American Enterprise Institute

October 3, 2006

[Edited transcript from audio tapes]

9:45 a.m.	Registration
10:00	Panelists:	Grant D. Aldonas, former under secretary of Commerce
		Claude E. Barfield, AEI
		Daniel W. Drezner, Tufts University
		Daniel K. Tarullo, Georgetown University Law Center
	Moderator:	James K. Glassman, AEI
Noon	Luncheon
12:30 p.m.	Introduction:	Christopher DeMuth, AEI
	Remarks:	The Honorable Susan C. Schwab, U.S. Trade Representative
1:30	Adjournment

Proceedings:

James Glassman:  Good morning, everyone.  I’m Jim Glassman, resident fellow at the American Enterprise Institute and Editor-in-Chief of its magazine which will be relaunched in mid-November and re-christened The American: A Magazine of Business and Economics and Ideas.  And thanks for coming - it’s a very big crowd here today - to the World Trading System after the Collapse of Doha, the WTO, Developing Countries and Regionalism.  So it’s a big subject.  We have a distinguished panel of four experts, and I’m going to introduce them in a second.  I just want to say a very few words about what our conference is about today. 

It was difficult to get Doha started in the first place.  Attempts in the late 90s failed.  Finally the first ministerial was held in November 2001, shortly after 9/11, in Doha, and there were subsequent ministerials in Cancun, which Claude and I attended, and then another one in Hong Kong which I went to, unfortunately.  And since then, it’s been pretty clear - maybe it was clear from the start - or certainly, not from Doha but from Cancun, that things were not going to proceed very successfully.  And maybe Doha, which was a round that was supposed to bring the benefits of trade to developing countries was misconceived from the start.  Many developing countries certainly felt that this was a way to get more non-trade benefits, and Doha was framed, again unfortunately, as a negotiation where developing countries would say well, we’ll take down our barriers if you take down yours, and they were encouraged in this, certainly by many NGOs, even though, as the World Bank has shown and as many of us have repeated over and over again, developing countries would have benefited far more from lowering their own barriers, no matter what developed countries did.

Anyway where do we stand now?  One of our panelists, Dan Tarullo, has written a piece in The International Economy with the headline, The End of the Big Trade Deal.  Is this the end of the big multilateral trade deal?  Dan Drezner, in a recent piece, another one of our panelists, points out that U.S. support for free trade is falling even among groups – high-income groups - that supported it quite fervently in the past. 

Well, let’s hear what our panelists have to say.  Dan Tarullo will speak first.  He is, as many of you know, a professor at Georgetown Law Center, and he teaches in areas of international economic regulation, international law.  From ‘93 to ‘98 he was successively Assistant Secretary of State for Economic and Business Affairs, Deputy Assistant to the President for Economic Policy, and Assistant to the President for International Economic Policy for President Bill Clinton.  Dan Drezner, from Tufts, is an Associate Professor of International Politics at the Fletchers School of Law and Diplomacy.  He is also for the ‘05-06 academic year a non-resident Transatlantic Fellow for the German Marshall Fund of the United States.  And Grant Aldonas, who will speak first, is the Principal Managing Director of Split Rock International and an Adjunct Professor at Georgetown University Law Center, and he formerly served as under secretary of Commerce for International Trade at the Department of Commerce.  Claude Barfield, who with Phil Swagel was instrumental in getting this conference together, is a Resident Scholar and Director of Trade, Science and Technology Policy Studies at AEI.  He’s the author or editor of a number of books on trade and science policy, including Free Trade Sovereignty, Democracy, the Future of the World Trade Organization.  So here’s the order.  Dan Tarullo will speak first, then Dan Drezner, then Grant Aldonas, and then Claude Barfield.  Dan Tarullo.

Daniel Tarullo:  Thank you, Jim.  So I’m going to start with a bit of a structural overview, that is, rather than address Doha as such I’m going to examine some of the reasons why, as Jim has already indicated, Doha was so difficult to get started in the first place and why is the title of that little piece I did for SMICS (phonetic) Magazine suggests, whether or not Doha ends up being a success in the sense that it comes to a conclusion, I think it’s quite likely to be the last big round of trade negotiations, and I ask a few questions about the implications of that. 

So what are the structural problems as opposed to the contingent problems in trying to move a major trade round through in the WTO in the early 21st Century?  Well, I think the problems in organizing rounds have become successively more obvious.  The number of participants is obviously not dispositive.  If you have three big important participants and 200 small participants, you may still be able to organize a round, but that obviously is not what’s transpired within the WTO over the last 20 or 25 years.  The complexity and sensitivity of the issues that are under negotiation, something that everybody talks about, everybody understands, the introduction of domestic regulatory and economic policy issues, IP, the desire of some to move environmental and labor standards into the negotiations, all the regulatory and welfare issues that arise when you do services negotiations, have substantially complicated the task of putting a framework on these negotiations as opposed to the days when you had tariffs.  Tariffs may be complicated, may be a lot of politics around them, but basically you’re either reducing them or you’re not reducing them.

I put together this little table to try to give some indication numerically of how things have progressed over the years.  That first column of members is a little bit - if I could have fit participants I would have put participants in there - for Kennedy, Tokyo, Uruguay and Doha, members and participants are essentially the same congruent sets, but for the early rounds of trade negotiations, sometimes not all the members or the contracting parties of the GATT participated in a round.  When I say Geneva, I mean the very first Geneva rounds, so this is the 47 round; Dylan, of course, was ‘60-61; Kennedy, ’64-67; Tokyo, ’73-79; Uruguay, ’86-94; and Doha ‘01 moving forward.

So the three columns here obviously you’ve got participants in the first, just showing the rapid increase that began actually after the Kennedy round in the number of members, contracting parties, eventually members of the WTO.  The duration is the duration of the round from the formal launch until the formal conclusion, but in many respects what I think is the more telling number is what I call the “lag.”  The lag is the number of years from the completion of the prior round of negotiations to the completion of the next round of negotiations.

So if it takes a while, as it has, to get a new round started I counted those years.  And you see that, if we had included the various tariff negotiating rounds between ‘47 and ‘60, you would have seen there were three others, all lasting a year or less, with between 13 and 30-something participants. 

We begin to see after the Dylan round the increase - or at the Dylan Round and then thereafter - the increase in the lag time which coincides with, but, as I suggested earlier is not directly caused by, the increase in the number of participants.  Whatever the reasons, the point here by the end is, we’re now talking more than a decade from the conclusion of one set of big multilateral negotiations to the conclusion of another set of big multilateral negotiations, that oft commented upon inability of the WTO to move forward in a quasi legislative fashion between rounds has become a real handicap.  It’s, by the way, one of the things that put such pressure on the dispute settlement system in the WTO as well.  It’s the only institutional mechanism that functions for long periods of time. 

My suggestion is that the combination of the number of participants and the complexity of the issues has led to the position we’re currently in where it’s going to take so long to do these things that people are just not going to wait; they’re going to look for alternatives, and, as the difficulties seem greater rather than less, that propensity will be increased.   Now, when we talk about number of participants, I already indicated that it’s the importance - the diffused importance of the participants - which I think is now having a big impact.  In the not so distant past basically if the U.S. and the EU could agree on how to move forward, they then went, consulted Japan, a handful of other countries, and they didn’t quite then tell the rest of the membership this is it, but it wasn’t that far from that kind of approach with some negotiating around the edges.  That is not possible any longer, in part because in the not so distant past the developed countries were basically looking for concessions from other developed countries, and that’s not true any longer. 

Number two, the big growth areas in the world, the places where people are looking for markets and the people who feel - on the other side of the equation, the people who feel the economic heft - are in the BRICS and some of the other big emerging markets.  So that means there are many more actors who are relevant here, and these are not blocks.  Even though emerging market countries or developing countries may for tactical purposes take a single position and for limited periods of time speak with one voice, they have quite different interests.  They really are individual countries, by and large, with an individual way of looking at the round, and thus nobody’s position - at least no significant actor’s position - can be easily represented by any other significant actor.

All right, so that is probably the most important set of structural problems that confront the WTO in trying to move forward with a big round of negotiations.  I think declining leadership in some of the key countries - declining trade leadership - is another major problem.  Now the degree to which this is contingent or structural or secular I think is still open to debate, but it’s pretty clear, I think, that both the U.S. and the EU, the traditional leaders of the World Trading System, have slipped substantially in their capacity to lead, their willingness to lead or both. 

There is, I think I can say with fair assurance in the major European countries and in the United States today, quite weak vulnerable political leadership, not prepared to spend much, if any, political capital on trade.  In the EU the blowback from member states which have tried to hold up the process of power moving to Brussels has affected everything including trade.  Those medium-term political constitutional issues within the EU are making it more difficult for the trade commissioner or even the president of the commission to push forward with a common policy.  Even a farsighted, insightful, smart guy like Pascal Lamy is thus reduced to being a tactician playing the Bob Putnam two-level game, and is not in the position to actually try to move everybody forward with some vision that includes taking some risks.

In the U.S., trade has become an increasingly partisan issue.  We are in one of those cycles of American history where partisanship has been on the rise for a while.  This is not the first time it’s happened, and all we can hope is that, as in the past, it will cycle down after a while, but that’s captured trade.  In part the reason trade has become more partisan is what I said earlier, there are economic, regulatory, social issues that are at stake, and thus the domestic politics, for example, regulation versus deregulation in an area, now have an international component.  So there’s a whole new group of interested actors who are paying attention to trade.

