Global Trade: Implications of the Current Crisis

Thursday, March 5–
Friday, March 6, 2009

This session was part of the 2009 CFR Corporate Conference.

JIM BACCHUS: Good afternoon, everyone. My name is Jim Bacchus. And the staff of the council has very kindly but thoroughly instructed me that I am suppose to begin by doing certain things. The first thing I want to do is welcome you to this session on global trade. We're looking forward to a good time together and to solving all of the problems of world trade. (Laughter.)

Please completely turn off, not just put on vibrate -- (laughter) -- yes, that's true; I turned mine off -- your cell phones, your Blackberries, and all wireless devices to avoid interference with the sound system. Also, I'd like to remind the members that this meeting is on the record. The three of us wanted to make certain that to the extent that the world has any interest in what we're about to say, the world has a chance to hear it.

I am pleased that there are so many in the council who are interested in international trade. I am hoping that the interest in international trade extends beyond the confines of this room. A year ago it was hard during the presidential campaign to get anyone to talk much about international trade. Jagdish and Carla and I kept hoping they would talk about the WTO and the Doha round and it never happened. All we got were the obligatory denunciations along the campaign trail of the NAFTA. We still get some of those.

But now a year later, a month or so into this new administration in the midst of a global economic and financial crisis, we find that trade is everywhere. It's not yet on the agenda of the United States of America, but it is on the front pages of the newspapers, those that remain in the United States of America. (Laughter.) On the front page of The Washington Post today, I read when I wrote up on the Amtrak from our nation's capital a frightening front page story --dateline: Singapore -- about the shrinking of world trade, the retreat from globalization, the decline of domestic economies everywhere, the rise of protectionism, trade protectionism, financial protectionism, the hydro headed beast of protectionism in all of its guises.

I had the privilege of sitting through a very enlightening discussion on China earlier today. Some of you were there where a professor of economy explained to us that the Chinese have now discovered that they are part of the world economy. I'm waiting for my former colleagues in the Congress to discover that the United States is part of the world economy. (Laughter.)

With that in mind, and with the fact that this is on the record, I wanted to briefly introduce my colleagues this morning, and then ask them a question nor two that will provoke thought and hope, some provocative responses from the audience we have with us today.

First of all, to my left is my friend Carla Hills, the co-chair of the Council on Foreign Relations, the former United States trade representative, a woman, a statesperson that I admire enormously and always have. To her left is Jagdish Bhagwati, my fellow traveler in pursuit of a stronger world trade system. We work together side by side on many issues relating to the WTO through the years. As all of you know who have read his many books and articles, he is a profound advocate of free trade, a great thinker on the global economy. So we have two truly insightful people here today. My only regret is that they're not making the decisions in Washington right now.

I want to begin first of all with Ambassador Hills. Carla, I think you maybe remember when we first met. I had just been elected somehow as a Democrat to the Congress of the United States from Florida in a heavily Republican district. And I called you on the telephone and volunteered to help the first President Bush -- even though I was a Democrat -- secure fast-track negotiating authority. I'm told by my friends at the USTR office that you nearly fell out of your chair. But we worked well together. We got that passed, we did other things together. Trade was controversial then, but people worked side by side on a bipartisan basis for trade, and there was leadership then in large part because you provided it.

What are the prospects in this new administration and in this new political world in which we find ourselves for bipartisanship and trade and for leadership and trade?

CARLA HILLS: Well, Jim, let me say that we have too few Jim Bacchuses in our Congress today. You provided wonderful leadership, and that gracious manner of reaching across the political aisle. You also were knowledgeable and went on to serve at the WTO as an appellate judge and did a splendid job of bringing the judiciary there together. So we owe you a lot, a lot of brownie points for the fact that we have an institution that is a real jewel in the international setting.

And I have to confess I am worried about trade. I'm not normally a pessimist, but I would tell you that it's always tough when times are difficult to push for open markets, and times are difficult.

We have a spiraling down of global output so that the West, the United States included -- industrial output is down 10 percent here. And the IMF has just announced that global trade, they reversed their earlier projections and brought it down to 180 basis points. So it will be a minus two. That's the first time in a very long time that trade is contracted so sharply. And you'll have to remember that trade, up until August, was providing 100 percent of our growth. So it was cushioning the shrinkage in our consumer market, the shrinkage in our financial market, and the shrinkage in our housing market. And it was providing a plus.

Now, how do we get people to understand that trade is one component to deal with the economic crisis. It's not a silver bullet, but if we turn inward and go toward a protectionist mode, which is being evidenced around the world, we will greatly elongate and deepen the current economic crisis.

So we need a leader. We need a leader that raises a flag and says follow me. I was hopeful at the November 15th G-20 meeting that we would come together and say let's have a plan among the largest economies, let's move forward on trade. And one of the first things we ought to do is to reactivate the Doha round. Well, they said a lot of good things. They said that they pledge with solemness that really inspired me, that not one of them would engage in restricting trade as they moved forward, and they would meet again on August -- on April 2nd.

Well, 17 of the 20 have raised barriers to trade in the interim, including the United States with buy American. So this is a huge disappointment. And we have I think a real problem with our elected representatives not only in the United States, but also around the world from China to Europe that need to have the constituencies aware of why trade matters. And I think there is a natural tendency to turn inward.

Americans, for example, don't know the value of trade, and I think we should talk about that, because I'd like to have this audience appreciate how much trade can contribute to our growth, to our leadership in the world, and to our security. All three are indispensible to those three items which are categorical today.

