American Enterprise Institute

July 7, 2008

[Edited transcript from audio tapes]

11:45 a.m.	Registration
12:00 p.m.	Luncheon
	Keynote Speaker:	Christopher A. Padilla, U.S. Department of Commerce
1:00	Panelists:	Eric Altbach, National Bureau of Asian Research
		Claude Barfield, AEI
		Edward Gresser, Progressive Policy Institute
	Moderator:	Michael Auslin, AEI
2:30	Adjournment

Proceedings:

Michael Auslin:  My name is Michael Auslin.  I'm a resident scholar in Asian studies and head of the Japan program here at AEI.  We are glad that you have joined us today for what promises to be a stimulating discussion on economic development in Asia and America's participation in Asia's regional economic architecture. 

Nations in Asia are actively pursuing economic integration whether through multilateral or bilateral mechanisms.  Already today, as most of you know, Asia accounts for about 35 percent of global output and that figure is certain to rise as free trade agreements stoke further growth. 

The U.S. economy, it need not be said, is deeply tied to Asia as fully one-third of our total trade is with the region, and American businesses do more than two trillion dollars worth of trade in goods and services.  But is the U.S. in danger of missing out on the economic integration currently taking place in Asia? 

Congress is in a decidedly anti-free trade mood and the U.S.-Korea Free Trade Agreement is languishing.  Presidential candidate Barack Obama has called for amending NAFTA and voted against the Central American Free Trade Agreement.  Under the next administration, will the United States watch from the sidelines as Asian nations create economic regimes that deepen trade among themselves? 

We are very pleased to have not only a distinguished panel, which we will get to in the second half of our program today, but to have Christopher Padilla, under secretary of commerce for international trade, with us today to share his thoughts on Asia and U.S. trade policy.

Under Secretary Padilla currently leads the International Trade Administration, and before that he served as assistant secretary of commerce for export administration.  Earlier in the Bush Administration, he was assistant U.S. trade representative for intergovernmental affairs as well as chief of staff and senior advisor to then deputy secretary of state Robert Zoellick.  He also has had a distinguished career in the private sector including positions at Eastman Kodak, AT&T and Lucent Technologies.

Before I ask Under Secretary Padilla to come up for his talks, I'd like to remind everyone to please turn off your cell phones or beepers if you have them.  When we get to the question and answer period, we also ask for your patience because we only have one microphone today, and so it will take us a little bit of time to get around to each of you.  But, with that being said, please join me in welcoming me Under Secretary Padilla.

[Applause]

Christopher A. Padilla:  Thank you very much, Michael.  I appreciate you organizing this program today, and I thank you for the introduction. 

I also want to thank Claude Barfield, a long-time expert on trade, a friend, and colleague.  I'd also like to acknowledge the presence here today of my predecessor as under secretary for international trade, Ambassador Frank Lavin, here from Hong Kong.  So, thank you for being here, Frank.

A few months ago, I went to Thailand to mark an anniversary, but this anniversary didn't celebrate a wedding.  It recalled a very long sea voyage from a long time ago.  One hundred and seventy-five years ago, to be precise, in 1833, an American envoy named Edmund Roberts traveled to Siam to sign the Treaty of Amity and Commerce with his Majesty King Rama III.  Roberts had departed Boston in March of 1832, charged by President Andrew Jackson to negotiate commercial treaties with Asian nations.

According to a later newspaper account, Roberts concluded what was to become the very first U.S. treaty with an Asian nation "after many weeks of tedious negotiations with a royal minister weighing 300 pounds and dressed chiefly in a waistcloth," all without submitting himself to any degrading prostrations. 

Roberts was a native of New Hampshire and called himself a Yankee diplomat.  In fact, with due respect to my friend, Ambassador Karan Bhatia, who could not be with us today, Edmund Roberts was in many ways our first deputy U.S. trade representative for Asia, and a very good one, at that.  The treaty he negotiated specified, "The trade shall be free on both sides to sell, to buy, to exchange on the terms and for the prices that the owners may think fit." 

And his agreement was forward-looking as well.  It specified, "If hereafter the duties payable by foreign vessels shall be diminished in favor of any other nation, the same diminution of duties shall be made in favor of the vessels of the United States."  That means that if anyone else gets better market access, we get it too.  And the trade experts in this room will recognize that that is a most favored nation clause, which became later a bedrock principle of the post-World War II global trading system.

It's interesting that in the 19th Century, America's trade priority in Asia was to promote the values of economic openness to Asian nations that were, at the time, islands of isolation.  It is therefore very ironic that in the 21st Century, America is turning inward uncertain whether economic engagement with Asia is in the national interest, even as Asian nations themselves rush to conclude trade and investment agreements with one another.

Perhaps this seems alarmist, but I think we should look at the facts.  America is more dependent than ever on trade with Asia.  The region accounts, as Michael said, for about one-third of U.S. merchandise trade, more than any other single region of the world.  U.S. goods trade with Asia last year reached nearly one trillion dollars.  Yet many in Congress are deeply suspicious of expanded trade with allies like Korea and are downright hostile toward trade with China. 

This ambivalence comes at a time when Asia's economic importance is on the rise.  The region is responsible for -- or was responsible for about one-quarter of global GDP in 1990, but today accounts for about 40 percent of the global output on a purchasing power parity basis, and Asian economies are growing faster than economies in other parts of the world in a trend that seems likely to continue. 

But what I think is most interesting is that Asia is increasingly trading with itself.  According to the World Trade Organization, nearly 60 percent of all Asian trade today is intraregional, within Asia.  And that's up from about 45 percent 20 years ago.  Meanwhile, the United States is losing market share in Asia.  We are the source today of only about 10 percent of Asia's imports, down from 20 percent two decades ago.

There are more than 100 free trade agreements currently in existence or under negotiation within Asia today, and the number is growing fast.  As of February of this year, Japan had bilateral economic partnership arrangements with Singapore, Malaysia, Thailand, the Philippines, Brunei and Indonesia, and is negotiating with Korea, Vietnam, India and Australia.

China has a goods-based FTA with ASEAN, the Association of Southeast Asian Nations, and is working to expand this to cover services and investment.  And China just signed a free trade agreement with New Zealand.

Korea has a free trade agreement with ASEAN and is negotiating with others.  ASEAN itself has reached agreement in principle with Japan, is negotiating with Australia and India.  China has proposed a Northeast Asian FTA, to include itself, Japan and Korea. Japan would go even further, with a regional agreement involving all of Northeast Asia, all of ASEAN, Australia, New Zealand and India.  Perhaps by now you've noticed these regional trade agreements do not include the United States.

Meanwhile, back here in Washington, we're reliving the trade debates of the 1980s. It seems to me some days like a bizarre combination of “Back to the Future” and “Scary Movie 2.” [Laughter]

Congressional leaders demand managed trade in automobiles with Asia.  Seems to me we've heard that one before.  Labor unions want to cancel NAFTA, just as they were opposed to it when it was negotiated 15 years ago.  And China has replaced Japan as the boogeyman of the 21st century, responsible for everything from lost jobs to the price of gas.

In a few weeks, most of us are going to be glued to our TV screens, watching the Beijing Olympics.  Imagine, if you will for a moment, how we would react if we saw an American sprinter standing at the starting blocks of the 100-meter dash, screaming, "Time out!" while the rest of the sprinters rushed forward across the finish line.  I worry that this is what America's trade strategy in Asia could become, because Congress is behaving like this angst-ridden athlete, assuming that the world will wait for us, while we decide what to do.  But in trade, as in athletic competition, competitors wait for nobody.

There are a number of reasons why Asia is moving quickly toward regional economic integration.  Certainly rapid economic growth especially in China is driving more trade.  Much of Asia's intraregional trade and investment is due to the integrated, just in time, global supply chains of modern corporations.

In fact, we know that the typical product made in China, sold in the United States actually contains significant amounts of materials, components, and subassemblies from elsewhere in Asia.  For some products, the Chinese value-added is as low as 20 or 30 percent.

Some of the increased cooperation among Asian nations, I think, can also be explained by the 1997 Asian financial crisis, which highlighted the interdependent nature of Asian economies but also pointed out the lack of regional mechanisms to deal with such an economic crisis.  Asia's moves toward regional trade could also be seen as a natural reaction to the economic integration of Europe through the European Union and North America through NAFTA.

And a final factor, I think, behind the increasing regionalism in Asia is one that is rarely spoken of, but is never far from the surface.  And that is that regional ties are partly a defensive reaction to the growing economic influence of China.  Despite the explosion of Asian free trade agreements, however, the region is still in a formative period of Pan-Asian associations.  And these are only gradually evolving into a more effective and functional regional cooperation mechanism.

There are more and more of these groups, such as APEC or the ASEAN Plus Three, or the Chiang Mai Initiative, or the Asian Bond Fund, or the Asian Cooperation Dialogue or the East Asian Summit.  The proliferation of these groups has been, it must be said, somewhat indiscriminate.

And many of the intraregional Asian FTAs are less than comprehensive.  Japan's agreements, for example, lack complete coverage of trade and agriculture.  China's approach to investment agreements generally has been limited to selective coverage of certain sectors, rather than to the entire range of the economy.  And it's interesting that relatively little intra-ASEAN trade is actually covered by that region's preferential trade arrangement.

And so, while there is clearly a movement toward more Asian economic cross-regional structures, there is still an opportunity for U.S. leadership, although not for long.  Some people look at the proliferation of free trade agreements and these regional initiatives and they wonder, "How should America react to the trend of Asian economic integration?"  I don't think we should talk about how we should react to it.  I think we should talk about how America can be the driver in pushing forward an inclusive pan-Pacific economic architecture.

