentially are far more quick and volatile and so on. So I think this is one of the reasons why I think the idea that we should extend to services the notion of liberalization fully, when we are embracing financial sector liberalization, I think it's going to run into a roadblock.

Mike Moore, who was here the other day, he's now -- not the mad one, but the former director-general of the WTO -- (laughter) -- he now represents -- he's an ambassador of New Zealand. And he was saying, you know, we are going in the -- (inaudible) -- to full liberalization of services. And I said, look, you haven't lived in this country long enough, you don't know. But I mean, you start talking about opening up the financial sector to free flows, it means you haven't lived through a crisis at all, you don't have a clue.

So I said, you know, take financial services out, bring them in later. But anything like UPS, DHL, whatever you want to, non-financial services is something we can negotiate.

And I would just add one more point to what Charlene was saying, that already in fact there are lots of things which have actually been done, which have not been accounted for. Like in India, lots of things have opened up, like Credit Suisse finally opened up a full branch of its own, which was unthinkable before.

So you could actually package a lot of these things which have actually happened, and then work for a deal, right, rather than start at the telecom kind of end. So I think there's more give, but not on the financial side. Forget it. I mean, that will kill whatever you want to do, at least in this country, unless I'm reading the things that --

BARSHEFSKY: No, I think -- look, I think you could -- well, financial services has been done once, and there was quite a bit of liberalization. That needs to be updated just because prudential rules are very different now and so on.

But I do think -- and I think that can be done. And the services sectors of course encompass an extraordinary array of things. And it just seems to me that's where the growth is, that's where countries really have not liberalized in accord with any plan for convergence along the way.

All the Uruguay round did in services was basically a fancy standstill. Just don't do anything worse than what you're doing now. But that didn't bring services regimes in concordance.

And so I think there's a lot to be done there, which would be much more productive, a more productive use of time than manufacturing tariffs which are really not the issue.

ALDEN: And might be politically easier, because services liberalization is so complex that nobody can begin to understand it. So probably good to have -- (laughs).

BARSHEFSKY: Well, it's complex, and it may be easier in general because you tend to have -- and this is a gross generalization, but I think this is right -- you tend to have substantial leadership on the services sector side through various trade associations and so on, that are quite pro-trade and want the opportunity to be able to export or operate cross-border in some fashion.

BHAGWATI: With the views you have, Charlene, on manufacturers, you wouldn't get a job with Jeff Immelt, I'm sure. (Laughter.)

BARSHEFSKY: Good thing I'm not looking.

ALDEN: Do you still have a question, sir? Wait for the microphone.

QUESTIONER: Yes. In discussing the --

ALDEN: I'm sorry, could you just identify yourself quickly.

QUESTIONER: Abe Katz, former president of the U.S. Council for International Business. In talking about the politics of trade, Charlene, I think we have to spend more time understanding the role of the trade unions in all this. It's not because they got the wrong idea. They're in a quandary. They've lost members because the whole character of industrialization in the United States has changed. They won't get -- they need members. They won't get card check, so this is the only thing that they have, is stopping all trade.

My experience has been unfortunately they don't want any -- they'll fight any move to liberalize trade. There isn't a way that you can convince them that trade will be good.

And I really wonder, when you said, Charlene, depends on whether the president can work with them, whether this president will want to override the union. This is a question, his own ideology and (conscience ?).

But as far as trade unions are concerned, I have a question for Jagdish. You're going to try to resuscitate the Doha round. We always believed that in order to have a multilateral trade negotiation, you need fast track. The one thing that the unions will be absolutely opposed to is fast track. They'll try to kill it in a number of ways.

What's the strategy? Wait for a Republican president or a president who will squelch the unions? I'm curious as to how you see the future?

BHAGWATI: Charlene is the expert there.

BARSHEFSKY: Well, thanks a lot. (Laughter.)

ALDEN: And I'm actually going to put Doug on the spot afterwards, just on the history, because the unions used to be a lot more supportive of trade liberalization.

Go ahead, Charlene.