And I would remind you that our National Director of Intelligence Admiral Dennis Blair, when he testified before Congress, said that the global economic crisis has supplanted terrorism as our nation's number-one risk. That being the case -- and I agree with him -- then we ought to look at those tools that will help us deal with the global economic crisis, and trade is one of them.

BACCHUS: Well said. Jagdish, what's wrong with turning inward? This is what they call a softball. (Laughter.) Do you sense that we're turning inward just on trade, or are there other areas in which we're beginning to turn away from the world.

JAGDISH BHAGWATI: I think everything is wrong with turning inwards. I think one of the first things that leaders like Gordon Brown and the president have to emphasize is that the post-war prosperity is unprecedented in history. We have enormous change in income and just in GOP, and it's due to openness -- you know, opening up, it's sometimes called the liberal international economic order, both by its friends and its foes. And essentially, that's number one.

Two, because people talk about -- populists in particular -- about how the distributional income has gotten worse, you have to point out to them that basically India and China have brought about 500 million people above the poverty line as a result of outward orientation among other reforms. So if that's not doing something for the poor, I don't know what it is.

In our end, unfortunately some of our international economists would like to point out -- and with the unions to support the unions, that really the distributional income here has made progress as a result of globalization. But actually, there's no compelling evidence of the stagnation of our work as wages is due to international trade or multinational investment. A lot of people have tried to show that. The unions believe it. But in fact, there's literally no compelling evidence.

So there are other reasons why we have stagnation of wages, but it's nothing to do with the outward orientation in our system. So both on distributional grounds, and in terms of international prosperity, I think our leadership can say, look, this is a great thing, that we really -- you know, we don't want to throw away openness.

Now, when you go around and see what is happening to openness -- and I'll talk about leadership in a moment -- I mean, I was very optimistic like everybody about President Obama, you know, stepping up to the plate in a big way. I used to carry a little button real back -- because I have no aspiration to be in office and there is no demand for me in office either -- (laughter) -- so I was out there in front expecting him that he would do well because I really felt that he was someone who was really very open to ideas.

And when people said -- well, many people said that he had been corrupted by listening to Pastor Wright, I said I didn't know of intelligent person who kept awake during sermons. (Laughter.) On the other hand, he had been talking to the Chicago Business School economists, some of whom are MIT-trained like Austan Goolsbee, and I said that's really what matters because -- and I would often say that the company you keep is more important than the company that keeps you. (Laughter.)

And so I was very optimistic. But he's been constrained in many ways, and, you know, we have no time to go into that right now -- maybe during questions. So he really has not been able to do anything beyond insert the -- because Jim wrote about it and I wrote and I'm sure there were others that everything has to be -- (inaudible) -- consistent. And so he put that as a qualifier in the Buy America. And as we -- we all three of us know about the dispute settlement and how long it takes and how retaliation can break out and -- (inaudible) -- consistent ways.

It's not enough. He's really got to go further than that. But he's really not going forward. And I think it's because he really buys into all of these fears also as a result of the -- his constituents. The Democratic politicians are very much fearful maybe -- and the unions which have helped elect them are also very fearful. That's where it comes from. So I don't expect too much from him. But I think he needs to bring this particular fact that this is really the most important thing before us.

I think he has to really use his rhetorical powers at some stage to try and say that openness is at stake, and openness which is really -- it's not just trade, which Carla was correctly focusing on -- trade -- we have Buy America; bailouts which are -- you know, if they are sectoral subsidies, which there are, and they are even more sectoral in the sense that they are Detroit and within that probably just two firms -- those are clearly actionable under the SCM agreement, so I don't see how it's going to be proven to be the ability of -- (inaudible).

Those things I think are certainly things to worry about. But you see that lack of openness. It's near -- it's almost xenophobia, but it's not quite xenophobia; it's just discrimination against the outside world, and xenophobia is a strong word to throw at people. You know, I don't like that. In my e-mails of course I'm pretty wild -- (laughter) -- but, you know, on blogs, you do that. I call blogs "flogs." You know, there is no constraint on what you can write there.

But I think it seems to me that you take hiring and firing of aliens. Gordon Brown has run into that problem. Senator Grassley, who's a perfectly reasonable man, has H-1B visa restrictions on it. That's another area. And that also conflicts with our values much more directly, right, because we are basically an open system, and we don't discriminate against foreigners normally. And so we have provided leadership on that front. And which comes to multinational investment. The president is saying he wants to remove the tax bias in favor of investing abroad. Now, that sounds reasonable to me, but it's a slippery -- it could be a slippery slope.

The second one of course is the Lou Dobbs kind of position, that if you invest abroad, you're Benedict Arnold, right. And that is something -- when I heard that, I thought Benedict Arnold must be some obscure English boy, a distant cousin of Matthew Arnold because I didn't grow up in this country. (Laughter.) And then I discovered he was the worst traitor in the world as far as America was concerned. And I was disturbed by that image. But fortunately we haven't gone so far as to -- as President Sarkozy and said that firms which are already investing abroad should pack up their bags and come back here. That's the worst kind of position.

So if you look at trade, immigration, and hiring and firing of labor, labor markets, and if you look at multinational investment, that's pretty much an attack on the open economy. And I think all of these represent real threats. And, you know, somebody has to step up. And I think this is why I -- I'm very concerned. And I think we can actually say that this is going to undermine the basis of post-war prosperity, an unprecedented -- and we really have to be very forceful about it.