I think another reason - this is perhaps reversible - but it is the fact that, when partisanship gets to a certain point, there is a lack of an impulse to be cooperative in any area.  That was happening for a while.  I think we’ve seen in the last five years a level of partisanship on trade, which those of us who have been in this area for a while had not seen before, to the point where the members of the opposition party were literally not being talked to during negotiations except at the very end, when they needed a couple of dozen votes, which didn’t do wonders for producing a coalition either.  The waning interest of multinationals or big companies.  Everything that I’ve said thus far probably everybody in this room either believes or has heard before.  This one I keep being surprised at how many people haven’t focused on it.  The large U.S. companies which made up the coalition for an ambitious international economic policy by the United States has not dissolved, but the commitment and the resources deployed by that coalition towards trade agreements has been substantially reduced.

This, I think, is an interesting topic for a conference in and of itself, but let me just suggest a couple of the things that are at work here.  One, I think that about ten years ago a few prominent CEOs got reined back by their boards of directors, and in a couple of cases not just reined back, but shown the door, in part it seemed because the board felt they were paying too much attention to big public policy issues that didn’t have an immediate benefit for the company.  That’s, I think, one thing that’s going on here.  So now, although you certainly see businesses and CEOs wandering around Washington, there’s no question about that, they tend much more to be focused on individual issues, whether trade or otherwise, that are of interest to their particular company at this particular point in time.  You don’t see the corporate statesmanship that some characterize - the Business Roundtable and other groups - playing in the not too distant past.

Secondly, for many of these big companies, although, sure, there are other things they’d like to see in multilateral or bilateral or regional trade agreements, to a considerable extent they have much of what they need in order to be able to function internationally, in order to get stuff across national boundaries, in order to invest elsewhere, in order to get financing.  Again, you can get a wish list from the Vice President for Government Relations, but I think that these issues are not as high up on the priorities of the company as a whole as they generally used to be.

Third, the change in the way in which multinationals operate where production is truly globalized and it’s not so much just a trade and sub-satellite operation, has meant that, to some extent - and I’m using a more provocative term than I really intend here - but to some extent, big companies have their own foreign policies now, and they can negotiate with, and they do negotiate with, other governments singularly or in parallel, in order to get the kind of conditions that they want or need, and they actually, particularly in the recent past, don’t particularly like being identified all the time with their home government.

Finally, the availability of alternatives has meant that those who need trade or want trade or make a living off of writing articles saying we should have trade have another outlet for those desires, either bilaterals or regionals.  Obviously the big ticket items like NAFTA or Mercusa are out there, but, as the series of bilats the United States has done shows, there is a whole different agenda out there, which means that it doesn’t look as though it’s the WTO or nothing. 

So here are the factors that I listed on the prior slide, but now with a new heading and with a color coding scheme.  Of all those factors that I mentioned, I think the ones in red are all more or less secular developments that will not easily be reversed.  The only one that I could actually see a shift on is the declining leadership.  It could be that, you know, through a series of elections, new people in government, changes of the compositions in governments and the like, that you get some more capable, assertive leadership in key countries which are able to see the importance of a multilateral system and push it forward.  I’m not convinced that’s going to happen.

It’s an interesting question as to whether the United States, North America and Europe, are in a stage of political history where it’s very difficult to get strong, capable, assertive leadership, but it’s at least possible.  The rest, I think, are with us for a while and, thus, create big hurdles to a big multilateral round.

So what are the alternatives?  I’m not going to talk about these at length.  I just want to make one point about them.  Obviously, we already talked about bilats and regionals.  Mini rounds, Doha may end up being a mini round if it succeeds, notwithstanding the grand notions with which it started.  Those have been mentioned – pluralaterals under WTO auspices.  Can you have, as the Europeans would say, a variable geometry.  Pluralaterals outside the WTO, this has been talked about from time to time when people get frustrated with the WTO.  Non-WTO regulatory convergence, under which I mean to group a lot of things that are not formally trade agreements, so mutual recognition agreements or efforts at regulatory harmonization that in the process effectively liberalize trade.

What I would say about these is very interesting intellectually, a lot of bites taken up with economists and law professors and IO scholars writing about the limited experimentation in all these areas and proposals for further experimentation, but the only one that is actually proven to be able to have some effect is the first one, the bilats and the regionals.  Given that it would take a whole lot of effort to move the other ones forward to the point where they were both feasible and significant, given the – how shall we put this – limited patience and attention span of people involved in national capitals when it comes to things like trading policy, I think, if we had to predict, not as a normative matter, but as a positive matter, I think we’d have to predict right now that the alternative will be more bilats, more regionals and not just the bilats with the coalition of the willing, but the effort to have bilats with Korea or with Malaysia or with significant economic actors.

Closing comment here is that I think – and I do not attribute this to Sue Schwab – but I think in talking to trade ministers from other countries, people from the EU and people from our government, there’s a sense that somehow the default position of no round going on but the bilaterals is not a change from what we’ve had – not a significant change from what we’ve had – in the last 15 years.  I don’t think that’s right.  I think that the role of bilats has been defined in part by the existence of a more vital multilateral system, and, if that system is no longer seen as a complement, no longer seen as vital – not that it will collapse, but that the movement forward is going to be limited – then bilats and bilateralism and regionalism could take on a very different character, one that I suspect is less desirable for the United States as a matter of economic policy and foreign policy, but we may not have an alternative.  Thanks.

James Glassman:  Thank you, Dan.  You reminded me that I did not describe our agenda completely.  This panel will be here until about noon, and then we’ll break for lunch, and we will hear an address from the Honorable Susan Schwab, the U.S. Trade Representative.  I just want to ask Dan one question.  If the big trade deal is over, what does that mean in substance?  What does that mean to the United States?  What does that mean to developing countries?  You had said earlier that one of the reasons that you’re seeing less commitment by multinational corporations is because they have most of what they need.  Do we?  Does the United States have most of what it needs?  Does it need these big trade deals?

Daniel Tarullo:  I don’t know, Jim, that we need the big trade deal in a big way as an economic matter.  Certainly at present, it would be nice to have a Doha round because we’re going to have an Ag bill, we’re going to change our subsidies practices.  It would be nice to use that as leverage to get the rest of the world to also reduce trade distorting and allocatively inefficient subsidies.  But I guess I could generalize a bit and say that I’m a little skeptical as to how big the gains from a big round will be in sort of consensus economic terms.  I think that people will see particular gains, but that there you get the clash of whether the gain is at the cost of some other desirable policy.

James Glassman:  We’ll explore this more, I’m sure, in the question and answer period.  Daniel Drezner of Tufts University.

Daniel Drezner:  Thanks, Jim.  I think whenever you have a talk about trade policy, there tends to be a lot of hyperbole on all sides.  In fact, I think one thing that’s interesting about both the current climate about those who are very ardently in favor of trade integration and those who very ardently oppose it, is that both of them – both groups – believe the sky is falling.  If you take a look at those who are opposing any form of trade liberalization through the Doha round – trade is destroying our way of life, it’s causing wages to fall, it’s causing unemployment to rise, a huge trade deficit, cats and dogs living together – you name it, they believe it’s responsible for that.  And at the same time, a lot of people who want to see the Doha round come to completion will often use similar kind of rhetoric, believing that if the Doha round collapses that will destroy our way of life if we resort to a more protectionist trade policy.  Again, all of these sorts of bad things – inefficiency, decline of productivity, also a large trade deficit – all of these things really.  It’s worth taking a step back, I think, to sort of realize the current status quo is not all that bad.  And this explains why, in part, as Dan pointed out that multinational corporations have not been terribly vigorous in pursuing or in backing the Doha round.

If you take a look at trade barriers at the global level, they’re roughly at their lowest level since a century ago, since the late 1800s.  Within the WTO, everyone wants to get in.  No one wants to get out.  Russia is complaining because we’re taking so long to let them get in.  Other countries that ordinarily you would not think of as being terribly enthusiastic about free market economics want to get into the WTO.  The one thing that the Uruguay round of the WTO created was a very strong dispute settlement system.  That’s been working relatively effectively for the last 10 years now, and that’s not going to go away anytime soon.

From the United States’ perspective, we have a free trade agreement with our two largest trading partners, Canada and Mexico.  We also have free trade agreements with vital strategic allies, such as Israel and Australia.  You’re in a situation now where there’s even rumblings within the German government about creating a TAFTA, a transatlantic free trade area, which, given the level of anti-Americanism in Europe, is rather extraordinary.  And even if you take a look at transatlantic trade disputes, things like GMOs or hormone-fed beef, things like those, the fact is that covers less than five percent of all transatlantic trade.  On the whole, the transatlantic trade relationship is rather strong. 

And furthermore, and this is important to stress, no matter what trade policy looks like, technology is making it such that, regardless of what happens with regard to the Doha round, you’re going to have ever increasing levels of trade integration.  And again, the parallel here is with what happened a century ago.  From about 1900 to 1914, you saw countries across Europe gradually raising their tariffs, as they were terribly worried about excessive interdependence.  The interesting thing was it didn’t matter all that much in terms of trade flows.  Trade continued to grow, not because the tariffs weren’t significant, but because technological gains made trade so much cheaper that it was able to overcome those kinds of barriers.

