P R O C E E D I N G S

MEETING CALLED TO ORDER

By Mr. J.W. Marriott, Jr., Chairman

CHAIRMAN MARRIOTT: Good morning to everybody. Welcome. It is a pleasure to call this meeting to order.

This is the second business meeting of the President's Export Council and we really are grateful for your attendance. We have a good crowd this morning.

Last October, we approved three letters of recommendation which were sent on to the President concerning China, services and trade negotiation, and the establishment of a corporate stewardship compendium. I look forward to hearing from Secretary Evans on the impact of these letters with the administration.

As a representative of the service industry, I am always cognizant of the role that services play in these negotiations in world trade, and happy to hear about the free trade agreements the United States has completed with Australia, Morocco, and CAFTA.

As you know, services represent the largest sector in the private economy, providing more than 85 million jobs. The United States still accounts for nearly one-fifth of all global services exports, and I hope that services will always be a fundamental part of any trade agreement.

Beyond the services sector, one of the main concerns affecting business in our country today is China. Improving our economic relationships with China involves negotiations, cultivation, and relationships, and a level playing field. For this reason, the President's Export Council will go on a fact-finding trip this June as representatives of the U.S. business community.

Today, we will discuss four letters of recommendation. We will hear an update on the corporate stewardship best practices compendium, as well as the statute of the separately chartered President's Export Council's Subcommittee on Export Administration.

Since we last met, the Department of Commerce has released a manufacturing report. A copy has been sent to all of you on the PEC. But with many of you representing the manufacturing sector, I know we look forward to Secretary Evans and Under Secretary Aldonas briefing us on the latest effort.

There are four letters of recommendation on equally important topics that we will talk about today: worldwide sourcing, unilateral sanctions, intellectual property rights, investor protection, and post-Cancun summit WTO issues.

Next to me on my left are two men who have first-hand knowledge of these issues, Secretary Evans and our Executive Director and Under Secretary for International Trade, Grant Aldonas.

First, I would like to introduce the Secretary of Commerce, Don Evans. Thank you, Mr. Secretary, for the great support of all you do and your dedication to this council.

Ladies and gentlemen, Mr. Secretary.

WELCOME/INTRODUCTORY REMARKS

By Honorable Donald L. Evans, Secretary of Commerce

SECRETARY EVANS: Thank you. Thank you very much, Bill. Thank you, sir. I am delighted to be here. It is great to see such a terrific turnout. I think the last meeting we had was very constructive. I see you have done a lot of work since that meeting. I have had a chance to review some of it.

I am looking forward to further discussion of it at this meeting today and the work that you have accomplished. Bill, thank you for your terrific leadership along the way.

I also want to thank our friend, Hank Paulson, for joining us today. We need to officially swear you in, Mr. Paulson. So if you would please rise, I will swear you in and administer the oath.

(Whereupon, Henry Mr. Paulson, Jr. was duly sworn as a member of the President's Export Council.)

SECRETARY EVANS: Congratulations to you, Mr. Paulson.

(Applause)

SECRETARY EVANS: I do not think any of the members of Congress have joined us today. I know that Congressman Wu, I think, was planning on stopping by, and also Chip Pickering. If they come in, or others come in, I will acknowledge them when they do.

I think Hector is -- hi, Hector. Great to see you. I didn't see you, sorry, down there at the end. Hector and I have been traveling across the country together talking about this economy and small businesses. So, thank you for your ongoing great work as the Administrator of the Small Business Administration.

I also want to thank my friend, Jim Morgan, who is serving at Bill's right side, right hand, and is Vice Chairman of this council, and also doing a very terrific job.

You are a tremendous asset to this project. I know I have said that before, but I want to reinforce that because as I look around this table and this group of individuals, I know that you share the values of the President and America, the values of hard work, faith, integrity, and perseverance in giving back to your country and serving your country. So let me just say how much I appreciate that and how we need that more than ever right now.

We have an economy that is certainly snapping back. In fact, the signs are very constructive. All of the indicators are headed in the right direction, shall I say. Economic growth in the second half of 2003 was the fastest that it has been in 20 years at 6.1 percent.

It was a remarkable six-month period. Most of the private economists would tell you that in 2004, also, we should see growth in the range of 4 to 4.7 percent. Real disposable income for the year was up 4.8 percent, a very important number to the American people, families all across this country.

We have gone six successive months now of creating jobs. We have created some 364,000 jobs in the last six months. We have seen unemployment, which peaked as 6.3 percent, now decline to 5.6 percent. We saw fourth quarter exports grow by some 21 percent, which was also very encouraging to see the tremendous export growth in the fourth quarter, and productivity for the year was remarkable.

The 5.3 percent productivity growth is fabulous. It shows that our workers in America are the best in the world. We can out-perform any workers, anywhere. We are going to be successful as we continue to move into this global economy. So, there are lots of good economic signs, lots of good indicators.

We have more work to do. We all know that. But I think when you consider the numbers that I have recited, plus inflation is in check, plus interest rates are at historic lows, 45-year lows, the economy is certainly poised for long-term, sustained economic growth and I know we will get there with your help.

Before we get into today's deliberations, I would like to just talk briefly about three of the issues that were brought to this council's attention, the first being China, as the Chairman has said. I certainly look forward to being with you in China later in the year when we can have certainly an in-depth discussion and review about China being integrated into the global economy.

We are all aware of the rapid growth in the country of China. We are also all aware of how important it is that we make it clear to China that we do not mind competing, we like to compete, but it is going to be on a level playing field.

We are all going to play by the same rules and we are going to enforce our trade agreements. We are going to expect them to enforce the trade agreements. Intellectual property rights is an area that we are certainly very focused on right now and expecting to see results.

So I look forward to our fact-finding trip to China in June and doing all we can to continue to expand our exports to China. Exports to China

is the fast-growing export market that we have right now in this country, so that is a good sign.

Liberalizing services. We heard you loud and clear. We think it should be, and is, in fact, a top priority for this administration. Ambassador Zoellick is pursuing it aggressively through all trade agreements that we are negotiating, particularly in the Doha Round. We are working very, very hard to move the Doha Round WTO process forward.

We have had ongoing discussions with other trade representatives around the world, as well as the head of the WTO about the importance of not letting this process slow down or lose this opportunity to expand free trade around the world, particularly in the area of services.

Finally, we talked a lot about corporate stewardship, which is so important for us to continue to shine a spotlight on. You have done, I think, a terrific job on helping on that front.

I was pleased to be able to announce three corporate stewardship awards this last December along with the Chamber of Commerce where we spotlight companies that are not only looking at the bottom line on the financial statement, but looking at the bottom line in the communities in which they operate and making sure that their companies are integrated in the community and leading to a better quality of life for the people in their communities, or in their neighborhoods, or in their regions of the country or the world in which we operate.

We are going to continue to work with Congress to enhance and expand international trade. We know that this world is rapidly becoming more integrated. We understand that we need to lead the global economy. We need to continue to articulate around the world the kind of policies, economic policies, that have worked for us here in America.

We continue to be the global economic leader in the world. It is because of the kind of economic policies, regulatory policies, trade policies that we have pursued, and we need to continue to impress other countries or impress upon other countries what has worked for us.

Last winter, I asked Under Secretary Grant Aldonas to take a comprehensive look at the manufacturing sector. This would have been the winter of 2002 and 2003. We traveled all across America, talked to many of you. Thank you for your participation in that. We listened and we heard a powerful message from the manufacturing sector.

In fact, I would say from just the job creation sector of our country, which is the private sector. That is where the jobs are created. All we can do here is try and establish policies and create an environment that it makes it easier for the private sector to create jobs here in America, and not harder.

Out of that year or so review and town hall meetings all across America, certainly at the top of the list was implementing the President's jobs and growth agenda, which is to make tax cuts permanent, drive health care costs down, eliminate frivolous and junk lawsuits, expand trade, open up markets around the world while maintaining a level playing field for the good workers here in America, providing available and affordable energy for our businesses and our families across America, and also, importantly, eliminating and getting rid of the excessive burden of regulations and reporting that will really handicap our entire private sector, and particularly, disproportionately, to small business owners, which is where the real job creators of our society are.

