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U.S. Trade Policy at a Crossroads: What The People Really Want [Rush Transcript; Federal News Service, Inc.]

Speakers: Edward Alden, Bernard L. Schwartz Senior Fellow, Council on Foreign Relations, and Bruce Stokes, International Economics Columnist, National Journal, and Journalism Fellow, the German Marshall Fund
Moderator: Nancy E. Roman, Vice President and Director of the Washington Program, Council on Foreign Relations
May 22, 2007
Council on Foreign Relations

NANCY E. ROMAN: (In progress) -- forward to this conversation with our guests, Bruce Stokes and Ted Alden. Many of you know one or both of them. But really, no two better to have the kind of conversation that we'd like to have about trade tonight, and we really do want it to be a conversation.

Bruce Stokes, among other things, is a columnist for the National Journal and has read -- written so many thoughtful pieces from which I have learned over the years, and he was previously a senior fellow here at the Council on Foreign Relations. And Ted Alden was the esteemed bureau chief of the Financial Times and is now here as a senior fellow on trade issues, immigration issues and other assorted economic issues. And so both of them really, from their positions, have looked at trade up close, down in the weeds and in a personal way, but also taking some steps back and looking at it in a broader sense. And what we wanted to do tonight is -- you know, there's so much going on right now in trade -- maybe there always is, but it feels like it. We've got the bilateral agreements with Peru and Panama. You've got a Doha agreement that is languishing on the vine. We're on the eve of the Strategic Economic Dialogue with China, and we've got the perennial currency debate before us. And if in the Q&A we want to get down into those things, we could all have some fun.

But we really wanted to begin by taking 10 steps back and really trying to think about what is sort of happening in the psyche of the public, and hence the psyche of the Congress and in this town on trade. You know, just to begin, you know, with my own observation, it seems like we have this anxiety in the middle class that's called anxiety about globalization. But when you really peel back the onion layers of what it is, it's anxiety about the cost of heath care, about the high cost of college tuition, about job churn. Yet this anxiety attaches itself to trade, so we see sudden -- you know, uproar over Dubai Port World or support that surprises even Chuck Schumer for his Schumer Bill that puts tariffs on China. And it's a public that thinks of itself as free trade, but is increasingly willing to embrace sort of protectionism.

And so I wanted to start with this very broad question that I'll put to each of you, but starting with Bruce is, what in the world's going on? (Laughter.)

BRUCE STOKES: I mean, it does seems to me that there is growing anxiety about change and about the pace of change, and this is happening at a time of a globalizing economy. And so I think that we can't disentangle these two things. I mean, clearly the -- globalization plays a role in people's anxiety about other things that are happening in their lives, and globalization has a role in creating some of these issues for people. I always like to use the example of when workers blame trade because they lost their job and then economists come in and say, "Oh, it wasn't trade. It was technology that caused them their job loss." Well, the reality is when General Motors puts a robot on the factory floor, it doesn't do it because it likes robots. It does it because it's trying to keep up with the Japanese. So workers understand that, and I think that we have to understand that you can't disentangle these things, and there is great anxiety.

On the other hand, I think that we need to be very skeptical of those who say there is, quote-unquote, "rising protectionism." It's rising relative to what? Compared to the 1980s and compared to what we attempted to do vis-à-vis Japan, we are -- and we're close to being -- to having the kind of protectionism in this country today that we had in the 1980s, when we had controls on imports of cars and steel and machine tools and semiconductors. We have none of that today. By the same token, clearly there is rising interest in doing things in the Congress. There is some recent survey data that show that people's anxiety about trade is beginning to rise. Even though it's still fairly positive, it's -- their anxiety's beginning to rise. So I do think we need -- this bears watching, I agree.

ROMAN: Mm-hmm.

EDWARD ALDEN: The first week I joined the Council here in January, I went up to New York and Gideon Rose, who's the managing editor of Foreign Affairs, gave what seemed to me to be a very good piece of advice and he said, "Don't ever be afraid to say the obvious." So on -- in answer to this question, I'm going to say something that seems obvious to me. It's probably obvious to everybody in this room. The thing about trade is that there's no question that trade has benefited the United States enormously, but the benefits are spread very unequally. And I think what we've seen over the last decade is an intensifying of that inequality, certainly not all due to trade; there are many other factors underlying it -- technological change being the most noticeable one. But if you look at the data, there's no question that the percentage of the population that is seeing real wage gains is getting narrower and narrower and narrower. Matt Slaughter, who was formerly a member of Bush's Council of Economic Advisers and just joined us recently as an adjunct fellow, has looked at the numbers for 2002 to 2005 and they're quite striking if you break it down by education.

That -- you know, we're all familiar with the story -- well, those with high school educations or less have done very poorly relative to the better-educated over the last 30 years. Well, if you take the data from the last five years, every category except the very top -- being basically professional degrees and PhDs -- every category has seen slight, or in some cases, significant declines in real wages. So the reality is that the benefits of the growth that we've seen in this country over the last decade -- much of that associated with an open trading environment and the trade agreements that we're all familiar with -- those benefits have not been spread at all equally in the U.S. population. And I think that accounts for a great deal of the anxiety that we see coming to a head now in the U.S. Congress.

ROMAN: But it sounds like what you're saying is that the returns to -- on education aren't as great as they once were. But would putting tariffs on China or forcing them to revalue the Renminbi or stopping Dubai Port World from happening -- would any of those things that we see happening address that point that you're making?

ALDEN: No. I think it would make it worse. But you've got a situation were you've got a political system that's more or less in paralysis. I mean, we could all make a big list of urgent things that need to be done to address long-overdue domestic economic problems have to do with a low savings rate, with the long-term crisis in Social Security and Medicare, with the lack of job retraining, with an unemployment insurance system that was designed for an economy that no longer exists. But Congress and the administration haven't shown themselves capable of making progress on any of these things. It's much easier, I think, to turn to external causes to say, "Well" -- and they're -- you know, I'm not saying that there aren't real international problems out there. There are real trade problems with China and elsewhere. But protectionist sorts of responses of the kind you're talking about aren't -- no, they're not going to solve any of the underlying problems. But in the absence of action on the underlying problems, you can see why there is public enthusiasm for any effort that seems to least be taking the problem seriously, even if it's a counterproductive one.