Through our position as Asia's leading trading partner, meaning Asia's biggest customer, America can bring its traditional advocacy of open markets to a region that is still taking only partial steps toward free trade and investment. 

The United States does not view the various Asian economic groups as threatening.  In fact, if there is any danger associated with Asian economic integration, the danger is that an isolationist America will exclude itself from regional mechanisms, failing to lead the way to expanded trade both with and within Asia.  America is and must remain a Pacific economic power.  The Bush administration has been actively working to create the building blocks of an Asian economic architecture that includes the United States.  We have signed free trade agreements with Singapore, Australia and Korea, and launched negotiations with Thailand and Malaysia. 

The Enterprise for ASEAN Initiative and the ASEAN-U.S. Trade and Investment Framework envisioned building further on this foundation.  We recently announced that we would begin work with the P-4: Singapore, New Zealand, Brunei and Chile, who already have an agreement amongst themselves, on services and investment, perhaps leading to a broader trade agreement that would include the United States. 

We're also pursuing a variety of trade and investment framework agreements and bilateral investment treaties.  Just last month, for example, the United States announced that we would launch bilateral investment treaty negotiations with both China and Vietnam.

America is, of course, a proud founding member of the Asia-Pacific Economic Cooperation Forum, or APEC.  And APEC remains an important vehicle for multilateral engagement in Asia.  In 2011, the United States will host APEC, the APEC Summit, for the first time in 18 years, providing the next administration a unique opportunity to set an agenda for economic openness in Asia.

The next administration will, I hope, whomever it is, be creative and ambitious in launching new bilateral and regional trade agreements and working toward a Free Trade Area of the Asia-Pacific.  FTAAP is not something that will happen overnight, but our strategy must be to work toward such an agreement to achieve APEC's core agenda of trans-Pacific economic integration.  It would have the benefit of bringing under one umbrella the plethora of subregional and bilateral free trade agreements, which now exist in Asia, with harmonized rules and harmonized disciplines.

The FTAAP could serve as a useful catalyst for multilateral trade negotiation in the WTO.  Or it could liberalize trade even further through WTO-plus commitments.  And perhaps most importantly the Free Trade Area of the Asia-Pacific would include the United States.

The key question is whether America will remain committed to economic openness; to open trade, open investment and the more open movement of people and ideas across borders.  That is America's crucial trump card.  It is what makes us more dynamic and different.

But if the United States turns away from openness, if we drift toward trade protectionism and restrictive investment and immigration policies, then Asia is likely to proceed on its own with regional integration that leaves the United States behind.  This would lead leadership on the Asian economic playing field largely to China, which is the fastest growing and most dynamic Asian economy.

Make no mistake, a hesitant, timid, inwardly focused America could give rise to an economic "Pax Sinica" in which China has the opportunity to shape Asia's economic architecture as it would prefer rather than as we might like.  Others in Asia might have little choice but to accommodate themselves to such an economic reality.  This is why many Asian allies are quietly thirsting for American leadership of an inclusive and ambitious pan-Pacific economic architecture.  And it's why, frankly, the current debate in Washington on the Korea-U.S. Free Trade Agreement is so maddening. 

Congress has shown in this debate a remarkable instinct not for the jugular but for the capillary.  Congress is focused only on near-term issues like beef and autos.  While these are important, certainly, to many constituencies, these issues are ultimately secondary.  The much larger importance of the Korea-U.S. Free Trade Agreement is that it could spark a trend toward more comprehensive Asian trade agreements leading toward a Free Trade Area of the Asia-Pacific that includes the United States.

Japan is certainly closely watching our Washington debate on the Korea-U.S. Trade Agreement and is anxious not to be left behind if America implements free trade with one of its closest neighbors.  Passing the Korea agreement through Congress would likely energize ongoing U.S. talks with Thailand, Malaysia, the P-4 and possibly others.  It should not be a difficult decision.

The Korea-U.S. Free Trade Agreement would be our largest trade agreement in nearly two decades, adding more than $10 billion dollars to the U.S. economy and further anchoring the United States in East Asia.  Most importantly, it would complete Korea's remarkable and decisive turn away from the old traditional East Asian economic model of closed markets and restrictive investment policies.  If Korea is moving in the direction of openness, this is the kind of transition in Asia that America should actively work to encourage, not to turn our backs on it.

But already, the hesitancy and delay of the Congress to ratify the Korea Free Trade Agreement has created uncertainty among our Asian partners about America's economic commitment to its closest regional allies.  Meanwhile, China's economic footprint continues to grow larger, and its economic diplomacy grows more assertive.

The window for U.S. economic leadership in the Pacific is closing.  If the Korea Free Trade Agreement fails to pass Congress, the cost to our economy will go far beyond lost trade opportunities in Korea.  America would effectively be ceding economic leadership in Asia, increasing the likelihood that a future Asian economic architecture will leave out the United States.

Ladies and gentlemen, the stakes are very high, and the debate we have here in Washington on issues like Korea is far greater than a debate about beef or a debate about automobiles. It is about the future role of our country in the largest, most dynamic economic region of the world.  I cannot help but wonder what Mr. Edmund Roberts would make of our modern trade debate if he were alive today.  Edmund Roberts devoted himself to expanding American trade with Asia.  Unfortunately, he died on a trade mission to Canton in 1836.

A naval officer who served as a midshipman on the vessel that took Roberts to Asia later recalled something interesting, "An attempt was also made to secure a treaty with Korea, but when the government there sent a mandarin of low grade for an interview, Commodore Kennedy put him ashore with small ceremony as soon as he discovered the official was of inferior rank."

Roberts agreed with the commodore's decision to stand up for America's dignity.  It bothered him that the Asian economic powers of the 19th century thought they could snub so weak a country as the United States then was.

One hundred and seventy-five years later, the situation is different, yet similar.  We are now the world's largest economy, and Korea stands ready and eager to move forward on a trade agreement with the United States.  Yet Congress seems paralyzed, prepared to snub Korea because it is deeply uncertain whether to seize the opportunity for expanded trade with Asia.

If we went to the Protestant Cemetery in Macau, to visit the grave of Edmund Roberts, I feel certain that his ghost would wonder what on earth we're waiting for.  Thank you very much.

[Applause]

Michael Auslin:  Under Secretary Padilla, thank you very much, not only for those thoughtful comments, but as a former historian of the 19th century U.S.-Asia relationship, I particularly appreciate you putting it into an outstanding context for us.

The under secretary has graciously agreed to take some questions.  As I mentioned, we unfortunately have one microphone today, so it will be coming around to you.

I ask first that when I call upon you, you wait for the microphone before you begin your comments.  We ask that you ask a question, and we ask that you also keep it relatively brief.  In fact, extremely brief, so we'll be able to fit in as many of you as possible.

So with that, I will actually be moderating the questions, so first questions. 

Male Voice:  And identify yourself.

Michael Auslin:  Yes, thank you.  And please do identify yourself.  Questions.  I assume there are some.  Maybe not.  Yes, over here.

Luke Engan:  I am Luke Engan --

Michael Auslin:  Wait.  Please wait for the microphone. 

Luke Engan:  Hello, Under Secretary.  I'm Luke Engan from Inside U.S. Trade and I appreciated your remarks.

I wanted to follow up on the Korea beef situation and to what extent do you consider it still a problem in Congress's eyes, given now that the market is open and that the bone-in beef is traveling to Korea at some point soon?

But, secondly, do any of the recent remarks from Congress on China currency renew any fears on your part about legislation, in that regard, moving this year?

Christopher A. Padilla:  Well, the Korean government has taken a remarkably courageous decision.  If we the think debate on trade is difficult in the United States, look at what's been happening in Korean over the past couple of months with tens of thousands of people in the streets protesting against the safety of American beef, even though American beef is perfectly safe to eat.  It's the beef that we eat every day.  I just had some for lunch.  I feel fine.  [Laughter]

But I think we cannot minimize the courageous nature of the decision that President Lee and his government took.  And given that decision, and given that we have reached an agreement which Korea is now implementing on allowing American beef to be sold in Korea -- and I note that the first shipment, I think, of 400 pounds or so sold out in a couple of hours -- certainly that should no longer be an obstacle for Congress.

But, frankly, I don't think that's the real reason that Congress isn't moving forward on Korea or on the other free trade agreements currently pending.  These agreements are, in many ways, being held hostage to election-year politics.  I think that's wrong.  I think it goes against the 60-year tradition of bipartisan cooperation on trade that we've had in this country.  It goes against our tradition of expanding trade with Asia under presidents both Republican and Democratic since World War II.  And so, I hope Congress will move forward on Korea because I think the stakes, as I said in my remarks, if we don't are quite severe.

On China, I can't predict what Congress will or will not do on legislation.  But, I think that using the blunt instrument of punitive trade legislation to deal with China's currency would be the wrong policy.  What's little-known is that the Chinese currency has actually appreciated by 20 percent since China went to a managed peg in 2005.  I think that there are a lot of issues in our relationship with China, but punitive legislation on the currency is not going to get at the core issues in the U.S.-China economic relationship.

Michael Auslin:  Yes, Mr. Yamakoshi.

Atsushi Yamakoshi:  Hi, this is Yamakoshi of Keidanren-USA.  Thank you very much for the comprehensive presentation. For the further kind of involvement of the United States into Asian economy, I think the Japan-U.S. EPA or Japan -- FTA between Japan and the United States could be a prerequisite.  So, I'd like to know how do you think about the need and possibility of the FTA between Japan and the United States. Thank you.

