PRESIDENT'S EXPORT COUNCIL
The Ronald Reagan Building International Trade Center
Washington, D.C.
November 10, 1998

CHAIRMAN'S OPENING REMARKS
The meeting of the President's Export Council (PEC) was convened at 10:10 a.m. and was presided by Chairman C. Michael Armstrong. A formal welcome was extended to the new members of the Council who were officially sworn-in. They included: F. Duane Ackerman of Bell South Corporation; Philip M. Condit of the Boeing Company; Gary T. DiCamillo of Polaroid Corporation; Lodewijk J.R. deVink of Warner-Lambert; John P. Manning of Boston Capital Corporation; Ernest S. Micek of Cargill, Inc.; Leo F. Mullin of Delta Air Lines, Inc.; and Jonathan M. Tisch of Loews Hotels.

Chairman Armstrong began his opening remarks by recognizing that this year marked the 25th Anniversary of the PEC, and that the Council will face opportunities and challenges in the next two years ahead. He mentioned that one of the challenges facing the PEC will be on exports that have been providing a third of the growth of the U.S. GDP and have now gone flat, which is not a good harbinger for the future of the United States.
 

PRIORITIES OF THE PEC
Chairman Armstrong outlined the priorities of activities for next two years that he hopes will bring the PEC closer to its goal of forging a new national consensus on trade for the 21st Century. The PEC priorities are as followed:

Chairman Armstrong concluded his opening remarks by noting that the PEC is the premiere advisory council to the President on trade matters. The PEC should create a legacy in promoting the long-term health of the economy, especially as it takes the lead in this important responsibility.

Chairman Armstrong then formally introduced the Secretary of Commerce William M. Daley to give welcoming remarks and an overview on trade.
 

TRADE OVERVIEW
Secretary of Commerce William M. Daley thanked Chairman Armstrong for his continued leadership of the PEC and welcomed the new members to the Council. He then proceeded with an overview on trade and the impact the deepening financial crisis is having on global economies. Secretary Daley said that the Administration and the Commerce Department are working hard to make sure that the financial crisis of 1998 does not become a trade crisis in 1999. Exports to many parts of the world are substantially down, especially Asia and Russia. Exports are also slowing down to Canada, Mexico, as well as to the Middle East, and could also slow some economies in Europe that are even more dependent than the United States on trade with some of the countries which are being hardest hit. In the United States, geographically, California and the rest of the west have been hardest hit with the decrease in exports, and then the Midwest. The impact on other parts and other regions of the United States may grow as this crisis spreads, possibly, to Latin America. In the meantime, the decline in U.S. exports to Korea has leveled off after several months of steady decline, and the Japanese currency seems to be stabilizing. Secretary Daley said that it will take longer time for these economies to recover, and the goal must be to prevent this financial crisis from becoming a serious trade crisis in the United States.

With regard to imports, there is not a lot that the United States can do, or may want to do, to stop them from coming into this country. In fact, the United States can help promote world growth by absorbing some imports from troubled economies. Other industrialized powers, such as Europe, must also do the same. However, Secretary Daley said that the United States will not, and cannot, stand by and watch U.S. workers and communities bear the brunt of problematic policies in other countries. He cited, for example, the steel industry which has filed a number of anti-dumping cases. If other industries follow suit, the United States will have to take a closer look at the merits of the cases and react accordingly.

On the export side, Secretary Daley said that the United States will be taking a very aggressive stand to make sure that other countries, including China and Japan, comply with the many trade agreements which they have reached with this country. However, industry is needed to help in reporting trade barriers that continue to exist to the people at the Commerce Department who monitor these situations.

Secretary Daley talked about the anti-bribery legislation that was recently passed by Congress which allows the United States to move forward on the anti-bribery agreement that was signed with over thirty nations. The United States is pushing the other nations to ratify the agreement in their legislatures and hopes that those countries do not slide back on the promises that were made. At a recent Transatlantic Business Dialogue meeting, which the Secretary said he had attended in Charlotte, very few European countries had yet to ratify the anti-bribery agreement although European Union officials were positive about their desire to see this legislation passed in their individual nations.

On the fast track issue, Secretary Daley said that the business community and those in government need to give a lot of thought on some form of fast track in 1999 if the United States wants to continue to try to hold the center on trade issues. He does not feel that the American people are in the center on trade because Americans do not equate imports with lower prices or more choices for them as consumers. The Administration, instead of fighting to convince Americans that fast track is good, needs to convince them of the end result. The Administration and industries who support fast track must take this case to the American people and reach into the classrooms to educate them on this important issue.

Secretary Daley then opened a dialogue with the PEC members by asking, "What can we do to prevent this year's financial crisis from turning into next year's trade crisis? How do we lead the world to more open markets without turning ourselves into the dumping ground of products for many countries. Do we need to rethink the tools at our disposal so we can be more aggressive? How do we develop a national consensus for trade in this country, and how do we bring labor and environment into the equation?"