ROMAN: Mm-hmm.

Let me ask you, Bruce, because it is true that it seems like one of the things that even the Republican party has concluded is that trade isn't all gain and no pain -- that it seems like in the wake of NAFTA, people acknowledge that it's harder than we think and that there are costs associated with it. When you look at some of the potential remedies, be it wage insurance or portability of health insurance -- I guess I have a two-part question that I'll put to both of you. One, why is it hard to sustain discussion and momentum for these things? And then of the various options on the table, which would we prefer to help offset the costs associated with trade?

STOKES: I guess my sense is that even though there are costs -- and they are very severe costs, and I agree with Ted. I think that the evidence of the costs becomes more and more evident every day. And yet I don't think the pain is sufficient to actually move the country to make the kinds of changes, because I think we need a -- we need to have it crystallized into a broad change. If you look at the Scandinavian model, where the Scandinavians have a -- what's called a flex-security model, where they have an extraordinarily flexible work force, which is what we want in economy, what you want business environment -- but you have a very strong social safety net -- health care, pensions, retraining and so forth. They got that after a crisis in their economies, a crisis that's -- that was at the level that we haven't yet experienced.

And my guess is you -- to make that broad leap because what you're suggesting is why -- can we do it more than just piecemeal, and I think we should obviously. I mean, it's -- it would be great if the next election was in part a debate about how to create a more flexible and more secure economy to cope with globalization. I doubt that we're going to get that. We'll get little piecemeal things that won't really kind of address the entire problem and -- but we should. We should have a broader conceptual thing that would include a variety of different issues. It's interesting in this deal that the administration has struck with Capitol Hill. Charlie Rangel forced into the deal a strategic -- an agreement on a strategic approach to all -- to training that would include not only training but portability -- health care portability, pensions. Now, the chances of Congress actually addressing that in the next year and a half I think is almost zero.

ROMAN: Okay. So let me just jump in for a minute. So if I take your point and I do -- that the pain isn't sufficient to build the political momentum that would be required to affect some of these things that probably a lot of people in the room think would be a good idea -- then where are we? I don't want to be extreme but let's just ask this question. Let's just say we're not going to do any of those things. Have we reached a point of diminishing returns where we're just not going to see many more bilateral trade deals or many more rounds? What if we were sort of frozen where we are now? How would things look 20 years hence? Because it's hard to see having the political momentum to drive a lot more trade deals if you're not going to be able to address any of the costs. And if you disagree with that analysis say so.

STOKES: Yeah. Why -- I think that if we see future trade deals in the next administration it -- they're most likely to be trade deals with fairly rich large countries -- Japan, Europe, maybe countries along the level of South Korea, where some of these issues don't arise like cheap labor -- where you might be able to make the case for strategic reasons -- this is a useful thing to do. And certainly it's a big market so you can mobilize some interest in the business community for these. I think we've kind of played out the string on doing deals with small poor economies that have cheap labor.

ROMAN: Uh-huh. Okay. Well, I'm tempted to ask you about the deal with Europe, but I won't because I don't want to go down into the weeds.


ROMAN: Ted, do you want to build on this?

ALDEN: Well, I mean, to sort of build on the last point, I think every year it clearly gets harder to keep up the momentum on trade. We've seen it in how long Doha is dragged out for -- you know, an agreement that has a lot less on the table than the Uruguay Round did and yet has been every bit as difficult to complete. So I think we will continue to see a slowing, and that's partly, I think, because some of the domestic things we're talking about but partly because it just get -- it gets harder and harder to do. You know, the trade -- the post-war trade agenda for most of 40 years was essentially about removing tariffs. With the Uruguay Round, it got into a whole bunch of other areas like intellectual property, and rules and subsidies and more complicated areas. The next stage, if you really want to push forward, you're going to get much deeper into internal economic policies -- areas like competition policy and others that are much, much harder to move forward on.

So I have every reason to anticipate a slowing, not just because of internal skepticism about trade, but because it's actually harder to do internationally than it was in the 70s or the 80s or the 90s. I'm not sure that that's a great problem as long as you don't see an undoing of what's been done. I mean, to build on Bruce's point about how the protectionism that we've seen is incredibly modest compared to the 1980s, I think the reason for that is the existence of the WTO, and to a lesser extent NAFTA and other agreements with dispute settlement procedures. You just can't do any more unless you're really willing to blow up the WTO rules system. You can't do a lot of the things that you were able to do in the 1980s. You can't go to the Chinese and pressure them into voluntary restraints the way the U.S. did with the Japanese. You can't unilaterally impose tariffs when you're particularly upset because that's a blatant WTO violation. Not even clear that some of the things Congress is talking about now you can do without running afoul of the WTO. So it's been -- it's acted as a real brake on the U.S. ability to backslide on its commitments, and I think as long as that holds you can imagine a situation going on for quite some time in which there was minimal forward progress but not any serious backsliding, which is I think where you potentially get --

(Cross talk.)

STOKES: And to reinforce Ted's point -- I mean, if you look at what's being proposed to be done against China, for the most part people are trying to make it WTO-consistent. There -- at the margin, there are debates about whether certain things will or will not be WTO-consistent. But what's most interesting I find is that nobody's saying, "The hell with the WTO -- we'll just do this. Let them sue us." And, you know, which would be potentially an approach people could take. But certainly the --

ROMAN: A few might want to.