In addition to that, we are going to move forward on setting up an Office of Industrial Analysis so we can continue to provide the kind of data that allows us to make smart policy decisions. We talk about establishing a President's Manufacturing Council so that we have people from the private sector that we are listening to on an ongoing basis. We have beefed up our Compliance Office at the Department of Commerce to make sure that other countries are complying with their trade agreements.

We have also beefed up our Enforcement Division within the Department of Commerce to put more resources behind enforcing our trade laws. We are also continuing the process of interviewing for an Assistant Secretary of Manufacturing and Services so we have a point person that will be coordinating across all departments and all agencies to bring the resources together that will improve the environment for job creation here in America. I want to thank Grant for his terrific work on that.

There is one other topic I would like to bring before this body, and I would like for you to consider forming a special subcommittee, and that would be export issues relating to nanotechnology or the nanotechnology industry, obviously an emerging industry.

Obviously, we have got a leadership position here in the world right now and we ought to, I think, look very hard at what it is we do to maintain that global leadership position. So, I would hope that you would take a hard look at this.

Everybody talks about, where is the future economy, and where are the jobs going to be created? It seems to me like this is one area where we can look forward to many, many, many jobs being created. So, I think we ought to be out in front of this and taking a very hard look at it. So, if you would give that your consideration, I would appreciate it.

Again, thank you for all that you do to serve your country. I know this is not a high-paying job you are doing here, so I appreciate you all being here and understanding that you are here because you care about America and you want to serve not only this country, but provide a very important service to our President.

So, I thank you on behalf of him. Having said that, I would like to turn the mic over now for a few moments to my friend Grant, who will talk about whatever he wants to talk about.

(Laughter)

SECRETARY EVANS: I always give him free reign at it.

OVERVIEW OF THE PRESIDENT'S MANUFACTURING INITIATIVE

By Honorable Grant Aldonas

Under Secretary for International Trade

MR. ALDONAS: Thank you, Mr. Secretary, thank you, Mr. Marriott, and thank you, Jim. I very much appreciate the opportunity.

A couple of things a little more on the housekeeping front before I talk a little bit about the manufacturing report.

The first item is that the Trade Promotion Coordinating Committee, which was traded originally under an executive order under Bush 41, and then Senator Sarbanes really drove through as a legislative initiative to keep us focused on trade promotion, requires us to publish each year a report about our export promotion activities and a sense of direction of where we need to be going next.

One of the things I would like to do is take the draft that we have in hand and use the PEC to give us some advice about it. You will see where we think the priorities are, where we had been spending the money in the past. I think it would be really helpful to have this group and have the staff take a hard look at what we have got here and use you guys as a sounding board on this.

This is a really important initiative. It certainly does set the direction, even down to the levels of spending that we put into, whether it is Ex-Im, whether it is the export promotion activities at Commerce, or the Agriculture Department, certainly in terms of the activities that Hector gets involved in on behalf of small business exports at SBA.

This report always is the principal vehicle for the Secretary's testimony once a year in front of the Banking Committee and the House International Relations Committee, which do oversight on export promotion. It really does become, kind of, our bible.

So what I would like to do, is take the draft we have in hand, submit it to the PEC, and see if we could get some comments back about the directions we ought to be headed.

The second thing is, in preparation for the Secretary's meeting with Vice Premier Wu Yi in April, Joe Setshiner, who is Deputy USTR, and I will be going to China next week to have a long conversation with our friends. A part of that conversation is going to be based on the PEC's letter.

We are taking that as an indication of our willingness, both in the business community and the government, to embrace a trade relationship with China, but also to lay out what we think the ground rules are.

I think a large part of this conversation on which I base the terms of the PEC's letter is really asking the leadership in China whether we are engaged in what I would describe as a shared enterprise.

Do we both see the direction of the trading relationship the same way, the things that we need to do in our trade relationship, as well as what we have to do domestically to ensure that the trade can grow?

Certainly from our perspective, trying to encourage China's process of shifting toward a market economy can provide profound benefits, not only in terms of economic growth, but also in terms of leveling the playing field. So, that is sort of the nature of the conversation. I appreciate what the PEC has done in providing a letter to the President.

Separately, I think if there are items that I should be raising, I would like to hear about those from the PEC even now, because there is no doubt that this is the crunch point. You know how this process works. We will try and narrow the issues as much as possible so the boss can close, I think, is the way this process is going to work.

So this is probably the hard negotiating session in advance of what we hope was a successful meeting in April. But the real message is, you have to come prepared to do business on these issues. If not, it may not be worth having the meeting, in part because we have got to make sure this is on the right course.

As you know, the atmosphere on trade is sulfuric at this point. We do not need a failure, we need a success, frankly, in this most important trading relationship as they are growing and we are growing as players in the world economy. So, that is the message that I will be taking forward for the Secretary and for the President.

And certainly if there are other views that ought to be taken from the PEC, knowing that you are going to be there in June with the Secretary, I think I would like to solicit the opportunity for everybody to make their views known so I can carry those with me next week.

Turning to manufacturing, probably the first and most important thing to do is underscore that the approach we took was one that was generated by the Secretary and the President, who was one of saying, plainly, our manufacturing sector had gone through some very significant challenges.

They started well in advance of the recession of the rest of the economy. All of you in manufacturing know that. The economic conditions at the end of the 1990s had a couple of different effects, certainly, in terms of the international playing field, the lack of growth in our principal export markets. It put a hard hit on what had always been a strong advantage from the point of view of the American manufacturing sector.

At the same time, we saw demand shrink abroad due to the Asian financial crisis. Then, of course, as our economy went into a recession, what we saw was the rest of the economies in the world, rather than acting as a counterweight as they oftentimes had in the past, instead, at this point they were reinforcing the downturn or trailing us into the recession.

Beyond that, there is significant structural changes going on throughout the world. I would say they are driven mostly by technology, but I do not want to ignore the fact that the end of the cold war meant there was an awful lot of additional capacity brought on the market.

As those walls fell down, it also meant that a lot of capacity that otherwise was not justified if it was a global market was going to be brought in. There was going to be pressure on pricing, power, all the sorts of things that I know you guys have faced in business.

And the last thing certainly is the success of our trade policy combined with technology in terms of trying to create a global market. All that creates new challenges that we have to face. As we went across the country to 23 cities, 24 cities and talked with manufacturers, those were amply reflected.

If I could distill it, though, what I found most fascinating was at a hearing that Olympia Snowe had in Maine, she had a panel of nine manufacturers that followed our discussion from a government perspective about the challenges facing manufacturing.

While there were a lot of concerns registered about what was going on internationally, and certainly about the competition with China, India, and a number of other low-cost providers, low-wage locations, when Senator Snowe asked each one of the members of that manufacturing panel what she could do as their Senator in Washington, to a person, each one of them named something that we have under our control in the United States. It might be energy costs, it might be the fact that our corporate tax rate is higher than Sweden's, it might be the fact that we have provisions in the Tax Code that penalize our best competitors internationally, it might be the fact that we don't have an energy policy consistent with the President's proposals that would both add conservation as well as add new sources of supply, that we had not dealt with the problem of tort reform, that we still had to grapple with the issue of health care costs that ate away at manufacturers' productivity on an annual basis. Those were the sorts of issues they named.

So, what was fascinating about the discussion, and made optimistic, in one sense, is what manufacturers themselves were saying was, we control our own destiny. This is not a situation in a global economy where we do not control the levers that can make us competitive and make us an attractive place to invest in manufacturing.

The other thing I want to share, particularly because Mr. Marriott is our chair, is that in terms of the recommendations, it also will not surprise you that what manufacturers were asking for were economic policies that would serve the entire economy.

This was not something where, as we talked with manufacturers, that they said, we need things that are manufacturing specific. They said things like, we need to encourage innovation for everybody.

