NEW ATLANTIC INITIATIVE EVENT
The Best of Both Worlds: Tax, Trade, and Cowboy Capitalism in the United States and Europe

Thursday, February 13, 2003

Partial transcript (Thomas and Baucus's remarks)

Agenda:

8:45 a.m.	Registration and continental breakfast
9:00	Welcome:	Christopher DeMuth, AEI
	Keynote speaker:	Bill Thomas, United States House of Representatives
9:30	Tax Competition in Europe--A Lesson for America
	Speakers:	Chris R. Edwards, CATO Institute
		Eckhard Janeba, University of Colorado
		Adam Lerrick, Carnegie Mellon University
	Moderator:	Kevin A. Hassett, AEI
10:30	Break
10:40	Opportunities in the New Europe--Does Europe Need a Dose of Cowboy Capitalism?
	Speakers:	Robert D. Atkinson, Progressive Policy Institute
		Alfred Berkeley, Nasdaq Stock Market, Inc.
		Jan Krzysztof Bielecki, European Bank for Reconstruction and Development
		Hans H. J. Labohm, Netherlands Institute for International Relations Clingendael
	Moderator:	James K. Glassman, AEI
11:40	Break
11:50	U.S. and EU--Leaders or Laggards in Establishing Global Free Trade?
	Speakers:	Ellen Frost, Institute for International Economics
		Patrick A. Messerlin, Institut d'Etudes Politiques de Paris
		Hugo Paemen, Hogan & Hartson LLP
	Moderator:	Claude E. Barfield, AEI
1:00 p.m.	Luncheon
	Luncheon speaker:	Max Baucus, United States Senate
2:00	Adjournment

Proceedings:

Rep. Bill Thomas

THOMAS: I like to be a keynoter. Obviously, if you're going to be a keynoter you need to try to get your arms around the theme and part of my job, I guess, is to warm you up for the rest of the conference. So I'll try to get you at about a hundred degrees--you choose Fahrenheit or Centigrade.

Tax, Trade and Cowboy Capitalism. I get tax. I get trade. I was trying to get my arms around Cowboy Capitalism. Well you go to the dictionary if you try to get your arms around something, at least to begin with. And of course if you look up cow, you know what's going to be there. But actually there's a second and a third definition for cow, C-O-W. So I looked at the third definition of C-O-W, Scandinavian in origin, to intimidate with threats or show of strength. I don't think that's what you mean by Cowboy Capitalism. Lets do some word association to see if I can get a feel for it. Cowboy, choose one: brave or bravado; courage or recklessness; rational or shoot from the hip. I probably think some folks chose all of the latter, which if they did, I don't think creates the mental set, I hope it doesn't create the mental set that you were looking for. So lets go to the Internet. Let's go to songs you can kind of get a feel for how folks feel in a particular society by the songs that they have. If you look up songs with cowboy in it you'll find one that says, "Mama don't let your babies grow up to be cowboys." So, understand that ones climbing the French hit parade.

I apologize but I don't know if I can get my arms around the theme of this conference, if I can't, maybe I'll offer some other words. Of course, I find it somewhat disarming if you use their own words. I know its old and worn and almost hackneyed and clichéd, but entrepreneur is not bad. Because if you look up entrepreneur, low and behold, the dictionary says, one who assumes risk of a business or enterprise. I guess we're focusing on risk, nowadays much more figurative than literal. However as we all know in the recent tragic space problem, risk can be very real, and it's how you deal with risk. And I think you've seen is a clear understanding that through science and technology, we will reduce the risk. In this world you never eliminate the risk, and if you start any activity on a principle, that is the elimination of risk--I just can't give a word to put in front of principle there, which might emphasize someone assuming that there would be no risk, precautionary a good word to use? Precautionary principle, no risk? There is no such thing as, no risk? The human endeavor is the management of risk, and when you think about what happened in that tragic situation with the Columbia we know another shuttle will go up, we know based upon are examination, that it will be safer. It can never be safe to be safer. And maybe an appropriate name for that shuttle that goes up next should be Phoenix, because out of the ashes grows a new and viable bird. In fact Phoenix Capitalism, to me, might be a better term to focus on this business of creative distruction that somehow seems to really separate the United States from Europe. The embracing of risk--in fact the embracing of failure--which means you've learned what not to do and then go on, versus the unwillingness to risk and therefore the unwillingness to fail. And I do think the emphasis you're placing on capitalism is either a combination of or an offshoot of the idea of willingness to risk and to risk failure the Phoenix concept of rebirth out of ashes, or even the entrepreneurial, where anytime you engage in an activity part of the definition is risk you can't avoid it. If you argue that you want to assume a position which avoids risk, that's an excuse, not a reason. If you use excuses for your behavior we know were that leads.