BARSHEFSKY: (Inaudible.)

ALDEN: Well, why don't we start that, and then we'll put you on the spot on what the president should do.

BARSHEFSKY: Okay.

IRWIN: Actually, unions were typically neutral prior to World War II. So the AFL conventions in the 19th century and early 20th century, they took no position on trade, because they were an umbrella organization for so many individual unions, and each individual union had its own interest depending on the export orientation or the import-competing nature of the business they were in.

But really, you know, it did change in the late '60s, because that's when, you know, there's sort of this delay in terms of we had the GATT in '47, Europe was still recovering, Japan was still recovering. It was until late '60s, early '70s that major industries began to be really adversely affected by foreign competition. And that's of course when the unions stepped right up and came in.

And once again, the timing of when the unions changed their positions very much to avoid import competition, so the United Auto Workers was very late in the mid to late '70s, whereas the steelworkers in actually the late '50s were already complaining about trade. So it's very individual specific.

ALDEN: And what are the prospects now, Charlene? I was reading this morning, and it may just be a dodge, but Richard Trumka was leaving open the possibility that they might not oppose the Korea deal. (Didn't say ?) they'd support it, but said they might not oppose it. What --

BARSHEFSKY: Right. Yeah, look, the key, in terms of Democratic votes, the key is not union support. The key is simply that a vote for the agreement will not be counted by the union as among the key votes against which the union will measure whether you should be supportive or not.

So neutrality by the union isn't even needed. It's just not actively opposing. So that's a lower threshold, obviously, than having the unions decide that trade is a good thing. That's the first point.

Second point is, I think that the union movement has to consider whether it's in their interest to weaken the president if the president decides he wants to do this. And -- yeah, the Korean deal, especially.

And third, I think there are a number of arguments, particularly pertaining to the Korean deal, that are quite effective, including with respect to the union, having to do with national security, having to do with reinvigorating U.S. relationships and alliances in Asia, particularly now. Those are also very effecting arguments particularly to union members and more liberal Democrats.

So the threshold isn't as high as might be suspected. Having said that, it is really tough. And the president does have to decide whether this is how he wants to use a large portion of his political capital.

ALDEN: Further questions? Right here.

QUESTIONER: This -- I'm not sure -- (Inaudible) -- International.

ALDEN: Thank you.

QUESTIONER: I noted that there is much, I guess, view that the financial sector, you know, should be left out because it's going to be politically difficult. And I agree with that assessment. But it seems to me it's a very important sector, and there is much going on there in other fora, the BIS, all the industry associations on bond markets. And it's quite crucial to how competitive advantage of financial sector companies evolves.

There's a great fear that the regulation that's done at national levels in response to the financial crisis, that there will be a destruction of the level playing field. So I would just wonder if you have any comments or thoughts on how to try to move this to a more balanced, sort of level field.

ALDEN: I guess the question is whether this falls inside the trade system or whether it's just better to handle it in other forums.

BHAGWATI: I think it -- I mean, it should be left to other fora. This is like the, you know, the issue in the GATT's agreement on trade and services, what we call Mode Four, meaning provision of services, movement of natural persons. By "natural" they didn't mean ruling out Frankenstein and other unnatural persons. (Laughter.) They're just excluding forums, actually -- (inaudible).

But that is something where even liberal Democrats like Dianne Feinstein have the view that the flip-side of that is immigrational, temporary or permanent, so it should be dealt with in immigration debates rather than this part of trade. So that's exactly the, you know -- which is a perfect forum where it's just more important, more likely you'll get something accomplished, right?

BARSHEFSKY: Agreed, totally.

ALDEN: Yeah, and it's certainly true that the Uruguay Round put a number of issues out there on the trade negotiating table. And it's not clear we can move on all of them. I think the reach, in some ways, probably exceeded the grasp.

We probably have time for one or two more questions before we break for lunch.

We've silenced the audience.

BARSHEFSKY: There you go.

ALDEN: We've solved the entire -- (laughs) -- Sebastian, you've been integral to this whole event, so a good final question.