Christopher A. Padilla:  Well, I think the fundamental question with regard to Japan depends on the extent to which Japan is prepared to do a comprehensive free trade agreement.

As I mentioned in my remarks, the many agreements that Japan has signed in Asia are less than comprehensive.  They omit key agricultural products such as rice, for example.  And under WTO rules and certainly under U.S. tradition, the free trade agreements that we negotiate are quite comprehensive.  The agreement we've negotiated with Korea is quite comprehensive.

And I think if Congress acts to pass the Korea Free Trade Agreement, as I hope it will very soon, my sense is that that would perhaps be an incentive for Japan to consider, whether it is prepared to stand aside while its neighbor Korea and, in some sense, its competitor Korea. has preferential access to the U.S. market.

I would hope that the passage of the Korea agreement would have a positive effect on Japan and other countries in the region who might desire a closer economic relationship with the United States.

Michael Auslin:  For those of you around the corner, we also would like to get to your questions.  So, please just maybe have a chain of hands coming around, and we'll get over to you eventually.  Other questions.  Yes, standing up right here, please.

Doug Palmer:  Hi.  Doug Palmer with Reuters.

Just regarding the FTA, I mean, you know, Congress is getting back this week from the July 4th recess.  There's not a lot of time left before the August break and then you get into September.

I mean, do you still think it's realistic that Congress is going to approve these FTAs this year?  Or is this more likely something that will be left over to the next administration?

And then in terms of just sort of a related question, on the Doha Round, there's going to be another run at getting a breakthrough in Geneva this month.  But, I don't think anybody believes that a deal can actually come together before the end of the year.  I just wonder, what are your thoughts?  If Senator Obama is elected president, are you optimistic that he would continue to negotiate a Doha agreement and try to get it through Congress?

Christopher A. Padilla:  Well, that's a pessimistic question, Doug.  [Laughter]  With regard to Korea and Doha, let me say, I do think that Congress should move ahead on the Korea agreement, and I think they should do so right away.

I think that it is inexplicable to me, how we can negotiate and sign a free trade agreement with one of our closest allies in Asia which then, at considerable political cost to itself, has implemented the agreement to allow beef into the market, which is something we said they had to do.

And the Congress will not even give Korea the courtesy of a hearing on their free trade agreement, not even a hearing. That's inexcusable and it's no way to treat an ally.  And that's what I think Congress should think about as they come back from their August -- or from their July 4th break, and that is, "How is America going to treat allies in the region?"

With regard to Doha, as Ambassador Schwab has said, "Stand by.  Perhaps the negotiators in Geneva will surprise you."  Beyond that, I can't speculate, but we do know that the fundamental issue is whether or not mid-range, mid-level developing countries such as China, some of the ASEAN countries, India, and others, like Brazil, are prepared to open their markets.  Certainly we're prepared to open ours, and to cut our agricultural subsidies.  The fundamental question, particularly on industrial goods, is whether others are willing to make those cuts.

And with regard to what might happen in the future, I'm not going to speculate on what any future president might do, but I know what this president's policy is.  And this president's policy is consistent with the policies of presidents both Republican and Democratic since 1947, and that is that expanded trade is fundamentally in the interests of the United States.  It's in our economic interests and our political interests.  And I would hope that any future president and any future Congress would continue that bipartisan tradition.

Michael Auslin:  Yes, standing back here.

Rick Leeds:  Thank you.  Rick Leeds, Virginia. What about a combination approach on China?  I know this administration will probably not be interested in it, but I just wanted to put it out there, both a combination of reducing U.S. domestic costs in combination with a reciprocal trade treatment -- tariffs or whatever that might be.

I asked you at CSIS a couple of months ago if it was accurate to describe this trade relationship as free trade, and you gave a diplomatic non-answer, so I assume you were saying "No."  And prior to the event I saw someone there from Heritage Foundation, a conservative think tank, and I asked him -- I won't say his name -- the same question and he basically just looked at me and he said, "No."

So -- and I'm a free trader; I'm a free-market guy, but you've got a military buildup, you've got an environmental catastrophe going on, so -- and I understand the main costs are -- the main problem is domestic cost.  The tax code is, I understand, a $1 trillion-a-year cost exclusive of revenues. You've got $400 billion dollars of waste -- of fraud and abuse, according to Citizens Against Government Waste.

But, you need both parties to get something done. You know, we can't have the Republicans sitting in one corner, Democrats sitting in the other corner; Democrats advocating tariffs, Republicans advocating just lower costs.  You need both parties, so what about a combination approach?

Christopher A. Padilla:  Okay.  Well, I try to be diplomatic, but I try not to give non-answers, so let me see what I can do with your question. 

I actually think a combination approach of lower domestic costs in the United States, lower taxes, less regulation, less burden on business combined with an open free-trade approach that would require China and others like it to lower their barriers is exactly the right approach.  And I think that has been, generally speaking, the bipartisan approach of American government since World War II.

What concerns me is that we seem to be at a point where America is turning inward on itself, not just with regard to trade, but with regard to investment, with regard to immigration policy.  And it's vitally important that we understand, in both parties, that America is stronger and more dynamic precisely because it is open.  It is our openness that gives us our leg up in the global economy.  It's what makes us different.

You know, people say to me, "Why didn't Japan overtake the United States when everyone 20 years ago was predicting that it would?"  The reason is that we remained open.  We kept our markets open.  We stayed open to foreign investment and we keep allowing immigrant entrepreneurs to come into our country.  And I think that's what makes us stronger and better.  It's why I don't think China will overtake us in the 21st century.

So, I agree with you.  We need a combination bipartisan approach, less domestic regulation, frankly more encouraging -- more encouragement of domestic savings, because we don't save as much as a country as we should, combined with aggressive market access measures in Asia, including in China.

Michael Auslin:  Phil.  Chihiro, up front, please.

Michael Auslin:  The question will be better for the anticipation, I'm sure.  [Laughter]

Phillip I. Levy:  That's right.  What you've all been waiting for.  Phil Levy, American Enterprise Institute.  I share -- I wanted to see if you could say a bit more about autos trade.  I share your -- what I took to be your aversion to the managed trade idea and it -- but, as you know, critics of the Korea Free Trade Agreement, whether this is really their main point or whether it's a cover for something else, argue that non-tariff barriers mean that the concessions in the agreement won't really buy very much.  Could you discuss a bit what you see as the prospects for auto trade between the countries?

Christopher A. Padilla:  Sure. I think the agreement is very good on autos.  I think the agreement requires some unprecedented measures to remove non-tariff barriers in Korea, such as discriminatory taxes, for example, the engine displacement tax that tended to work against the sale of American automobiles in Korea.  The agreement also has special provisions so that if there is a dispute between the United States and Korea on autos, it goes into a special and expedited dispute resolution process.

But I don't think that what some auto companies and some members of Congress have suggested is the right way to go.  And what they've said is we should have basically no free trade agreement until American companies have a guaranteed 20 percent market share in Korea.

Now, I come from the private sector.  I worked for three different U.S. corporations.  It's nice to have guaranteed market share from government, but I don't think that's the way that the market should operate.  I think what the role of government is to remove artificial obstacles to business and then let business and consumers make decisions on their own; in much the way as Mr. Roberts' treaty did with Siam.

And I think what the auto company -- one auto company in particular has requested in terms of a guaranteed market share is not the right way to go.  I don't think that's the role of government, and in many ways it is back to the future.  It's back to what auto companies were asking for in Japan in the 1980s.  I didn't think it was right then, and I don't think it's right today.

Michael Auslin:  We have time for about another question or two for the under secretary.  I'd like to see if we have any folks off in the back corner who have a question.  Is -- there is one -- Chihiro, back there somewhere.

Rochelle Moore:  Greetings. Rochelle Moore, Nubian Enterprises.  Just wanted to know, would it be possible to get a copy of your speech?

Christopher A. Padilla:  Absolutely.  It will be on www.trade.gov.  If it's not already there, it'll be there within an hour or so.  And I think we will also make it available to www.aei.org.  Put in a plug for my host today.

Michael Auslin:  Thank you for the plug.  [Laughter]

Christopher A. Padilla:  And we'll be happy to share copies.

Michael Auslin:  Yeah, we will have a video of the event and I believe a transcript as well.  I think we have time for one more question.  Yes, straight in the back, please.

Andrew Tein:  Andrew Tein, C&M International.  Mr. Under Secretary, Senator Baucus has suggested that one way to improve congressional support for trade is to launch agreements with core economic trading partners like Korea and also Taiwan.  And many experts, some in this room, have suggested that a U.S.-Taiwan FTA, in addition to the economic benefits it would deliver, it would also be an opportunity for U.S. participation in Asia and pave the way for an FTAAP.  Can you comment on your thoughts on the role of a Taiwan bilateral agreement and the outlook for a launch either this administration or next?  Thank you.

Christopher A. Padilla:  Thank you.  Taiwan is a very important trading partner of the United States.  In fact, Taiwan, as an economy, is our 10th largest export market.  A very significant destination, as well, for U.S. investment and, interestingly, Taiwan is our 10th largest supplier of imports into the United States.

And one of the reasons that I think it's so important that we continue to work through APEC and that we work on a Free Trade Area of the Asia-Pacific through APEC is that Taiwan is part of APEC.  APEC has always included Taiwan, and I think it is important that we have a mechanism to deal with such a large and important economy as Taiwan is.