STOKES: Yeah, I'm sure there are a few would be more than happy to, on the extreme right and the extreme left. But for the most part there's an attempt to make these things WTO-consistent or at least consistent enough that you'd have a chance to win a case in a -- in dispute settlement, and I think that that is a change that is quite striking. I think in retrospect when we created the dispute settlement system in the WTO, I'm not so sure I would have bet that something like the Byrd amendment -- that we'd change the Byrd amendment on anti-dumping, or that we would change the way we tax the overseas profits of our corporations just because the WTO said we should, or that we would change the way we subsidize our cotton farmers just because the WTO said we should. I -- it -- there is -- there's been a movement in this town which I think we have -- none of us have fully appreciated. Now, whether it'll sustain itself -- I mean, obviously it could change over time, but there's no sign of that eroding at this point.

ALDEN: I think it only erodes in a really serious economic crisis --

STOKES: Right.

ALDEN: -- you know, huge rise in unemployment --

STOKES: That would be the test.

ALDEN: -- where people say the rules -- the old rules don't work anymore.

ROMAN: Okay. Well, let me ask you I guess -- it's not part of the script but let's go to China. We're on the eve of the Strategic Economic Dialogue and China's come up. So without going over the well-worn details of the Renminbi, let's just sort of look at the situation. We've got a business community and an investment community that's about as excited as a China -- about China as it ever has been. That's where the businesses want to be, that's where the deals are. China's trying to buy a stake in Blackstone. There's more excitement and enthusiasm at that level than ever before. The public, and hence the Congress, is probably as anxious as they've ever been about the China relationship, and we've seen some of this in the lead-up to Vice Premier Wu Yi's visit. How do you see the bilateral relationship working itself out over the next couple of years?

ALDEN: The difficulty I would say is that in some respects both of these constituencies are right. I mean, business is right -- that China's the most exciting thing going on economically in the world. They have lots of reasons to want to keep that going forward. The anxiety that you see in the Congress, apart from the factors that we've discussed, I think reflects the reality that we're in a situation that cannot continue indefinitely. There is a serious imbalance in the global economy and nobody has any great ideas about how you right that imbalance.

I think both sides -- you know, both the U.S. and China -- have a very, very strong vested interest in not letting the situation get out of hand. It works in the Chinese interest because they've got a very strong market for their exports, which they need for domestic, economic and political reasons -- works in the U.S. interest because it keep -- it keeps interest rates here low and keeps the U.S. economy moving forward. But both sides need to find a way to rebalance, I don't think there's any question about that, and neither is really focusing sufficiently on the things it needs to do internally to rebalance, and that's where I worry. That's where I worry that the longer you have a situation right here really -- which really is fundamentally imbalanced, the greater the danger becomes of some kind of precipitous action on either side.

ROMAN: We need to save more and they need to consume more? You mean internally?

ALDEN: They need to consume more domestically. We need to save more. Yeah, that's the basic --

STOKES: And I do think -- I mean, there are two problems, and one is that the model that we're using to apply pressure to the Chinese is the same model we used with the Japanese -- the Gyatso model -- the foreign pressure model. And it's arguable whether that really ever had much impact on the Japanese. We thought it was worth pursuing in the 1980s. It may or may not have had an impact. But that assumes that the Chinese will react in the way we think the Japanese favorably reacted. That may be a big assumption about China. Second, I'm concerned that the Chinese don't understand us very well. They don't understand our system, they don't -- we were worried the Japanese didn't but they learned very quickly. I'm not so sure the Chinese are on the same learning curve about how our system works, how to play our system, how to interpret what our system does.

ROMAN: So if you were advising them, how would you counsel them to play our system?

STOKES: One, it seems to me that they have to get over the fact that they're Chinese and assume that they're just players in the game like everybody else, so that they aren't the "middle kingdom" that is somehow special and should be different.

I think that -- and I hate to say this, although there's a lot of people in this audience that who would make a lot of money off of it -- you know, what happens is -- you play that game, is you spend a lot of money is this town. You hire a lot of good people -- now they're doing more and more of that, which is -- which is actually -- is exactly what they should be doing. They need to begin investing in real assets in the United States because that buys votes in the U.S. Congress -- it's a tried and true system now. It's harder for them because what would they invest here that they couldn't make just cheaper in China? But it seems to me we need to find ways to get them embedded into our political system so that they can play the game and understand the game better.

This is going to take time and it's not clear to me yet that they have decided that that's the game they want to play.

ROMAN: Mm-hmm.

STOKES: And I think, you know, also that this is the point that the Treasury secretary, Hank Paulson keeps making. It's a question of the pace. I think the Chinese want to move in the right directions but there are lots of reasons which are -- many people are starting to probably understand better than I -- why it's very, very difficult for them to do that.

And so I think, you know, if I were counseling them, I would say, don't overreact to every blip coming out of the U.S. Congress. I think that there is basic agreement between China and the U.S. that China needs to keep moving in the direction it's moving, it just needs to be moving a little faster. And the question is how long you can play that game out for. As long as there continues to be progress, I think you will see the U.S. hold off on anything serious.

ALDEN: And, you know, just to talk about the strategic initiative tomorrow. Wu Yi is here. Wu Yi is a much revered, tough, former trade negotiator of the Chinese. She's not a member of the leadership council in China. She has no responsibility for most of the financial issues over which they're going to be discussing. Now a negative interpretation of this is they sent her to talk to us, but they didn't send somebody who could actually make decisions. So, you know, the proof is in the pudding in terms of what these talks produce.

It is -- it would appear that there will be some movement in these talks. It's not going to be anywhere near the movement that the country needs or the Congress needs. And post-talks, it seems to me the rhetoric to do something is going to increase. And I would predict that Congress will pass something. Now whether the -- the president will probably veto it, in which case it probably won't pass over his veto, but there's going to be some movement.

ROMAN: Okay. I think we'll -- we'll turn to you. There are microphones, so anyone who wants to get in, just raise your hand, state your name and affiliation, and we'll come to you. Who wants to lead off?