So the status quo is not all that bad.  If you take a look at it in terms of a snapshot picture – and again, I think this is why among others multinationals are not relatively phlegmatic.  I think the key question that you have to ask if you’re taking a look at what we’re going to do from now on is whether you really accept the bicycle theory of trade.  The bicycle theory of trade, for the two of you in the room that probably aren’t aware of this, is very simple, which says that trade has to be moving forward, that if you don’t continue to liberalize, if you start to slow down, like a bicycle it will eventually topple over and fall under its own weight.  I personally think that should be renamed the Annie Hall theory of trade because it’s like the dead shark line, a shark’s got to keep moving, otherwise you have a dead shark.

The question is what’s going to happen from here on.  Now, I actually thought it was interesting, the sort of conditions that Dan listed as being secular, the one he didn’t list was – or the one he thought could potentially change was – a change in the potential leadership roles in the roles of the U.S. and the EU.  I’m actually, I think, much more pessimistic than Dan about whether that can be changed.  If you take a look at U.S. trade policy right now, I think the best word that you can describe it is standstill.  I don’t think that the Honorable Susan Schwab is going to be able to restart the Doha round in her current efforts.  I think the fact that trade promotion authority is going to expire in July is the sort of Damocles hanging over all, and I don’t even think you could get a round finished by the time that’s going to happen.

The second most important free trade agreement that the United States should be concerned about is one that no one’s talked about for three years, which is the free trade agreement for the Americas, and that’s DOA at this point.  CAFTA barely passed.  Besides TPA expiring in 2007, I think after the midterms there’s going to be very little chance that you’re going to have anything reauthorized there.

And the final fact is to realize that President Bush, for all his rhetoric about supporting free trade has sort of treated trade policy as the neglected cousin that stays locked in the closet for most of the time, which is in moments of extreme emergency he might trot out and use the bully pulpit to argue in favor of advocating trade liberalization, but those moments are very few and far between, and I think the rest of the world notices that, and that’s part of the reason why there’s such a stalemate on this issue.  The question is why is there the disconnect?  Why is there so much of a problem on this?  On this, I’m going to partially reinforce what Dan says, but stress a little bit more about domestic changes.

I think there’ve been changes in domestic public opinion and in congressional attitudes towards trade that have basically made this the least hospitable environment for trade liberalization in recent memory.  The shifts in the global structure of trade negotiations Dan has talked about ably, and I’m going to skip over that.

And then of course related to that is simply the growth of connections – interconnections – between trade and everything else, which is you no longer can talk about trade policy in terms of tariffs and only tariffs.  You have to talk about it in terms of intersecting monetary policy – the war on terror, labor policy, environmental policy.  It’s impossible to disentangle these things from one another.

To talk about the public opinion polls, it’s just depressing.  To repeat the one that Jim mentioned in the beginning, the Program on International Policy Attitudes at the University of Maryland polled Americans in 1999 and 2004 about what their attitudes were about trade.  Now the bread and butter of those who should support free trade are those who earn over $100,000 per year.  That’s the base of any sort of domestic support for trade policy.  And in 1999, 57 percent of those who earned over $100K a year supported free trade.  By 2004, that figure had fallen to 28 percent.  Furthermore, if you take a look at recent polling, the German Marshall Fund of the United States did a poll on trade attitudes in late 2005.  Approximately 57 percent of Americans believe that trade destroys more jobs than it creates.  58 percent support increasing tariffs to support to protect jobs that are under threat from trade.  There is less support for free trade agreements in the United States than there is in Europe.

Why is this the case?  I think it’s a couple of reasons.  The first and most important is that in times of economic uncertainty trade is the easiest scapegoat you’re going to have out there in terms of a source of ill.  And I think that there are three reasons why there are times of economic uncertainty now.  First, and this, I think, explains the drop among wealthier people is the fear that offshore outsourcing is not just a blue-collar fear anymore.  It’s not even that the jobs are actually being outsourced.  Trade in this sense is kind of like crime, I would argue, in terms of a political problem.  It’s not so much that you lose your job due to trade.  It’s that you know someone who’s lost their job due to trade or that you know someone who knows someone who’s lost their job due to trade.  It’s a psychological problem that magnifies the costs that take place, that occur if someone loses their job or if someone feels threatened from import competition.

The second and related issue, and trade policy people don’t like to talk about this but they’re clearly interrelated, is the size of the trade deficit.  The current account deficit was over $800 billion last year.  It’s an enormous figure.  Now trade policy people will understandably point out this is very little to do with trade policy, but try telling that to politicians.  To them, it’s a clearly interlinked matter, and surely one of the arguments that those who oppose Doha will make is why should we liberalize anymore if we’re running this large of a trade deficit.

And finally, and one thing where those who oppose trade potentially have a point, which is wages.  Trade economists like to point out that trade is presumably win-win for all concerned, but even trade economists acknowledge that one of the effects of trade liberalization if you’re liberalizing with countries with large labor pools like, say, China and India is that there’s going to be a downward pressure on wages on unskilled jobs in the United States.  It’s understandable, therefore, that unions and other groups would oppose free trade on that.  If I was a union member, I’d probably oppose free trade or trade liberalization.  It affects their wages.  There’s a debate over the extent to which it affects their wages.  I would argue that probably technology affects things a lot more, but there’s a logic for why there’s sort of this opposition.

The second reason you’re not going to see much leadership on this is elections, which even now in the midterms you’re seeing trade occasionally brought up.  Not necessarily trade per se.  I think it takes the form of bashing Wal-Mart, which is really a nice veiled way of bashing trade because Wal-Mart buys so much from China.  The election cycle is getting ever, ever longer, so I think there are fewer periods during which politicians actually feel like they can do anything without some sort of electoral backlash.

And finally – and this is important – as I said in the beginning, I think trade is over-hyped by everyone.  It’s not just protectionists who argue that trade is destroying jobs when they’re actually not.  I think it’s those who are enthusiastic advocates of trade that also cause some of the damage by arguing, for example, that NAFTA was going to bring liberty and justice for all and riches for all.  When in fact, the primary benefit from NAFTA for the United States is less economic than it was a foreign policy one, which is it locked Mexico in to the policies we wanted to see them pursuing, and that was a huge gain and grossly underestimated by many in the United States.  But the economic benefits, among others that the Clinton Administration touted, aren’t necessarily there.  I think it’s a net gain.  I don’t think there’s any question about that.  It wasn’t quite the gain that a lot of people said it was, and, therefore, it’s easy to become disillusioned, I think, about the projected benefits of trade liberalization.

Within Congress, protectionism has become respectable again.  I believe one of the top non-fiction New York Times bestsellers at this point is Senator Byron Dorgan’s wonderful opus, Take This Job and Ship It, which you can imagine what the overall tenor of the book is.  I actually had a debate with someone else in D.C. over this point.  We were debating whether or not Dorgan actually wrote it or whether someone else wrote it.  That person insisted that someone else must have written it for Dorgan.  Having read the book, I’m pretty sure Dorgan wrote it himself.  Draw from that what you will.

Even trade promotion authority, which is going to expire in six months, is not the same as old style fast track, and I think if TPA is renewed in any form it’s going to be renewed with even more degrees of congressional consultation and sort of stipulations that multiple trade objections that the U.S. TPR is required to pursue, and that’s going to hamstring the executive even further.  And furthermore, I also think it’s too easy now for congressmen to torpedo trade negotiations on their own.  When the Chairman of the House Ways and Means Committee says in the spring of 2006, Doha is dead, I don’t see why we should bother with it, that’s probably going to have an effect on the negotiations down the road.

In terms of the changes within the world, I’m not going to talk about that because I think Dan did such an excellent job of discussing the ways in which it’s just a bigger green room now, and it’s obviously going to be more difficult to get more people to agree.  Instead, I’ll close with a certain irony here, which is I think if Doha winds up dying a slow death, the irony is that, from the developing country’s point of view, they’re actually going to be made worse off by this.

As much as you’ve got developing countries complaining that the Doha round and the Uruguay round before it was stacked – the deck was stacked against them – and you’ve got people like Joe Stiglitz complaining that we need to democratize the WTO a lot more, you have to consider what the outcome will be if Doha collapses.  The outcome is going to be, as Dan pointed out, a switch to more bilateral FTAs, and in a world where you have more bilateral FTAs that the U.S. is pursuing, we’ve got much greater bargaining leverage in a bilateral situation than we do in a multilateral situation.  All you have to do to realize this is take a look at what has happened with intellectual property rights within Doha, as opposed to the bilats.  Within Doha, even after TRPS was passed in 1994, in 2001 the United States had declined back a little bit and allow a large public health exemption because of controversies over the price of pharmaceuticals in the least developed countries.  On the other hand, since the Doha declaration in 2001, the U.S. has pursued a number of bilats which include TRPS plus provisions, which are far more stringent than what you would see in trips.  And as a result, they’re going to keep pursuing this because they have the market power and because other governments are going to be willing to comply to get secured access to the U.S. market.

I think the interesting question is what’s going to happen from the developing country’s perspective.  How are developing countries going to respond to this, both individually and collectively?  I think they’ve got three strategies, and I think you’re going to see all three of them pursued.  The first is you’re going to see some efforts to sort of slap their heads and realize, gee, maybe we really don’t want to walk away from the WTO.  Maybe we should reinvigorate Doha.  We’ll be the ones to take the first step precisely because of the benefits that they can gain from it.