And these -- the president is a great orator, right, and he should be able to do it, but I'm beginning to lose hope. But I'm hoping Gordon Brown who seemed to something -- regain his voice in the Congress the other day -- you know, and he was almost eloquent -- maybe as a host he can do that at the G-20 meeting, and really chain the president into responding, and make trade the moment because to go and talk about, you know, what we have been talking about this morning about the stimulus and fixing the economy, there are hundreds of people writing about it, and probably thousands of opinions on what to do about it. Just saying that is of course good enough, but what he wants to say is not just what to do but what not to do. That is really much more important -- what not to do in terms of closed -- you know, succumbing to these pressures, and really holding onto the great -- you know, the great sort of world system we've had so far.

And I think since Carla mentioned peace -- and I think that's very important too. I mean, I don't know how many of you know that Cordell Hull got the Nobel Peace Prize for free trade among other things. Today, to think of the Nobel Peace Prize going to a free trader, forget about it. (Laughter.)

BACCHUS: Thank you, Jagdish, for those thoughtful remarks. One of the reasons I got elected to Congress in that Republican district is that I refrained from quoting Matthew Arnold. (Laughter.) But I think that Jagdish has accurately described our situation as being somewhere between culture and anarchy here on the shores of Dover Beach in the world economy.

Perhaps a few political observations as someone who has run for office -- I see Jimmy Jones out there who got elected a few more times than I did. Perhaps there's some others. My mentor, Reubin Askew, taught me there's a difference between an opinion and a decision. And it's only when you actually hold a piece of the public trust, either as a legislature or an executive branch that you learn the truth of that. I certainly didn't learn it as an aide; I learned it as a member of Congress and then as a judge.

But a few political observations: I'm willing to give President Obama more than a month to solve all of the world's problems. (Laughter.) My concern is the same as Jagdish's concern, which is I'm not sure the world is going to give him much more than a month. But I cling to the audacity of hope, and I hope he will do in trade what he is so boldly trying to do in energy and environment and health care and education and so many other areas of our common concern.

And I certainly, and I'm of the view, and have said so many times publicly, in speeches and in writing, that I don't believe that the president can accomplish all he hopes to accomplish in terms of economic recovery for this country unless he makes trade central to his economic plan. I believe he is coming to realize that now that he is president and has discovered that lo and behold, he actually is in favor of trade.

His problem is a political program. Partly it's a problem that was created by the campaign. Partly it's a problem that's created by our economic situation, and the tendencies that arise toward inwardness during such economic times. Partly it's a problem in our political system.

Members of Congress cannot be expected to act out of nobility because they want to get reelected. Occasionally they will vote out of nobility and be willing to fall on a sword. But generally they want to be able to think that they can vote a certain way and get away with it, and live to vote another day.

So they're going to need leadership, as Carla said. They're going to need the president standing up and explaining what they need to know. One of the things they need to know is that we can't look overseas for others to blame for the situation in which we find ourselves. It's the old Pogo story: "The enemy is us." It's not just the government; it's not just the bankers; it's not just Wall Street; it's all of us who wanted to have it all and not pay for it. And now we're paying the price for that. And politicians who really want to serve the people have to be willing to stand up and say that.

Another thing the president needs to remind members of Congress so they can go back and home and remind their constituents is simply this: 4 percent of the people in the world are Americans. This means that 96 percent are not. We tend to forget that. We tend to forget that we are a minority group in the world. And one of the consequences of that is, guess what, what happens in the rest of the world affects us, and what we do affects the rest of the world. You would think that we would know that by now. And yet there is this solipsistic arrogance in the halls of the Congress on both sides of the aisles, and in both the House and the Senate that leads members to think that we can somehow vote on measures on national concern without any consideration of the consequences internationally.

The best example of this so far this year is that Buy American provision. Had I been in the Senate, had I been so fortunate and so foolhardy as to be a member of the United States Senate, I would have voted for the McCain amendment that would have taken those Buy American provisions out of the bill because I think it's going to cost American jobs. And I think a lot of members knew that. But they didn't have the political courage to stand up and say so because it's inconvenient to say so right now. We need to understand that we have to have the audacity of politics to match the audacity of hope.

On the Democratic side -- and I am a Democrat -- my long-standing concern is that not enough Democrats understand the necessity of trade. We can't do all of the other things that we want to do to help the American people unless we also are open to the world, unless we are willing to be open to the world and trade with the world. We can't grow and prosper as we should. We can't compete as we ought to. The American people cannot become all they want to become, all they ought to be unless we're willing to be open to the world and trade with the rest of the world.

At the same time, I would say to my Republican friends that too often they seem to think that all we need is free trade and no taxes. The American people need some help. We need a basic safety net. We need real investments by the government that will create the economic conditions, the climate in which we can all prosper: education, energy, health care. I'm not saying that all Republicans don't believe that, but all too often it seems that they don't.

I'm someone who believes in the necessity of trade, and also that trade is not enough. And I think that probably President Obama agrees with me, and that's how he really feels. But if he feels that way, he's going to have to stand up and say so, because the only way that the right things are going to happen in the Congress of the United States is if the president of the United States leads the way.

And also -- we haven't talked much about this yet -- maybe you can ask some questions about it -- the only way that things are going to happen in the world that should happen in the rest of the world is if the United States leads the way because now that we have passed that Buy American provision, every other member of the WTO thinks it's okay to go on and engage in protectionism in some fashion, and it is proceeding apace.

That's perhaps enough provocation to start. We have reached the point where we want to open it up to questions. I'm leaving a little extra time for questions because when I'm in the audience I always want there to be more time for questions. So I thought I would do so now. There are some bright young people with microphones I think. Will someone please raise your hand? And I think I'm suppose to say, if you ask a question, please tell us your name and your affiliation, and then we'll try to answer it.

Who has a question? First this young man and then his colleague.