While we're waiting -- okay, you'll be first, but I want to ask Tim Adams to weight-in (sic) on the point that Bruce just made, okay? So he's just fresh out of Treasury and has a lot of perspective on this Wu Yi coming.

What's your sense about --

TIM ADAMS (Former Treasury undersecretary.): (Off mike.)


ROMAN: Well, we are -- we are on the record but my question is, from your perspective, do you think China choosing a person who couldn't engage in the financial issues was an intentional sign?

ADAMS: Thank you. Well, they didn't have much choice. Huang Ju, who was in charge of that portfolio, has pancreatic cancer and so was unable to participate. And she is a seasoned veteran -- she's been around this game for 20 years, and she's a known quantity, and she's -- she's damned tough. And she may be here to talk "at" us for the next 48 hours and she'll be very good at that.

But I think Bruce is correct in that I don't China understands us, nor do I think we truly understand them. And so it's that lack of understanding -- although getting better I think, gives rise to the possibility of policy mistakes that -- if made on one side of the Pacific will only be replicated and reverberate across the Pacific. Whatever we do, whether it's -- whatever the legislation looks like, you can, you can bet that they're going to retaliate in some form or fashion.

And I agree with you, I think there's a high probability that we see something that passes -- and I suspect the rhetoric is going to get turned up pretty loud in the next couple of days, and starting next week Congress will be in rare form.

STOKES: And I think Tim's point is very important -- and this is the potential difference with the Japanese: We would hit the Japanese and they would turn the other cheek because I think they were wise enough to know that it probably didn't matter that much and that there was a longer game to play here.

We don't know yet whether the Chinese will have that sense that, "We can absorb some punishment here." I think -- and my fear is yours exactly, that they will feel, "No, we have to respond and show those Americans, you know, we don't take this kind of stuff." And then you really -- things could get ugly.

ADAMS: And I would add that the metrics -- the dashboard for our relationship is only going to deteriorate. The first quarter reserve accumulation was on the average of about $500 billion annually. And I think it's $1 million a minute that -- accumulating reserves. Those kinds of numbers -- and the rebalance that you talk about is a decade, maybe two-decade-long phenomenon. So these statistics -- this dashboard is going to continue flashing warning signs for a very long time.

ROMAN: Okay. Right here.

QUESTIONER: Irving Williamson, U.S. International Trade Commission.

I want to sort of think back if there are any lessons we can learn from the '88 Trade Act -- which started out as the '88 Trade Act and wound up as the '88 Trade and Competitiveness Act. Now I must confess I can't remember any of the things on the competitive side that really had a long-term impact -- (laughter) -- but I was very comforted at the time that we did talk about competitiveness. And it seems to me that what the real crisis is the crisis of leadership in the country -- that we're not addressing, but everybody agrees is the real issues like, you know, health care, education, ensuring that a broader range of our citizenry are participating in the benefits of international trade.

And so I guess my question is, how do we -- how do we get to that? How do we get our political leadership to address the things that are going to allow us to compete in the global economy on a long-term -- irregardless of what happens with China?

And as aside, the other lesson from the '80s, I think, was the Japanese investment in real estate and what happened to all of that.


ROMAN: Yeah.

QUESTIONER: And I'll stop there.

STOKES: I do think it interesting when the Democrats took control of Congress, I -- my hope at the time when I wrote it was that you would see, on a smaller scale, a repeat of the '88 Trade Act because you had the kind of "balance of forces" -- with a Republican president, a Democratic-controlled Congress with a fairly moderate leadership, that you could see some kind of deal.

And I think, in a small way, the deal we've seen -- that Charlie Rangel brokered, is an example of that. I think that's closer to the spirit of the '88 Trade Act, which was very much a kind of "Yes, but" trade act -- that we want to move forward on trade, there are big things on the table, but there are a lot of things we need to do in terms of enforcing our trade laws, dealing with environmental labor standards, and doing things at home with trade adjustment assistance and others that are not getting done properly.

Q (Off mike.)

STOKES: The question is whether you can -- on even education and other -- the question is whether you can scale it up. There's a real institutional problem in the Congress, right, which is that a lot of the things that you need to do to reinforce the trade agenda are out of the control of the committees that deal with trade. You know, I think people like Rangel -- and Boxer and Grassley on the other side, are trying to do with trade adjustment assistance, things that really should be done in other parts of the Congress -- and the administration should be done on a much larger scale. And you link it to trade in an effort to find some way to do something.

Optically, I actually think it's an unfortunate thing. I think, in terms of the selling of trade domestically, the whole idea of trade adjustment assistance is a very bad idea because it sort of takes out this one category of jobs that are lost due to international trade competition and puts all the focus on that, even though that's a very small percentage of the, you know -- what is it, 15 million jobs that we turn over in this economy every year. But I think, institutionally, it's hard for Congress to deal with it any other way.

ROMAN: Yeah.

ALDEN: And I think one of the struggles we face is that -- and the economy is doing very well, and implicit in what we're talking about here is, "Yes, but, a) we have to keep running this fast forever because we're now in a global system, and b) maybe we could do better than we were ever doing." But that's hard to sell, politically, it seems to me.

ROMAN: But see part of the problem is, it is true -- if your measure is low unemployment and, you know, GDP growth and everything -- we're doing just great. But when you poll people to ask them how good they feel about the economy, the numbers are very low. And when you try to dig deeper -- you ask them how secure they are that they'll have this good job they have this year, next year -- and those numbers are just strangely high. And so I think that's part of it.

The other thing, on the question about education -- because I agree with you. So much of whether our workers are competitive -- which is a big piece of this, has to do with what we're doing in education today, for 20 years hence. And you have members of Congress calling the shots -- who get elected every two years, and you've just got a structural problem there to sustain the momentum.

Okay, in the back. Camille?

Q Thank you.