So as we begin examining what it is we are talking about: Tax, Trade and fill in the blank Capitalism, I would also like to just add a little bit more to the title while I'm at it. In 2003 and Beyond? Because it's the question mark I want to spend a little bit more time on. Clearly we're in 2003, so lets discuss tax, trade and the way in which people approach risk, or the excuse people use for not approaching risk in 2003 and beyond. In the US, 2003 I think is a signal year. It's going to be one that will mark a significant change. In the area of taxes, I do want to thank our European friends for providing me with a reason, and not an excuse for changing our corporate and international tax code. I will tell you, I had no way to motivate my colleagues to address an area of the tax code that frankly had been left morbid for too long. And in which Europe, in changing their tax rules on capitalism, and frankly had gotten ahead of us. This is a leapfrog game. We were ahead and obviously Europeans, in understanding the sensitivity of capital and the fact that you ought to encourage it and not punish it, have been slightly ahead of us. But thanks to the FSC-ETI case, we now have the opportunity in the year 2003 in which we will take advantage of that opportunity to change a portion of our tax code and our international business regime to the tune of one well more than a hundred billion dollars. It not directly taxes, but its in response to a number of concerns, we will address the Irish music question. We will introduce, and the Chairman of the Committee of jurisdiction, which happens to be Chairman Jim Sensenbrenner on the Judiciary Committee, will introduce and we will pass the removal of the 1916 dumping provisions. And we will pass a significant tax bill under the leadership of President Bush to change the way in which we tax dividends, which of course will be a significant adjustment on the question of reward or punishment of capital. And that will get us someway down the road toward redressing the differences between European approached capital and the U.S. approach to capital. We await EU responses in the area of labor taxes because, although, if you examine only the capital area there maybe some advantages, I happen to think that part of the reason we have the ability to create, destroy and recreate in a very positive way is in large part because of the differences between the way in which we handle labor taxes and the way in which Europe handles labor taxes.

We will be wrestling with questions along the social safety net: healthcare, Medicare, Social Security. And we dauntingly look at our demographic curve in the out years and begin to wring our hands and worry about how we deal with that evergreen aging population, and if you'll take a look at some of Europe's demographic line our problem looks slightly easier to solve then theirs.

2003 for the EU is, I think, a very important year as well. Twenty-four years ago, a freshman Congressman met for the first time with members of the European Parliament. He was from a predominately agricultural area and his first committee was the Agricultural Committee. And he began to ask questions about something called the Common Agricultural Policy. He was assured by a number of the Europeans there that this is not a problem, because once it reaches one percent of the funding there will be automatic adjustments to the Common Agricultural Policy. He was then engaged in a number of conversations by several elderly members of the European Parliament, wanting to know why we were so keen on competition; when if we would just take the Western hemisphere and they could have the Soviet Union and we could kind of agree not to compete, we both could do very well. As that freshman Congressman, I began to understand the mentality of cartelizing versus competition. I think that's a fundamental difference, still, and a fundamental problem, still. I believe as the European Union attempts to expand to ten new nations, either the common agricultural policy will change or the European Union will not be able to do what it believes it should do, and all of us believe it should do. And frankly from the early testing, I'm not as optimistic as I would have hoped. When you take specific suggested changes and convert them to generalities, that's probably not a good first move. And obviously these changes have to be made by 2004. And if we were to mirror the European Union's positions in international negotiations, you would examine what the Europeans offered as an opening gambit in the trade area to reflect the position on agricultural policy internationally, and lo and behold, it looks like it reflects European Union policy internally. I wish our friends on the other side of the pond luck. It's going to take more than luck. It's going to take a significant refocusing on the way in which Europeans have operated. And as a matter of fact, we don't have all of 2003. As we all know, DOHA in Cancun, will be in September. And if we aren't able to come out of the DOHA Cancun Round, then I don't know about '04 and '05, at least on the international level, and that's why I want to put a question mark after 2003.