The second is they can pursue their own free trade options, their own bilateral options, and you’re seeing China and other countries starting to pursue this now through ASEAN and through other regional and bilateral arrangements.  And you know, when you’ve got economies growing at the rates that India and Brazil are, other countries are going to pay attention to that.

And the third approach, which is less talked about, but also similar in what you might see in the United States is just straight out-and-out economic nationalism.  In some countries, there’s going to be an appeal for this.  In China right now, you’re seeing a fair amount of pushback against China’s steps to obey WTO dictates, as well as liberalizing foreign investment laws.  And it would not surprise me if the Premier Wen Jiabao decided to use trade or trade protection as a lever to insure and bolster his basic power prior to the 2007 Communist Party Congress.

Furthermore, in Russia I think you’ve seen economic nationalism take place over the last couple of years, and India is sort of economically nationalist by inclination, I would argue.  It’s going to be tough for them to break that habit.  In this kind of world, it’s interesting, I actually do think there will be some countries that would benefit.  I think some countries like South Korea, sort of Singapore or South Korea, countries that are sort of middleweights.  They’re not considered true threats to become great power status, but are still significant market economies.  You’re going to see everyone try to pursue FTAs with them, the United States, China, the EU and so on and so forth.

Those I actually think would be the chief beneficiaries if Doha collapses.  I think the ones who will lose out will be the great powers, including the United States, because they’re not conducting trade deals with each other, and the least developed countries, which are going to get screwed by everyone.  They’re not going to have much of a choice in terms of who they sign an FTA with.

James Glassman:  Thank you, Dan.  You raised the specter of economic nationalism.  You know, with the declining support in the United States and elsewhere for trade is occurring at a time when the economy – the global economy – is probably as good as it’s ever been or certain not much less good – I think Paulsen said in May that the global economy was better than he’d ever seen in all his time in Wall Street.  Now that doesn’t last forever.  We have cycles, things turn down.  Can you see us actually reversing direction on trade?  You talked about the bicycle or the shark, but what happens if the world goes into recession or the economies get very sluggish?  Do we risk seeing something along the lines of what happened in the 1930s?

Daniel Drezner:  That’s an interesting question.  I would disagree with the distinguished Treasury Secretary as to whether this is the healthiest global economy in a while.  A healthy global economy, 90 percent of which relies on U.S. consumers, I’m not terribly sure is that healthy.  I think you’re talking about a fair amount of economic imbalances.  I’m hardly a protectionist, but, yeah, an $800 billion current account deficit, that gets my attention too.  And so, I think that steps have to be taken to more balance out global economic growth.

Can you see a reversal?  I think it’s possible.  I think if you were to see – look, the big question, I think, in terms of the global economy right now is what are Asian and Middle Eastern countries going to do with the approximately $1.2 trillion worth of dollar-denominated assets that they’re holding?  And if there’s a threat of the dollar declining, whether or not you’re going to start seeing any kind of run on the dollar.  That’s the big question that no one necessarily wants to find out the answer to, and I think if that happens you would see some kind of reversal.  I think you’d see some kind of knee jerk congressional response like, I don’t know, slapping a 27.5 percent tariff on Chinese goods or something.

You know, it’s interesting, the IMF, I think, did a series of simulations about what could cause – if the next level of recession happens, how serious it could be, and their worst case scenario was, in fact, if a downturn causes countries like the United States to start imposing more protectionist measures.  I think if the downturn is serious enough, yeah, anything could happen.

James Glassman:  Grant Aldonas of Split Rock International and Georgetown University Law Center.

Grant Aldonas:  Thanks, Jim.  Well, a couple thoughts just to start, actually sort of picking up on some of the things that both Dans said.  One is I’m contrarian by nature.  I’m actually less pessimistic now than I have been for a long time because, you know, because there’s a bracing effect when people get out of the cycle of ministerial after ministerial, between which there wasn’t the time to engage in the intellectual effort or the political effort to actually build any sort of momentum.  So while there’s always a tendency to cry wolf and talk about the structural problems in the WTO, to be honest, if you look at the pattern of the negotiations really since 2001 and Doha, what we’ve seen frankly are decisions that were made that a lot of us second guessed at the time and, in fact, contributed to the cul-de-sac we’ve driven into.

This isn’t necessarily a failure of the structure of this, and frankly the WTO, in my view, has been enormously successful if only for the dispute settlement process, even though we have an activist appellate body and question the judgment of some of the decisions.  The reality is that in a global economy you’d have to invent this if it didn’t exist, and I’d say the same thing about the structure and negotiating rounds, to build the political will or the political initiative to actually encourage strong liberalization, you’d have to invent something very much like a large round to bring everybody in into the tent to be able to try and make the reductions that you’d have to do.

On top of that, I do wonder – you know, probably the most powerful statistic I read recently that suggested to me how much the trading system has changed from the days in which I grew up, I guess, was the fact that The Economist in its most recent survey of the world economy suggested that the U.S. share of imports, given that we have such strong growth, developing economies now representing more than 50 percent of the world’s GDP and considerably more than 50 percent of world GDP growth, of which China and India only represent 25 percent, so you’re getting 75 percent of a large chunk of world growth from elsewhere in the emerging economies, not from what we all focus on in terms of the market these days.

But when you add all that up, the United States has about four percent of the level of imports, so to Dan’s point about whether we’re actually driving the world economy, I don’t think so anymore, and I think that really does mean we have to adopt a different approach to how we in the United States interface with the international political process.  So you need leadership.  You need to find a sort of substantive theme that can drive the negotiations forward.  And there, I think you come down to the question that everybody is now second guessing about whether development should have been the goal of the Doha development round.

And I have to say identifying development as a goal, but not pursuing development as a part of the negotiations is a fundamental problem, and I think what you have to start out with is looking at whether or not in the context – and this is where I do take exception to sort of the structure of the WTO – if you look hard at the way the deal was put together, starting in ’48 and how it’s evolved, there’s a profoundly anti-development bias inside the trading system.

It’s not what our friends in the developing world oftentimes point out, but, to be frank, in 1948 the way the deal was struck was the U.S. laid down a blueprint, it contained very strict standards with respect to manufactured goods where we had a comparative advantage, very lax standards on agriculture where a lot of what then existed as the development world and the GATT system had a comparative advantage.  And not surprisingly, the negotiators for the then developing world balked, but rather than asking us to impose stricter disciplines on agriculture, they asked for relief on the manufacturing side.  In effect, what they were saying was we don’t want the imports, thank you very much.  Now this leads somewhat to what looks very much like me periodically to say, you know, it’s the strangest thing, when Ricardo said trade was good because the UK should specialize in cloth and Portugal should specialize in wine, he didn’t tell the Portuguese to go naked.  What he said was sell your wine, get the clothing.  Right?  That’s the goal.  And yet, you have a trading system from the developed world’s perspective that was geared directly against them.  It did nothing to encourage that.

Now, what’s interesting about it is, when you think hard about development, imports are far more important than exports.  It’s hard for people to grasp that, but the reality is that it’s the imports that bring the competition that drives you towards your competitive advantage.  It’s the imports that bring the technology that allow your entrepreneurs to actually engage usefully in a globally competitive economy.  So at the end of the day, if you have a system where what you want is simply export access and not the full benefits of trade, you don’t have a development model at the core of the trading system. 

Let’s roll forward to today’s negotiations.  How do we bargain on a purely mercantile basis?  The reality is that when you sit down at the negotiating table what are you trying to achieve?  In today’s world, and this is ever thus from sort of the origins of the GATT to today, you’re trying to achieve export market access, you’re trying to avoid the political pain of anything that resembles an import.  In other words, you want to go naked.  That’s not the result you’re going to have to be shooting for if you actually want a profoundly pro-development result.

So how would we get there?  In my view, in some respects, the first thing that you have to do is recognize when you’re in a cul-de-sac, because then you’ll recognize that pressing down on the accelerator isn’t the answer to your problem.  You’re going to have to drive out, and you’re going to find a new route to your destination.  And therein, I think, lies the power of the development argument.

I recall with my good friend, Linda Menghetti, that we were stuck after TPA failed in 1997, both because the President couldn’t bring enough Democrats to the fold and because the speaker forced the President to crawl through broken glass basically trying to get a grant of fast track authority.  But it failed.  And we all looked around and said what the hell are we going to do to try and get trade moving?  And two old warhorses, one was my boss, one was Linda’s, sat down and said, “We got to find a bill to move.” 

And what we chose was the Trade Development [indiscernible] what became the Trade Development Act of 2000, was, in fact, the African Growth and Opportunity Act and CBI.  Everything we did in that bill flies in the face of the conventional trade politics in the United States.  We took the textile industry on, the most protectionist industry in the United States, straight up without a trade agreement wrapped around it, without the additional benefits that normally flow from a trade agreement.  And the reason was that, as Dan was saying, you can get away with being called a protectionist, but even in the Democratic Party, you can’t get away with being called an isolationist.  And so, as a consequence what we were trying to do is pull arguments in in support of moving trade legislation that would allow you to bring votes to the table. 

And this highlights my point about development which is that it is an argument, properly understood, that does help you bring votes to the table that you wouldn’t have on a pure trade basis for all the reasons both Dans have described at this point.  And I think it’s essential that we focus on it.  Well, then, okay, what then is development?  Well, you know, we’ve gone through with economists an evolution of an idea, that’s why I kid many of my economist friends that they actually engage in a hobby, not a profession, because, in fact, what’s happened over time is the development of ideas in the economic sphere that were fads.  It was like a fashion show with models running down the runway, first you had stages of growth, everybody focused on GDP growth, everybody fought about just the improvement in GDP as the answer and that would close the savings and investment gap and spur its own form of economic growth.