Gary DiCamillo of Polaroid Corporation wanted to hear Secretary Daley's view on how the Administration sees the new Congress affecting trade initiatives over the next couple of years.
Secretary Daley said that he feels that there is an attempt by the Administration to do more bipartisanship in lieu of the shrinking majority in Congress. It still remains to be seen what the priorities of the Majority leadership will be, and it may be more difficult to put together a consensus on trade issues.

Frank Savage of Alliance Capital Management International then asked Secretary Daley where the Administration is on fast track, given the intervention that has taken place recently in Congress. Secretary Daley referred back to his earlier remarks on how fast track can strengthen the economy, since the goal is not to weakens it. Historically, fast track has been used to try to open markets, and, if that is still the primary goal of fast track, then thought has to be given in the negotiating process on how best to achieve the end result, which is that open markets will strengthen the U.S. economy, not weaken it. The debate on fast track, at this point, needs to be taken to the American people so that they are educated on this issue.

George Becker of United Steelworkers of America asked if the Administration is going take another run at fast track in 1999, or will fast track be packaged differently? Chairman Armstrong suggested that may be the name "fast track" should be changed since the word alone connotes all the criticisms and problems that cannot be ignored and cannot be sustained in future discussions. Secretary Daley responded that some people did not believe that the Administration adequately dealt with environmental and labor issues when getting NAFTA passed. However, Secretary Daley said that President Clinton did what no other President had ever done, and that was to address environmental and labor issues in the context of trade. In the world economic situation, those issues need to be discussed. Secretary Daley then said the he would defer this question further to United States Trade Representative Charlene Barshefsky when she comes to address the PEC members later that morning.

Michael Jordan of CBS wanted to know about the Administration's position on the status of China. Secretary Daley said that so far no commercially, meaningful proposal has been put forward in the area of market access and that it is imperative for the United States to do so. Historically, China has not had an open market, although there has been tremendous investment by U.S. companies to the benefit of the Chinese and, to a degree, to the benefit of the companies. Imports from China have risen dramatically over the last year and the United States remains very adamant that the Chinese market must be open to receive the same reciprocity. The Administration would like to see China in the WTO and live by the same rules.
 

STATE OF THE GLOBAL ECONOMY/ECONOMIC ARCHITECTURE
Secretary of the Treasury Robert E. Rubin arrived and was introduced to the PEC members. After a few informal remarks, Secretary Rubin began an open dialogue with the members. With regard to the Asian financial crisis, Secretary Rubin described the difficult and threatening situation that erupted in South Korea in December 1997, but he said that in the last six to eight weeks the crisis has been a bit calmer and that Japan has shown some important, positive developments toward IMF funding and banking reform legislation. Now, the prime focus of economic policy is from inflation to growth and stability. In Thailand, Korea, and the other countries that are facing difficulties, interest rates have come down substantially and currencies have depreciated, but they still have declining GDPs. There will be enormous challenges and long periods of difficulty for those countries as they work to get back on track. Secretary Rubin said that the best course of action right now is for Japan to continue to implement their banking legislation; for the European countries to continue to promote growth; for the United States to continue to stay on a policy regime that promotes growth as effectively as possible; and, for the countries who are facing difficulties to stay on their reform regimes. Overcoming this financial crisis will take time in order to reestablish stability and growth in the troubled countries. Secretary Rubin said that in his judgment, there is no question that the economic self interest of the United States is enormously at stake. The concern right now is with Brazil and Secretary Rubin's only statement on Brazil is what has already been publicly said: "that whatever happens in Brazil will have very substantial effects on this hemisphere and, therefore, on the United States."

The market-based economic philosophy which has served the United States well and has provided extraordinarily good economic conditions, has also served the world well. However, the economic crisis of the last year has created an opening for those that are opposed to that point of view. Opposing points of view are being expressed in both industrial and developing countries such as Malaysia. However, Secretary Rubin said that it is in the interest of both the United States and the rest of the global economy to continue to function on a market-based economic philosophy.

Secretary Rubin also said that the architecture of the global financial markets has to be very seriously changed in order to become less prone or susceptible to crisis and can be so enormously dislocating and disruptive to so many people in so many parts of the world. This will be the Administration's focus. There will also be a substantial increase in the United States' trade deficit and this will create a whole set of other issues that will have to be dealt with in this country. Politics must keep pace with policies, otherwise reform policies that are needed in developing countries will not result in the policies needed in industrial countries.

Michael Jordan of CBS wanted to know what is being done in Japan. Secretary Rubin said that private sector forecasts with respect to Japanese growth still tend not to be enormously encouraging, and that the debate in Japan right now is whether there needs to be greater fiscal stimulus. However, a positive development is that the Japanese Diet recently passed a substantial provision of public funds for their banking system that was somewhere over $500 billion. This was a very constructive step, but the key now is getting the legislation implemented.