As far as the United States is concerned, we have passed the Trade Promotion Authority that we lacked for far too long. That legislation will run through 2007. In 2005, the United States will have to renew its membership by a vote of the Congress on WTO. Sometimes I never know whether you're supposed to read italics or just look at them--but I read them, and part of the introduction was, Greater economic collaboration might even lead to the establishment of a Trans-Atlantic free trade zone. I could probably get that passed on the floor of the House, with one simple amendment--before a Trans-Atlantic add everywhere but. That's the feeling right now on the floor of the Congress.

When I've talked to Europeans over the last quarter-century, they say, "You know, I just don't understand U.S. politics." And I will tell you right now, based upon recent events, I don't understand European politics, or at least I don't understand politics in France and Germany.

OK. I've been provided with the answer that the reason the government in France and Germany has not been willing to step forward to show leadership and support--obviously my perspective--is because there's so many Muslims in Europe today. I understand that; leadership is always a difficult thing. But if that's the reason France didn't support the U.S. in the Security Council, explain to me why France and Germany didn't support the position of protecting Turkey against potential Iraqi attack in NATO, when if there is a Muslim at the dinner table in Germany, and he happens to be your son-in-law, it's a far greater chance that he's from Turkey than any other Muslim country. So that seems to me a kind of an excuse rather than a reason. There's that relationship again. And frankly, the argument is, "You don't understand. French and German people are opposed and their elected leaders certainly can't get out front, especially when their people are opposed." I go back to Franklin Delano Roosevelt in 1940 and early 1941. I invite you to check what was in the polls, judging whether American sentiment was to enter the European War. And take a look at what Franklin Delano Roosevelt did in 1940 and early 1941--he did what was right, not what was popular. Excuse versus Reason.

It just really concerns me a lot, and I do hope that you pick Fahrenheit instead of Centigrade, because the opportunity in 2003 is enormous. The United States is once again on the move; and I say that in a positive way. We have a number of bilateral agreements coming before us with Chile stressing agriculture, with Singapore stressing financial services, with Morocco, a Muslim Nation showing especially in the Northern part of Africa. We have a regional trade agreement in Central America as we pull five Central American countries together to be represented as one, and a regional relationship in which we'll continue to expand. We would love to do the same in the World Trade Organization, but it depends upon the others who are principle players in the World Trade Organization as to whether or not that same kind of dynamism is transferred to the multilateral trading relationship. If it isn't, if it isn't the vote to join the WTO, which was primarily driven by what we call the Aggies, and I still am one even though I left the Agriculture Committee along time ago based upon my district, they basically gave us a very clear message. We will give you this vote one more time. When you come back show a significant movement on agricultural subsidies worldwide, show a substantial movement on dispute settlements, when we lose, we will change, but when we win, we expect the losers to change. I know that's radical concept. And there's ample evidence internationally that that's exactly what's not happening. Then finally, bring back to us decisions to do or not do based upon science. If you can't do those, don't expect our vote to renew WTO. Frankly and unfortunately, in my opinion, it's not in our hands. We would be more than willingly to deal with agricultural subsidies with the dispute settlement model and with science-based decisions. Its whether or not our friends in the European Union want to engage in that serious substantive reform at the World Trading level? If they do, I can take the question mark off. We won't have to worry about '04 and '05, they'll take care of themselves, and in fact beyond. And I may not have to offer the amendment everywhere but a transatlantic free trade area. I'm quite assured that the President will be reelected in November of '04 and that his party's Congress will control both the House and the Senate. We're not going anywhere over the short term, in terms of going out the exit. I do hope we go somewhere, and that the rest of the World goes with us, in making a safer world, a free-er world, a world in which trade is the primary means of international competition, and that our taxes reward effort, our structure rewards risk and that the human condition improves.

