PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | SPEECHES & EDITORIALS | 2001 | COMMENTS TO PBEC

Comments to PBEC David E. Sanger The New York Times 2001 Annual Policy Conference PBEC U.S. Member Committee January 31, 2001 I WANT TO THANK YOU ALL, particularly the many friends I see in the audience today. We meet at a particularly interesting time. These days when you wander through the Old Executive Office Building and find that half the offices are empty, a third have hand-scrawled signs on the doors, and more than a few of the occupants are down on their hands and knees looking for the W keys that were popped off their keyboards. But I thought, before going into a more serious and detailed discussion of Asia today and the trade issues ahead of us, that I'd tell you a story from my recent days down in Texas. About eight days before the inauguration, then President-elect Bush invited two of us down to his ranch for a talk, and a drive around his 1,600 acre ranch in Crawford. Now, I'd like to think that he did this because my reputation as a nice guy precedes me, or because he learned my ancestors were among the early settlers of Waco, the nearest town to his ranch. In fact, you can visit Sanger Ave. there it's now a string of Taco Bells and strip bars. But the sad fact is that he knew that sooner or later he would have to sit down for a New York Times interview, and he figured he might as well get it over with. I thought it would be instructive to ask him about Asia, because he had said so little about it during the campaign. So after we had run through the usual the nomination of John Ashcroft, the economy, Bill Clinton's executive orders I steered the conversation toward China. "What worries you more when you think about China,'' I asked. "A strong China that begins deploying more weapons, that becomes more aggressive in the area, or a weak China that is internally having great difficulty.'' The president-elect started off clearly mystified about what I meant by weak. "China is not going to be weak,'' he said. "It is still going to have a military presence.'' So I repeated "internally weak'' and he got it, and started talking about the Cultural Revolution and the chaos it wrought. "It was anarchistic in many ways. I would like to see predictability with the people with whom we are dealing.'' And then he looked at me and said "I'm trying to figure out if your question was a trick question?'' I said it was pretty straightforward. He changed the subject. Well, Bill Clinton was no expert in Asian affairs when he took office either. But he learned, and I know President Bush will as well. The question is how long it takes, and whether he is driven toward the kind of engagement policy that his predecessors have been or whether he tries some new formulas. We'll get to that. But I thought that since I have the luxury of being the first speaker, I would briefly run through the region, highlighting a few areas of concern. And then I would turn to the bigger trade issues, some of which I have discussed in a Foreign Affairs article that I recommend as a sure cure for insomnia. I want to start with one major observation: After spending the past three or four years worrying about economic contagion from Asia to the American markets, I think the dynamic has reversed. We suddenly have to begin to worry about contagion that radiates from here, and that could have an effect throughout Asia. Even President Bush acknowledged this in our interview and he knows that if Asians didn't like American arrogance and swaggering when we were up and they were down, they are going to hate what coming. I don't know how severe that risk is, because I don't know if we are headed into a mere slowdown, or a real, lasting recession. But clearly we are gong to stop sucking in imports at the pace we have been in recent times. And that is going to have a radiating effect from Japan to China to Southeast Asia. It could be particularly severe in China, which right now has about $350 billion in foreign direct investment, or just shy of ten times larger than the foreign direct investment in Japan. Growth in China is extraordinarily dependent on both that investment and growth in the rest of the world. The FDI has certainly accelerated China's integration into the global economy, and forced China's domestic firms to restructure. It is turning China into a regional growth leader. But one of the concerns has to be what happens when this slows, at a particularly vulnerable moment for China and the rest of Asia. We'll come back to this topic when I pick up my arguments about where we are in the world of trade, post-Seattle. But first, I thought it might be worthwhile to take a quick survey of Asia these days, the Asia that confronts the new Administration. You are all expert on this more expert than I, for sure so I won't dwell anywhere for long, and we can turn to that in the Q & A. But the big question is what faces the Administration, and are its leaders ready for it? I think that question hits hardest with Japan. You don't hear many specifics about Japan out of the White House, but you do hear one thing: Gaiatsu doesn't work, and this new administration won't be lecturing Japan the way Larry Summers and Bob Rubin did, it will be telling the Japanese that they must solve their own problems. A nice sentiment, and I give it about two months. If the Japanese had a good way out of their own problems, if they could muster the political will to make the reforms they need, I suspect that this would not have been a lost decade for the country. But it has. The country's political paralysis, and its inability to get beyond the strictures of its own employment system, have kept it from executing any bold changes of direction. The highlights are well known to all of you -- deregulation, promotion of a culture of venture capital, a system of reward for innovation, a concerted effort to move young talent into the biggest companies, and older workers out. But it's not happening, and now Japan is headed into its fourth recession in a decade. In ordinary times, that would be bad enough, but these are not ordinary times. The American boom has slowed, to say the least. Alan Greenspan says our growth this quarter may be zero, putting us on par with Japan. That means the two largest economies in the world, making up not quite half the world's GDP, are posting essentially no growth. That's trouble. In Southeast Asia, the financial crisis has passed. But the political crisis it