SEBASTIAN MALLABY: Sebastian Mallaby from the council. So one issue which might come up in future, you know, in this debate about 21st century protection, is raised by Charlene's comments to The Wall Street Journal in the story they ran yesterday about China, where you were talking about the way that the government was backing Chinese companies with cheap financing and so forth. And this came up in Larry Summers' comments, too.

And so I guess maybe a set of disciplines around government subsidies, implicit and explicit, might be a new frontier, particularly -- and of course, they bleed into questions about national security when you're dealing with the government that's doing the subsidizing being a potential rival, not just economically, but strategically.

So perhaps you could elaborate a bit on that. And I'd love to hear also what the others are thinking, too, about whether this is a proper part of the trade debate, this question of state capitalism.

ALDEN: And the issue has been raised of competition policy. How far should trade get into the realm of domestic competition rules?

Charlene.

BARSHEFSKY: Well, look, the issue of governments heavily subsidizing industrial sectors, indeed, going so far as to create them, is dealt with very well under existing trade rules. This is the case against Airbus which is an entity created and then financed by certain European governments.

It's the situation with respect to steel, particularly in Europe, but also Korea, where industries were financed heavily by their governments.

And so, too, in the case of China or any other country, including the U.S., that heavily subsidizes industries or creates industries that weren't there. These are already practices very well dealt with under WTO rules.

The rules process ought to be -- the dispute settlement rules process ought to be enhanced, in my view, by providing for injunctive relief, so that if a case is pending, a government is forced to stop doing what it's doing. And this is, I think, an unfortunate gap in the rules that needs to be corrected.

But having said that, I don't think new disciplines on subsidies are needed so much as governments acting on the subsidies they do find, and taking these issues to the WTO for appropriate resolution.

ALDEN: Doug, have you --

(Cross talk.)

Yeah, please.

BHAGWATI: The whole point about this is the green subsidies.

BARSHEFSKY: Yeah.

BHAGWATI: They actually were not actionable until '92, and then they were removed from that. And so I think we'll have a problem to get back to it, because I think everybody's really wanting to subsidize, you know, green technology. So we probably should put it back into a non-actionable box. Because I think --

BARSHEFSKY: Well, I'm not --

BHAGWATI: -- there's universal agreement on that, I would say.

BARSHEFSKY: Yeah. On that, I'm not sure about, because you have a situation where there's already a concentration of productive and other capacity; in the case of solar, for example, most notably with respect to China.

That in and of itself will squeeze out other competitors because, you know, solar panels and so on, it's a scale business. That's all. It's a scale business. If you don't have the scale, you aren't going to make it unless you're a highly innovative or a highly particularized product.

But for basic stuff, scale is everything, and scale will be largely located in China.

And so for industries here that are then forced to source offshore, or who would like to have gotten into the business, the issue becomes, I think, one that's appropriately subject to WTO rules.

ALDEN: Doug, maybe I'll give you the last comment. Are there any kind of historical precedents for the sort of challenges that the U.S. and Europe and others face in dealing with Chinese state capitalism? Is there any way to help us sort --

IRWIN: Well, I just want to make two points. One is that there's a subsidy agreement through the OECD in the 1970s, because exactly the same issue came up. But the major issue -- so it was just the OECD countries. But the major difference is that then the subsidies were on the books, they were explicit government subsidies, they were identifiable and actionable.

The problem with China, I think, is a lot of these subsidies are implicit through the banking credit system and the state-owned banks. And who you channel credit to and what the price of that is, that's very hidden, very hard to see, very hard to identify, and it can be a source of friction, because the allegation will be very much like against Japan in the 1980s as to allocation of credit, that you build up surplus capacity that depresses prices.

And how you actually, you know, quantify, what is the magnitude of the subsidy, very, very difficult thing to do. So it could be an issue, whether there's going to be growing friction in the future.

ALDEN: Very good. On that note, let's thank our panelists for an excellent discussion. (Applause.)

And you are all invited to join us for lunch until 1:00. Thanks again.

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