Let me just stop and throw it open for questions.

(Applause)

CHUCK NADINGER, TAX ANALYSTS: Mr. Chairman you mentioned the FSC-ETI Act and you mentioned wanting to change some of our corporate tax legislation. Do you have a timeline for reintroducing your legislation to repeal the FSC-ETI Act?

THOMAS: I believe I said we would do it in 2003, that's calendar year 2003. As you know some folks have handed us an agenda on taxes that probably got moved up to first place. We believe that as we move through March and April, we will move out of what I've called for some time now, the "Education and Information Stage". We will move in a bipartisan way with significant amendments designed to move that legislation of the floor of the House and thru the Senate to the President for signing.

DOUG PALMER, REUTERS: You talked about the unhappy mood on the floor of the House to Europe these days, and there have been some reports of possible retaliation; Congress approving possible sanctions on European goods in retaliation. Do you view that as a serious possibility?

THOMAS: No. The primary reaction is kind of sadness and disappointment. There are folks who make rash statements. Those won't be translated into policy. They will simply reflect a mood about an inability to understand where and how people make decisions, especially when your presented with evidence, whether it be scientific in an attempt tom make sure that people who are starving in Sub-Sahara Africa aren't intimidated in not taking humanitarian whole grain aid on the basis of some reported health or trade threat. That's the kind of thing that really concerns us. I was asked by Mr. Lamy to read what he said was the seminal position was on the European Union in an August document and when I read it I couldn't believe it. It was a thinly veiled threat, both in terms of potential health hazards and clearly in terms of trade. I do hope they revise that statement, so that there's no question of misinterpretation. I can't believe that Europeans what to leave the World with the impression they did in the last paragraph, we'll supply you with some dollars and you can buy some grain. Notwithstanding the fact that the lack of grain was their original problem in the first place. I look forward to some revised position of the EU on the question of humanitarian food aid to Sub-Saharan Africa.

But that kind of apparent attitude seems to permeate more and more. The positions, if not of the European Union, at least two of the dominate powers in the European Union, in which you kind of ignore sixteen nations in NATO and focus on two ore three. Some of us just don't understand the need to be confrontational across the board and in every effort. I've been told by some friends that that's just the French; I understand. That is an explanation for our friends in France. That isn't, I think, a reasonable or fair explanation for our friends in Germany. There's an old political saying that you reward your friend and withhold from those who are not. I don't believe there would be any positive sanction effort, but certainty withholding from those who are not your friends is something that isn't hostile but is something that could be done.

JUTTA HENNIG, INSIDE US TRADE: You said today that the stimulus is something that you will deal with. You've previously said that there were other factors influencing the passage of FSC-ETI. Would the biotechnology issue be one of those factors, the existing moratorium and the commission inability to get member states to lift that moratorium? And if there is no influence on the FSC, does it influence your willingly ness to move forward the legislation that you introduced today on Irish Music, on the 1916 Act?

THOMAS: No. When you're found in violation you present your best argument as to why you're not, and if you're found, you then you do something about it. We will provide funds to settle the Irish music question. As I said, the Chairman of the Committee of jurisdiction will introduce legislation to resolve the 1916 dumping question. The Bird Amendment question, even Commissioner Lamy in his most recent phone call said he wouldn't put that on my ledger just yet, it's too fresh. But we'll be moving in resolving that as well.

That's what people do who are in a working agreement relationship. We just expect at some point that our European friends will move where panels have found that they are in violation as well. And once again, the argument that you can then take sanctions, you can fine, you can retaliate is not really in the spirit of what we came together to deal with. You're suppose to resolve the differences, not be willing to pay for a continued violation. That is kind of whole theme of Excuse versus Reason or Responsibility.