engendered has not. Indonesia never made the recovery --- it dumped its dictator, and headed into a swirl of chaos that many believe is ultimately leading to the breakup of the country. The recent events in the Philippines are sharp evidence of how unforgiving the markets are of political shenanigans the impeachment of Estrada, followed by the rumblings over whether the new president can hold the loyalty of the military, have kept investors away. There is growing reason to question political stability in Malaysia. And President Clinton's trip to Vietnam in the last days of his presidency demonstrated anew that there is still not a consensus about the court of economic reform. There are sharp divisions in the country, divisions that were evident when he encountered mayors and technocrats who were asking about welfare-to-work programs, and then ideologues, like the Communist party chief, who lectured him about American imperialism. On Air Force One on the way back, he was musing about where this debate would lead and concluded, I think rightly, that none of us really know. But there is a presumption here in Washington to assume that all countries, even former communist nations, are inevitably moving on the capitalist course. That may be right, eventually. But it won't be a straight-line course, and there will be plenty of setbacks. In short, this is a long, long way from the seven tigers we talked about, and in my case wrote about, in the mid-nineties. We took political stability a bit too much for granted. Now let's turn to the role that trade plays in all of this. The essence of Clinton Administration foreign policy was this: In a post-cold war world, economics forms the core of America's approach to the world. Over time, economic interdependence will beget cooperation, and will create a web of cooperation. It worked in many countries, and China could end up being the poster-boy for the Clinton approach. But it turned on one intellectual leap: That the rest of the world was willing to accept the leadership of the American hyperpower to use the French term for us and that as we maintained the world's most open market, the rest of the world would follow suit. Plans have a way of going awry, and this was no exception. America's military rise, its cultural exports, its economic supremacy triggered resistance. And we saw it all unfold, some might say implode, in Seattle. Now I'm not talking about the image of Seattle that is most often in the public mind the anarchists throwing bricks through the windows of Nordstrom's and Starbucks. The real rebellion was going on upstairs. The United States had come to launch a round of trade opening, but was taking off the table all the most politically difficult issues in Congress -- dumping, for example, and an end to agricultural subsidies. The rest of the world was still absorbing the market openings of previous rounds, and was in no mood to give. Europe, Japan and the US had not coordinated. And by the time the negotiators made their way through the protests, no one was in a mood to give. I got a call during the riots in the streets from a friend, an American negotiator. "How's it going down there?'' he asked. Terrific, I said, as I was ducking tear gas canisters. And how's it going up there? I asked. Oh, great, he said. The Pakistanis just told us, "We will blow up the negotiations,'' and the Indians, who are usually only interested in blowing up the Pakistanis, say they will help. The Administration had tied its hands because of the presidential election; Al Gore was not about to alienate the unions. And then President Clinton poured fuel on the fire, telling an interviewer on the way in that he ultimately hoped that organizations like the WTO would be able to impose trade sanctions against countries that violate labor rights, or pollute their environment. To Americans, it sounded eminently reasonable. To the developing world, it confirmed every suspicion they had that an American plot was in the works, one designed to keep them down. Or as the Egyptian trade minister, Youssef Boutros Ghali, said, "Why, all of a sudden, when Third World labor has proved to be competitive, do industrial countries start feeling concerned about our workers?'' The new president ignores this at his peril. So I argued in that Foreign Affairs piece that it is time for a grand bargain between rich and poor. The first step is a full opening of American markets for goods produced by the world's poorest nations, where workers live on $2 a day or less. It means ending the barriers on textiles, the main product that the poorest nations produce. And it means dumping many of our dumping laws. None of this will be popular on the Hill, and maybe the political objections will prove insurmountable. But look what America gets in return. It should insist on several concessions from the developing world. The first is agreement on the enforcement of intellectual property and copyright protections. Over time this will be far more valuable to the US than anything we are giving up. If the dominant language on the Web is about to be Chinese, then the dominant law over how the content should be used ought to be Western. Otherwise, we're heading to a far larger battle. And what about labor and environmental standards? We're caught here, between competing Democratic and Republican ideologies, and the opposition of the rest of the world. The only way I see out and it's imperfect is the promotion of market-based incentives for these protections. Our power lies in the size of our market. And that's why the Starkist tuna I open for my kids has "dolphin-safe'' written on the sides. Starkist knows that my six year old isn't going to eat tuna if Flipper is getting killed in the nets. It's why Nike and Reebok got embarrassed into joining the Fair Labor Association. These organizations are spotty, they make no effort to determine if workers are making a living wage. But if the Administration can pursue faith-based solutions to poverty at home, it seems to me possible to pursue market-based solutions to poverty abroad. And this is one. No such grand bargain is a panacea. American hegemony will engender resentment no matter what deals we strike, how much debt we forgive, or how many protestations of a "humble foreign policy'' the White House issues. But a system that seems rigged to benefit the richest will not work. And selling that thought to the Congress will rank among Mr. Bush's bigger tasks. Thank you, and I look forward to our discussion.