They said, we have got to have tax cuts that are permanent, in part, because it is not just demand in the manufacturing sector that drives growth in the manufacturing sector. It is demand in the services sector, it is demand in agriculture, it is really across the board.

So, what was helpful and sustaining about the advice that we got from manufacturers as we went across the country, is what they were articulating was a program about how to make the economy as a whole more competitive.

That was what was most helpful, frankly, and what we took back from manufacturers, because as we go, as you know all things do, back to talk with our friends from Congress, part of what you have to say is, you know, we did listen to manufacturers, and here is their agenda. That agenda is a good one for the entire American economy.

Now, with that, let me shift just briefly to some of the recommendations. First and foremost, it was creating the conditions for economic growth. Part of that were fundamental issues of tax policy.

Also, importantly, what manufacturers were recommending was that we had to make sure that we were taking the case to our trading partners as well, that what we had not seen in Europe and Japan were the corresponding policies that would increase growth there.

The good news is that the manufacturing report itself has started a process of working with our trading partners, first of all, among the NAFTA trading partners, where it has already become a part of our discussions, but also increasingly with Europe.

I got a letter yesterday from my counterpart on the Transatlantic Business Dialogue saying they welcome an initiative that would get both us and Europe talking about these same things, of eliminating the sclerosis in both of our economies so that we could prosper in manufacturing and we could continue to encourage innovation. The same thing has been true with Japan.

So in one sense, well beyond what we normally think about as trade barriers, the manufacturing report and a lot of that analysis has generated discussions with our principal trading partners about the sorts of things we have to do to change the business environment in the United States, Europe, Japan, Canada, and Mexico so that we are also increasing markets and our strength in manufacturing as a part of that effort.

Most of what we heard from manufacturers focused on lowering the cost of manufacturing in the United States. The topics are big ones. They have been in front of the Congress for a long time: energy costs, tort reform, health care costs.

A number of good recommendations came out of the process. For example, for small businesses with associated health plans so they can use their bargaining leverage in the marketplace to try and get health care costs, things like that that were really pro-market in terms of the advice we got.

A lot of focus on innovation, the need to increase and expand on the 25 percent increases that the President has promoted since he has been in office in terms of funding R&D in the government, but also making the R&E tax credit permanent for the benefit of manufacturers, as well as service providers, and to think hard about how we restructure the R&E tax credit as well.

As those of you who are in manufacturing know, and I think particularly in this respect of conversation I had with Glen Barton and some of his folks, the truth of the matter is, for most manufacturers who have been in business, anything longer than five years, that R&E credit is meaningless because of the base rules.

If we really want to drive innovation and try to make sure it is available, whether it is to Boeing, or to Cat, or to some of the other big manufacturers, we are going to have to reform the R&E credit, as well as make it permanent. But the first step is making it permanent, in terms of innovation.

Obviously, a lot was on manufacturers' minds on the international playing field. What I did not hear, I have to stress, particularly given a lot of what has been going on as a part of the public debate, was an interest in putting walls around the country. That was not what I heard from manufacturers in 23 cities.

What they said was, get to the negotiating table, break the barriers down. They applauded the proposal, which I know you guys have supported, which was, we ought to be pursuing total duty elimination as part of the Doha Round.

In every one of our free trade agreements that has to be the benchmark we are trying to achieve for all the negotiations, where maybe in the past in the middle of the Cold War we left more on the negotiating table to make sure the process worked.

The bill has come due and at this point we really have to eliminate all the tariffs if we are going to see a level playing field. Those are the sorts of things that we will carry forward and the sorts of things that manufacturers endorse.

Now, the other point that they endorsed, which I know will resonate with this group, is that at the same time it calls for a very, very tough effort on enforcement.

If I think about China and intellectual property, which I know we have heard from the PEC about, one of the interesting things we heard about is that intellectual property in China is not just an issue of somebody selling pirated CDs on the streets in Beijing.

The more profound effects happen when manufacturers in China essentially get cost-free software that drives a five-axis machine tool for which an American manufacturer is paying $20,000 to $25,000 a pop. It really goes to the bottom line in terms of the intellectual property losses, not simply the things that are sold as consumer products.

That is the issue that we have to tackle with the Chinese, as well as trying to clamp down on what we see in terms of pirated CDs and movies. That is the theft of technology that we really have to go after because it goes to the core of how we compete in the international marketplace.

Lastly, what we heard, frankly, was the need for greater focus inside the U.S. Government. What we heard, if manufacturers described there was a crisis, they described it as a crisis of neglect. They talked about it at all levels of government, and frankly in all three branches, including the courts.

The notion that, in taking individual actions, whether it was a state legislature or whether it was the federal District Court in a tort action, people failed to recognize that the total cost of all the actions that people were imposing on business in America was making this a significantly less attractive place to invest in manufacturing, as well as a significantly less attractive place to invest, period.

So the bottom line was, you had to find a way to grapple with that by providing greater focus in government and advocacy. This was best described for me by a guy from Rockford, who told me that he had been to Washington once, that he had stood on Independence Avenue. He did say that he didn't want to go back, I have got to admit that.

(Laughter)

MR. ALDONAS: But he had been to Washington once. He stood on Independence Avenue at 14th Street, looking up toward the Capitol, looking east. He noticed on his left-hand side he saw a building called the Department of Agriculture. Then he looked on the right-hand side of Independence Avenue and he saw another building and he noticed it was called the Department of Agriculture. As he walked a block down, he saw a third building that was called the Department of Agriculture.

Not to take anything away from the Department of Agriculture, but his question was, why is it so hard for us to create an Assistant Secretary for Manufacturing and Services to look after the rest of the economy? He is not wrong about that. What he was saying is, for too long we have ignored some core drivers in the economy and we have to find a way to provide that focus.

That is what really became a germ of the idea of creating an Assistant Secretary for Manufacturing and Services, creating a President's Manufacturing Council, which is not intended to duplicate what the PEC does, and I would say that, on these issues of competitiveness, we still expect the PEC to weigh in, because you guys are the best competitors we have in the global marketplace. We need to hear from you on these issues as well.

At the same time, we will go after an inter-governmental coordinating committee, not to highlight what is wrong, but look where states are doing good things, whether it is health care in Wisconsin or tort reform elsewhere, to make sure those best practices are available throughout our communities so people understand that we do control our destiny and we can make a difference in terms of trying to create the environment for manufacturing and services in the U.S. economy.

Let me stop there. That is kind of a broad pastiche, I guess, of what we have been doing. I am happy, certainly, to take any questions or thoughts that people have about it as we go through the day. Thank you.

SECRETARY EVANS: Thank you, Grant.

Quickly, I just want to acknowledge Congressman Jay Inslee, who has joined us from Washington, and Congressman Robin Hayes from North Carolina. I thank both of you gentlemen for joining us very, very much. I appreciate it.

CHAIRMAN MARRIOTT: Any questions for Grant?

(No response)

CHAIRMAN MARRIOTT: Thanks, Grant. Very, very good. Nice work.

Before we go into our subcommittee reports, I would like to establish a rule of order. Once the reports have been presented, I will open the floor for comments from the members of the council. Following their comments, I will ask if anyone from the public would like to make any remarks, hopefully keeping them to one or two minutes.

I will begin by calling on Ray Gilmartin, chairman of the Subcommittee on Corporate Stewardship, to give his report.

Ray?

CORPORATE STEWARDSHIP SUBCOMMITTEE REPORT

By Ray Gilmartin, Chairman

* Description of Subcommittee Activities

* Presentation on Corporate Stewardship

MR. GILMARTIN: Thank you, Mr. Chairman, Mr. Secretary. On behalf of my subcommittee colleagues, I am pleased to update you on the status of our Corporate Stewardship Subcommittee's work. My report this morning will be brief, as the subcommittee is not presenting any items for action today.

As you will recall, at our last meeting we approved a letter to the President seeking his support and the preparation of a report that will showcase examples of U.S. corporate stewardship in developing nations.

As you know, we are at a challenging time and gaining recognition of the benefits of trade within the U.S. and with our neighbors in developing nations. The work of the Doha Round, which our Subcommittee on Trade Negotiations will discuss later in the meeting, is critical to building the worldwide consensus for exports and trade.