Jack Manning of Boston Capital Corporation raised concern about capital flight out of Asia and the possibility of imposing guidelines to restore Asia to a healthy economy. Secretary Rubin said that Malaysia has imposed capital controls, but that is not what is best for the long run. Capital controls can also deter inflows of capital, and could make a very substantial and negative difference in terms of the kind of global economy we want to have in the future. Capital controls can also deter investment, and are enormously susceptible to all sorts of administrative problems as well as corruption. History would suggest that comprehensive capital controls over time become less and less administrable. Rebuilding confidence in these countries will help capital to stay there.

Frank Savage of Alliance Capital Management International stated that Europe is about to launch the euro, and that there is a debate going on between the Central Bank Governors and the Ministers of Finance about whether they should vote for having a strong euro or continue to have lower interest rates so that their countries can continue to grow at lower unemployment.  Secretary Rubin responded that there has been debate on the euro between some of the finance ministers--not all of them--and the Central Bank Governors. Yet, he agreed with what Jean Claude Truchet, who is head of the Central Bank of France, said, and that is, if the finance ministers want to have those kinds of discussions, they should hold them in private because their comments can alter the process in ways that are not constructive and not productive in terms of the deliberations of the Central Bank itself. Secretary Rubin would not comment on exactly what the Central Bank should do, but he did say that he thinks it is significant and worth noting that finance ministers and the Central Bank Governors of the G-7 nations have signed one statement and one communique in which there was the reference to shifting the risk of inflation to promoting growth and financial stability.

Jonathan Tisch of Loews Hotels asked Secretary Rubin his opinion on the formulation of the euro, and what effect the euro will have on the dollar and on the United States' ability to trade with that part of the world. Secretary Rubin responded that it may take a long time to see how the euro works out, but a strong Europe, economically, is very much in the interest of the United States. The European Union (EU) will be a bigger trading partner for the United States and can provide more strength in terms of export markets for the developing countries around the world. An economically strong Europe provides another strong engine of growth in the global economy. If having a single currency (euro) contributes to that, then it is all for the good as far as the United States is concerned. On the position of having the euro as a reserve currency, Secretary Rubin said that as long as the structural policies and macro-economic policies of the United States are sound, then people will have confidence in the dollar and in this country, and the U.S. will be able to attract capital from around the world. Secretary Rubin said that as long as the United States keeps its own house in order, then the country should be okay, but it will be interesting, because there will be more competing currencies than before in terms of debt issuance and changes will have to occur.

Leo Mullin of Delta Air Lines wanted to know if the trade deficit, which is likely to reach over $250 billion, will create a difficulties in this country, and if the intersection of the principles of pursuing free markets are going to be overtaken by practical realities in responding industry-by-industry to the challenges that a high trade deficit puts forward. Secretary Rubin replied that the trade deficit will be higher than $250 billion, but he thinks substantively, that the United States can continue to have healthy economic conditions, although there will be ups and downs. However, if you look at what the U.S. economy has done over the last six years and compare it to other countries with far more restrictive trade regimes, such as Europe where unemployment is hovering at 10 or 11 percent versus the United States with 4.6 percent unemployment and low inflation, than the United States has shown good, solid growth. The politics are far more complicated, especially when there is a high trade deficit and certain industry sectors begin to feel the trade pressures, but the United States has trade laws that should be enforced vigorously. In the meantime, the United States has benefitted enormously from our market-based economic philosophy and the result has been low inflation, low unemployment, competitiveness and efficiency, and that is where the United States should stay.

Chairman Armstrong wanted to know whether the Secretary had heard that although Europe had made fiscal responsibility and stability a priority in order for the euro to happen, that in some back room political discussions the priority really has been on creating jobs, and if that is the case, history would dictate that some deficit spending and other kinds of conduct would result in inflation. Secretary Rubin said that he thought there was a lot of agreement that the one thing for Europe to do would be structural reform. However, within Europe, there has been enormous impediments to flexibilities as well as a whole host of other structural issues that have greatly discouraged economic activity. European leaders have recognized that the reason they have had persistent 10 or 11 percent unemployment on the continent lies in these structural issues. On the question of stimulating demand through deficit finance or through monetary policy, Europe is in an interesting situation. On the one hand, they had a number of countries that needed to get their fiscal house in order, and on the other hand, there are those countries who feel that they should be in a relatively stimulative mode. Europe has got to figure out how to balance all of those considerations in terms of their fiscal and their monetary policies. What concerns the United States is that even if the euro turns out to have been a very good thing, it has been a distraction from the central question of structural reform. Yet, the long-term answer for Europe is, in very large measure, structural reform.