The unfortunate thing is that we saw plenty of growth in the developing world without a rise in living standards over about a 50-year period.  That didn’t work, so people started to look at patterns of development and structural analysis.  And they saw too much unemployment in the Ag sector. They said we’ve got to absorb that so we’ll focus on rapid industrialization, the most prominent example of which was the great leap forward in China, and 20 million people died in the ensuing famine.

The point should be we needed to find the right focus for development.  It’s only when the evolution comes forward to a Marcus Sen, and a lot of his work that you start to focus on the individual and their freedom as the basic building blocks in society, as well as in the economy.  And the beauty of what Sen writes, is that when he talks about freedom he doesn’t, as we oftentimes do in the West, divide it between political freedom and economic freedom and frankly diminish the importance of economic freedom in the equation as a part of the process.  I think it’s a flaw in the way we approach freedom in the West.

But his point was is that anything you do to move an individual’s freedom out, their freedom of action, their ability to engage in a simple act of exchange, is going to encourage them to act as an agent of change and an agent of development in their own economy.  He also recognized they had to be able to participate in their society, and they had to be able to participate in the political process because that oftentimes defines economic opportunity in any society. 

The question is, how does the trade system work to try and reinforce those goals?  And therein, I think, lies the tale, because there’s a lot you can do.  Even basic trade liberalization drives the government out of the market as a practical matter or certainly reduces the burden, and so it expands the range of freedoms.  If you think about what a tariff barrier quota is, in fact, it is limiting the individual’s rights to be able to participate effectively in the global economy whether as a consumer or as a producer. 

Well, in that context what else could you do?  And there I think it boils down to looking at hard at the structure of the world economy and how a trade is conducted.  We now live in a world where multinationals and their supply chains really drive the trading process.  A very, very significant percentage, above 50 percent of world trade, is either in the MNCs themselves or in their supply chains.

So just as a very pragmatic question you have to ask yourself, what do I do to lower the barriers for an entrepreneur in Mali who is farming cotton as his principal economic activity to find his way into the supply chain of Wal-Mart so it represents the shirt on someone’s back.  Suddenly you start looking at trade from a very different perspective.  It’s not just a question of what you are bargaining for in the way of export access because, in truth, in today’s world, it’s not about what we export to Japan, it’s not about an individual company exports at arm’s length to Europe or to anywhere else in Asia or anywhere else in the Middle East.  What it is is whether they're can export to Toyota.  And if they export the Toyota, there are a lot of things that you have to be able to do internally in a developing country, as well as the external trade barriers to allow someone to participate in that market. 

A good example for the cotton farmer in Mali, the truth is that the biggest obstacle they face is the fact that they have a single buyer.  In which case, what you need are the tools, the telecommunication tools principally, to be able to find another buyer, create the competition for your goods so you can reap more of the economic rewards of the transaction rather than the middleman.  My point being, we could change all our cotton subsidies, which I profoundly believe we should, but that would help the American citizens and taxpayers in this room and not the cotton farmer in Mali, unless there are fundamental changes in Mali that liberalize the supply chain that allows them to participate and lowers the cost for that individual producer to be able to produce for the global economy. 

Well, suddenly you can see the outlines of a deal that would even fit in the context of our normal sort of mercantilist process.  What do really need?  You need health care, you need clean water, but you also need a decent telecommunications system, you need a good transportation system, and you need a good capital market to finance transactions.  Well, suddenly there’s a deal for services that allows you to say from a U.S. perspective I’m willing to trade some of those agricultural subsidies, which are going to change anyway to be honest, in part not because of the financial burden but simply because there’s less involved or less benefit to farmers under current prices, but the reality is there’s the outlines one of the classic trades in the trading system.  I think that you can actually dig deeper and find more of that in terms of how we bargain, in terms of how we stack up our negotiating positions.  It also means that you have linked the interests appropriately of the developed world and the developing world to try and achieve an economic end.

Now would I stop there?  No.  The reality is for the way business operates today is that bargaining tariff by tariff makes no sense.  In fact, what we should be talking about is a larger bargain which is would we liberalize in the developed world and frankly bargain for an internal free trade agreement in every developing world that participates in the WTO, because that’s what, in fact, is needed.  For very large companies to provide the benefits of what they produce, they need scale.  And to achieve scale what you have to have frankly is the removal of the internal barriers to trade in many countries rather than just the barriers at the border.

So to get there what I would suggest frankly is not only to be thinking hard about those areas where we could reduce the cost of the input products and the tools for participating in the global economy, but I would also suggest that we have a very, very large trade, which is that for the developed economies we think very seriously about an Article 24 consistent free trade agreement with the ability of our friends in the developing world to participate if they’re willing, in fact, to engage in a serious discussion about internal free trade as well as the external free trade because therein would lie the opportunity to see significantly greater economic growth and I for one - I feel the same way about tax reform incidentally - would rather bargain for the economic growth and think that our exporters and American companies and American workers will benefit from that growth far more than they will from a decrease in the individual tariff line item. 

The last thing I’d say is that, at the end of the day, you know you’re bargaining about things that are very difficult.  You’re bargaining about rights.  We probably can’t get there in this round.  But I would suggest that the sooner we start to actually have a serious discussion about what drives development and the role the trading system plays in that process, the quicker we’ll get to the end of the Doha round, and actually start talking seriously about the reform of the trading system so that it can play a mediating influence in the process of globalization and continue to drive support for trade liberalization.  Thanks.

Jim Glassman:  Thank you, Grant.  Very provocative ideas.  I certainly agree with you about the internal barriers, but I want to turn to something that you said earlier about the mercantilist paradigm in negotiations, and I’ve often wondered why people don’t focus on that, you know, the idea that our trade negotiations are basically I’ll stop banging my head against the wall, but only if you stop banging your head against the wall.  I mean, why is it that we don’t hear more about why that mercantilist paradigm is, I think, ultimately pretty counterproductive. 

Grant Aldonas:  Well, Jim, I think part of it is, it’s just worked very well for a very long time to try and create the political benefits.  You do enough in the way of export access to be able to sell the deal back home.  Claude and I have talked about this a lot.  And I can understand that, but I think we’ve come to that point where we really do need to focus on what you’re describing so that people start to say I now need - even in the United States, if you think about our basic economic equation, aging society, we’re helped by much more than the Europeans by immigration, but an aging society, very significant outlays for people who are going to be a part of that community.  What that means is fewer workers per retiree, got to raise your productivity just to keep your standard of living where it is. 

What do you have to do?  You got to liberalize your economy to drive that sort of change.  Suddenly you have a reason actually to be thinking not about export market access, but the changes you want to see in your own economy, even in the world’s largest and most productive economy.  So I think that focus on the real underlying economic goals and the targets we should be shooting for in our own economy can start to steer us away from that sort of purely mercantilist approach. 

Jim Glassman: Okay, our last speaker and then we’re going to turn to the audience for questions.  My good friend Claude Barfield of AEI.

Claude Barfield:  I guess the first thing I’d like to do is defend mercantilism.  [laughter]  No, seriously I disagree with Jim about this that it’s been counterproductive.  I know we’ve all rehearsed, and we know all the unilateral disarmament is best, but I would argue that the mercantilist view way of negotiating since 1945 has brought us to where we are today because of the underlying political facts that producers are always going to be stronger than consumers, which are dispersed, and that’s not going to change.  I don’t like it.  I would certainly agree with you about the way to go, but it hasn’t happened, and that’s also the reason that – and I’ll come back as a trip off to this - I don’t know whether Dan is right that we won’t have any more big rounds, but I don’t see any alternative at the multilateral level to have enough on the table so that you can trade off among countries.  That has not changed, nor has mercantilism changed.  Little mini – the Clinton Administration flirted with this at one point, but out of necessity in the late 90s when they thought - I remember going to meetings in the late 90s where Clinton people were saying the way to go is, look, we’ll do sector by sector, just as we’ve done with the financial services and with telecommunications.  I mean, the idea, even then, but certainly now, that the United States could walk in and cherry pick the sectors that we had a comparative advantage in was absurd then and absurd now.

Let me get back to where -- sort of a hop skip.  When we planned this, we weren’t certain, we were hoping until the very end that Adam Larson would be able to join us, but he had heavy consultant commitments this week, and so I wasn’t really sure whether I would be the kind of co-moderator or have something to say, so I just got … part of what I will talk about is reaction to things that have been said before, but part just some variations on points that have been made.  And I thought I was going to disagree with Grant until he got to the end about this package that he was talking about, putting things together.  And then he said at the end, I don’t think this can be done in this round, and I agree with that.

And let me start off with an argument that it is at least possible that over the medium- to long-term this byway into bilateral agreements and regional agreements, and I’ll make a distinction about that a little bit later because I think we don’t really have many regional agreements, except for the EU and that’s a special case.  But this byway or this movement away from a direct line that we’ve seen in the last decade and that’s continuing now, may not be as bad as we think initially.  And I would argue that, while the basic economic arguments about the pros and cons of bilaterals and regionals versus more of the multilaterals are still there, that is you have to look at trade creation versus trade diversion, and you have problems with rules of origins.  But I think you need to supplement that with the situation that we’re in.  And let me just go back to the situation that we were in at the end of the Uruguay round.