With regard to a bilateral agreement with Taiwan, as I think is well-known, there have been some long-standing concerns between the U.S. and Taiwan particularly on the issues of intellectual property rights protection.  I must say that the new authorities in Taiwan have taken some positive steps just, in fact, in the recent -- last few days in setting up a new IPR court in Taiwan, which is something we had been looking for them to do.  We need to continue to work on these IPR issues as we go forward. 

Thank you all very much. 

[Applause]

Michael Auslin:  Okay.  We will be moving into the second half of our event today with our distinguished panel.  We will probably just take about a two-minute break for the under secretary to leave. 

But, before that, please once again join me in thanking Under Secretary Padilla for his gracious comments. 

[Applause]

Christopher A. Padilla:  I hope I got it right.  [Laughter]

Michael Auslin:  Thank you so much.

Michael Auslin:  Ladies and gentlemen, we would like to get started soon, so if you could please take your seats, we'd appreciate it. 

Michael Auslin:  Ladies and gentlemen, welcome to the second part of our event today.  If you could please take your seats, we'd like to get started. 

I think the under secretary set us up perfectly to delve a little bit more deeply into some of these issues, and gave us a necessary historical background to talk about the U.S.'s deep involvement and long-standing involvement in Asia, both from a political as well as an economic perspective.  And to talk about both, what is happening in Asia, what has happened in Asia, and what we think may be happening in the near term future.  We have assembled a very distinguished panel today, and we're glad that you are here for this as well.

We have to my immediate right, Eric Altbach, from the National Bureau of Asian Research.  To his right, my colleague, Claude Barfield, from AEI, and down at the other end of the dais here, Ed Gresser from the Progressive Policy Institute.

Each gentleman will be talking for about 10 minutes or so, giving an overview as well as their own particular take on these issues.  We will then have a moderated discussion and, as before, plenty of time for questions and answers.  So, let me start it off by turning it to Claude Barfield. 

Claude Barfield:  Thank you very much, Michael.  We set up a theme of looking at things historically, or with some historical background, and I will continue that though I'm not going to go back to the 19th Century.  I will go back to around nine -- the late 1980s, and try to walk through a little bit of the history of United States' involvement in East Asia -- the -- or East Asia -- developing East Asian economic architecture,  and also some comments on some characteristics of that architecture as they have -- as they also have evolved. 

And I guess one point -- I have a couple points -- preliminary points I would like make.  I mean there is a debate and it's -- there -- this debated in attitude by some recent books and recent literature about whether or not -- is it important for the United States itself to be involved in that architecture in some -- however that architecture evolves -- or could we stand back. 

I should say that I am one of those -- and we can talk about this in discussion -- who believes very strongly that we should be involved in the architecture in a formal manner.  We can't predict how that architecture will evolve over the next five or ten years, but the United States should be a piece of it. 

Now for reasons that I will go over, it very well may be that we should lead from behind in terms of the evolution over the next few years, because of -- and I can be bipartisan here as you will see -- I think blunders of U.S. leadership over the last decade under Republican and Democratic administrations depending more on our lives on Japan or Singapore and Korea in terms of -- and I'm talking about reasonable integration.

And finally just, I think the challenge has -- was in the 1990s -- as you will see as I'll walk through -- and will be -- is today and will be in the future.  The degree to which the United States, which in its own -- in its bilaterals and also as it has in the GAT and the WTO -- demands legalization, demands tight rules and very strong judicialization. 

The degree to which we can bend that or compromise on that to a much more traditional Asian -- as they say, the ASEAN way and it can be a caricature, but there are characteristics there that are important, of trying to work things out through mediation, through looser rules, through diplomacy, rather than litigation.  And I think that's -- that was, and it has been, it will continue to be a continuing problem.

Let me say, there were -- there has been -- and I'm going to start with the Bush One administration when the United States got -- really made its first statements on Asian regionalism.  There have been two visions that have competed since the late 1980s about U.S. involvement, about East Asian integration. 

One -- and I'm oversimplifying it -- I'm going to be rushing here because of time -- Secretary Baker under the former President Bush, made the point -- I think it was in 1991 -- that the United States would not allow a line to be drawn down the middle of the Pacific with us on one side of it and the nations of Asia on the other side of it. 

At the same time, just about that time, some -- those of you who are Asian specialists will know -- a -- it wasn't a large option at the time, but Premier Mahathir from Malaysia put forward a so called East Asian Economic Caucus vision.  That is, that would be regional institutions that would include only East Asia, and in his mind that did not even include Australia or New Zealand.  So, it was an intra-Asian, if you will, economic structure or political structure. 

I will come back to this because -- and I don't want to spend any time on it -- but the economic structures -- this is not -- it's not just true in East Asia, but anywhere -- they may start as trade agreements, but as you -- as we saw with APEC, and as you will see with the ASEAN Plus Three and other agreements, really spread out very quickly to other issues such as energy, the environment and to some degree into security issues.  There were those two visions. 

Well, throughout the '90s, I would say that -- and I take APEC as the symbol here -- we had the prime time, if you will, or the priority, in terms of what we were doing -- excuse me -- and also what the East Asians were doing of a trans-Pacific economic vision. 

From roughly 1993 to 1997, APEC seemed the wave of the future in terms of economic institutionalism -- economic institution out there. 

Now a couple points about APEC, because these issues will come up.  APEC was not and is not a traditional bi -- multilateral or sub -- or regional trade agreement.  It was not a reciprocity based agreement.  The themes of APEC were so called unilateral liberalization. 

In 1994, under U.S. leadership, but with others going along -- I don't think at that point reluctantly -- APEC made a commitment for free trade in the -- among its members for 2010 for the developed countries and 2020 for the development countries.  But that was a commitment that was done on an individual basis.  It was not a reciprocity based commitment.

It also meant, and this is important I think, that President Clinton was not forced -- and neither would President Bush today or his successor unless APEC changed -- to go back to the Congress.  Did not have to go back to the Congress to ask them to put through a -- some sort of regional trade agreement.  And that was -- it looked as if the wave of the future might be a trans-Pacific -- the trans-Pacific vision.

But then, as those of you who follow this closely know, two events really shattered this vision.  One was the East Asian financial crisis.  It is hard to overestimate even 10 years later, I think, the impact of that crisis, not only for the things that we're -- I'm talking about in trade, but in terms of the psyche of East Asian countries as a group.  And that crisis really, I think, shattered -- in turn, shattered the vision of APEC or -- and that APEC seemed incapable of handling the issue and the APEC meetings really didn't touch it.  On top of that didn't try to deal with the issue.

On top of that, the United States came forward in the year after the East Asian financial crisis with a very strong set of proposals for a set of reciprocity for the first time -- reciprocity based sectoral agreements that would bind and commit nations -- the nations in APEC -- to liberalization.

Now, the combination of what was considered -- we could have a whole afternoon of debate on this -- the hard heartedness of the United States and the IMF in their reaction to the East Asian financial crisis, on top of which the United States comes -- blunders forward with a very heavy handed set of proposals for trade liberalization right in the midst of the crisis caused a reaction. 

Now, we can -- obviously the lead here for those of you who follow this was Japan.  Japan could not go along with several of the sectors, but I think we ought to step away from the particulars of Japan or other nations resisting it to the point that what it showed was that at least at that point, the United States would not be able to get its way to push through trade liberalization on a traditional basis.  The Asian nations, even though they followed behind and hid behind Japan, were not ready for that. 

And I would say that that -- at least at our own time -- was the high point to 1997 of a trans-Pacific vision, because after that the Clinton administration became discouraged, turned away, did not really pay much attention to APEC.  You did -- the only thing you had -- action you had out there was a very late negotiation -- beginning of a negotiation with a free trade agreement with Singapore.  But, the Clinton administration thought that this was not the way to go.  That these people were not serious, at least in the minds of the Clinton trade officials and Clinton himself.  And so, they just walked -- they looked to other things.  They looked for sectoral agreements around the world and not just with Asia.

And that brings us to the -- and I'm moving quickly here -- to the Bush administration 2001.  The Bush administration -- there were two, I think, characteristics of the Bush regional trade policy.  One was a so called "competitive liberalization," which was in the works before 9/11, in which Robert Zoellick, who was the U.S. Trade Representative, argued that -- not just in Asia -- and I should say that we did not -- not that we ignored Asia, but Asia was part of a worldwide view that the United States thought through bilateral agreements or regional agreements you could build as an alternative to the WTO, you could build a free trade from bilateral regional right up to multilateral trade agreements.

And so, in that regard, they did not deal with Asia -- the United States was not dealing with Asia as a whole -- East Asia as a whole, but dealing with individual countries.  And there you've got the beginnings of -- you've got the negotiations with Thailand and Malaysia, finishing negotiation with Singapore.  But, it did not go beyond that in terms of a vision.

And the second problem that occurred was that after 2001, the Bush administration, certainly in the first couple of years, viewed APEC as a security arrangement, or wanted to push APEC in the direction of a security arrangement.  I forget whether it was 2002 or 2003 in which -- or at the meeting which President Bush went to APEC and never mentioned really trade.  He talked totally about security.  And so, there was the wrenching -- or at least the -- at least to some, I'm sure, Asian nations, the confusion of what were the goals -- what were the United States' goals in relation to APEC?

And so, basically I think for that -- for what happened in the -- because of what happened in the Bush -- the Clinton administration and the Bush administration, one could say with -- I'd be happy to get a reaction to this -- I think since 1998, APEC has been drifting.  It has really been without purpose.  It's still there.  They still go. 