We believe that one of the benefits of trade to developing nations is the presence of U.S. businesses and U.S. values. Our goal in providing the President with our report is two-fold. First, we want to inform American business and the American public about the positive contributions that U.S. economic engagement is making in the developing world, and therefore inspire more contributions.

Second, we hope to provide developing nations with a better understanding of the positive effect of the presence of U.S. businesses in their country and the impact that it can have on the long-term growth of their economy and on the living standards of their citizens.

So, our subcommittee is now hard at work preparing a report. We have already gathered information from a wide spectrum of companies, representing a good cross-section of industries, geographic locations, and company size.

We provided each of our PEC members the opportunity to provide information on your company's activities. I would like to thank those of you who have provided us with some great case studies.

The examples we have received demonstrate that you believe, like Secretary Evans has said, that a company's true value encompasses not only the profits that we make, but also its contribution to its employees, to its customers, and to the communities in which we reside and to gather evidence of the positive effect that the present American business has had on developing nations. I think this is a very unique approach that we have undertaken that our Chairman, Bill Marriott, has contacted on our behalf the U.S. embassies of 30 developing nations.

To date, we have received an enthusiastic response. Of course, that response was facilitated, I would suggest, by Secretary Evans and Secretary Powell, as well as Bill Marriott, in their efforts in securing the attention and participation of these foreign posts.

So, we believe the information we have received from our embassies will add great value to our report and will differentiate it from existing reports on the subject of corporate stewardship.

I am also pleased to report that we will be including in our report essays on corporate responsibility from two well-respected academics whose writings have had a large impact on corporate thinking.

Dr. Michael Novak of the American Enterprise Institute has agreed to contribute a guest essay to our report, but I am also equally excited to note that Dr. Mike Porter of the Harvard Business School will be contributing an essay on the importance of corporate stewardship abroad. He has done a lot of work in this area.

We are also honored that we will be able to include the contributions of Secretaries Powell and Evans in our report. We have invited other cabinet members represented on the council to contribute as well.

So I would say, with the progress we have made to date, the kind of enthusiastic response that we have gotten, we play to have a report to share with you. I think that will be quite exciting. We will share this with you and transmit it to the President at our next meeting in the fall.

So, thank you for this opportunity to serve. We look forward to delivering our final report.

CHAIRMAN MARRIOTT: Thank you, Ray.

Any comments by any of you? Questions?

(No response)

CHAIRMAN MARRIOTT: Okay.

Now I would like to call upon Henry Paulson, Jr., Vice Chairman of the Subcommittee on Services, to give his report. Michael Eskew could not be here and he asked that Mr. Paulson present in his place.

SERVICES SUBCOMMITTEE REPORT

By Henry M. Paulson, Jr., Vice Chairman

* Description of Subcommittee Activities

MR. PAULSON: Thank you, Bill. Thank you, Mr. Secretary.

As you said, Mike Eskew cannot be here. I am substituting for him. I would like to, before starting, mention that this subcommittee is hard at work also on another issue, which is the issue of trade, tourism, and terrorism. Mike will be making a final report then on the letter at the fall meeting.

* Presentation of Proposed Letter

MR. PAULSON: Now, the major issue for consideration today is a letter on worldwide sourcing, which is a matter of considerable public debate right now around this country.

I am not going to read the letter to you. The letter is, for those of you who have read it, a long letter. It is six pages, single spaced. I think one of the things that we would like comment from you all on, is the length of the letter.

The decision made by those who drafted the letter was that this is a subject of such intense public debate, that it really deserved a comprehensive look. So, this letter goes into a lot of detail, the idea being that it would be a real resource for people.

No one thinks that it is going to end the public discussion, but it is an attempt to really put all of the issues down, all the arguments down in a comprehensive form. Before the meeting, Riley Bechtel mentioned that a number of people felt maybe we should make it shorter, so that is one of the things we can talk about.

Now, as I said, I'm not going to read the letter. Let me just make a couple of points relatively quickly here, because I think they're important.

First of all, this subcommittee feels very, very strongly that worldwide sourcing benefits the U.S. economy in a number of ways. First of all, it ensures that U.S. businesses remain globally competitive, and that is key. It generates follow-on demand. It leads to more economic activity here in the United States. That is key. It also frees up capital to flow into the most productive and efficient uses. So, it clearly leads to the creation of higher value added jobs in the U.S.

Now, the macro benefits of world-wide sourcing are also substantial. It keeps downward pressure on inflation, keeps costs down, keeps costs to consumers, to businesses, even to the government down. It is no doubt that there have been big benefits to the U.S. in terms of the increasing free trade in services because we enjoy a very significant trade surplus in the U.S. in this area.

As a matter of fact, when you look at the numbers, over 22 percent of the jobs in this country either come from international companies that are headquartered here or from foreign companies who are making investments here. It is a big number.

Now, all of that said, and I think one of the reasons why the letter is as long as it is, is that everyone on the subcommittee understands the fact that, as valuable as free and open trade is, it is not without hardship and real human cost. So, it is a tragedy when anyone loses a job, with some of the economic distress experienced by families here.

But we believe the answer to this problem is not raising barriers. I think a large part of the answer are the points that Secretary and Grant Aldonas made earlier, which is pursuing very aggressively the administration's trade agenda and working to open up markets for U.S. companies. So, that has got to be a key part.

The other key part has got to be to focus on education, worker education, worker training. The President has got a very strong program there. I think, as you all know, or at least is emphasized in this letter, the private sector already spends about $70 billion a year on worker training, so the private sector has got a very vital role to play. But there are certainly more things that can be done.

This letter lists a number of innovative ideas and proposals that are not recommendations yet, but they are worthy of further discussion.

So, on that note, let me conclude. Let me say that this is a very serious and important topic. You are looking at a letter that reflects that. It is a lengthy letter.

I think we could go one of two ways. We could go with this letter this length and say, this is a comprehensive statement of the various issues and arguments. It can be a good source going forward.

Or we could look at it and say, listen, we should be able to shorten this and cut it in half. So, if the decision is to shorten it and cut it in half, I think then what we could do is we could have a group redraft it and circulate it very quickly to committee members.

So on that note, Mr. Chairman, I will open it to discussion.

* Council Discussion

CHAIRMAN MARRIOTT: Okay. Any questions, first, for the Services Subcommittee?

(No response)

CHAIRMAN MARRIOTT: Okay. How about the council? Any council members like to comment?

CONGRESSMAN INSLEE: Mr. Chairman?

CHAIRMAN MARRIOTT: Congressman?

CONGRESSMAN INSLEE: Thank you. I represent a small congressional district up north of Seattle. It is very trade-dependent on Microsoft, Boeing. We understand trade up there. I appreciate, actually, the length of this because this is an extremely, extremely complex and important topic to the body politic at the moment.

I would also note that in the chamber of the House of Representatives, actually, verbosity is a virtue, sometimes.

(Laughter)

CONGRESSMAN INSLEE: So, I would just make that general comment.

But let me express just -- and I am not a CEO of any major corporation. My job is listening to about 600,000 people. So I just want to kind of relate to you what I am hearing out in the mainstream of a very, very trade-dependent district. That is, there is extreme anxiety about this issue. Perhaps it goes without saying, but I think it needs to be said.

Well-meaning, highly educated people in tech sectors, folks who have gone through four, and post-graduate degrees, have extreme anguish about the situation where they are now competing internationally with engineers from Russia, and software developers from India, and the like. So, this is of extreme moment to people, both from an intellectual and emotional standpoint.

The reason I mention that is, I think for those who believe in the benefits of trade as I do, and I think everybody in this room does, it is very important on this issue to recognize that anything approaching dismissing that anguish or anxiety, or diminishing them, or essentially trying to intellectualize them away, really is not a successful strategy.

I think we have seen just a little bit of that. Some comments have been made that somehow sort of pooh-pooh the anxiety that this creates in our citizens. That is number one.