And no, none of those other factors will determine the timing, movement or passage of the Foreign Sales Corporation-Extraterritorial Income revisions. It's simply getting a number of folk to understand that that avenue of support is no longer available, and it is impossible to create an equally beneficial and narrowly rewarding structure for the same folk, and that we have to move on. But in moving on, we can make significant strides toward freeing up our folk and not inhibiting international Capitalism, Cowboy, Phoenix or Entrepreneurial much better than we have in the past. This is in--I apologize for the term--backwater area of the tax code that hasn't been visited for a long time, and that is why I sincerely thanked our European friends for providing us with a necessity, not an opportunity, because we were in violation because of the rules. Now, if you want to revisit the rules on the difference between direct and indirect taxation, I think you'll find primarily in today's world, a distinction without a difference, which needs to be changed. That's a different battle for a different time. We will under the current rules, conform to the panel decision and it will make us better for it. We're willing to risk, and by risk I believe we will gain reward. I just some of my friends on the other side of the Atlantic would try that once or twice.

QUESTION: Something from your remarks that stuck me as very interesting was the notion of what definition of Capitalism of we want to use. The notion that Europeans had a unique on we might call it "Red-Tape Capitalism," or we could come up with the correct adjective. I wonder if you think Democrats, say in the House, who you know very well and know how they think because you talk to them all the time, have a distinct view of Capitalism from that of sort of Europe. Do you think that if the Democrats had all the power and could do what they wanted that we would move very close to having an attitude about capitalism like that of Europe, or do you think that they have different views?

THOMAS: The short answer is no. The longer answer is that we are all captives of our culture and society. And almost everything is relative and in degrees. So when we have the battles over capital, it's within a much narrower spectrum. When we talk about the burdens, costs and inhibitions of labor it within a much narrower spectrum. And when we look at solutions it's over a much broader range. And it all boils down to risk. We are much more willing to change, believing that change is a positive, as opposed to people who are opposed to change because you know that there are so many things that could occur. And the idea that safety is a higher good than risk and reward. It's just a mental set. So when we sit down with our democratic colleagues, there are a number of them who think that if you're going to change the way in which capital is taxed, removal of all taxes is not the preferred position. And the equalization, so that people are not forced to make decisions by the tax code, but rather choose their own poison with an even tax, whatever poison you choose, is the much-preferred route.

When you look at the question of labor, our concerns about labor costs--one of the advantages, if the Europeans can resolve there common agriculture policy and actually absorb the larger Eastern European nations, is that we will kind of be bumped from what is now what, I believe, is a factual statement. You can build cars in countries that you can drink water out of the faucet cheaper in the US than any other country that fits that criteria. But as the Czech Republic, Slovakia, other countries of Eastern Europe become a part of Europe and as you've already seen, Volkswagen AG and others are moving into that area to take advantage of a cheaper and more risk-prepared labor force. That will be, I think, a positive dynamic and that the more familiar--older if you will, both in terms of chronological and in terms of age demographics--Europe I think is going to need to respond. That's positive for Europe but it's a little more difficult for us they have really good water over there. They use is to make really good beer. And those labor costs are going to come down as more and more of that manufacturing capacity moves to Eastern Europe. I don't what that for the son-in-law on the assembly line of Mercedes or Porsche. It's going to be a real interesting question.

So when Democrats and Republicans sit down discuss our differences, the range is narrower and the options are broader just because, in my opinion, and the mental set is to how we approach the solution. And of course what we always try to do is come up with a win-win. It goes sometimes to the fundamental system. I think its very telling that many European governments create a proportional representation. You get a piece of the action for how much you get to play. What do we have? Winner take all. I mean could you see a George Carlin routine; he's done one on the difference between baseball and football. You could do one in which the terms in which people get elected to office and what it takes to get in and how much your responsibility is to drive toward a majority or how much the structure allows you to pick your own way, one which is relatively safe with no risk. But frankly in our opinion, doesn't have the same rewards, and as soon as we can clean up our capital area I think we're going to be in really good shape.

JILL BARSHAY, CQ: Chairman Thomas, you said before with the ETI dispute that it's impossible to create an equally rewarding structure for the same folk. Is it possible to have some sort of manufacture's tax credit, where perhaps people who don't export at all would benefit? Would that be a reasonable solution?