Q Camille Caesar, U.S. Department of Commerce.

Thank you both for your comments about the need for a paradigm shift in both the Chinese and the U.S. political economies. I wanted to follow up on that and just ask you to revisit -- I think the period we've talked about 25 years ago, when we faced the challenge from Japan and when so many in policy circles and even in -- you know, sort of rarefied and boring political science circles were saying that we had to develop a comprehensive industrial policy. We had to look at Midi (ph) is doing. We need to do that. And I think Blueson (ph) and Harrison were quite good at that, and there are a number of people who are -- some of whom are still on the scene -- who were kind of beating the drum for industrial policy. We have to pay attention to IO. We have to think about this proactively.

Absolutely no one that I have heard is saying that now. Could you speak to that point? Thank you so much.

STOKES: It was the point I was trying to get at. I mean, you had in that period a sense of fear that doesn't exist now. And so what's striking is that how little there is in this town of a competitiveness discussion that goes on.

Q I know.

STOKES: And now industrial policy is kind of discredited for all sorts of ideological reasons that I don't necessarily share, but I mean, it's real that they've been discredited. It's just that it hasn't kind of resurrected itself under some other moniker -- you know, which is what probably you -- one might hope would happen. And I'm not so sure how you -- I mean, I totally agree with you. Individuals, it seems to me, are feeling more and more of this pressure. You see it in the public opinion data. You see it in the personal income data. You see it in the fact that -- you know, the struggles people are going through are quite severe. But it hasn't, it seems to me, percolated up to this town, where people are willing to kind of comprehensively look at the issue and I don't yet see in, say, the presidential race, anybody making that an issue, really. I mean, even someone on the left like Edwards doesn't talk about that. He talks about how -- what to do about poverty and so forth or maybe what to do about trade, but not a more comprehensive competitiveness strategy -- how do we keep up with the Joneses, basically. That's --

ROMAN: Well, what is Edwards' position on trade? I know he's fought for the unions' support, but has he taken a public --

STOKES: He's strongly critical of NAFTA. He was strongly critical of CAFTA. There has not been to my knowledge -- there may well be in some odd speech or not -- you know, any kind of specific thing, say, the way Gephardt -- you know, had a very articulated trade agenda that was quote-unquote "protectionist." I mean, there was not -- as far as I know, that's not the case.

ROMAN: Okay.


QUESTIONER: Thank you. I'm Brett Lambert with the Densmore Group.

You touched on briefly the investment and understanding the U.S. and with the recent Blackstone announcement and the non -- they're not going to have any interest. They're just -- it's just a strict investment. But I'm wondering if you both could comment on how you think that portends to how it will play in U.S. politics. I mean, does that when they make investments like this, the people they invest in are shut out of a certain U.S. market, whether it be securities or whatever or just how you see that playing out over time.

ALDEN: I honestly -- I don't really see any controversy developing over this just because I think it was handled very cleverly. I think -- you know, the lack of any kind of voting stake, it seems to me, would diffuse any sort of reaction that you might get. You know, "Oh my God. You know, the Chinese government taking a stake in -- you know, in a big American private equity firm." So I think that was quite clever, and I think it actually -- it was intended and I -- you know, I guess we'll -- it remains seen whether it'll be received that way. But it was intended to send a very positive signal that -- you know, the Chinese are diversifying what they're doing with their foreign exchange holdings, which is something we've been encouraging them to do. But they're diversifying into U.S assets. So -- you know, it's not a sort of warning shot that, oh as a result of this pressure, you know, we're going to start investing in more euro-denominated assets or move our money out of U.S. dollars.

So I -- you know, I think it was intended to send a good sign, and I suspect it will probably be received that way. It's not quite -- it's not the same as the sort of -- you know, as CNUK kind of situation where you had -- you know, a company buying a major U.S. energy asset. I still think that was an extraordinary overreaction, but I don't think it's an analogous situation.

STOKES: I mean, I do think that Blackstone better listen to their Washington talent. I mean, if tomorrow Blackstone announced that they're buying some Silicon Valley, high-tech firm with military applications --

ROMAN: Mm-hmm.

STOKES: -- there's going to be trouble. You know, the fact that they're -- that the Chinese government would -- it's hard to understand how they would actually get access to that technology through Blackstone. It doesn't matter. There's going to be trouble. But I do caution you that despite the reaction to CNUK and to Dubai ports-- and it's true that 53 percent of the American public at the time of Dubai ports said they were against this. You know, that's down from 70 percent of the American public who was against the Japanese purchases of American assets in 1989. So the American public is getting slowly more accommodated to this. It's still a serious problem, and it will certainly be whipped up if Blackstone makes a mistake. But I agree with you. It seems to me on the surface at least, the fact that this is government money shouldn't necessarily cause problems if Blackstone's smart about how they handle it.

ROMAN: Mm-hmm.

Right there, in the blue?

QUESTIONER: Thank you. My name is Sonia Schott. I am with the European Broadcasting System in select -- (inaudible) -- of Panama.

I would like to know once Rodrigo de Rato from the IMF said that he's more in favor of multilateral agreements instead of bilateral agreements, probably because he was thinking about the Doha Round or the bilateral agreements they are going probably to sell with Latin America -- the U.S. with Latin America. I would like to know what speak more about or against bilateral or multilateral agreements -- who has to win more, who has to lose more with those modalities of agreement? Thank you.

ALDEN: So the question is whether there's more political opposition to multilateral agreements than to bilateral?

Q No, he criticizes, actually -- Rodrigo de Rato criticized the way that some countries are trying to replace multilateral agreements by bilateral agreements. So --

ROMAN: So is the question -- is there more upside gain in multilateral agreements?

Q Yeah.

ROMAN: And should we be fighting for them instead of siphoning the energy at the bilateral --

(Cross talk.)

Q -- and he recommended instead of bilateral, multilateral agreements.