But then, finally -- to move on -- finally other means of integration in East Asia came forward -- and I'll be very quick here -- one, East Asia belatedly moved to become a part of the wave of bilateral agreements that was sweeping the rest of the world or which had begun in the 1990s.  As late as I think, 2000/2001, there were no subregional or bilateral agreements throughout all of East Asia.  As I think the under secretary said there are now somewhere between 70 and 100 -- maybe over a hundred now -- if you take all the -- all those that are being negotiated as opposed to those that have been settled.  So, there was a wave of bilateral agreements of which the United States was a small part -- a part, but a small part.

And secondly, more importantly for our discussion today, there was the turning inward.  Starting in 1997, in an informal meeting to actually react to some proposals that the Europeans were thought to be about to put forward in terms of trade investment, the -- was born -- what came to be known as the ASEAN Plus Three.  That is, the ASEAN nations plus Japan, China, and Korea got together to, at first, form an informal reaction -- or to create some sort of informal reaction to the Europe -- what they thought would be the European proposals.

Out of those informal meetings came formal annual meetings.  And as I said with APEC, the ASEAN Plus Three started as a trade.  They began discussing trade, but then they moved out after 2001, 2002 to energy issues, to environmental issues, to broader issues.  It was an intra-Asian, if you will, East Asian, alternative to APEC, which grew up at the same time as APEC. 

And then, to complicate matters further, you had in 2003 the call for a so called East Asian Summit, which would be a peace -- it was both a part of the ASEAN Plus Three, but also separate.  So, you had these various intra-East Asian formulations or organizations which came into being as a -- really side-by-side with APEC. 

It was clearly -- there were a couple of things you should note about this period.  I've mentioned that the administration -- in the Bush administration from 2002/2003 was -- seemed to be totally interested in turning APEC into a security arrangement and into an anti-terror arrangement.  The administration was curiously unconcerned or didn't really seem to take seriously the intra-Asian -- the growth of an intra-Asian set of alternatives. 

Mr. Zoellick as late as 2004 said, "Well" -- when he was asked about the summit -- he said, "It's not something that would concern us.  We think the Asians showed if this is what they want to do, go in that direction." 

I should say that by 2005, however, Richard Armitage, who was then the Deputy Secretary of State was saying that this was a dangerous phenomena.  But, the administration was really divided and not really paying much attention I would say until 2005.  And then it came forward with a -- or back to a proposal that Fred Bergsten of the Peterson Institute had first circulated a year or so before, for a free trade agreement of the Asia-Pacific, which the under secretary mentioned. 

So, I want to finish up now with the options that we -- that are on the table the moment -- for the new -- for a new administration.  And I should say -- should have said at the beginning, I'm doing -- I'm actually proceeding in a way that is quite unreal in that I have ignored what has been alluded to, but we haven't talked about, and I'll be happy to talk about it more when Ed Gresser has finished and we get to this then -- I have ignored the deepening division within the United States, the political division over trade, and as I say, to some degree that's foolish, but we can come back to that. 

I am at the moment assuming that an Obama or McCain administration will at some point come to have to face choices in East Asia and let me put forward those choices as I see them now.

At the one level -- besides doing nothing -- and I think that probably is going to be the case no matter whether it's -- certainly if it's Obama and also likely with McCain, because we don't have trade promotion authority at the moment, a new President -- if it's McCain -- he's going to have a lot of time -- it will take a lot of effort to get it.  Obama -- an Obama administration will take at least a year or so to get its feet on the ground, so that it's likely for the year -- the next year and a half, we may have no action at all.

Beyond that, the United States could continue its current push for bilateral agreements to come back -- to get Thailand back to the table -- to go to Malaysia, to approach the Philippines.  So, there -- we could continue on the way that we're going now.

On the other end of the spectrum, the administration -- and you heard it again today from an administration official -- of an administration official -- could overleap this to go to a -- the large long-term vision that the President has endorsed and that some of the -- and the APEC leaders have agreed to as a long-range vision of a free trade of the Asia-Pacific. 

Now, Chris Padilla said something in passing that is, I think, important because it -- in my mind, at any rate, it presents another option.  And that is, I think clearly the -- at least at the moment -- I think for the perceivable future -- most of the agencies -- nations of East Asia are very wary of a grandiose proposal about an East Asian -- a total trans-Pacific East -- a free trade agreement.  And so, you're going to have to start I think smaller, but I think you can go beyond just the bilaterals. 

It seemed to me -- and he made a point about how we get to the larger vision is still up in the area.  And I think the next administration will have to deal with that.  If, as I say -- as I -- if they agree, as I do, that the United States does need a presence -- a visible presence -- and not just as someone on the other side of the ocean. 

That is, I think one of the things that could have been done, and I'm sorry the administration hasn't taken -- hasn't done more with this -- is to use the APEC -- the institution of APEC not to push for the larger vision of free trade by 2010 or 2020.  But to try to pull together a -- as you -- I know this is not a good phrase these days, but I'll do it in terms of trade and not in terms of security -- a coalition of the willing.  That is, to pull -- to begin discussing with the members of APEC, with Korea, with the Philippines, with Singapore, certainly, and maybe with Japan, an inner core within APEC that could advance more toward liberalization. 

I think actually that's what's going to happen in the WTO after the Doha Round.  The WTO's going to -- we're going to split off so that we will have a kind of variable geometry, and I think that's what the administration, hopefully, -- I'm sorry, this administration to do it and hopefully the next administration will move in that direction.

I think it's important that we have some visible presence out there, and not only a presence that is as an advisor or as merely -- that builds from what is going to continue to be a strong economic foundation, but that also has an institutional foundation.  I think I'll leave it there and answer questions later. 

[Applause]

Michael Auslin:  Claude, thank you a wide ranging historical background as well as a look forward. 

Now, let's turn to Eric Altbach from the National Bureau of Asian Research.  Eric.

Eric Altbach:  Thank you very much.  First of all, thanks to AEI for inviting me.  It's a great honor to come and speak to such a distinguished audience and on a terrific panel. 

Claude has given us a lot of food for thought on the development of regional architecture and U.S. policy responses.  I just wanted to add a few thoughts on some of the drivers for Asian economic integration and the institutional -- broader institutional -- innovation that's occurred, and then add a few additional points on the U.S. policy responses to date and what we might do going forward.

First of all, just to draw on some of the remarks that have already been made, regional integration in Asia has been largely a market driven phenomenon.  If you look at the dramatic expansion of intraregional trade, the expansion of this intraregional trade pattern occurred substantially before any of these FTAs even were launched much less concluded and implemented.  So, I think that's the first point that it has been the outward orientation of many Asian economies, particularly their interest in reaching to world markets, their openness to foreign investment albeit a -- of varying degrees, that has been important in driving this regional -- intraregional trade patterns, which largely reflect the growth of production networks. 

Initially, these were largely the result of the transfer of production activities, particularly from Japan, following the appreciation of the Yen in 1985 and the Plaza Accord, but it was part of a broader shift of production activities to take advantage of low cost labor and the rising -- rapidly rising productivity of many Asian economies. 

This dynamic, of course, has now coalesced around China, with China's increasing importance across a range of production activities in Asia.  And I think that that's added further fuel to the fire of this effort to create a policy environment to facilitate this further intensification of regional economic integration.

Just to throw a few facts into the mix, intraregional trade in 1986 accounted for about 37 percent of total trade by Asian economies.  It was over 50 [audio glitch] continue to grow.  As Claude I think pointed out, as of 2000, Asian economies had concluded only three FTAs with limited coverage and were in negotiating, I believe, three or four additional FTAs.  By 2007, this picture had radically changed.  There were now a total of 102 FTAs concluded under negotiation or proposed and that's just if you look at East Asian economies.  If you expand it to include South Asia, Australia and New Zealand, you rapidly get nearly 200 agreements in process.  So, clearly this is -- has been a dramatic shift. 

The complexity of these production networks is -- has grown over time.  Japan liked to characterize these as sort of the flying geese pattern.  As Japan transferred production activities overseas, first ASEAN economies and then increasingly to China, but Japan of course is only one player and this has really been a very broad based set of investment and trade relationships driven by multinationals in the United States and Europe and increasingly in the newly industrialized economies in Asia itself.

If you look at the impact of these market driven processes, this intensification of these regional production networks requires a set of policy measures to create a more permissive environment for these business activities.  So, if you look at the kind of harmonization of policies, rules, and standards that govern trade and investment, this process of market driven, internal trade patterns creates new constituencies which have a much higher stake in this harmonization process.  So, you have this very real economic driver for free trade agreements and other kinds of agreements to address these policy concerns.

As has been mentioned, this is also a defensive response by political leaders in the region to economic regionalism, or perceived economic regionalism, in the United States particular with NAFTA and in Europe with the European Union.

As has also been mentioned, the Asian financial crisis is a critical driver here.  The financial crisis, of course, was driven by a set of financial challenges faced by some of the emerging economies in the region.  But, I think, it spurred a broader reassessment of Asia's role within the network of global institutions.  It created a crisis of confidence for the Bretton Woods and institutions more broadly.  Not only the IMF, but also it raised questions about whether the global trading system was sufficient -- the WTO processes were sufficient for Asia to teach -- to continue its progress of economic development and growth, or whether regional self-help made sense across the board in terms of these trade and financial collaboration initiatives.  So, I think that's -- that is a critical element and particularly the U.S. policy responses is worth reflecting on as we think about what should be the U.S. response to these initiatives going forward. 

At an event that we hosted in May, former commander and chief of our Pacific command, Admiral Blair, made a comment that, "The United States failed to perceive the Asian financial crisis as a crisis that would affect U.S. security interests more broadly in the region." 