So, in developing a pro-trade strategy, it seems to me that we in the trade community have to really recognize that fundamental anxiety, and recognizing it as real, because my folks understand how advanced some of the software designers are in India, and engineers in Russia. They understand that this is a real concern. So, I just make that as a comment.

To that end, I think there is something really, really good in this report, and a couple of things that I think it is a little bit short on that I would suggest.

First off, the effort to really try to suggest we need a comprehensive retraining infrastructure for folks is very important, and one that I am very pleased to see in the report is embracing the idea that our trade adjustment assistance program, which is our fundamental, number-one tenet of dealing with people who are displaced by trade, should apply to those in the service sector as well as manufacturing. It is extremely important.

Adam Smith and I, the Congressman from Seattle, have introduced a bill to exactly that end. I very much appreciate the subcommittee's advancing that type of idea.

But two other things I think we are short on. First, I think we need to have a bolder statement here about the need to be aggressive with our trading partners regarding access to their markets. Let me tell you why I am prompted by saying that.

I read in this morning's paper that Secretary Powell was in India and was talking to an open group about the need to open up Indian markets to our exports to India, which we think there is tremendous potential in that regard with the burgeoning economic middle class in India for our products, including Boeing aircraft, obviously.

The response back from the crowd, at least, was, well, why should we worry about President Bush's electoral problems? Well, not everybody does worry about that, actually, even in this country.

(Laughter)

CONGRESSMAN INSLEE: But that is not the issue for India. India has got to realize, they have to open their markets or we are going to lose the trade debate in the United States as far as openness as well. They need to understand it is in their best interests to start opening their markets so that we can continue on a pro-trade agenda in the United States.

I think, in the context of out-sourcing, it is very important for us to be gladiators for trade, and us getting market access as well, at the same time that we are talking about the out-sourcing thing in general. So I would just suggest, I think there are things we could beef up in that regard to be more aggressive.

The second thing I would suggest is, there are apparently things in our Tax Code which do act, at least to some degree, as incentives to ship jobs overseas. I read in the Wall Street Journal a few months ago of a major financial institution in the United States sort of crowing to Wall Street that they had reduced their obligation to Uncle Sam by several hundred million dollars, if not a billion dollars, by literally moving jobs offshore.

That is not a goal, or I do not believe should be a valid goal, of U.S. tax policy. There are things that do that. Fixing those things is not going to eliminate incentives to have jobs in other, lower-cost countries, but it is one element.

I think it is very important for the U.S. Government to tell citizens that we are going to scrub the U.S. Tax Code and look for things that are incentives for out-sourcing that do not give us the bang for the buck for further policy reasons and eliminate them.

Now, in the FSC debate, we are having a little bit of debate right now about that to design a FSC solution that does remove incentives in that regard. There is a debate right now in the House going on. But there are a lot of other places, too, that I think we need to scrub this situation.

This needs to be a strong message to our citizens that we are not going to use the Tax Code to incentivize moving jobs offshore. I think that is very, very important.

So, those are unsolicited, but sincere, comments, Mr. Chairman. Thank you.

CHAIRMAN MARRIOTT: Thank you very much. Excellent comments.

Anyone else have any comments to make?

SECRETARY EVANS: Yes, I would like to. Congressman, I agree with much of what you say. I could not agree with you more that we do need to be very concerned, very conscious, very sensitive to the anxiety that is in many sectors of our economy today because of this transition that our economy is going through.

We have seen a global economy that continues to become more integrated and more interconnected than anybody really dreamed imaginable, even 5 or 10 years ago. That is something we all must stay very conscious of. I know that Hank made mention of that in his comments.

We need to stay very focused on what it is we do to help those that are going through the transition at this very moment, today, the people that are feeling the pain today.

That is why I also welcome thoughts from this council as to what it is we can do as a country and as Federal Government, state governments, local governments, local communities to help people that are going through the transition. I mean, I think that is number one on the list.

Then you talked--and I could not agree with you more--as the President has said since he arrived here over three years ago, he made very, very forceful remarks to this in Cleveland, Ohio just a week or so ago, how important market access is, opening up markets around the world. That is the key. We must put all of the resources, all of the energy we can into making that very clear to other countries.

As you know, we worked very hard to, one, achieve trade promotion authority, because without the authority to negotiate a trade agreement and open up markets, you do not have a lot of tools to work with. So, I thank all for the support in getting trade promotion authority so you have got the tools so you can begin to work very hard at opening up markets around the world.

Our market is certainly open to others around the world. We have got the lower tariff of any industrialized country. It is time for others to bring down not only their tariff barriers, but non-tariff barriers as well, which are an area that we are going to have to continue to wrestle with.

We are seeing areas in China, for instance, where certain types of standards they are talking about setting for certain sectors of their economy that could disadvantage our companies here in America. That is not right. We have got to be very clear about how that is not right, and not only very clear, when necessary, we need to take action. So, I agree with you wholeheartedly.

We have got to redouble our efforts and do all we can to open up markets around the world. On tax policy, also, I wholeheartedly endorse what you said. We have got to make it so that everybody wants to hire American workers, where people want to invest here in America, foreign companies, multinational companies, small companies, medium-sized companies.

Our responsibility as a government is to create the conditions, create the environment for others to want to hire American workers, which means invest here in America.

A big part of that is tax policy here in America and to make sure we have tax policy that certainly is not encouraging companies to go someplace else, but is putting incentives in place to encourage them to invest right here, as we have been doing, cutting taxes.

And not only cutting taxes across the entire spectrum of our economy, but as part of the manufacturing report. One of the recommendations in the report is to take a very hard, comprehensive look at our tax policy to make sure it is creating the right tax environment for capital being invested here. So, I welcome your very thoughtful comments and agree with what you said.

CHAIRMAN MARRIOTT: Are there any other comments?

Glen?

MR. BARTON: I would just like to add a thought here, also. I think what we are talking about on out-sourcing is really a symptom of the problem. We all have rising costs, either from litigation, health care costs, or a whole host of other kinds of costs that are going up.

The out-sourcing issue is brought into question simply because here is a way that you could offset some of those other rising costs that you have, and you can do it in short order. So, I think the real message we also ought to deliver here is the fact that we have got to go back and address some of these other things as well with a lot of haste.

SECRETARY EVANS: Like tort reform.

MR. BARTON: Yes. Exactly.

SECRETARY EVANS: Like junk lawsuits.

MR. BARTON: Exactly.

SECRETARY EVANS: Listen, when we go around the country and you talk about the job creators that are struggling to create jobs, high on the list is junk, frivolous lawsuits and high insurance premiums that they must pay for product liability here in this country that they do not face in other countries.

The frivolous lawsuits that we have in this country destroy jobs. It kills them. These high health care costs, which are in part driven because of litigation and higher judgments in the whole medical arena, destroys jobs. So, it's some of these other basic areas. It is tax reform. It is bringing down health care costs. It is tort reform.

I cannot tell you how many times I heard, junk, frivolous lawsuits. They are just absolutely killing us. It is not just the judgment. It is, as the insurance goes up, do people want to face that? They know they are going to have to offset that by going someplace else.

MR. BECHTEL: Bill?

CHAIRMAN MARRIOTT: Yes?

MR. BECHTEL: Hank, my suggestion was purely one of brevity. I think there is a very powerful statement here. Maybe there are two documents. One, is a short white paper, the other is a punchier executive summary letter.

MR. GILMARTIN: We can clearly do that. I just read this paragraph on opening up markets abroad. I would agree with the Congressman after reading that that we could make this stronger. We say "keeping markets open abroad."

We should be talking about "opening up markets abroad," and we could make that stronger. So, do people agree that maybe one way to do this is to make a modification or two in this longer paper and then have an executive summary on the top?

CHAIRMAN MARRIOTT: Grant?

MR. ALDONAS: Hank, to be honest with you, your oral summary was right on target. That was the letter. In some respects, the rest of this could be very valuable. In fact, as a white paper, it is designed to stimulate the data. But reinforcing some of the points that Congressman Inslee raised, the Secretary raised, Glen raised, that Riley raised, but that summary that you had in front, those themes are where the focus gets lost in the current letter.