ALDEN: Yeah. I -- you know, if we had (Jacques Des Baguate ?) here, he would give you a very clear answer. (Laughter.) You know, I think economists are generally agreed that you get more benefit out of these big multilateral agreements. The difficulty is they're hard to do. You know, the downside on the bilaterals tends to be a sort of transaction cost, that it's complicated to administer all these agreements because you have to figure out where each of the different components of some product that was made in a -- different countries it was made so you can decide what kind of tariff it applies for when it into the United States. But every time I ask business lobbyists and other about this, you know, is the -- are the transaction costs of these bilateral agreements getting so severe that you're beginning to rethink them, they always tell me no, that there are significant gains from the bilateral agreements, even recognizing those transaction costs. So I guess the question is more sort of political diversion, but again --

(Cross talk.)

STOKES: Also -- I mean, let's face it. If you're a trade negotiator and you can get the bilaterals done and you can't get the multilaterals done, you're going to pursue bilaterals because that the path of least resistance. And I think that whatever the theological argument is for multilateral agreements, bilaterals are the future for the time being -- for the foreseeable future. Now whether we get any of those done, that's a different question. We may not get any meaningful ones of those done, to go back to your question.

ROMAN: Yeah.

STOKES: But I think that even if we pull a rabbit out of the hat and we finish the Doha Round this summer, I don't think that there will be any stomach to start another multilateral round for a decade or more. It's just not -- people don't see the value of this exercise.

ROMAN: Yeah. And isn't part of that, to my point earlier about the point of diminishing returns that -- you know, in the first few rounds you have these big gains and then -- you know, in the -- in this last round, part of the problem -- Bill and I were discussing this earlier -- Bill Kratz, great staffer for the council -- you know, we were discussing this in my office. With every new multilateral round, we seemed to seem -- have a more tepid response from the -- you know, business community. And part of it is not just because the business community is tired or worn out or has changed its mind. It's because the upside gain isn't as great for them. You know, in the last round you had -- you know, the tech sector really motivated. You know, you had core constituencies really motivated and -- so part of this, it seems, is being able to negotiate around but has sufficient upside for all the key players to really bring it about.

ALDEN: Yeah, I don't -- you know, I'm not sure that the model of -- this is, you know, a slightly theological debate, but I'm sure that -- not sure that the model of these big cross-cutting global deals really works anymore.

The idea, you know, it's essentially a mercantilist sort of model, right? That everybody tries to maintain their trade barriers and negotiate them off against each other. And, you know, I'll give up textiles if, you know, if you give up steel tariffs and -- or, you know, cross-sectoral, you know, we'll get intellectual property and you'll get access to our agricultural market.

I don't see much evidence that that works anymore because there isn't enough left on the table. The idea of the WTO -- I'd be interested -- Ira Shapiro's here -- and I -- maybe I've just made this up, but I think it was the intention at the time -- was that you would move past the round system, that you would have this kind of built in agenda and you would negotiate in individual sectors and that -- there would be a kind of ongoing work program. And it was never clear to me why that was abandoned. I think it was abandoned largely for political reasons after 9/11, the U.S. and others wanted to show the world that trade, the economy was continuing to move forward and so they got together and launched the Doha Round. But I think in terms of actually making tangible progress, I think some kind of pluri-lateral negotiating model on substantive issues with WTO members who want to move forward on those issues actually probably makes a lot more sense. And I think that's probably where we'll go after Doha gets resolved one way or another.

ROMAN: Ira, do you want to weigh in?

ALDEN: You want to take responsibility for this, Ira? (Laughter.)

IRA SHAPIRO (CEO, Fisher Harris Shapiro, Inc.): No, I agree with Ted. We got it exactly right. (Laughter.) I mean --

ALDEN: I thought you were going to blame it on the Clinton administration.

SHAPIRO: No, the WTO was envisioned to be a forum for continuous negotiations. We have several sectorial negotiations at the outset which were successful in finishing up the Uruguay Round. I think historically we will view the decision to start the Doha Round as a mistake -- basically -- Leon Brittan's idea for a Millennium Round and something the U.S. felt they should do because Leon Brittan has started it. (Laughter.) And the WTO, I think, has been surprisingly successful in the dispute resolution area and terribly unsuccessful as a trade negotiating forum.

But I actually had a different question which was, if a leading presidential candidate came to the two of you and said, "Well, I understand" -- sort of -- "I understand the value of open trade and the dangers of protectionism but I've been reading Alan Blinder recently. And it seems to me that he's describing a world that is much changed because globalization has put in question so many more sectors that are exposed to competition than ever before. And I'm not sure what one does -- reading Blinder -- what does one do to keep the U.S. economy strong, to make changes that quick. And if you believe Blinder, can you run an economy while so many sectors are open to competition?" And what do I say to the people who ask me about Blinder's arguments?

STOKES: I mean, I would first say, I mean, take the -- I actually agree with Blinder. I mean Blinder's comments are highly controversial, but I think --

ROMAN: Well, could you just recap briefly what --

STOKES: Blinder's argument is that there are far more jobs threatened by outsourcing than economists are willing to acknowledge. And I think he's right in the sense that the economists who've studied this take a snapshot and say, "Look, the numbers are insignificant." But this is a moving picture and it seems to me the people you want to talk to are not economists about this but venture capitalists. You know, what are they investing in terms of what they think will be moved five years down the road. And when you do that, it curdles the hair on the back of your neck because I think Blinder's right. There are all sorts of things that technology will allow us to move.

Now, it seems to me the flip side of the Blinder argument is, so what do you do about it? I mean, most of this stuff is digitized and put in an e-mail and sent half way around the world. And so the only way you could, quote, unquote, "protect yourself" from it would be to make that illegal. And that would mean somebody would have to police every e-mail that every company sent out every day. Now, do we want to live in a society like that? I don't think so. Could we even do that if we wanted to? I don't think so.