You have not only with developing countries but with developed countries a huge plate that has been negotiated, and a plate that went far into the domestic economies, the domestic social fabric of individual nations in the WTO.  And we’ve talked about this, in the services and the intellectual property and investment.  And this was true with the developed countries, but it’s also true with the developing countries. 

One of the things I should have started with was that I just got an e-mail this morning from the Center for Global Development showing me that Joe Stiglitz has struck again.  He has called for the WTO to come against the United States with a subsidies complaint because we have not signed the Kyoto protocol.  And as Dan Tarullo said to me, well, that really helps getting the Doha forward.  But the point there is, and you tie that to the gambling decision, developing countries could look at not only themselves, but the United States and the Europeans and say, you know, you’ve really bit off a lot here, and if the United States didn’t know what it had signed with the gambling agreement or that we could possibly be I think he’s foolish, he doesn’t know very much about WTO law, but he certainly will have - I’m talking Stiglitz look at us.  And I think that’s one of the things that I would have to start with, and that is I think you need to think about the multilateral negotiations, and particularly the WTO, as a continuum. 

You have negotiations, and now we will have - over time you will have a set of decisions come through the dispute settlement system.  That will have an impact which will feed back on the next negotiations.  You begin to clean up, and it’s not just new areas.  It’s the lack of clarity in some of the areas that you’d negotiated.

Now think about that in terms of the developing countries and tie that to this huge growth of bilaterals, south-south, as what was the south-north negotiations, and I would argue that what is happening, and why are they attractive, at least one of the reasons, is that it gives you flexibility.  It gives you the ability to pace liberalization.  Now I would argue, I would say that - I don’t know how many of you as I have done in the last six months or so have taken a look at what are the contents of these bilaterals, and not so much the regionals, but just the bilaterals.  Now they vary greatly, and you get everything from the template that the United States forces, the EU forces, down to really just statements of intent.  But what is happening and what those who have looked at these, particularly in Asia, is that you are actually putting on paper advances in liberalization and services and investment, advances into, of all things, the so called super [indiscernible] issues.  Some of these bilaterals really have investment provisions, government procurement provisions, and competition policy provisions. 

Now there’s a lot that can be said, and I will stipulate at the beginning that some of this may not go anywhere on paper, but I would argue that what you’re seeing, at least in my view, is that a lot of these bilaterals allow countries to go forward a bit without having the Sword of Damocles of the WTO dispute settlement system over their head.  And I’ll have to say that I first got onto this - and let me give credit to Cathy Novelli, who is a former assistant U.S. trade representative and she was telling me just about six month’s ago - and she spends time as some of you know now in a law firm and is in Geneva a lot - and she said again and again, when she was talking to developing country representatives, they came back to this.  They said you know it gives us some leeway to advance at our own pace. 

Now we can talk about the downside of that.  I mean, this could all be just sort of lying about what they’re going to do. But I think there is something there, and I think it says something about where we are in terms of the multilateral negotiations and the implications of this back to the political processes not only in developing countries but I would argue, if Stiglitz and others have their way, what have you guys signed?

I’m surprised that there hasn’t been more backlash about the cotton decision, though I agree with it obviously, or the Fisk decision, that the Congress didn’t say, you know, we never really agreed to this.  And if that’s true with a developed country like the United States, with the most high-priced expensive lawyers in the world, you could imagine what it’s like in Southeast Asia and Africa.  So I think ultimately who knows how this will work out, but it may very well be that, as these countries get more comfortable with these issues, that they will be readier in the future to come back to the multilateral system.  Now there’s a second thing, and by the way, one thing I’d like to say again going back to what we worried about in the 90s - and I should say that I started as a card carrying Bhagwati spaghetti bowl, arguing against all these - still do think it’s not the best way to go, but as I say there are other things going.

One of the things you worry about - it gets back to the question of mercantilism and the producers - once Mexico signs an FTA with the United States, then there are going to be all these political forces that will want to keep the preference, and that that will be the case in all countries.  Well, it hasn’t worked that way.  Mexico now has 40 bilaterals, and that’s true with a lot of other developing countries.  It could have happened, theoretically -- there was no way in the 1990s to say that it wouldn’t happen in the way that Jagdish and others worried about, that you closed down the process, but it hasn’t happened that way.  And developing countries are negotiating bilaterals all over the place, and even those who have got bilaterals with the United States.  It’s not going to stop Singapore, certainly Singapore is a single case, but it’s not stopping it in a lot of these countries. 

Now there’s a second point I’d like to make and that is in relation to the bilaterals.  This goes back to the Bush Administration trade policy, but I think this will continue to be true no matter whether it’s a Republican or a Democratic President, and that is, increasingly the United States, I think, will continue the sort of the flat out declaration to the world that we see trade policy as a part of larger diplomatic and security goals.  And as I say, I don’t think that will change. 

We identify it with Bob Zoelick maybe, but I think that any future president will have to do that, and you have to make that as a part of the priority action.  And I think that introduces an element which we are probably - this audience, which is a trade policy audience, is not comfortable with.  I had people who’ve argued with me over the last three or four years that somehow the Bush Administration is polluting trade policy by introducing political or security elements.  Well, all they’re doing is saying flat out what other presidents I hope have done in the back of their mind and that is you have to think about how this fits in the larger pattern. 

And I think this is going to be particular true in East Asia, because what we have done out there, and what we will have to do, will be in some way - and I say this in a non-pejorative way - but to match the increasing Chinese presence in the region not just on an economic basis, but on a political basis and that gets you back to free trade agreements.  And so, I think that is going to be a part of the future, and in my view it should be.  It does not bother me that the administration, and I will hope that future administrations will do the same thing, is negotiating what are relatively small and in some case very small FTAs in the Middle East, because there are other issues that are far beyond just the economic issues here. 

Now one final point before I just talk a little bit about the things that were said before, and again this makes me hopeful in the long - at least in the middle to the long term - and let me come back to East Asia and what has happened, and that is what are the political economy implications of the so-called production-sharing paradigm, where you don’t have - and just look at the United States and Japan in the 1960s and 70s - where you have a head on head with Japanese auto - finished products, Japanese automobiles coming here competing with U.S. companies.  And you had obviously our big three - I’m oversimplifying here, but just to get on it - our big three really leading the charge against that.  The same thing with the steel companies.

Increasingly in East Asia, and this is spreading around the production sharing paradigm, you’ve got - you’re really part of the team out there.  And whether you’re in Thailand or Malaysia or Indonesia, the Philippines, Korea, basic, it’s in electronics, but it’s also spreading to chemicals and may also be moving in that direction in automobiles, it’s no longer - the trade is no longer finished products; the big boom in trade is in parts and components, and that means that imports no longer have the same symbolic meaning and political meaning that they had in the traditional way. 

Now obviously, before you have parts and components and this is all a shading, but it’s quite important out there, and I think what has happened, and for some of you who want to do some more reading, I suggest to you recent pieces that Richard Baldwin has written on not just East Asian regionalism but how this is going to work throughout the world economy.  And what you had out there, in terms of many countries, not in all sectors, but in many countries, in many sectors of East Asia, you have had pressure from producers to cut tariffs.  And so that what you’ve got in electronics basically around East Asia are tariffs on components, electronic components and piece – they’re not even finished products - that are quite low.  And indeed they are so low that most of these countries ignore the rules of origin in any bilateral that they sign.  

And so it’s a very different political economy and political underpinning, and that, I think, is what has driven the extraordinary increase in trade among the East Asian countries, even though that not a single one of these countries, with the exception of China, because of its obligation under the WTO, which has actually agreed formally to this, that is these are applied tariffs, they are not formally notified tariffs to the WTO, but they are all going below it, and that, I think, explains it, what’s happened.  Just a couple of other points to move from that.  In terms of somebody just talked about, one of the speakers talked about, have a reaction in China, an economic nationalism.  I agree.  I think it was Dan Drezner.  I think there is some push back in China, but so far it really has been contained, and I will take at least for the moment at face value the recent statements by Beijing, at least at the top, it says no, we’re not going to turn in that direction, we are going to remain an open economy. 

To get back to one of the things that Grant was saying in terms of development policy, the Chinese development model has turned the traditional development model of Japan and Korea on its head.  Even before the WTO and as a part of their movement toward getting into the WTO the Chinese development model was open investment, unlike Korea which still hates investment from foreigners, and not really worrying about - it is export driven, but they were not mercantilists that they were driven all the time for exports over imports.  They needed from the beginning imports, because they became a kind of assembler, and, as they are gradually moving to develop these things themselves, that will change.  But as I say, the Chinese development model is one that could go for economic nationalism but it would be because of extraneous political or security or other reasons, not because of what has made them successful.  And I think the top knows that. 

Just two other points to close, to give some contrast here.  We’ve got (indiscernible), and I don’t know if someone is with the Business Roundtable here or we certainly have some corporate representatives.  I have heard for every round for the last 20, 25 years people bitching and complaining about the private sector is not doing enough.  [laughter]  And I’m sure they’re not doing enough, but I don’t see - after all it’s their bottom line in a lot of this stuff - I don’t see that it’s that much different.  I would say that you don’t have the fervor that I remember in the Uruguay round of the services guys who suddenly discover that they were international traders and they want to be part of the process.  There is no Harry Freeman of American Express around.  But I think the service companies are pushing and that leads me - as well as the manufacturing companies.  They are obviously are not their textile industries, but the others are still pushing pretty hard. 