So, if there was an instinct on the part of the membership to distill that so you're right there telling people what the things are, and then supplying the punch behind it in terms of the substance, I think that would be most helpful.

MR. GILMARTIN: I would agree with you.

MS. MANETTA: Grant, I want to add something, too. I think, to the Congressman's point, not only the constituents, the individuals, but also the small businesses and the minority- and women-owned companies, right, because as Hector knows, we are doing a form now with Supercom and the topic of discussion is out-sourcing, you know, because it impacts the small businesses, which is the growth engine of this economy in this country.

So, that is another issue, I think, that needs to be addressed. I want to work with Hector because there are some low-hanging fruits and things that we can quickly demonstrate that can be done to make people feel a little bit better about that.

CHAIRMAN MARRIOTT: Thank you.

Yes, Jim?

MR. MORGAN: I think, in listening, and I've talked to some other people over the last couple of weeks as well, I would encourage us to do a summary letter. I agree with Grant that Hank's was a pretty good summary. So if we got that on tape someplace --

We also might take a look at the white paper with a little different perspective and be sure we've thought about it in terms of the points that the Congressman raised. We may be able to kind of improve that part of it a little bit as well.

I think it is really quite well done and it is a good job. But with it being segregated, we may have a little flexibility to do some things that you could not do when you try to make it do everything. So, that would be my suggestion.

MR. PAULSON: Jim, I like that suggestion because I think we can certainly write something strong here along that market sector.

CHAIRMAN MARRIOTT: I'm also hearing that we ought to address in that short white paper something on tax reform, just whatever, you know.

MR. PAULSON: To me, and we can do whatever you want. If I were voting, I would say tax reform is sort of a different issue.

CHAIRMAN MARRIOTT: About tax policy.

MR. PAULSON: In some ways, the hip bone is connected to the thigh bone and we could end up addressing everything, health care reform, tort reform, and so at least I would opt for really being much punchier in an executive summary and being punchier on opening up markets in some of the Congressman's points.

CHAIRMAN MARRIOTT: Okay. That's fine.

MR. ALDONAS: If I could, just to maybe take issue there just a little bit, Hank. I mean, if I could capture what Congressman Inslee was saying, it could be a simple statement. One of the things we have to do is eliminate the penalties we impose on our best competitors in a global economy. That may be all it needs to say because that, in effect, is what we are doing right now on the Tax Code.

That is the sort of stuff we have to clean out if we want people to continue to invest here and not engage in some of the transactions that frankly the Tax Code forces people to do at this point, which is a sad commentary. I think that's what Congressman Inslee pointed to. We have got to clean that stuff up.

MR. PAULSON: Point well taken.

CHAIRMAN MARRIOTT: Okay.

MR. MORGAN: I wonder. The thing that I thought was interesting in this discussion that has not seemed to come out that I know of, is what is pressuring people to do out-sourcing is the variety of things that are driving the costs here. Somehow, that has not really been captured, at least the things that I have sort of read as sound bytes around it. I don't know what other people's perception is.

CHAIRMAN MARRIOTT: Well, we've touched on them today. We've got health care costs, tort reform.

MR. MORGAN: But I'm talking about --

CHAIRMAN MARRIOTT: Which is costing America more to do business here. Government regulation is a huge expense.

MR. PAULSON: Can I just say one thing on that? You can look at it a couple -- it would be easy to address that, but that seems to imply that if it weren't for that, it is wrong to do out-sourcing.

I think the letter makes the point that, in and of itself, worldwide sourcing is a very good thing for this economy and for this country. So, to me, I would not confuse the two issues. I think that this is one man's view.

I think that there are a lot of things we should be doing in terms of making ourselves more competitive from a manufacturing standpoint, and the tort reform, health care reform, all sorts of costs.

But I think, separate and apart from that, no matter what we do there, we want to have an efficient economy, and worldwide sourcing is a huge benefit. The fact that 350 of the 500 largest companies in the world are global companies that are headquartered here is a huge advantage to this economy.

MR. STALEY: I think we have to be a little careful, too. If you go back to when our economy was booming in the late 1990s, out-sourcing was growing then. International investment was growing then.

So, I agree with Hank. We don't want to make this bad and say, if we resolve the tort reform, if we work on health care -- which I fully support and we really need to do in the United States -- it is still a natural phenomenon that is going on and is going to continue to go on as the world economies grow that we are going to invest and out-source out of the U.S. So, I think we need to be a little careful about suggesting that is the remedy, and then it will go away.

MR. ALDONAS: Could I suggest that we welcome out-sourcing to the United States as a part of this, since we're here to promote our exports? The one thing that it would help capture, in that sense, Hank, is that it is a two-way street.

If you look at our services trade surplus, which I know you guys have -- well, as well as a lot of what we do even in the manufacturing sector -- I'm thinking of IBM's recent contract, $5 billion, with Nokia to provide not only services, but goods, that would help them reshape the IT environment for Nokia, it dwarfs anything that is going to Bangor, India in a single contract.

But to make sure that, in saying out-sourcing is good, we need to make sure we are emphasizing it is benefitting us as well in that direct sense, because we're exporting.

MR. PAULSON: As I read this letter, maybe we could do it more clearly, but I think we make the point in the letter, or the point gets made that we have a very big, positive surplus in this area. So, it is a good thing.

So then is the take-away that we are going to have an executive summary, some of the points that I made early on, and then that we are going to redraft this letter to incorporate the tax point and the importance of more strongly opening trade opportunities overseas?

CHAIRMAN MARRIOTT: That sounds fine.

SECRETARY EVANS: And I think Warren makes a very good point. It's probably in the letter. This is not something new. This has been going on for the last 50 years. But that is not to say that, as the good Congressman said over here, there is a different level of it, there is a different group of it, more anxiety, so we need to do a good job of very clearly explaining it, and the benefits of it.

CHAIRMAN MARRIOTT: Yes.

MS. LEVINE: As a small manufacturer on the border, I appreciate all these initiatives that will help us remain competitive here in the United States. I am great believer of out-sourcing, especially for the border states, with regards to Mexico.

For every job that we put in Mexico, there are five jobs in the United States created. This is a figure given to me by Delphi Corporation that is doing a lot of business around the world.

The issue of frivolous lawsuits hurts us in the border area, especially in the border areas. If we could have some assistance in promoting this, it would be fantastic. We need some assistance.

CHAIRMAN MARRIOTT: Thank you.

Does anybody else have any comments or questions? Yes?

MR. FARIS: I understand the primary thrust that we are trying to do in the letter. It is well-known. But if we're doing six pages and there are those people who are saying, if we solve some of these other problems we wouldn't have the problem, if we don't address it all in the letter, I'm afraid we'll have some that might look at this and just dismiss the whole content by saying, you've missed my problem. You don't understand what I'm dealing with every day with frivolous lawsuits and health care. That is what is costing us jobs.

So, I think somehow there ought to be at least one or two sentences that could be in a six-page letter that addresses the obvious that we are all dealing with now, not taking away from the thrust of what the letter is all about, but identifying the fact that those are critical issues today.

The Congressmen is saying, when people are feeling emotional about an issue, giving them more facts just makes them madder if we do not address the fact that there are all these things that are causing the anger and causing the push-back. Don't address them in the letter.

MR. PAULSON: I would, just to be intellectually pure, I'd have no problem, one person, saying that these are costing us jobs in the letter. I just didn't want to connect and say, if we solved these, we wouldn't have to out-source because out-sourcing is --

MR. FARIS: Sure.

MR. PAULSON: But we could clearly put a sentence or two on that if people want to. The only question is, how long are we going to make the letter, and the letter is about out-sourcing?

SECRETARY EVANS: Yes. Well, I agree with what Jack said. I don't think you need to expand on it. But I think you need to acknowledge it. I mean, you know, you get to the point where if we have zero unemployment in this country, everybody is working, guess what? There is going to be out-sourcing and we're going to need to have others that are providing services back here at home.