So it does seem to me it is a dilemma without -- what you're suggesting -- without an easy solution. And -- but I do think the problem is graver than the economists want to acknowledge right now. And it's why you get 48 percent of white-collar people in this country think that trade's not worth the threat to jobs. Now, that's a very high level for white-collar people because white-collar people generally have thought, "Well, this doesn't bother -- this doesn't affect me. It affects those blue-collar workers and that's too bad but I'm kind of insulated from this."

And I think that you're going to see as a result more and more reaction to trade down the road because people who used to consider themselves to be immune from competition all of a sudden face competition for the first time. You see this among farmers for example. You know farmers were always the bedrock of support for free trade in the United States because we had a God-given right to produce things better than anybody else and we'd export it and if we could remove trade barriers, we'd export even more. And all of a sudden, the Brazilians can produce soybeans and beef and sugar and oranges cheaper than we can produce it and land it here in the United States. And I think over time -- you're already going to see the tick up in the numbers in rural areas of opposition to trade -- that's only going to continue because it's -- people hate competition.

ROMAN: So if we want to scare ourselves about the white-collar jobs that could conceivably be outsourced, what kinds of things would they be?

STOKES: Well, you're a research associate here, right -- or what? I don't know. I don't know you. When I was --

ROMAN: He's our --

(Cross talk.)

STOKES: I'm sorry -- okay. I had a research assistant when I was here. I hated people who worked here -- no -- I hated to come to work so I was never here. I would talk to her every day on the phone multiple times. I would see her maybe once a week. It dawned on me at some point that she could have been in India. There was absolutely no reason why my research associate -- my CFR research -- had to be here. In fact, it would have been cheaper. I could have bought -- I could have hired three, you know, MAs in whatever, International Affairs in India for the price of one MA here. And if I had a TV screen to see -- to talk to her when I needed to see her face -- generally could be through e-mail and that's when it dawned on me that this is much broader than we ever thought.

When you talk to folks on Wall Street now, they're saying I'm paying some college graduate 60,000 (dollars), $80,000 a year to sit down the hallway from me and crank numbers. Why don't I hire three Indians to do this? And they can do it overnight while I'm sleeping. And so it's -- what I wanted in the evening is there the next morning -- it's ready to go. And I, you know, they're already doing that. And I think we're going to see -- see more and more of that as we go forward.

ALDEN: Just quickly because we got -- I will take the rare opportunity to disagree with Bruce. I think it's --

ROMAN: Oh, good.

ALDEN: -- it's simply -- it's a question of scale. I think this is a phenomenon that we've seen. I think it will happen on a bigger scale. But there's no evidence, it seems to me, that the result is a kind of large scale job destruction in the United States. That hasn't been the effect in the last 10 years. I don't think there's any reason to believe it's going to be the effect going forward.

In fact, I think labor shortages, particularly the skill then are going to a bigger problem, meaning India -- the example of outsourcing to India you get, well, the result you get of that, you know, may not be great for our personal lives, but the result of that is increased productivity, right? If, you know, if your company is effectively working overnight because it's outsourcing certain things to India so the work is done when you arrive in the office the next morning, that's a good thing. Those are economic gains.

ROMAN: Yeah, but -- but those are real jobs lost. I mean --

ALDEN: Yeah, but -- you know the way economies operate, right? Real jobs are lost but other jobs are created, people are redeployed, capital --

(Cross talk.)

STOKES: Back to the point we started with, there's a reason that if you take the long view, wages have stagnated in the United States because the good paying jobs are not being created in the same way -- the same numbers that they were in the past. Yes, we're creating jobs; we have a very high employment society. The question is whether we're getting the same bang for the buck in that job creation that we once did. And it does seem to me that we thought at one point that these while-collar jobs would all be ours. And it seems to me it has to influence that wage problem that we started with.

And I would argue and we should acknowledge this is not just happening to us. If you look at the employment elasticity in manufacturing in every country -- almost every country in the world, an extra percentage point of growth is generating fewer manufacturing jobs today than it did 10, 20, 30 years ago -- in Asia, in England, in the United States -- and those jobs tended to be the good jobs, the good paying jobs with benefits. And they are not being necessarily replaced with service jobs that pay as well with the same kind of benefits.

And that's why we get the broader problem of the average American, you know, losing his health care, having stagnating wages. And, you know, people who lose their job in this country today stand a one in two chance of making less money in the job they take next. Now, if you were that person, why would you believe in trade? It's a gamble that no one -- no rational human being would be willing to take.

You stand a one-in-four chance of losing your health care if you lose your job because of trade. Again, it's just not a rational bargain that an average American is going to want to make, and I think this is the problem we face. And yes, there are jobs out there; I totally agree with you. But I just don't -- I don't think they're the quality jobs.

ROMAN: Okay. Now, we've got a lot of hands in the air and we don't have a lot of time. Let's bundle these last three questions -- Andy, and then we'll go to the back too.

QUESTIONER: I'll be quick. I guess I'm the bad guy in the room. I'm Andy Olsen with the U.S. Trade Representative. I just had a quick question. I mean, obviously this is a complicated issue and we've been talking a lot about the U.S. and its relationship to the rest of the world, but the world's a very dynamic place and you have our major trading partners -- Japan, China, Europe -- who are themselves engaged in working trade agreements with others, and to what extent does that activity factor into what you're talking about here? I mean, in terms of, you know, let's pretend the U.S. were to sort of pull back a little on its trade activity for 10 years, and the rest of the world is cutting their trade deals. Do you think that there might be sort of a reaction to that and the American people say, "Wait a minute. We're losing out on this game. We're out -- we're off the field basically?"