And that leads me to a second final point.  This is AEI and I suppose you expect me to defend Bush, which I would not do certainly in a lot of foreign policy issues, unlike some of my friends here, but I think the Bush Administration, I disagree with Dan that [indiscernible]. If you look at what the United States put on the table and has pushed and also has pushed while we were going the bilateral and regional route, I think you have to say that we have been in the lead.  And that includes even, I think we can talk about this, that we’re being very foolish.  And it’s something that I will ask Sue Schwab about not putting things on the table in agriculture now.  But if you look back from 2001 to 2005, whether it’s in services, whether it’s in zero to zero manufacturing or total free trade manufacturing by 2015 or services, and even I would say in agriculture with the exception of the production subsidies where they have to keep looking over their shoulders -  I mean, to internal production - the United States still has taken the lead. 

This is not to say that there are not crosscurrents in our society.  But I just think that you can overdo it that we have somehow been neglectful, even though Cancun was a disaster that was of Zoelick’s making.  Here this administration, which as Jim and I wrote about, this administration, which had been dumping all over Old Europe let the world think that we and Old Europe were in cahoots in some way.  But you know those things aside, I think the United States has been at the forefront.  I think I’ll just leave it there. 

James Glassman:  Thanks, Claude.  Actually, you mentioned your term “polluting trade policy with politics,” actually there’s one issue that I wanted to raise that some people would say was polluting trade policy with politics and that is GSPs, the generalized system of preferences.  Senator Grassley has talked about blocking India and Brazil from getting program benefits and other people have talked about Venezuela, for I guess obvious reasons, maybe Argentina for not being responsible and repaying their debts.  Is there a reason to punish countries by limiting their benefits under GSP if they don’t behave properly politically from our point of view? 

Grant Aldonas:  Jim can probably talk from my remarks that I think GSP itself is pretty broad and you’re talking to somebody’s who’s spent his whole life in trade working and implementing the first CBI and everything else.  It’s just the wrong approach.  But in that context I really think that we ought to take a number of the major trading countries in the developing world and graduate them out of the process, because frankly the whole process of GSP hasn’t worked in either a pro development sense, nor have we as we’ve bargained with these countries over time actually held them to account for the conditions that we’re subject with, whether a CBI or it was - I forget her name who was negotiating the deals on the African Growth and Opportunity Act - but there was absolutely, absolutely no attempt to actually encourage the changes that were the conditions that were part of that bill. 

And many of those conditions frankly would have encouraged an internal free trade agreement among the beneficiary countries, so I think, unless you’re going to take it seriously, you probably should just try and get rid of these sorts of things and try and move people into the trade negotiating process.  As a consequence, I don’t really quarrel with Sue’s instinct, if that’s what it is, to try and use this as leverage, as part of trying to encourage people to get into the broader reform process and get out of dependency on things like GSP or the idea that export market access is the end all or be all of the development strategy.

James Glassman:  Claude, do you want to say something?

Claude Barfield:  I agree with Grant.  I start from something, this was a bad idea, it may have been a necessary one 20 years ago or whenever it was put forth, but it’s a bad idea.  What bothers me about the conditions is that - and one can say well, the developing countries don’t have to accept it, except as an overwhelming economic power - is that you can use it for things that are not necessarily in their interest.  And I really do think that the WTO decision which tried to split the baby, but basically said use language which said the GSP is for the national economic interests of these countries to allow them to do these things, and allowed that, but then actually who decides the national economic interest of Brazil or Peru?  It’s the United States.  I mean, that really turned the WTO language on its head to repeat something that I said about something else. 

So I have very mixed feelings about it.  I would like to do away with it.  I’m very nervous about the conditionality that is separate by country.  I think ultimately I see where you’re going.  I know you’ve written stuff about this.  But I think you really go in this direction and for all the pluses for us they’re really minuses and resentment that suddenly we are setting up the conditions.  Now some of the conditions are pretty good conditions but others are not necessarily so. 

James Glassman:  We’ll go to the floor for questions.  Raise your hand if you have a question.  Wait for the microphone and when the microphone gets to you, identify yourself.  I guess there’s someone up here.  There’s a race to the get the microphone to you, from both sides. 

Ernie Preeg:  Thank you.  Ernie Preeg, Manufacturers Alliance.  I’d like to pursue this mercantilist issue a bit further and ask for reactions.  It received negative comment, except Grant mentioned the political benefit of selling an agreement at home based on export benefits.  But it did work actually through the Doha rounds, certainly through Tokyo, because it was firmly linked to reciprocity where all members had to come down by roughly the same amount so you could still sell it to the political reason.  That was fine, because it was only developed countries that all were committed.  But in the Doha round, it started in Uruguay, but that went out, and the non-reciprocity, special differential treatment for developing countries including China, Malaysia, all the big Asian exporters, that got caught up into it where the whole thing has sort of drifted towards the mercantilist mentality even though that’s not a good development strategy. 

Now there is an alternative, is there not, in play, and demonstration affect that should be very clear to everybody.  That’s the FTAs, because here with developing countries they go to zero, we go to zero, and they start with tariffs three or four times higher, whether it’s Mexico or Peru or CAFTA or Australia even or South - and not only that when the U.S. pursues these FTAs of developing countries we even insist they take the initiative, they come to us first, and say we went an FTA because it’s in our own self interest.  That is basically throwing the mercantilist thing out the window and saying we’re doing more because that’s a good development strategy.  And shouldn’t that be the way we go? 

And the last question on this, one way, maybe a fourth alternative to Dan’s three, is if you get enough FTAs where they make up the bulk of world trade, let’s say the 90 percent threshold of world trade, then the step would be to consolidate them, put them together.  And I should say that if all the APEC countries who are moving FTA wise and the EU which would come in, if they all consolidated you’d reach 90 percent of world trade and you would be there. 

Grant Aldonas:  Well, Ernie I think you’re right in part by default.  I think we are in a world where it’s going to be regional and it’s going to be free trade agreements.  And there is an advantage in the sense that the developing country steps up because they are making a choice about their development strategy.  And then there is real reciprocity on the table in terms of the exchange, the classic exchange that used to work in a context.  And, of course, you’re absolutely right in the context of Doha, once Pascal Lamy said that it was going to be a round for free for the developing world, you were buying wholly into the idea that it was all about special and differential treatment rather than some sort of reciprocity that will allow you to sell the deal.  That’s one of the reasons why I want to get back to focusing on what drives development because it does bring you back onto the ground of saying there actually is room for a reciprocal deal.

Now I also have to say, though, in my own objections on the FTA side, and it goes in part to the difficulties of the possibilities Claude was outlining is the political dimension, which from all of us trade geeks you know we look at these things and we think, jeez, Oman is a gimmick, you know.  But the point of view of a congressman, particular a Democrat congressman, given our political firmament these days that’s a trade vote, and it doesn’t matter if it’s Oman or CAFTA or whatever it might be.  And as a consequence, we have been eroding political capital in support of trade with each vote on a bilateral FTA. 

And I know in my own experience that the conversations with members of Congress became much more difficult.  The classic line, which I think explains it all, was actually one that Charlie Rangel had in the bargaining over TPA in 1997, where he used the classic line, “I’ve got three bridges now I have to find a river," right?  And he had been given so much for his vote; he literally didn’t know what to do with it anymore.  (Laughter)  And, of course, the process of bargaining on this - TPA was difficult enough, right, because Thomas wouldn’t shake hands with Rangel, you couldn’t get 30 votes out of the Black Caucus, so suddenly you’re bargaining the textile industry, the steel industry, and Larry Combest on the agricultural committee.  Those aren’t places you want to be, you know, politically. 

And so, part of what I think we have to do is be cautious about how we do the bargaining ourselves so that we can remain engaged in the process.  And it really does reinforce your point, Ernie, which is I think Korea matters both because it’s a very powerful precedent that others might follow in the region, whereas Singapore would never be, Singapore’s a one off, including Japan, and separately it’s also something where suddenly for Democrats in Michigan there’s something real on the table for the benefit of their auto parts suppliers and for the auto guys.  So there’s a reason for them to engage in a serious discussion about the benefits of the FTA and actually ask for something as opposed to being able to stand pat and say we’re just going to adopt the AFL-CIO’s position.  Now what that should also tell us is we’re heading for an election where things are going to be very, very difficult for trade, and that’s whether or not Democrats take the House or the Senate. 

Dan, come on, what you’re going to do is you’re going to have freshman members who are dependent on labor’s money to get elected.  Nancy Pelosi, when she’s speaker will say, we got here because we enforced party discipline, we stayed on message, you bastards get in line, right?  So as a consequence -

Daniel Tarullo:  You could have had 25 to 30 more votes for most of these FTAs if the administration had been permitted by Republican leadership to speak to Democrats, okay?  There are more Democratic votes out there (a) to speak to Democrats, and (b) to put into these agreements labor standards which the partner countries had said would be fine, but were unacceptable in U.S. domestic terms.  So I just reject the idea that -

Grant Aldonas:  I disagree with you fundamentally because it takes two sides to a conversation, Dan.

Daniel Tarullo:  Well, of course you do.