QUESTIONER: I'm Gregory Merit (ph) from the Rolatin (ph) Group.

So you've outlined a series of really tough things that Congress has to approach here. And the problem is we have a legislative election cycle of two years. And a lot of these things that need to be done appear to be unpopular, and I think that's the result that you get of people knowing how they would like to vote, but actually doing something else in order to preserve their jobs. How are we going to get out of that?

BACCHUS: I'll take the first crack at this. Madison and the Founders, in their wisdom, gave us a system in which there are certain inherent interests. One of them is that we have House members who get elected every two years. And this is a problem. I had to start raising money for my reelection the week after I was first elected. This is one of the reasons I stopped running, but there's the reality of it. And who are you going to raise money from? Someone has to support you. And if you only do things that offend you, well, it becomes harder to get reelected. Everyone knows this.

But why do people run in the first place? They run to serve. They need to be reminded of that. We need members of Congress -- and I think we have some -- who are there for the right reasons. They want -- they ran for the right reasons in both parties. They want to serve their country. They want to do what's right. Despite what Rush Limbaugh says, people on both sides of the aisle want this country and this president to succeed, and we need to succeed now because if we don't succeed here, then there is a perilous road down the other direction of xenophobia and populism and rank nationalism. It's a frightening road. We have to succeed.

And they have to have the courage to stand up and say so. Now, practically speaking, they need political cover. That's why I'm saying -- the political cover can only come from the president of the United States. He's the only one with that bully pulpit. He's the only one who can stand up and tell all of the American people on national television, this is what needs to be done, and this is why, and this is why we need to go down this particular road. Then those members in both parties can go back home and say, yes, you heard what the president said; I think he's right, and this is what we have to do and why.

The president is popular, and we need to use that popularity and spend that political capital, not just so the president can get reelected or anyone can get reelected, but so that we can do what needs to be done for the future of this country and the future of the world.


HILLS: Jim, I think that -- you mentioned the president has been in office for 40 days. And he too needs some cover. We are woefully ignorant about the benefits that trade gives. He campaigned against trade. He bashed the North American Free Trade agreement and said it cost millions of jobs. The Congressional Research Service documents that it did not cost any jobs. And a senator pays for the Congressional Research Service, in effect.

So we've got to get him back on track. There's a great anxiety in the country. The country is worried about emerging markets like China bringing 1.3 billion people into the workforce that could rob them of their economic futures. So we have to educate as to what trade, as a component of our economic policy, what does that mean.

We can look back and we can say history shows that as a result of opening our markets since World War II, the United States economy is $1 trillion better off than it would be had it kept its markets closed. And that means that every American family is $9500 better off than if we kept our markets closed. So if the mean income in the United States is about $44,000, it would have been about $34,000 if we wanted to stay closed.

Now, with 5 percent of the world's people, we produce 20 percent of the world's goods. What are we going to do with those goods unless markets are open? And we can talk to Americans about the fact that jobs connected to trade, pay 13 to 18 percent more than jobs in the overall economy. We can talk about the fact that multinational corporations that invest abroad don't do so to try to get lower wages.

Eighty percent of their investment is in high-wage countries. And when they invest in low-wage countries, disproportionately, they are trying to create markets in the low-wage country. And that's certainly are what the facts reveal with respect to China, which has become in our crosshairs.

We can also talk about the fact that trade has a component of security. You know, we had such a philosophy of enlightened self-interest following World War II. Europe was devastated. Asia was devastated. The Marshall Plan came out and created markets so that we created consumers for our products, and it worked. And we thrived, and they did too.

We have that problem today. We have countries that are very poor with large populations that are at the fringe of our trading system that are in the WTO. For example, Bangladesh, Indonesia, Pakistan -- huge, mostly Muslim countries -- have 1 billion people -- 1 million people per country -- 3 million people -- oh, god, my figures -- 300 million people -- 100 million for each of the countries living below the poverty line. These people make their living off the soil. They need to be able to sell their agriculture and primitive manufactures -- textiles and heavy glass, simple things. That's where our tariffs and our restrictions are the highest.

Agricultural tariffs are five-times higher than manufactured tariffs, so that last year Bangladesh paid us $130 million more in tariffs on $3 billion worth of exports than France did on $30 billion worth of exports. That works out -- so France is paying less than 1 percent tax. Bangladesh, whom we want to bring a long, create a market, is paying a 15 percent tax. Now something is wrong with this picture.

But Americans don't know these facts, and they don't know that there's 25 percent unemployment in some of the large Muslim countries, and we would rather have them work and create goods, and be into the trading system that we've seen work since World War II then we would have -- then be unemployed, desperate, without hope, and be a security threat to the United States.

So if we could educate Americans -- and I believe that corporate America could do a better job -- you know, the -- we think about exporters. Ninety-seven percent of our exporters are small- and medium-size businesses. They account for about a third of our exports. Multinationals count for most of our exports.

But I have this dream that if everybody connected with trade, every CEO connected with trade -- and that means small- and medium-size companies -- small ones were to educate their employee populations, whether they be five people, 5,000 people, or 50,000 people, about these trade facts that you can reel off and tell them why it is that their company prospers because of trade -- to what extent? Are their revenues how much higher? What percentage of that employees' paycheck is related to something due to international trade, and why does it matter? And why are they more secure than those that are not connected with trade. And they could post these notices. They could put it in the W-2. They could put it in the annual reports of why trade matters.

And that would make our Congress, their elected representatives far less nervous about trade. But we are quite ignorant about the basic facts of why we should care. And we lament the fact that congressmen that have to run every two years are scared to death of trade.