But our goal is to get to zero unemployment here. Part of that goal is dealing with issues like frivolous lawsuits, and health care costs, and tax policy. That is not to say that out-sourcing is a bad thing. So, I think acknowledging it in there--it doesn't have to be long, two or three sentences--makes reasonable sense to me.

CHAIRMAN MARRIOTT: Okay.

Yes?

MR. HAYES: One more thing. Mr. Secretary, there are two things I want to mention, briefly. One, is we have a vacuum because we haven't created high-tech, high-energy, high-paying jobs to put our people in -- research and development, using the financial strength of America, our capabilities as manufacturers, to create those jobs and products that go with them and create export markets for, something our tax policy needs to reflect our ability and take advantage of.

The other thing is, offsets by foreign competitors requiring our companies to put jobs overseas to sell that product, that is a terrible barrier that we are not talking about enough.

MR. ALDONAS: That's a fair point.

CHAIRMAN MARRIOTT: Okay. Thank you.

We can move on then. Hank, will you just take what you heard here?

MR. PAULSON: Yes. So what we will do, the question I have is, once we do this, do we need to recirculate it or can we just take the comments and go with it?

CHAIRMAN MARRIOTT: What is your sense, everybody? Is it okay to take it and go?

MR. CONLIN: That would be fine with me.

CHAIRMAN MARRIOTT: Okay. We'll trust you.

(Laughter)

CHAIRMAN MARRIOTT: Okay. Thank you.

We will move on.

I would like to call now on Glen Barton, chairman of the Subcommittee on Technology and Competitiveness.

TECHNOLOGY AND COMPETITIVENESS SUBCOMMITTEE REPORT

By Glen Barton, Chairman

* Description of Subcommittee Activities

MR. BARTON: First off, I am pleased to report this morning on our Technology and Competitiveness Subcommittee. I would have to be the first to admit, our subject probably is a lot less controversial than the one that we just talked about in terms of overall impact, but it does deal with something that has bothered us for a long time--and I will expand on that in a minute--in regard to the impact of unilateral sanctions and what it does at times to our overall competitiveness.

I can also report to you that our group will continue to work on some other trade-related issues and we'll have a report ready by the fall meeting of this group on the subject of education and the importance of education in our overall competitiveness.

* Presentation of Proposed Letter

MR. BARTON: But let me get to the letter that we have prepared for you. Again, I will not go through it, but each of you have a copy in front of you. I would like to make a few comments that maybe will help explain why this letter is important.

As you may know, over the years much of the work the President's Export Council has focused on the need to open foreign markets to improve U.S. competitiveness, and to keep the U.S. market open to imports.

At times, however, there have been other concerns of the PEC, namely, the tendency by policy makers to unilaterally restrict American exports to achieve various foreign policy goals. Even though unilateral sanctions rarely achieve the intended objective, are often counterproductive, and almost always hurt U.S. economic growth and job creation, during the 1990s, U.S. unilateral sanctions were used with great frequency.

For clarity, I am only referring to unilateral sanctions. Multilateral sanctions that include our trading partners have a better track record in that they, too, deny the intended party a right to some of the equipment and technology that they are seeking.

In 1997, PEC was so concerned that it issued a white paper that reported "more than 75 countries now are named as subject to, or under threat of, one or more of some 21 specific sanctions based on 27 target behaviors."

It is hard to believe, I am sure, for many of you, that that meant about half the world's population was the target of some kind of U.S. unilateral sanction. I am pleased to report that, after an extended policy debate led by the business coalition USA Engage, policymakers started to view unilateral sanctions with more causing.

According to a 2002 study by the respected Barry Carter, Georgetown University Law Center, during the period 1997-2001, the United States used fewer unilateral sanctions.

Moreover, the sanctions used were smarter, in that the people involved in terrorism, drug production, and the proliferation of weapons of mass destruction were targeted, not the population of an entire country. Clearly, this was an important and positive change in the way U.S. viewed unilateral sanctions.

However, on September 11, 2001, the world changed for all of us. PEC fully recognizes that the United States must be willing to deploy the full range of tools at its disposal, including economic sanctions, to fight the war on terrorism.

At the same time, we recognize that there are still limitations of broad, poorly targeted unilateral sanctions. Today, policymakers are embracing new, unilateral sanctions against countries like Syria and Burma, while possibly lifting sanctions against Libya and Sudan. There is also legislation pending that would impose unilateral sanctions against Saudi Arabia and enhance the Iran-Libya Sanctions Act.

While not taking a position on specific legislation, the letter that I propose we submit to President Bush discusses the issue of unilateral economic sanctions and recommends that the administration undertake a comprehensive review of U.S. unilateral sanctions policy, weighing the results of previous sanctions in achieving their intended goals against the costs they impose on other U.S. policy objectives, including the impact on the U.S. economy and jobs.

We also ask that the administration review the process by which unilateral sanctions are imposed, both in the executive branch and in Congress.

I would like to thank the members of our Technology and Competitiveness Subcommittee for helping us draft this letter. I think we have support from nearly every one of the parties that were active in that activity. I submit this letter to you for your consideration.

* Council Discussion

CHAIRMAN MARRIOTT: Thank you very much.

Any comments, questions?

(No response)

CHAIRMAN MARRIOTT: There seems to be a consensus. We will move it on to the Secretary of Commerce and he can forward it to the administration.

MR. BARTON: Thank you.

CHAIRMAN MARRIOTT: Thank you and your subcommittee very much.

Now I will call on Warren Staley, Vice Chairman of the Subcommittee on Trade Promotion. Raymond is the chairman, but he is not here today. Mr. Staley will present.

TRADE PROMOTION AND NEGOTIATIONS SUBCOMMITTEE REPORT

By Warren Staley, Vice Chairman

* Description of Subcommittee Activities

* Presentation of Proposed Letter

MR. STALEY: Thank you, Mr. Chairman, Mr. Secretary.

Our subcommittee has two letters to present this morning, so I will talk about the first and then see if there is discussion, and then go to the second.

The council is encouraging continued trade liberalization efforts. That is what is behind the paper on IPR, intellectual property rights, and investor protection. We think it very important that protections set out in previous agreements are reinforced in these two areas.

On IPR, I think we all know it is a global problem of infringement. It continues to grow. The NAM, National Association of Manufacturers, estimates that 5 to 7 percent of trade every year is in counterfeited or pirated products. There are several very severely impacted industries, and we listed those and we were specific in our paper about that.

Then moving to investor protections and especially international arbitration, for U.S. companies to maintain competitiveness in our global economy, the ability to establish and maintain investments overseas is really critical to all of us in business.

Free flow of capital across borders is vital. Equally important is the flow of IP across borders around the world. Strong investment protections and trade agreements reduce the risk that foreign governments will impose arbitrary measures.

We are concerned that investor protection in some of the FTAs may be weakened in order to satisfy concerns on the part of a few U.S. Government agencies. We ask that the administration not abandon provisions to ensure U.S. investors access to international arbitration. We also ask that the administration not move backward by placing limits on investors to state arbitration. So, that is the end of the comments on the first letter, Mr. Chairman.

* Council Discussion

CHAIRMAN MARRIOTT: Any comments, questions?

(No response)

CHAIRMAN MARRIOTT: Okay. We will move that one forward then and move on to the next.

MR. STALEY: Thank you, Mr. Chairman.

* Presentation of Proposed Letter

MR. STALEY: The second, was comments on post-Cancun issues, mainly around agriculture. The council agrees with USTR Representative Zoellick's initiative to encourage world leaders to embrace, with a great sense of urgency, a fresh approach for the Doha Round.

The council is suggesting four steps:

1) The first, is to proceed with the negotiations on trade facilitation with regard to the Singapore issues, as they are called, while further exploring other areas around those discussions.

2) We support the ambitious agriculture agreement and call on developed, as well as developing, countries to do likewise, specifically that the U.S. should reduce trade-distorting measures of our U.S. agriculture policy.

3) The U.S. continue leadership by living up to WTO commitments and thereby have the absolute right to ask others to follow suit.