So, not only did we harm our economic ties with our key partners in the region by our slow response and our perceived support for what was viewed in the region as an unnecessarily harsh IMF response; we also undermined our ability to have defense cooperation.  And Admiral Blair related some discussions he had with Thai counterparts on U.S.-Thai military cooperation.  That his relationships took on an entirely different tone based on disappointment in Thailand over the U.S. response to the Asian financial crisis.  And I think that's something that should inform our thinking more broadly about how we respond to these developments in the region.

We've heard from Claude, I think a very good taxonomy of the -- history and taxonomy of the developments of a lot of these regional institutions: the ASEAN Plus Three, the East Asia Summit, and how the APEC institution fits into this broader sort of network of this regional cooperative economic architecture.

I think one institution which he didn't mention specifically is ASEAN.  ASEAN, of course, is said to be at the heart of the ASEAN Plus Three process.  It was the earliest regional institution in the sense that it has existed for -- I think it's now nearly 40 years old.  It has expanded its membership, but it also was, in recent years, beginning in the 1990s, very focused on expanding economic interactions between ASEAN members.

It has continued to play this role as the stated center of gravity for this regional architecture.  I think it's important to note that the ASEAN Plus Three and the East Asia Summit both acknowledge ASEAN as the center of their activities.  And to some degree, these institutions can only move as fast as ASEAN is willing to go.  It also speaks to the need for the U.S. to enhance our engagement with ASEAN as a key player. 

People often think of the competition within the region, in terms of the regional architecture, as a competition between the United States and China; Japan as perhaps a secondary player in this set of relationships.  But, at least to the present day, all of the major players in the region acknowledge that ASEAN should play this central role, perhaps because it's not seen as a true political force that seeks regional domination.  It is kind of a party that is acceptable to all the major powers in the region, but I think that that reality of the -- of ASEAN's role requires that the United States enhance our relationships.

So, turning to an appropriate U.S. response, I think I'd note first that some of the concerns that some have raised about the negative impact of these various trade agreements on the U.S. economy are a bit overblown to date, that we've seen little of the kind of trade diversion that people often fear from preferential trade agreements.

While the U.S. market share in Asia has declined, it has declined not because U.S. exports have not increased, they have increased, but it is that Asian intraregional trade has increased faster.  But, when you take a deeper look at some of these numbers, you realize that this in itself is probably significantly overstated.

If you look at direct Asian exports to the U.S. and the European Union, 48 percent of Asian exports are shipped to the U.S. and EU.  However, many analysts have noted that if you include intraregional trade and parts and components, and assess how many of these goods are destined for the U.S. and EU markets, it may be that as much as 67, close to 70 percent of regional trade ultimately ends up in the United States and European markets.  So, I think that this sort of risk of marginalization in the global economy is a risk of the future and not of the present day. 

One of the other risks that people often point to in terms of the poor quality of these regional trade agreements is the so called "noodle bowl" effect of different procedures required to meet the requirements of these FTAs.  This is particularly troubling with the case of rules of origin, which are a problem FTAs internationally.  But, it may be sufficiently problematic with respect to Asian FTAs that people don't, in many cases, even try and qualify for the preferential tariff provisions of the agreements, because the rules of origin are so onerous to meet, and there are so many different ones that they would have to meet, they don't bother to do it.

Some people have estimated that the compliance costs of meeting these rules of origins could be as high as three to five percent of the cost of exporting the goods.  Depending on what the tariff treatment might, it may net out that it's not worth doing.  So, some people have argued that in the case of many of these regional FTAs as little as 10 percent of actual trade is being conducted under the provisions of these free trade agreements.  So, there is significantly less than meets the eye potentially with these agreements.  But, that's not to say they can't have a negative impact in a variety of ways. 

One is on the global system.  I -- Claude mentioned the challenge of competitive liberalization as a strategy.  Given the current state of the WTO, I think it's a little bit hard to argue that competitive liberalization has been a resounding success.  But, at least the Asians remain highly committed to it. 

I think there is much more energy going into internal economic cooperation than there is in participation in the WTO process, for example.  And this can have a significant impact on the vitality of the global trading system to the detriment of all participants.

If you look at the strategic and diplomatic impact of this Asian integration, there is no question that many governments, including our own, really do view free trade agreements, in large part, as political as well as economic initiatives. 

The fact that Asian countries, particularly China and Japan, have invested so many resources in launching carrying forward these free trade agreements, I think builds, as we've discussed with respect to the strategic economic dialogue with China, habits of cooperation.  These habits of cooperation are important.  They are difficult to quantify, but they may have a broader diplomatic and strategic benefit to countries that are willing to participate.  And has Claude has mentioned, our narrow, high standard agreements, even under TPA, have made it very difficult for us to reach out to the kinds of a range of partners that we've seen many of our competitors in the region reach out to.

So, just to say something very briefly about what is an appropriate U.S. response.  I think it's very clear, as Claude has pointed out, that it is very dangerous for the U.S. to fail to demonstrate our continued commitment to engagement with the region economically. 

Under Secretary Padilla pointed out how damaging it would be for the U.S. to walk away from the U.S.-Korea Free Trade Agreement, but I think it goes far beyond that.  I think there is a need for the U.S. to take a broadly based -- undertake a broadly based review of how we allocate our leadership and institutional resources to different regional engagement.  And I think the -- Asia gets sold short in U.S. policymaking. 

This has been true historically.  There is a variety of reasons for it, but it no longer I think it is appropriate given that Asia accounts of over half of global GDP.  It's an incredibly important trading partner.  It's increasingly a center of innovation, and it's the location of a major peer competitor strategically for the United States.

So, what do you we do, assuming that we are willing to devote more leadership institutional, and I think as has been mentioned, political capital to engaging with the region.  It requires that we -- I agree with Claude -- we should refocus APEC on economic cooperation.  We should do this in a way that is credible and, obviously, whether or not we have TPA will have a big impact on this.  But, we need to be clear that we are committed to advancing this trans-Pacific regional vision.  If we don't, then we are not a credible player. 

We can do a lot with moving forward with ongoing bilateral initiatives to Thai, Malaysia.  FTA is an additional to the Korea FTA.  I think are important to move forward with the P-4 initiative.  But, seeking these coalitions of the willing -- I think APEC -- they use a less loaded term of pathfinder initiatives -- is a terrific idea, but it takes effort. 

You have to build them.  You have to be willing to move at the slower pace of your partners, particularly in the ASEAN countries.  It's a frustrating, mind-numbing experience that will require millions of man hours of travel, lots of leadership exposure to meetings that are stultifying and perhaps don't yield deliverables of the sort the United States wants to have.  But, I think those are the costs we have to be prepared to pay to stay in the game in this critically important region.

[Applause]

Michael Auslin:  Eric, thank you for a very subtle and nuanced look at the structures and processes that are going on in the East Asian regionalism that we see.

Finally, I would like to turn to Ed Gresser from the Progressive Policy Institute, and to remind you that after that we will open up into a discussion and question and answer period.  Ed, please.

Edward Gresser:  Thank you very much.  I guess most of the discussion so far has, to a greater or lesser extent, assumed the centrality of policy and of government-to-government negotiations and agreements.  I think in my 10 minutes, I'd like to raise a couple of questions about that assumption. 

The Asian structure that I grew up with as a kid and that most of us did where -- was one defined by the Cold War and the end of the colonial era.  That is to say, Japan and Korea and most of the ASEAN countries, with the exception of Vietnam and Cambodia and Laos, were very closely linked to the United States and very sharply separated from China, because of its revolution and its isolation after the 1950s, and also very sharply separated from India because of its decision to adopt a kind of autarkic and inward-looking approach to economic policy.

It seems to me, the major event of the last decade is not how many FTAs have been negotiated or how many meetings have been held, but the collapse of that structure and its replacement by something that is more like the pre-colonial Asian structure.

I'm going to give you a couple of statistics that will illustrate it a bit.  This is Japan's trade statistics drawn from JETRO.  Year 2000 they record $144 billion dollars in exports to the United States and $57 billion to China and Hong Kong; year 2007, $143 billion dollars to the United States -- so very slightly less than the year 2000 -- and $148 billion to China and Hong Kong.  So, Japan now sees, you know, China and Hong Kong as a larger market than it sees the United States.

And about a year ago I called up JETRO and asked, you know, "When was the last time this has happened?"  And the person on the phone in New York, he looked up the statistics and said, "I don't really know.  Let us get back to you."  And so, they cabled Tokyo.  Then about a week later sent me a very long fax of all the Japanese year-by-year, country-by-country import statistics back to the year Japan adopted a western style customs agency, which was the late 1860s.  And if you discounted the World War II years, the last time Japan exported more to China than the United States was in 1873, which -- at which time China still had an emperor.  Japan still had samurai orders.  It was quite a long time ago.

You can see even something more dramatic like in the Philippine statistics.  In the year 2000, you see the Philippines exporting $11.4 billion to the U.S. and $2.5 billion to China and Hong Kong.  The year 2007, it's $8.6 billion to the U.S., so very sharply down, and $11.5 billion to China and Hong Kong.  So, this is the former U.S. colony, the pearl of the Orient Sea, is now much more dependent on the China market than on the American market. 

I think you can account for this, as Eric mentioned, not by FTAs, because most of this -- these trends predate FTAs and have not grown stronger since the adoption of all these agreements.  But, simply by the fact that China through the WTO accession and India through its own domestic liberalization program have greatly changed the policies they adopt -- they had from 1950 to 1990 or 2000.  And I think if you look back in Asian history, it's always difficult to say, "never before," but I think it would be very rare that you would find a period in which China and India played such a small and marginal role in Asian economics as they did in that Cold War period.