I went to a dinner another night. Seven congressmen talked to them about the Buy American program, brought a paper along by a set of fine economists that demonstrated that Buy American would cost us jobs. By requiring communities to pay 25 percent more, they would shrink their expenditure and have fewer jobs, and the echo effect around the world would cost jobs. And to a person they agreed with me but said they were going to vote for it.

Now, something is very wrong with this picture. Americans need to get the facts out and to talk from CEO, think tank, university, groups like this so that we correct this picture because trade is, as I said, not a silver bullet, but it's a very strong component of our economic prosperity and our security, and our program to alleviate poverty. Trade will do a heck of a lot more for helping sub-Saharan Africa than our development program because what we don't buy, and when we subsidize to take away the markets from those people, we are creating a problem for ourselves. And there never was a country where we opened our market and they, yes, sold us more, but with a hard currency, they also bought more from us. So this is really an act of enlightened self-interest.

BACCHUS: As we used to say in the Southern Baptist Church back home when I was growing up, amen. (Laughter.)

BHAGWATI: Can I add something to --

BACCHUS: Professor Bhagwati, yes.

BHAGWATI: Carla could take over my job at Columbia. She was so eloquent about the --

BACCHUS: She's read your books too. (Laughter.)

HILLS: Yeah.

BHAGWATI: But I would like to add a couple of things which are really -- I think she's absolutely right that we need to continue talking about everything she pointed out. But I think we also -- the politicians have to be able to use essentially anecdotes, examples, and so on and so forth to make things more concrete. It's not going to be enough for us simply to say there is so much gain from trade and we're, you know -- I'm absolutely with you on that.

But if you could just go down one idea of yours -- like, I mean, we are putting together for the next book I'm writing, we're looking at all of the different states from which -- and what are the exporting industries from their exporting firms. If we can (concretize ?) that, like G, Caterpillar will come out explicitly against Buy America saying we are going to lose business. Now there have got to be thousands of Caterpillars -- no pun intended -- (laughter) -- and there are going to be lots and lots of Gs all over the place, but we need to say, this is the job you're going to lose, right, and this is what's going to cost us.

HILLS: Every CEO has -- (inaudible, cross talk).

BHAGWATI: And I think that really is where I think we have to be able to provide. I mean, I remember on aid -- Sir Arthur Lewis who got the Nobel Prize for development economics, he was on a commission with -- the Pearson Commission on how to increase aid, and he said, we've tried all sorts of things, but ultimately we got it -- just hired Madison Avenue to do it. And finally we did. That's what in fact the poverty -- make Poverty History Campaign is about. It is PR; it is not -- and, you know, Bono singing away and so on.

So that's really -- you know, somehow seize the imagination. I don't know how long it will go on, but we've got to think of something similar. Maybe, you know -- again -- (inaudible) -- always talks about -- you know, things about agriculture and Sam Shepherd and Jessica Lang, you know, and the country, and we see the little farmer who is to be protected -- we've got to unleash the same weapons on the other side. Maybe buy Bono to talk about -- to sing about the farmers in the poor countries and so on.

But it seems to me that PR, I mean, is really what's -- and the ability to concretize. Along with the president's fantastic rhetoric, we also need specific examples and specific anecdotes. That really works because I don't think the -- even the American mind can hold the kinds of arguments which we use. I think at the elite level certainly it really helps, and we have got to carry the elite. But I'm really talking about -- Jim, we're wandering into your territory.

BACCHUS: Well, I'm struck by your suggestions. I like Bono. He's got a new CD out. My son has all of his CDs. But I might personally prefer Jessica Lang. (Laughter.)

One political thought, and we'll go to the next question. Carla mentioned NAFTA. And as she knows, I was an advocate for NAFTA, voted for it. But in the context of her point about the need for corporate America and business to speak out, mine was a district in Central Florida that has profited enormously from NAFTA. There was no reason in that district for anyone to oppose NAFTA, but I never had a single constituent of mine, I never had a single person who could actually vote for me ask me to vote for the NAFTA. I just m crazy and voted for it anyway.

Who has the next question? I think there was someone right back here? Do you still have a question, sir? And then we'll come to you, sir.

QUESTIONER: Jonathan Berman from Dalberg Global Advisors.

Well, my first question was going to be for Ambassador Hill to speak a little more about the value of trade to national security. She's handled that very well. And so really the question is to turn Professor Bhagwati's comment on itself. You've spoken a lot about things that can be said. But those are often said, and talk doesn't seem to achieve the output we're seeking. So what actions can there be that are nonverbal, perhaps, that would more broadly shape minds and influence opinion in America?

HILLS: Are you going to take a couple of questions?

BACCHUS: We'll take a couple of questions and then we'll try to answer them. There's one here. One here. We're going to let several people ask questions, then we'll try to answer them all.

BHAGWATI: That's what I was speaking to actually.

HILLS: (Off mike) -- has a question.

BACCHUS: Here you are. Over here, sir.

QUESTIONER: Thank you. Jacob Franklin, group of -- (inaudible) -- and American International Group.

Let me start just first, you started with the audacity of hope. And --

BACCHUS: Not my phrase. I heard it somewhere. (Laughter.) Foot note that.

QUESTIONER: I also heard somewhere from the English poet/philosopher Francis Bacon saying that hope is a fantastic breakfast; it's a terrible supper -- (laughter) -- which basically means that, you know, starting the journey, that's the easy part, and the question is whether we end with a strategy of the hope. And I think that one of the tasks to mobilize the support for opening markets is not to say tomorrow you will be better off, because the truth of the matter is there is a lot of adjustment costs, but rather to demonstrate why in the long run you are better off. And I know in the long run we are all dead, and we also know that not all of us die together, but that's the reality.