STOKES: I mean, I think you put your finger on an interesting question. I mean, I actually think that is the challenge. I mean, the EU is now negotiating a free trade -- begun to negotiate a free trade agreement with India. The EU will tell you very openly -- the Indians will tell you very openly, "Guess what? We can do a deal that the Americans can't do because agriculture's off the table. We both agree agriculture --". And we, for all sorts of reasons, can't have agriculture off the table. You know, trade people like you and I will think that's a problem and we need to do something about that, and it's a threat to us that that happens. I'm not so sure the American public will care, and I think there's a cost to that -- of not caring -- because if you talk to Wal-Mart, for example, and they'll say, "Look, if Carrefour, the French retailer, gets greater access to the Indian market because of this free trade agreement that Europe might sign with India than we, Wal-Mart, have, we're going to be really upset." And -- but I'm not so sure the American public or the Congress will get that, and I think you're on to something. I think it's a very important issue.

ROMAN: Okay. In the back all the way, and then right here and those will be the last two.

QUESTIONER: Moana Erickson from CSIS. My question is that given your diagnosis do you have any specific policy recommendations that could enhance the competitiveness of the American worker, given that lower middle and middle class persons have been most severely hit in this economy? So specifically, you know, what would you put forward in terms of legislation to the United States Congress to enhance the competitiveness and et cetera of the American worker?

ALDEN: I mean, I would focus most heavily on job retraining. I just -- I think the numbers all show that the higher you can move up the education ladder, the better off you're going to do, and some of that is very kind of skilled focused education. So I think, you know, midlife worker retraining is extremely important. I think education in all its facets -- I think a revamp of the unemployment insurance system because it's designed for a system in which we expect people to be unemployed temporarily and then to go back to jobs similar from the kinds of jobs they lost, and that's not the sort of unemployment we're seeing now.

The people who remain unemployed are unemployed for long periods of time and they often, as Bruce has talked about, get jobs at lower wages. So we may need to look at things like wage insurance. I just think that whole package of initiatives and then health care -- then clearly portable health care of one sort or another. I think if you could fix those pieces, you would have addressed the biggest sources of American anxiety over trade.

STOKES: I mean, we are 18th out of 19 countries in the OECD in terms of what we spend on retraining. We spend 0.2 percent of our GDP on retraining. The Danes spend 1.8 percent, the Dutch 1.4 percent. Now, I would caution you, I don't think we know how to do retraining, I don't think it generally works.

ROMAN: Yeah.

STOKES: But, you know, when you're 18th out of 19 you're not even in the game. You know, you -- these kind of quibblings about whether it works or whether it's wasted money -- you're not even enough into the game to be able to have that kind of discussion, so I totally agree with Ted.

ROMAN: Okay.

QUESTIONER: Shanker Singham with Squire, Sanders & Dempsey, LLP . Coming back to the point that Ted made about the notion of moving from rounds to a more built-in agenda, let's talk about language for a little bit. We have moved into a way of discussing trade -- not just here in this country but also in the context of trade negotiations -- that is almost entirely mercantilist in its approach. And in a sense we reap what we sow, and when we sell trade agreements on the basis of job creation, as NAFTA was sold, we're going to have to deliver, and trade is not about job creation. Trade is about enhanced import competition. It's about consumers. So my question for you is there's been very little discussion, and there's very little discussion here in Washington, about the impact of trade on consumers and the benefits to consumers, and I don't mean just people who buy things. I mean, every company is a consumer. General Motors is a huge consumer of steel, and so forth. How do we get back to that discussion? Can we get back to that discussion or is it lost?

ALDEN: You know, a lot of what you're talking about is a kind of public relations problem and, you know, people here who are inside the government have been fighting this battle for a long time. I remember the press conference that Bob Zellick did where he had Wal-Mart, you know, slashing prices and he was talking about how trade agreements, you know, were worth this much to the average family because it would knock prices down at Wal-Mart. They have really tried to do this but it seems to be very, very hard to change that discussion -- that so much of the trade discussion, as you say, is focused on job creation, which may not be the right measure since I think most of the economic analysis is that trade has minimal effects on job creation. That's not where the main gains come.

I also think we have an optics problem with a lot of the measures we use. You know, if it were in my power I'd stop doing major monthly reporting on the trade deficit. I'm not actually certain how important that number is now in terms of analyzing the health of the economy. But, of course, every month and, you know, we're reporters or I did this all the time -- every month big trade deficit numbers come out and you call the critics, who say, "Yeah, this is another example of our failed trade policy." Well, no, actually it's not, it's an example of our low savings rate. But it became a focus for that sort of criticism. So I think what you're talking about doing makes a lot of sense but it's tremendously hard to do, and there have been people in the government trying to do it -- trying to flip the discussion more to talk about consumer benefits, but they haven't made very much ground on that and I don't see that changing any time soon.

STOKES: And I might caution you that Paul Samuelson said, you know, a lower price for a t-shirt at Wal-Mart doesn't compensate somebody for a stagnating income.

ROMAN: Absolutely.

STOKES: So whether or not that person's income is stagnating because of trade probably doesn't matter to the person. The person, you know, if we -- and my word to -- of advice to all of -- you're all -- you wouldn't be here unless you were worried about trade or you're interested about trade. Translate that concern into actually doing something about these other issues. You know, you intellectually say, "Oh, yeah, we got to do something about education. We got to so something about retraining -- we got to -" -- but then, you know, what you're really interested in trade and so you're going to worry about trade. You're not going to do anything about these other issues. That's why we don't get any movement on any of these other issues because they're down and dirty issues, they're domestic issues, they're complex. Goodhearted, intelligent, committed people like you don't want to get your hands dirty on those issues, and we're not going to fix those other problems and then by extension fix the trade problem unless we all -- we -- you know, we get more money for retraining, we get more money for education, we get more money for a social safety net, we fix the health care system. And those are the trade fights of the future, but unless we're willing to -- we who are interested in trade are willing to get into that fight, to be quite honest we don't have a reason to -- we shouldn't be complaining.

ROMAN: I'm afraid we're out of time so I can't ask my last question, but thank you both for a very interesting conversation.









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