And what is happening now, now that they've opened up, is a very big flood of investment mostly from other Asian countries going into those two giants: the trade of ASEAN and of Japan and probably, most dramatically of all, of Korea, bending away from the United States and toward their larger neighbors. 

I think this is a natural and probably inevitable trend.  I do not think FTAs are particularly capable of changing it in a significant way.  And if you look, for example, at the one Asian FTA we do have that with Singapore, you find that actually American imports from Singapore dropped since it was adopted not grown.  So, what I think we are in the midst of is a very powerful rationalization of the Asian production networks, and one that is going to continue and probably accelerate over the next decade.

Does this have a big sort of kind of threatening implication for the U.S. export -- as an exporter or as an economic power?  I would say probably not.  If you look at our export trade to Asia, you see last year about $320 billion dollars worth of goods and services, about $55 billion dollars in commercial services that are not particularly treated in the Asian FTAs, about $32 billion dollars in agricultural products, likewise not treated, about $50 billion dollars in information technology products, which are all -- come under the Information Technology Agreement and are duty free and quota free.  Similar are the smaller figures in scientific instruments, scrap metal, pharmaceuticals and medicines and so forth.

So, I think that we can over argue and over worry about, you know, what does it mean that Asian countries are pursuing all these free trade agreements?  What does kind of alarm me, and I think is important to keep in mind as we approach the next administration, is I think the U.S. really has been sort of sidelined in macroeconomic and financial discussions, that we are not participating in the East Asia Summits, that there is, to my knowledge, very little in-depth discussion of energy policy and cooperation.

These are, I think, very major issues that the U.S. should be playing a leading role in.  I think to the extent we have worries about trade, it would probably be most productive to pursue them through the WTO, rather than through strings of FTAs, which as we can see in -- are quite controversial in Congress, hard to pass, and also hard to deal with in -- with the Asian countries. 

If you look at the trajectory of the Malaysia and Thailand agreements, they have basically broken down.  I don't see them as likely revived any time soon.  So, it does seem to me that we're all in Washington policy people or government people, and we love to think that what we do is central, but it isn't always central. 

And I think probably the last decade has been a case of the -- you know, the Asian waters finding their own level and our need to kind of adapt to it, and make sure that we remain engaged in the political and security and financial side as the trade trends shift, which I think is a kind of permanent thing that we have to live with.

[Applause]

Michael Auslin:  Ed, thank you very much, and thank you as well for continuing the historical focus that we have and even giving an important context to it. 

I'd like to move to a discussion period now, and I would take Moderator's prerogative to ask to the panel collectively the first question. 

Building off of what, Ed, what you just talked about in terms of a perhaps more natural and you used the word inevitable shift in investment and trade flows back to China and India as they take their own policy changes and policy choices to -- but to link that up with what Chris Padilla said regarding the U.S. standing on the sidelines and then ceding, in essence, the creation of norms and the architecture, the structure to China, to ask the panel, first of all, do they believe that that would happen?  And secondly, if it did happen, so what?  What would be so bad?  What is the down side that we're looking at or what is the upside potential that hasn't been explored? 

If you take -- if you work off the presumption that China, chief among all countries in Asia, has benefited enormously from the open trading system.  So, given that, the U.S. sidelining, is it inevitable that China then sets the rules?  And if so, what does that really mean down on the ground?

Eric Altbach:  Just to address that briefly, I think Ed's quite correct in that we shouldn't overstate the impact of a lot of these agreements and China's own interest in shaping the rules of the game in all areas of economic exchange.

That said, I would argue that international trade -- there has been an overemphasis on the importance of tariffs -- that increasingly, especially as tariffs have come down, behind the border issues are becoming more important determinants of trade patterns.  They're increasing understanding of how problematic they can be in terms of their role as trade barriers.  So, when you're talking standards, for example, whether they're technology standards relating to wireless encryption or, you know, third generation mobile telephones, or other kinds of SPS or other standards, if China, because it is engaged in these FTA negotiations, is able to push an agenda that harmonizes standards in the region on Chinese approaches or new approaches which are more favorable to China, I think that can have an impact on U.S. interests. 

We have an interest in fostering harmonization around U.S. approaches.  We already compete with the Europeans in many areas in this regard.  So, being out of the game in Asia could have some impact on our ability to shape these kinds of outcomes to the detriment of not only our firm's activities in the region, but also on the global debate over these kinds of things and how they are ultimately addressed in the WTO or other global standard setting bodies.

Claude Barfield:  I -- go ahead.

Edward Gresser:  That's a very good point, but let me add one other point is -- which is that about, I believe, two-thirds with Asia is trade with China and Japan.  And if we don't have a very strong sort of bilateral approach to both of those two countries, then we're probably not getting at the core U.S. interest.

Claude Barfield:  I don't disagree with that actually and I've -- it was probably my own -- I blame myself for -- if it came across that I was enamored of FTAs. 

I should say that at this time last week, we hosted a Book Forum for Jagdish Bhagwati's new book called -- what is it -- Insects -- what is it?  Termites in the Foundation, which is a -- the latest of Jagdish's warnings and jeremiads against FTAs. 

And I said then, and I would say to Ed, I -- who would not agree that we should start with the WTO?  What I would disagree with -- or what I would say though is that while this -- that may be where we should start.  We are sitting here the week before the Doha Round is about to founder, I think.  So -- and even if they scrap together some kind of face saving agreement, you're not going to have a big advance.  And so, we're not going to be able to do anything about the fact that FTAs are going to continue to explode around the world and in particularly and in Asia.  And I think that our -- you know, a reasonable way would be to try to at least consolidate on a regional basis, and that's going to be a real problem, I understand.

But, it's not that I am enamored of FTAs.  It's just that -- there are two things that I would add.  One, I am perfectly -- something that I would not have done maybe 10 years, but certainly have done so in my recent writings research, I am perfectly willing to defend FTAs on a political and a security basis.  I think it is important that we have a presence there.  Not that we dominate -- there being East Asia -- not that we dominate, but that we are a part of these endless meetings,  because one of the points that I made was that APEC and also the ASEAN Three, which began -- or begin as trade agreements, move out quickly to financial.  They're talking about environment.  They're talking about energy to other things.  And so, that institution then gathers all kinds of other particular -- moves into other areas.

And secondly, the ASEAN Three, the Chinese have pushed subtly but consistently for the ASEAN Plus Three to move into security.  And so, this -- what starts as a trade issue, I think moves quickly beyond that.  I agree though with Ed that it certainly the --it's important that down the road we have some arrangement -- some agreements that include China and Japan. 

I would argue that with regard to China in our lifetime, I think it would be, even with a Republican administration, difficult to have an FTA.  We have accepted, however, China in the APEC.  And anything that happens there, assuming that it does -- you know, it goes forward, would be an easier way to integrate China.  Japan it's more complicated.  I think one of the questions before was about a Japan FTA. 

If I think the -- if under an Obama administration or a McCain administration somehow the Congress does ratify the U.S.-Korea FTA, I think Japan will move quickly to get in on that.  There's a number -- there's a number research papers done over the last four or five years about the kind of domino effect that you -- and you made the point -- or somebody made the point that we've -- these FTAs so far have just been with small -- you know, some really small trade flows, but once you get one or two of the big economies out there who give some sort of preference to each other, even in a time where tariffs are low, there will be the -- both political and economic pressure to have the others come into it.  And I think that is what is likely to happen.

Eric Altbach:  I just wanted to follow up on Ed's point about the U.S. being marginalized in terms of macroeconomic and financial policy discussions.  I think that's less true on energy, because I don't think the Asians are effectively cooperating on energy issues very well --

Male Voice:  Everybody is marginal.

Eric Altbach:  -- so we're doing as bad a job as everyone else.  But, with macroeconomic and financial sector issues, I think that is a real concern.  The APEC Finance Minister's process is not particularly effective or well coordinated with the overall APEC process. 

But, I think -- you know the real impetus, in many ways, for some of the dynamism of the ASEAN Plus Three is the desire to have a more effective regional financial cooperation mechanism that could save them from another crisis.  And the ASEAN Plus Three Chiang Mai Initiative, which was -- began as the second best solution when the U.S. basically torpedoed Japan's proposal in 1997 for an Asian monetary fund that would have been $100 billion dollars that would have been separate from the IMF to bail out Asian economies in the event of a financial crisis, the Chiang Mai Initiative, in fact, has emerged incrementally to become a very similar kind of institution. 

It is now approaching $100 billion.  It began as bilateral swap agreements, but now is -- has been multi-lateralized.  It is -- it has as part of its activities a set of regional sort of transparency provisions.  And it may eventually develop a secretariat that would allow it to come to binding agreements with Asian economies to structure bailout packages.

And in this new Asian development bank report, in fact, when it discusses this necessary development of the Chiang Mai Initiative, it even argues that once this has taken place and it is institutionalized, then it need not any longer have any relationship with the IMF, which it at least up until the present time has -- the commitment has been that this provision of capital would take place in conjunction with IMF restructuring programs.  But, here the ADB is saying that maybe we don't need that in the future, because it will be a robust institutionalized mechanism in which the U.S. and other IMF members will play no role.

So, that is potentially a big deal.  We're marginalized.  I don't know what the policy response necessarily ought to be, but it's something we need, I think, to have a much stronger engagement on.