Let me start with two facts and I'll be very brief. First, this year, last year, world output -- 70 percent of it emanated from developing countries, and only 30 percent of it came from industrial countries. The developing country's growth would not have taken care without trade. World output, therefore, would have been so much lower -- fact number one -- and yet 17 of the 20 went the wrong direction.

Fact number two: The United States in the past two years grew in the positive territory in spite of -- and everyone was proud to say -- the drag that came from the housing sector. Why did it grow positively? Just because of export. If there were no export, if there was no foreign demand, the United States would have been in a recession long ago.

Against this background -- and here we have people who spend it on academic career, their political career, whatever it is -- actually starting from Ricardo.

BACCHUS: I'm reduced to the mere making of money now.

QUESTIONER: Yes, so you would have a (lot ?) to lose. (Laughter.)

The question is why -- what is in it. And, you know, it's too easy to say we need to explain. There is something deeper that candidates compete who is more against NAFTA, and all of these things. There must be something deeper that does not enable the self-evident truth to penetrate itself into the political support. And it's not that congressmen do not understand the gains from trade, as you well know; it is the audacity of politics, namely, they think it is a liability.

I think the answer must come from trade assistance. It is always the short-term cost and therefore the way to deal with it is to identify it, to speak about the trade assistance, to budget it properly, to make sure it is done efficiently, and then to speak about the supper time where the hope will materialize.

BACCHUS: Well, let me respond to that because I think those because I think those were accurate and provocative statements.

I think Carla hit upon it when she talked about the attitude of the United States after World War II, when in the first few years after World War II, on a bipartisan basis, the United States engaged in what she rightly described as enlightened self-interest. Tocqueville's notion of enlightened self-interest, self-interest rightly understood, as you probably know, as many of you doubtless know, was an interest in which you look not to the narrow interest but to the broad interest, and not just to the short-term interest, but to the long-term interest. That's what we need to do.

As you rightly pointed out, that's hard to do at a time when you're losing your job and you're losing your house, and you can't pay for food and you can't send your kids to college. So we have to deal with the short-term needs. This is one reason why I have been so much in favor of trade adjustment assistance, and why I think it's an important part of how we create a political constituency to move forward on trade. I thank you for your remarks.

Carla, Jagdish?

HILLS: I agree with what you say. I think that we definitely have to educate Americans. If you walk out this building and you talk to the first 10 New Yorkers that you see, and you say, do you think trade has advanced your interest, the majority would probably say no. And that -- and we're asking it at a particularly bad time because the economic picture is so gloomy. But they wouldn't come back and say, why yes, I work for a company that is international. We wouldn't have our jobs. I work for a small little company that's a small- and medium-size business. If we didn't have our market in Mexico or our market in Germany, we couldn't make it. You wouldn't find those answers because they're not being told that.

And what we hear from politicians, which is amplified by the media like Lou Dobbs, is that trade is bad for you and your pocketbook, and we've got to turn that around. And until we turn it around, I don't think that you're going to get your elected representatives to be excited about it. Trade has always been a hard sell because forever people have said it's the best thing you can do for your country, but the hardest thing to sell to your country.

BHAGWATI: I agree with mostly what you said, but we may be too pessimistic. After all, the postwar period was one of very rapid dismantling of trade barriers through, what, eight GAT rounds and so on. So, you know, while there's a lot of talk about perfectionism, the politicians have managed to liberalize trade in a very dramatic way. If you go to the developing countries it has been virtually without any pressure from the bank or the fund, which is a populist image.

A lot of it is just doing it for yourself because many people realize in countries like India, Chile, and so on and so forth, that actually you're shooting yourself in the foot with very high trade barriers. So unilaterally they brought it down. I call it going alone because if you say unilaterally it sounds like unilateral disarmament and you have lost the battle before you start. But, you know, going alone sounds more dramatic, you know, than -- (inaudible).

So if you look at the post-war history, Carla, we don't have to be that pessimistic. Right now because of the depression, it's true. And then going back to your adjustment assistance -- Jim, you know; you probably -- it's in 1962 when president Kennedy was going ahead with a Kennedy round which is a multilateral trade negotiation. He and George Meany worked out our first adjustment assistance program because the labor movement said unless we have the adjustment assistance, we're not going to do -- you know, work for it.

And then everything -- almost every bill, Carla -- correct me if I'm wrong -- has been experimenting with more and more. And right now, because services has become tradable in a big way -- online and all sorts of things -- we have to bring them into the adjustment assistance as well. And that's really where I don't understand why the Republicans are reluctant about that because clearly anything which is -- you know, which is tradable in principle politically would require adjustment assistance.

And it's not as true that it will -- it's going to grow dramatically. I mean, just to use an imperfect analogy if you have to -- if you have a trapeze artist going out on the high wire, you have to have a safety net. But once you have the safety net, 50 guys can walk out, right. And so it's an imperfect analogy. But the point is that the notion that somehow all hell will break loose in terms of expenditure, it's not really true.

So I think you're right that adjustment is important, but my own interpretation.

BACCHUS: I think all hell has already broken loose in terms of expenditure.

HILLS: Yeah, I do too.

BHAGWATI: Yeah, but my own interpretation is of why we are having problems, aside from the short run, is that the U.S. basically lost the -- it's comfortable margin, which was there in the post-war period. But all of the other countries were -- you know, just after the war were not as important as we -- and politicians -- even statesmen find it easier to sell free trade -- which is a (Darwinian ?) process of seizing markets -- when they think their countrymen will win.