4) Lastly, that the Doha development agenda should set realistic expectations, and the plan to include development, training, and national policy reforms as a part of the Doha agreement.

End of comments on that letter, Mr. Chairman.

CHAIRMAN MARRIOTT: Thank you.

* Council Discussion

CHAIRMAN MARRIOTT: Any comments, questions, suggestions? Did you want to say something?

MR. ALDONAS: Yes. Just as a technical matter, Warren. In the first bullet in the letter, on the one hand, you are recommending negotiations and trade facilitation while exploring negotiations on investment.

I just wonder if, maybe on that second "negotiations," we could find a more felicitous phrase, because I think the distinction you are trying to draw is, let's get to the table on trade facilitation.

This is going to have a real impact for the benefit of American manufacturers and service providers. These other things, we're going to have to figure out how to make progress on, but they're not really candidates now for negotiations, is what I hear you saying.

MR. STALEY: That was the intent.

MR. ALDONAS: Yes. So if there is a way of maybe finding a synonym or a substitute for that second negotiation, in that sense it might clarify what you guys are really after, which is a distinction between moving forward in the negotiations on trade facilitation and taking the time to figure out how to make progress on the other three.

MR. BARTON: Thank you.

CHAIRMAN MARRIOTT: Okay. We can make that change. Okay.

MR. STALEY: We'll do that.

CHAIRMAN MARRIOTT: Okay.

Any other comments or questions?

(No response)

CHAIRMAN MARRIOTT: We'll move that one forward then.

The President's Export Council has a separately chartered subcommittee on Export Administration. Brian Ferguson is the chairman, but he could not be here. But Ken Juster, Under Secretary of Commerce for the Bureau of Industry and Security, will give us a report on the activities.

EXPORT ADMINISTRATION SUBCOMMITTEE REPORT

By Honorable Kenneth I. Juster

Under Secretary for Industry and Security

MR. JUSTER: Thank you very much. I am pleased to be here on behalf of our chairman, Brian Ferguson, to report on the President's Export Council's Subcommittee on Export Administration, which is known by the acronym PECSEA.

Since the last meeting of the President's Export Council in October of 2003, the PECSEA has convened twice in Washington, DC, once on November 5, 2003, and again on February 25 of this year.

Chairman Ferguson and I have both been very pleased with the significant progress we have made at these meetings.

As you know, the PECSEA is responsible for assisting the President and the Secretary of Commerce in developing export control policy that both strengthens national security and facilitates trade.

With this goal in mind, on November 5, the chairman announced the creation of three working subgroups within the PECSEA: one to address the impact of technological developments on existing controls, our Technology subgroup; a second, to address foreign availability and the export controls of other countries, our Foreign Availability subgroup; and the third, to address security and economic issues, our Security subgroup.

At the February 25 meeting of the PECSEA, the subgroups provided progress reports on their work. All the subgroups are expected to produce draft reports later this year, and we are hopeful that the final reports will be available for your review the next time that you meet.

Dealing effectively with these issues is of critical importance to a successful export control process, so I would like to briefly describe the work of each of the three subgroups.

First, the Technology subgroup is expected to produce a draft report that will address the effect of the existing export control regulations on the sales and technology transfers of U.S. companies and the potential consequences of companies moving some of their activities overseas.

In particular, the technology subgroup has discussed the perceived disconnect between the global dispersion of technology and our existing export control regime. In many ways, the business models of the past no longer provide an adequate foundation for commercial operations in today's global market.

Our regulations must keep pace with these changes. That is why we are diligently working to both update and streamline the regulations. For instance, we are moving to improve the existing procedures for a company's internal technology transfers.

A company should be able to freely transfer technology internally if it adopts strong protections against the unauthorized release of that technology.

Second, the Foreign Availability subgroup will analyze the disparate implementation by foreign countries of multilateral export controls and provide suggestions for U.S. policy responses. It is important to improve the way in which we consider the existence of the foreign availability of high-technology goods in our export control licensing decisions.

The increase in foreign availability of items that we control means that this issue will become increasingly important in determining the utility and effectiveness of our export controls.

In an effort to highlight the importance of foreign availability, the Commerce Department is developing guidance for U.S. exporters in providing information to us supporting claims of foreign availability.

Finally, the Security subgroup will analyze the current distinction between State Department and Commerce Department export control jurisdiction. This division can have a major commercial impact on certain industries, especially if items are considered as defense articles and therefore cannot be exported to certain countries.

Much more so today than in the past, the U.S. military depends upon commercial suppliers for its procurements. Although U.S. companies are very eager to supply items for our national defense, they may be less willing to do so if supplying such items to the U.S. military results in those items being controlled as defense articles.

Accordingly, members of the administration are actively discussing the standards we apply for determining whether items are classified as defense articles or dual use items, and how to apply these standards in a consistent manner.

In fact, we have had a number of cases recently involving the aerospace industry in which we have addressed these issues, and I hope have reached conclusions that have been favorable to our ability to continue airline operations without having a negative impact on our national security.

It is also imperative that U.S. export controls focus on items of greatest concern. The United States has a critical national security interest in the economic strength of its technology suppliers. Our national security is not well served by simply denying every export license application for a sensitive item.

If U.S. companies are unable to compete in important growth markets and, therefore, are forced to exit those product lines, the United States loses in terms of both our national security and our economic interests.

We must, therefore, not lose sight of the impact of export controls on the defense industrial base in this country, and that is an issue that we are continually examining.

Let me conclude by saying that we are confident that the PECSEA will provide valuable information on each of these issues, and I would personally like to thank Chairman Ferguson for his commitment and hard work. We will look forward to hearing from the PECSEA subgroups at our next meeting in May.

I would be glad to take any questions you may have on those subjects.

CHAIRMAN MARRIOTT: Questions or comments?

(No response)

CHAIRMAN MARRIOTT: Thank you very much, Ken.

MR. JUSTER: Thank you.

CHAIRMAN MARRIOTT: I would like to commend all the subcommittees for their hard work that has gone into the drafting of these letters of recommendation.

GENERAL DISCUSSION

CHAIRMAN MARRIOTT: I would open up the floor now for any general comments anybody would care to make.

SECRETARY EVANS: Just let me acknowledge Congressman Phil English who has joined us. Thank you, Congressman, for joining us.

CONGRESSMAN ENGLISH: Thank you, Mr. Secretary. It's a privilege.

CHAIRMAN MARRIOTT: Comments from you, Mr. Secretary?

SECRETARY EVANS: No. I want to make sure Phil has a chance to say anything he'd like to say. We're winding up our meeting here.

CONGRESSMAN ENGLISH: I appreciate it. I will defer. Thank you.

SECRETARY EVANS: Okay. Thank you.

This has been a terrific session. What I'd just like to say, is to compliment all of you for the work, the energy, the time, the thought that's going into, I think, some very outstanding presentations. I know how much the President appreciates your work.

This is a critical period to be discussing these issues and have this thoughtful group advising not only the Department of Commerce, but the President. It is certainly very, very helpful and meaningful. So, thank you very much. Again, Mr. Chairman, thank you for your great leadership here.

CHAIRMAN MARRIOTT: Thank you.

Our next meeting will be in the fall, probably September. We'll let you know as soon as we get the date.

Thank you, Mr. Secretary. Thank all of you for participating today.

Since there doesn't seem to be any more business, I'll entertain a motion to adjourn.

MR. GILMARTIN: So moved.

VOICE: Second.

CHAIRMAN MARRIOTT: All in favor?

(Chorus of Ayes)

CHAIRMAN MARRIOTT: Nobody objects. We are adjourned.

(Whereupon, at 10:57 a.m. the meeting was concluded.)

C E R T I F I C A T E

This is to certify that the foregoing proceedings of a meeting of the President's Export Council, U.S. Department of Commerce, held on Wednesday, March 17, 2004 in Washington, DC, was transcribed as herein appears, and this is the original of transcript thereof.

WILLIAM J. MOFFITT

Official Court Reporter

My Commission expires: 5-14-04