Claude Barfield:  Just one quick note.  We got a little disagreement here.  I think that most of the financial arrangements that have been made to date have been overblown and overanalyzed.  There is very little underneath, I think, despite the fact the growing Chiang Mai.  It's still small potatoes.  It's still tied to the IMF, and while the ADB in one of its dreamier moments might think you can do this independently, I don't think it's going to happen for a while.

I think the really -- the key story of the last 10 years is not what they've done as a region.  It also says something about what these nations think about each other.  But, the key story over the last 10 years are these huge individual reserves, because they don't -- it's not that they don't trust the IMF, they don't trust the United States, but they don't trust each other either.  So, everybody has got this huge defense amount of money in case something like this happens again.

Now, I'm not arguing that it won't -- couldn't happen in the future, but I think that is -- it's really -- you know, it's only the beginnings on the financial side.

Michael Auslin:  Great.  We'd like to open it up again to your questions.  Same ground rules.  We appreciate your cooperation that please wait for the mike, identify yourself, and then also be sure to ask a question.  So, we'll have it open.  Yes, over here.

Robert Colorina:  Rob Colorina, Asian Advisory Board for the State of Virginia.  Question, are you all seeing a sufficient objective data as to the -- sort of the positive benefits of integration, meaning in terms of reduced costs, in terms of, in fact, jobs here in the -- in North America.  Those type of things to help sort of counter some of the arguments against.

And then secondly, to Claude's point on what I heard a little bit of capital integration, I was curious if it's, in fact, APEC or, in fact, some of these brick funds, which are merchant market related: Brazil, Russia, India, China -- if, in fact, that model is working towards returns to the pool investors.

Claude Barfield:  I'm not entirely sure of the second question.  I -- you know, thus far it has, but you're just talking about it just sort of return on investments over the last decade certainly.

Robert Colorina:  Yeah, or institution shareholders becoming smarter and then, as a result, sort of some of the portfolio companies reporting on time [inaudible] --

Claude Barfield:  I'm going to immediately say, I can't answer that.  I don't know the answer to that.

Edward Gresser:  Just one brief response to the first part of your question.  It's a little bit hard to tell because the U.S. -- our own macroeconomic and business cycle has been pretty gyrating pretty wildly.

In the first half of this decade, we had a sharp drop in exports and also a smaller drop in imports, and most growth was coming from financial services and real estate.  Now, those sectors are basically in a downward freefall and all of the growth, apart from government spending, is coming from the export sector.  So, I think we need to give it a bit of time and see how this leads.  But, at the moment, to the extent there is any good news about the U.S. economy, it's very strong growth in exports and particularly in a way to India and China.

Michael Auslin:  Yes, right here in the center table. 

Ralph Watkins:  Thank you.  My name is Ralph Watkins.  I'm with the U.S. International Trade Commission.  Peru, Chile, Costa Rica, Mexico are all supportive of an FTA with the APEC countries among the willing.  We haven't mentioned the role of Latin America.  With all four of those countries the United States currently has an FTA. 

The U.S. exporters have a competitive advantage tariff -- in terms of tariff -- in those four markets.  If the -- if those four countries are all at the table with the APEC willing countries, in terms of negotiating FTA, will those exporters be the real cause for the U.S. to come to the table in order to ensure that they're able to have their voice heard?

Eric Altbach:  I think it's -- that's an interesting dynamic support by the Latins of APEC members for an FTAAP.  I think the center of gravity in APEC is distinctly not with the Latin American members.  So, I think their views, supportive views, of an FTAAP is mildly useful.  It will not be the key driver for what APEC does or does not move forward with. 

In a pathfinder approach, I think it's helpful to have them as supportive, active participants.  But, I think one of the challenges that APEC faces is the differences of view between the Asian and the Latin members.  And indeed I think the general lack of enthusiasm by many of the Asian members to have active participation by the Latins.  So, I think it's -- it is one of the problems of APEC itself structurally.  So, because that's the case, I don't know how helpful they will be as proponents for the FTAAP, unfortunately.

Claude Barfield:  It reminded me of something I meant to say and that is -- I kind of skipped over -- and I think Under Secretary Padilla also glided by a problem, and I don't know how it will turn out, but that is if one -- I recommended a coalition of the willing in APEC, and I think that is the way to go to find a group of countries that will go forward with you.

But, what I did not point out is that this would mean a big change in the way APEC operates.  It would have to become a more traditional reciprocity based agreement.  And I don't know the answer to whether -- how that would work in the United States, nor do I know the answer to how it would work in other countries.  But, if countries are willing -- I mean the thing that would harden me a bit, but only a bit, is that you can -- and I was critical in one of my remarks about the Clinton administration, and I'm sure the Bush administration had it been in office would have done the same thing in terms of its reaction in 1970 -- 1997/1998 when it pushed forward sectoral agreements. 

But, since then -- and you can understand the reaction of the Asians -- but since then all of these Asian countries have -- or most of them -- I think all of the members of APEC -- are parts of bilateral and trilateral or subregional agreements.  In other words, they've had some experience in this. 

So, a decade later, you might find a different reaction among these countries for a more binding -- more binding than APEC, but probably less than what we would demand.  They would be not very happy with a reincarnation of judicialization of the WTO.  They would want some leeway I think, but you might be able to get beyond where we were in 1998 I think. 

Even though, I'll have to say, we -- you mentioned that ASEAN is the key driver here and people have not -- I think probably because they hope that something will happen in the future -- but I can't believe that the ASEAN leaders are not deeply disappointed in the results of the meetings in December of last year where they went in there with some commitment to get rules that would be to some degree binding.  That it would no longer be what was in effect a kind of APEC way of unilateral liberalization.  And they got nowhere or very little inching forward.  So, it's -- it could be a longer process.  And I have maybe indicated when I talk moving forward on any -- in any particular mode of operation.

Edward Gresser:  Claude was kind of dismissive of our -- what was it -- EVSL -- early voluntary secretarial liberalization initiative --

 [Cross-talking]

Edward Gresser:  Ninety nineties.  I didn't take it personally.  [Laughter] But, actually I think that's a much better model than the FTA model for going ahead in Asia. 

And that what you see in the WTO and you see in a lot of our FTAs is that everything is hostage to an agreement on agriculture that very few countries want to reach, everything in FTAs in hostage to an agreement on intellectual property.  It is quite discomforting for a lot of developing countries.  And a lot of the growth in trade in the future is going to be, I believe, in energy and environmental technologies, in medical and health equipment and those services, those sorts of things.  And if we could focus on those sorts of things that kind of make people smile more than it makes them frown, you might be able to have a lot more momentum than you can get in saying, "We want an FTA with you, Asia, but we won't conclude it until you agree to complete liberalization rights." 

Michael Auslin:  I also want to make sure I don't miss anyone off in the corners.  If you do have a hand up, please yell out so that we can get to you.  Anyone over there.  I don't -- yes.

Atsushi Yamakoshi:  Atsushi Yamakoshi, Keidanren-USA again.  Okay.  Yeah, I agree with you that if Korea-U.S. FTA becomes a reality that may affect the potential or the possibilities upon the U.S. 

But, at the same time, as you may know, EU -- EU has been negotiating with Korea about EU-Korea FTA, and some people argue that the impact of the -- that EU-Korea FTA could be larger on Japanese -- or the counterparts than the impact of U.S.-Korea FTA.

So, I would like to ask you -- some of you that -- to comment that the -- how you think about the implication of EU's involvement into Asian economy to U.S. involvement in Asian economy.  Thank you.

Claude Barfield:  Well, one of the things I've said to you with all the turmoil in Korea and the problems with our Congress, there -- the number of Korean trade people who have come by AEI and have talked to us -- and we've been in some meetings with the Korean Economic Institute -- but one of the things that I pointed -- have said to them that the best thing they can do right now -- the Koreans I'm talking about -- to move us off the dime is to conclude the Korea-EU Free Trade Agreement.

At that point, the Ford Motor Company, which is throwing up all this flack, and other companies would somehow think this isn't as good an agreement as I think it is, will be faced with a situation that the Europeans and the European automobile companies are getting a much better deal than we have, and here it does make a difference.  It's an eight percent tariff I think.  There are all these tax things, and there is no reason that the Koreans would multi-lateralize that. 

So, I agree with the [unintelligible] -- I should have mentioned I forgot to mention it.  I do think that the -- if -- I mean that Korea has its own -- all kinds of problems that I think spill over to the EU-Korea FTA, as well as just beyond the U.S. one.  But that -- when people -- when they've come to ask me what you could do to kind of get this forward, "Conclude that, get that done, and then turn to the United States and say, 'Here it is.'"

Eric Altbach:  I think that competitive liberalization dynamic can be useful for us as well, but it's only useful if decision makers care about the implications.  And I mean partly it's, you know, the size of the U.S. economy as such being put at a disadvantage by other free trade agreements.  It doesn't seem like such a -- you know, most of the studies don't indicate a huge impact on the U.S. economy.  But sector by sector it could be important, and if those constituencies could get more active in supporting progress in order to avoid that situation, I think that's a helpful thing.

Michael Auslin:  Yeah, I think those are good points.  Thank you, Ed.  Phil.

Phillip I. Levy:  Phil Levy, AEI.  This is a question for Ed.  You raised some suggest -- you put out some suggested numbers about trade flows with -- where the U.S. sort of slipped behind as a market for Japan, and you took it as a measure of relative importance. 

I wanted to ask how you saw trade intermediate products playing into that, because as you know, this has been part of this decoupling question in terms of these flows.  And you can certainly think of an instance where if you get sort of better distributed product