So free trade was a big thing in Britain in the 19th century when they were ahead of the curb. And we were ahead of the curb after the war. And I think once we began to see other countries coming up, it became a bit more difficult to sell it to two people. And the other thing is this is really the fear, which is that trade is really hurting our workers' wages, which I think that is -- you run into it everywhere.

So I think that we have to attack that fear and say -- I mean, if it's a real fear then we have to confront it. But if it is an imaginary fear, we got to confront it and tell it. And that's what -- unfortunately I don't think President Clinton did that. I mean, he had -- found religion on NAFTA and Uruguay round, but he basically vanquished the unions in the fight. He did not convert them and say, look, your fears, while they appear justified at first blush, are not real. And they should have really sat down John Sweeney, et cetera, with people like Paul Krugman who was on the right side at that time -- (laughter) -- and me and a whole lot of Democratic economists and said, fight it out.

HILLS: Let me tell you, if you're not -- you say you're not so pessimistic, that we should look back to and say eight multilateral trade rounds have occurred. Well, let me tell you something, be wary. The fact of the matter is there is an eerie similarity today right now to the 1930s. Think about it. Think about it. We have a financial crisis that is enormous. They had one. We had a presidential candidate, Hoover, who campaigned on protecting the American farmer. We had a campaign where respected senators competed to see who could thrash trade harder. We had -- they had terrorism, bombs going off and destroying things that terrified people in the form of Bolsheviks. We have al Qaeda and related groups -- Taliban -- and we have protectionism that is sweeping the world.

So there is an eerie similarity of what is -- what happened then, and we ought to take a lesson from history, and we ought to pick up our skirts and say we're not going to let this happen again. And I agree with Jacob. He can't just say I hope. What do we do about it? We've got the April 2nd meeting coming and we should be telling our leaders, come with a plan; convince the world -- because protectionism is not just in the United States -- convince the world that we are going to take a concrete action, a step forward. We are going to do something about Doha. That would be a concrete action. We're going to do it together.

But when you say, when 17 of the G-20 have raised their barriers to trade since November 15th, and around the world we've gotten up to 72 increased barriers to trade, I think everyone in this room, everyone who cares about foreign policy, security, economic policy and growth ought to be very concerned and be thinking in the future what can I do to make a difference? Do I talk to my employees? Do I talk to my lead manager so he talks in the district to his congressperson? Do I educate? Do I give money to certain groups? How do I stop this downward spiral that we've been on in the '30s?

And I just don't think that we -- I agree with Jacob, hope is one thing, action is quite another, and I do not see a firm action developing.

JIM BACCHUS: I agree completely. As I said at the outset, I would like to see the president be as bold on trade as he's been in other areas of our shared concern. He should begin by insisting on the early conclusion of Doha. That would be a huge shot in the arm, economically, for the world -- a tax cut for the whole world that would produce more trade. He should identify new ways of facilitating more trade finance at a time when companies all over the world simply cannot get the financing they need to engage in trade.

And he should begin to look forward to a 21st century trade agenda, to broaden the scope of what we're trying to do in establishing the international rule of law in trade, moving beyond traditional concerns of tariffs to engage in all of the non-tariff barriers we have in terms of food safety, in terms of technical standards to move into an investment, to move more into energy and the environment in ways that make sense on a multilateral basis that protect trade and also protect our other shared interests, that can address currency issues in a right kind of multilateral way which clearly affect trade, that can do something real about competition policy where the United States has lagged -- Jagdish probably disagrees with me about this -- but we ought, in my view, to do more to protect intellectual property worldwide through the trading system.

Jagdish will agree with me when I say that we need to take what we've done with the FTAs in terms -- that threatens to undermine the MFN principle in the world, and multilateralize those gains through the WTO. The president should be setting out this agenda for the next generation on trade and looking forward, because if we don't move forward, we'll fall back.

Another question. This gentleman has been patient.

QUESTIONER: John Beatty (ph) from UBS.

One of the key issues that developed countries were pushing for in the last -- the failed Doha round was for financial services liberalization. Currently as a result of the financial crisis, a lot of financial institutions have received government assistance of some sort or the other. Arguably this could be viewed as a form of subsidy. I wonder how state aid would be addressed in financial service liberalization discussions at any re-launched Doha discussions.

BACCHUS: With respect to financial services and subsidies -- and services and subsidies generally -- (inaudible) -- correct me if I'm wrong -- in the general agreement on trade and services, the issue was reserved for future negotiations. So it's not clear that you can engage in countervailing duties or in other trade actions relating to subsidies provided to services. This is something on which we agreed to negotiate further, but we have not concluded. Pardon for being a lawyer.

HILLS: Yeah, we haven't taken any commitments.

BACCHUS: Yeah, there are no commitments there. In my view there should be commitments, but in my view we should have a lot of other things that are not yet in the rules as well. So -- but as Jagdish just mentioned, with many of what we've been calling bailouts in terms of grants, loans, other types of financial contributions that provide benefits to manufactured goods/producers, those are subsidies under WTO rules, and they can lead to WTO claims.

HILLS: And that's another area where the G-20 could take a leadership role. They could agree to finance the IMF who could provide assistance to developing countries where their current accounts are in dire straits, and their trade, they can't get trade finance, as Jim mentioned. There's been an awful lot of talk in Europe about doing something. We ought to double the financing of the IMF to 500 billion at the Berlin conference, but there's no suggestion about where they would get the money.