THOMAS: Well, I don't believe we're coming up with a solution that will export to benefit. I believe that when you repeal ETI you produce a revenue stream in which you can modernize your international tax code to make it much more competitive and in line with the appropriate initiatives to motivate properly.

I think you'll find that part of the President's thrust on his question of changing the taxation of dividend is to get out of the business of trying to incentivize people through credits and other structures. My goal has always been to lower the rates so that you can have the capital to make the decision yourself, which is the better way to utilize rather than have the government provide a structure in which if you follow what government thinks is appropriate, you get rewarded. I think in the short run it doesn't work and in the long run it's a disaster. The idea would be to free up people to allow them to make decision for themselves. All right, thank you very much.

...

Senator Max Baucus

BAUCUS: Considered from a distance, the United States and Europe have every reason to maintain a stable, mutually supportive trading relationship.

The United States and the European Union have the largest trading relationship in the world. Each year, more than $375 billion in goods and services cross the Atlantic. Historically, the trade has been relatively balanced, without the enormous trade deficits that weigh down U.S. trade with China and Japan.

Both the United States and Europe are rules-based societies, and both have led the way in establishing a rules-based global trading system. In fact, the United States and Europe are sometimes called the twin pillars on which the World Trade Organization is based.

Add to that strong cultural affinities and a history of working together to face some of the greatest challenges of the 20th century, and one might expect the United States and Europe to have a rock-solid trade relationship.

Unfortunately, this is not quite the case.

In recent years, trade tensions have often flared to near crisis levels. Even seemingly minor disputes over meat from animals treated with growth hormones or trade in bananas have proven nearly insoluble.

Since 1995, the European Union has bombarded the United States with WTO challenges that go to the core of the U.S. trade and tax policy. At the same time, the EU has launched WTO complaints against the United States - like the challenge to the Byrd Amendment - that I believe are essentially nuisance litigation.

Making things worse, Europe has turned a deaf ear to a number of legitimate complaints raised by the United States.

Many of the concerns the United States has raised against the EU center on one sector - agriculture.

The reason for decades of tension is obvious. In 1970, European Community was the largest net agricultural importer in the world. By 1980, thanks to Europe's Common Agricultural Policy or CAP, Europe had transformed itself into the world's largest net exporter.

As one of the world's major agricultural exporters, this shift cost U.S. farmers billions in lost exports and caused the cost of the farm program to sky rocket.

Europe's CAP continues to cost the U.S. billions in lost exports. But in recent years the United States has shifted its focus in part from dismantling the CAP to combating European programs, such as the hormone ban and the current moratorium on new biotech products that unfairly restrict U.S. exports.

The United States has, for some time, been contemplating bringing a formal WTO complaint against the ill-advised and unscientific moratorium on new farm products based on biotechnology. It is always difficult to foresee the future, but I think there is little doubt that a challenge to the EU moratorium would succeed in convincing a panel that it violates WTO rules.

But the United States has held back in deference to the EU's leaders who have argued that this issue is not appropriate for WTO litigation because it is widely supported by consumer groups in Europe. They make this claim without seriously addressing the fact that authorities in the United States and elsewhere have demonstrated these products to be safe.

Indeed, these products have considerable potential to boost food production and provide consumers with a wider choice of affordable, healthy food.

I believe strongly that governments must make policy based upon sound science, not on fears based upon science fiction.

But the EU continues to argue that the biotech moratorium is necessary - in spite of overwhelming scientific evidence - because of the fears of consumer groups. I personally do not know how much of this rhetoric is an honest explanation and how much is simply a convenient excuse for protectionism.

What's worse, the EU's irrational fears are becoming the basis for policy in other countries. It is time - in fact, well past time - for the United States to make a WTO complaint against Europe's irrational restrictions on farm product imports which have benefitted from biotechnology.

I hope this point is heard not only in Europe, but in the decision making circles of the Bush Administration where the issue is presently stalled. To this point, the Administration has given too much weight to unrelated foreign policy concerns in making the decision on initiating a WTO complaint on this matter.