Grant Aldonas:  And what we didn’t have on the other side, you know, it’s like talking [indiscernible] one of the interesting things I found was, Bill Roth had -

Claude Barfield:  This is a rehearsal for next spring, by the way.  [laughter]

Grant Aldonas:  But Bill Roth had worked on the Chrysler bail-out, something which I don’t think was a particularly good idea, but he had great street credibility with the UAW.  Delaware’s a small state, more auto workers per capita than any other state in the union.  So we went to talk with them in 1997 after the failure of fast track, and I was amazed at the extent to which you could make progress in a conversation with the guys in the local before they all had their heads snapped back by the guys at the UAW and the AFL-CIO.  It was absolutely fundamental.

So I said to the guys at the AFL-CIO, help me with this.  And they said, we have absolutely no interest in actually achieving an agreement with you about any of this stuff and we will enforce what discipline we can.  We’ll leave the issue in the context of labor politics.

Daniel Tarullo:  But Grant how is that relevant to Charlie Rangel’s position?  I mean, I think Mr. Rangel has been clear and consistent on the trade issues from the beginning of this administration onward, and he is today, most recently in his quotations in yesterday’s Financial Times.  And it does seem to me as though there has been a disinterest in some quarters in talking to a guy whose door is open.  And look, I think that people at USTR were up to the very highest levels were interested in talking to him, and they were pulled back by the White House.  When Rob Portman was made USTR, everybody thought it was a good sign, okay.  But he didn’t stay at USTR for very long, not because he wasn’t good at it, because he was going to be so good at it that they needed him in a place that was even more delicate.  But I don’t - you know stories about constituencies from ten years ago strike me as not particular probative about what’s possible today. 

James Glassman:  I’m going to ask Dan Tarullo a quick question, and then I’m going to go to Dan Drezner to comment on this issue of reciprocity, which I think is a very interesting one.  Let’s assume that the Democrats win the House and Charlie Rangel becomes Chairman of Ways and Means, will we get a TPA under Rangel?

Daniel Tarullo:  Well, certainly, I think we certainly have the potential for a TPA.  What the administration will be willing to put into the TPA, what the context for the TPA will be, we just don’t know yet.  I mean, every trade act, whether it is TPA or the implementation of a completed round, comes in a package.  Sometimes the package is a bunch of bridges and dams, sometimes the package is a bunch of programs that actually have a more diffuse advantage for people who are displaced by trade or the like.  And I think that that set of issues is going to be one of the two key issues.  The other is going to be, what is it that he’s being asked to authorize and what kind of discretion is he being asked to give.  But I don’t think there is any question but that he will be a productive and open interlocutor for the administration. 

Claude Barfield:  Can I make one point about that?  I was going to say this in my talk, but the one part about the bilaterals versus the regionals, one of the things that we’ve seen, at least so far about, let’s say, the Zoelick/Bush theory about competitive liberalization and its failure so far is that it is very easy - I mean, what Zoelick was saying you can go to bilateral to regional and a variation of what Ernie said, up to global free trade. 

What we found is that it’s very easy for the United States or the EU or Japan to attract individual countries to our big markets, but when you get to the FTAA or when you get to the Pacific you run into the same problems and the same barriers that you do with the WTO because you’ve got this multiplicity of issues.  And so the idea that you can go from bilateral to regional to global free trade so far is flawed.  And that from an economist’s point of view is bad because that puts you right back to the worst of all worlds from an economist point of view to a world of bilateralists.

James Glassman: Dan Drezner’s been very patient.  Dan?

Daniel Drezner:  A couple of thoughts, on the TPA question I tend to agree that Rangel might be a useful interlocutor.  I think that it’s going to be an issue that’s going to come up that has nothing to do with trade that’s going to make TPA very difficult, which is I find it hard to believe that a Democratic controlled House is going to approve anything that gives the Executive Branch more authority, given what’s happened over the last two years.  I think TPA - it’s not a trade issue, it’s going to get wrapped up as a larger political issue of why on God’s earth are you going to empower the Bush Administration even more on any issue.  So I actually think it’s a dead letter. If the Democrats win the House, I don’t think that TPA is going to happen.  Now maybe it could be sort of hived off, but I’m very skeptical politically of whether that can happen. 

To answer Ernie’s questions on the mercantilism issue, I completely agree.  I mean, you’re right that it’s worked for a long time, but the logic is so imprinted on American political culture, it’s amazing.  The takeaway point I always got from Bob Rubin’s memoirs.  His last chapter he talked about how he testified before the House about how imports in the United States were rising, and he thought that was a good thing, that it promoted competition, lower consumer prices and so on and so forth.  Afterwards the Republican chairman of the committee came up to him and said, you were the first executive administration official who said anything good about imports in the last three decades that I’ve been here.  That’s telling in terms of the extent to which the logic flies. 

On your proposal for FTAs, you know, sort of mushrooming into a global system, I’m skeptical for a couple of reasons.  First, none of these FTAs have the most favored nation clause into it, you know, built into it.  I mean, this worked in the late 1800s.  The 1800s were liberalized not through any sort of multilateral means, but rather a series of bilateral trade treaties, but ones that had the most favored nation clause included in it, which meant that the benefits naturally diffused to any new partner that we signed.  That’s not in any of these FTAs, and you’re going to have to negotiate that and that’s going to be fantastically difficult, mostly I think because developing countries aren’t going to want to liberalize with other developing countries among other things. 

The second is, politically I don’t think in the United States you’re going to see it be that easy, terribly easy, to launch any new FTAs with a certain set of developing countries.  The Middle Eastern ones make sense because you can trump the security issue.  AGOA you can trump because no one thinks that Mozambique is going to be a trade threat to the United States.  But the East Asian countries that’s going to - you’re going to run up against political roadblocks, and I think that any sort of significantly large economy you can make it fantastically difficult.  And so as a result I don’t think you’re going to expand on that level. 

And then finally on the question about development, I’d point out two things.  The first is I think a development logic does work for passing, for example, trade with AGOA or African countries, I think that’s a positive.  But there are two down sides to this.  The first is the danger that I think Bill Easterly has identified, which is the belief that in replace of well we’ve got to boost GDP or it’s all about governments, you make trade as the Valhalla of development.  And I think that’s a danger.  I mean, I think trade unambiguously plays a useful role in terms of promoting development, but I don’t think that it’s the be all, end all of the development either.  And I think the problem again is the tendency or rhetoric to sort of overplay the benefits and I’m worried about that.

The second is that it works with small, weak countries.  It’s not going to work with India.  It’s not going to work with China.  It’s not going to work with any appreciable economy.  And so I’m skeptical about the overall sort of welfare benefits you’re going to get from this kind of approach.  I don’t think that it’s necessarily - in sort of a theory of the second best outcome it might not be a bad strategy given the current political lay of the land, but I’m pretty skeptical about the overall benefits of it. 

Claude Barfield:  I really disagree on East Asia with Dan because I think that the China card is going to be key.  That’s what will be played, and if we let these countries continue to drift into China’s orbit, and one way not to do that is to have FTAs and some sort of economic connection.  And that’s really what is the key, and that’s the area that the diplomatic and the security will have its most potent, I think, effect in both parties. 

Daniel Tarullo:  But perhaps wrongly so.  No, no, Claude, my point is on Jim’s and your point both about the foreign policy and the relations of the foreign policy to trade, that part of the debate that ought to take place is the degree to which U.S. foreign policy interests coincide with the maintenance and extension of a multilateral economic system. 

That is, you can make a pretty strong case for the proposition that whenever we are in a multilateral environment, at worst the U.S. is the most significant player.  It may not be dominant, it may not be able to determine the outcomes, but at worst it’s the most significant single actor.  Once you go regional, that outcome is no longer assured.  And I think I agree with you about what the dynamic is going to be.  It’s not clear to me what the outcome of that dynamic will be. 

Claude Barfield:  We could go on, but we need to get to some other - Mac, then I’ll come back over here.  

Mac Destler:  Thank you, Claude.  First of all, great panel, really good discussion.  I’m tempted to jump in on the congressional politics and just … let me just raise one …

Claude Barfield: Sixty seconds, you could do it, I’d like to hear what you have to say.

Mac Destler:  One possibility … I mean, TPA without anything going on in Doha just seems to me is a total non-starter.  The interesting question is suppose there were something real possible, could you get TPA, at least for Doha, like Clinton did for the Uruguay Round?  And it seems to me that that’s not out of the question.  I could see Rangel cooperating on that. 

But what I want to do is pick up on Drezner’s question which he pushed but then backed away from a little bit towards the end which was, is the bicycle theory any more operative?  Let me assert perhaps a little more strongly than I really believe that it is no longer operative, Fred Bergsten, my friend notwithstanding, and because we don’t have the same sort of business based protectionism as dominated trade politics through most of our history.

Now I know the sugar people are there, I know the cotton people, but they’re the residual and the main industries are interdependent, even the textile people are … while they’re not pushing for free trade as the way we think of it, they’re pushing for manipulation of trade, not the removal of trade.  So it seems to me that this is powerful structural condition that may lead for greater stability in trade policy.  It may also weaken alas the credibility of the argument, god, if we don’t get something in Doha we’re going to have Smoot-Hawley all over again.  Anyway, I’d be interested in one or two panelists commenting.

Claude Barfield:  Dan, go ahead.

Daniel Drezner:  I get very nervous if I disagree with Mac Destler on anything regarding trade.  So I’m going to step a little carefully here.  Let me paint a slightly more pessimistic picture on the bicycle theory, which is I take your point that the sort of traditional producer elements that would be considered protectionist and become less powerful in part because trade is actually taking place, and they’ve gotten wea