And if they're looking to Asia -- China, for example, China might be more interested if the shares and the responsibilities at the IMF were more equitably distributed. I suspect that the Arab states and China will be somewhat less enthusiastic about financing the IMF when it has such a small vote in the body.

BACCHUS: We have time for one more question: Ambassador Jones.

QUESTIONER: The 17 countries you're talking about are well-developed democracies, and they're responding to their people. I agree that we have to do something politically to kick-start the negotiations again, and the trade adjustment assistance is one of them. The most vocal groups are those who are trying to protect workers and those who are trying to protect the environment. Free-traders have always been opposed to putting labor and environmental provisions in trade agreements, even though IP is in there, et cetera, et cetera. What would be wrong with trying to creatively negotiate labor and environmental provisions as one other set of tools to kick-start the negotiations again?

BACCHUS: Let me say that I don't disagree with that view. My view is the same as that of President Clinton, Vice President Gore. I support the compromise that was negotiated by Sue Schwab and Democrats on the Hill with respect to some of the FTAs last year. I think we need international rules to protect the environment, just as much as we need international rules to protect trade. I think the evidence would suggest that to the extent that there have been judgments in WTO dispute settlement on issues relating to trade and the environment, they have protected the environment while also protecting legitimate trade interests. I think there is room to serve both of those ends.

I also believe that we can and ought to allow for protection of core labor standards, such basic issues as the right against discrimination, the right to collective bargaining. But if the United States insists on those things, as I think that we should perhaps should consider doing, we need to be aware of the consequences. And this is something the United States often forgets in dispute settlement. What's good for the goose is good for the gander. If we want other countries to abide by those rules, we need to abide by them themselves. And I would ask, do we provide full collective bargaining rights at the federal level for all agricultural workers in the United States of America?


BACCHUS: Jagdish and Carla may disagree with me on this issue.

HILLS: No, I totally agree. On the labor rights, I think the Peru agreement sets a wonderful example that we could follow. We often lecture other countries about the international labor organization standards, the core eight principles; however, we've only adopted two. So we are not a very good teacher in terms of following what we -- we want them to follow what we say, not what we do.

On the environmental issues, we are going to have the Copenhagen conference at the end of the year. I would like to see a global environmental organization where there could be an agreement between the large emitters and the producers. I think that to dump that into the WTO might be complicated. And yet there could be a bridge between so that the WTO rules, like subsidy rules could enforce those rules. But we're so far back in agreement on what our environmental rules ought to be internationally, I think we need to work.

And I would recommend that our nation and our president reach out to China and say, look, this is some place where we could work together. We're the two largest consumers; we're the two largest emitters. Our security in the future depends upon it, and let's work together and see if we can't bring others in. And you could get a half a dozen nations to sit down before the Copenhagen agreement. And if you had a reasonable plan, I think you could sell it, because I am worried that you're going to get some convoluted notions of putting a tax at the border to prevent the other guy's stuff coming in because you think that it emitted more CO2 than you did at home. And that would really be a 1930s mistake.

BHAGWATI: Can I just add something because I totally disagree with these two panelists.

BACCHUS: I thought you would. Go on.

BHAGWATI: We're talking about domestic environmental standards, right, like you're polluting a river or a lake which nobody has ever heard of in this country. Should that be harmonized? And so that's the demand. Kyoto II or Copenhagen I, it's an international pollution issue, and that's a very different game. And there I agree with --

HILLS: That's what I think the ambassador is talking about.

BHAGWATI: No, no, no. Domestic and environmental standards are the first two. Let me be absolutely clear -- to putting into trade treaties standards about your industry, which is the same as mine, having a lower environmental tax burden or a lower labor cost burden. And that has to be distinguished sharply from the international pollution questions, okay.

BACCHUS: Then we don't disagree.

BHAGWATI: No, no. But I disagree entirely because you take all of the big countries which are democratic, like India, Brazil, and so on, but you're not just going to roll over dead because two congressman from here go to Peru and tell them what to do. They say go get lost because we're going to pursue labor standards in ILO -- Lula who is the best trade unionist in the world, much better than any of ours -- you know, he grew up as a trade unionist. Brazil refuses to negotiate these things, and tell us keep these other issues out: labor, environment, et cetera, and pursue them in the -- (inaudible) -- of all places.

We are -- because we are fearful -- the unions on labor are fearful of competition from poor countries that they want to put in essentially these standards to raise the cost of production. It's a kind of export protectionism. And if you talk of altruism, then that also is not an appropriate way to do it, like in your interest in other works -- you know, workers abroad in there.

So there are billions of pages written on this. It's a very important issue. And I think this is the most outrageous kind of demand which the U.S. has bought into. Now, the U.S. had to do it in order to get the fast track, right. And there I agree with Jim and Carla. But trade is a matter of not just reaching bipartisan agreement in this country; you are to reach agreement with other countries. And the notion that just because we needed it for fast track to have this crazy thing in the bill doesn't mean that it is going to be accepted by the rest of the world. So if we tried to put it into Doha, forget Doha. In fact, EU trade to do something like that with India. India told them get lost; go back; come back stripping the trade -- FTA agreement of all of these extraneous matters, right.

So we are not Peru. We are not poor (Uribe ?). You can do what you like with those little countries. But this is not going to happen -- (laughter) -- this is not going to happen with the big countries, and the U.S. had better learn this. The U.S. really has this tendency to say, look, something -- if we work out something bilaterally among our people, Republicans and Democrats, therefore it's virtuous. (Laughter.) Remember the last time they did that. The Smoot-Hawley tariff was a bipartisan. (Laughter.)

BACCHUS: All right, they're going to bring the hook in a minute. (Laughter, applause.)







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