I also find it comic that Europe's leaders argue that they cannot make agricultural trade policy based upon a U.S. complaint to the WTO, but feel perfectly justified in pressing the United States to reform its tax policies based upon their WTO complaint.

This brings me to the second major topic I wanted to focus on today, the trade dispute over Foreign Sales Corporation or FSC tax and its descendant, the Extraterritorial Income Exclusion.

My initial reaction to this dispute was that Europe was out of line in bringing the complaint. Nothing I have heard or seen since has led me to believe otherwise.

Simply put, the FSC tax was no more trade distorting than Europe's practice of rebating its Value Added Tax on exports. Yet the EU pushed the case forward in direct contradictrion of a two- decade old "gentleman's agreement" not to pick away at each other's tax policy.

The United States probably made a mistake by not ensuring that this "gentleman's agreement" was explicitly written into the WTO as Europe did when it won a grandfather clause for its VAT rebates. Nevertheless, the rationale for bringing this case - beyond tit-for-tat retaliation for U.S. action on bananas - escapes me.

Were I the U.S. Trade Representative, I would be inclined to counter Europe's tax challenge by vigorously defending our own policy, attacking the portions of the European tax system that are open to WTO challenge, and negotiating new rules on taxes that were fairer to the United States. This is why my colleagues and I included a principle negotiating objective in the 2002 Trade Act designed to seek just this kind of fairness.

Now, I recognize that I am not personally in charge of U.S. trade policy. But the Administration's reluctance to vigorously defend U.S. tax policy and demand fairness in WTO rules baffles me.

Nonetheless I have been working with my colleague Senator Grassley and others on considering a range of possible approaches to the FSC problem, including new legislation.

Over the last few months, my staff has analyzed a number of options in consultation with the Administration and others in Congress.

I am now confident that it is possible to replace the FSC with a new manufacturing income exclusion, expanded research and development tax credit, or a combination of the two. And we need appropriate rules to transition to the new system.

Unlike some of the other legislative approaches that have been explored, I believe this approach would encourage companies that produce and export from the United States to continue doing so.

That said, however, I do not believe that legislation like this should be pursued in isolation. Rewriting U.S. tax policy is a wrenching and time-consuming exercise.

I would be much more confident in the process, if the Administration were meaningfully pursuing basic fairness in WTO rules on taxation. But right now, I see very little effort from the Administration to do its part. Instead, they seem to prefer that Congress shoulder the burden alone.

As I said before, the fact that European leaders can argue that the WTO cannot be used as a forum to force change in European farm policy, while maintaining it is fine to attempt to use it to force changes in U.S. tax policy simply floors me.

In fact, the irony does not end with taxes. The United States is under WTO attack from Europe on many fronts. In addition to FSC, Europe is challenging the U.S. safeguard on steel imports, the Byrd amendment to redistribute dumping duties, current practice for deciding the impact of privatization on unfair subsidies and a raft of other issues.

In most of these cases, political gamesmanship seems to play at least as great a role as economic interest.

It may surprise some in Europe, but I agree that some of the trade complaints pursued by the United States in the past may not have been chosen as carefully as they should have been.

That said, what is good for the goose is good for the gander. If Europe persists in this WTO litigation, the United States should employ all measures within its control to defend its policies and make sure the glare of the WTO also falls on some of Europe's many trade sins. There also may well be occasions in which the United States should persist in policies that particular WTO panels have criticized.

I do not, however, believe that this is the best way to do business. I believe that both Washington and Brussels could be more rational in deciding what issues to put before the WTO. I also believe that both would be better off resolving matters through serious consultations rather than relying on litigation.

Further, I still believe that more formal undertakings between the United States and Europe to expand trade and resolve disputes deserve consideration - perhaps even including the possibility of a real Trans-Atlantic Free Trade Area.

Unfortunately, if we cannot mutually manage far-sighted solutions, the United States must defend its trade interests.

Washington, Brussels, and even the WTO must all be respectful of each other's legitimate prerogatives and interests. Otherwise, the road ahead may prove bumpy for all parties.

Thank you.