Arnold Donald of Monsanto asked the Secretary about China's future commitment to the World Trade Organization (WTO), in lieu of China's massive re-engineering of their national government, the disastrous flooding, and their massive reduction in capital inflow from southeast Asia that has resulted in a significant reduction in their exports. Secretary Rubin replied that he believed very much in China's interest to enter the WTO. However, there needs to be some phasing in with respects to accommodating the problems that the Chinese Committee has had as they try to make this transformation.

George Becker of United Steel Workers of America said that the steel industry has been reeling from a tremendous amount of imports coming into the United States at cut-throat price levels from a multitude of countries. His concern is that those imports can collapse the steel industry, and he wanted to know if stronger laws are needed when setting up trade agreements for the government to act more quickly? Currently, it takes months and months for us to go through the trade cases, and the steel industry must show tremendous injury. By the time that has been accomplished, the industry has been devastated. He asked the Secretary how do to this in a realistic manner since there are simply not enough jobs that could be given away within the industry that could save the economies of Russia, South Korea, Japan, and Brazil. Secretary Rubin said that these are troubling questions raised by the steel industry, and that one needs to approach it in the context of what kind of a trade regime one thinks is in the best interests of the United States. The steel industry's concerns are very realistic in terms of the problems the industry faces. The issue is troubling because whatever the Administration does in response to those problems can be helpful to the steel industry and its workers, but they also can cause other effects that would be adverse on other industries. For an example, Secretary Rubin explained that if the Administration's response resulted in greater protectionism abroad, then this would also have an adverse impact on those who use steel and their competitiveness as they seek to export, and this would definitely affect consumers. In a broader sense, if we do something with one industry, we need to know what is going to happen with all kinds of other industries, and will move us into a whole different mode in terms of our trade policies.

Gary DiCamillo of Polaroid Corporation, recognizing that the Secretary has been a very strong proponent of a strong U.S. dollar, asked about the state of the volatility of the U.S. dollar, especially in the last six months that has provided some difficulty for many companies operating globally. Secretary Rubin said that when he used to do trade in currencies that it would never have occurred to him at the time that there would be the kinds of fluctuations in the dollar-yen relationship. One of the questions that is being raised is what effect it does have to have such enormous, unprecedented, volatility in major currencies, and are there approaches that one could take to reduce that volatility? Secretary Rubin said that some people are suggesting target zones, but for the United States, for example, if a target zone policy is adopted and the dollar should fall to the bottom of the range, with a weak economy, and a lot of pressure on the dollar, then that would put the United States in a position where interest rates would have to be raised at a time when the economy is weak.  That example is not a very desirable position to be in, even if the United States could tighten fiscal policy when the dollar is weak.  Secretary Rubin said that he could not make a prediction on volatility, but that the volatility in the last six months of the year has caused a lot of people to focus on this issue. Some of the responses carry the potential for creating far more difficulty than the volatility itself. For example, a situation that would force the United States to be constrictive at a time when its economy is weak, is not a very good solution.

Frank Savage of Capital Alliance Management International that asked the Secretary about his trip to Africa and if he could share with the PEC members some of his observations about the state of the economies of Africa, the state of the restructuring, and what potential business opportunities there are for U.S. companies in Africa. Secretary Rubin said that the trip to Africa was the first time that he had been there and was left intrigued. There are enormous issues, challenges, and problems, but what he thought was less obvious are the tremendous opportunities there. He said that he was enormously impressed by a lot of the people whom he had met in public policy positions and in business throughout the five countries that he had visited. He mentioned that he also had the chance to meet with the Saddic finance ministers and Central Bank Governors. He said that there is opportunity in Africa if you look at it country-by-country to see which ones are doing well. There are a number of countries that have been growing at reasonable rates of growth for some time now.

However, Secretary Rubin said that there are a lot of issues, such as in sub-Saharan Africa where large economies are providing engines of growth. Yet South Africa, for a whole host of reasons, has been growing very slowly. He said that he will not make any judgments about what is going to happen in Nigeria. The politics in Nigeria seem to be changing in ways that, if they continue to change, it could put the country on a very different track and provide a lot of opportunity for growth not only for Nigeria, but for the rest of Africa.

Secretary of Commerce Daley than added that he will be leading a trade mission to Africa in December, and that there has never been as much interest in the trade mission as there was in the African mission. Secretary Daley said that over 100 companies had applied and about 25 companies were going.

Chairman Armstrong concluded this portion of the meeting by letting Secretary Rubin know that the PEC will be taking on three major issues: opening markets and helping the Administration in getting fast track; unilateral sanctions; and expanding trade education throughout the United States. He then thanked the Secretary for the enormous amount of time he had spent with the PEC members.
 

UNITED STATES TRADE AGENDA/NEGOTIATIONS
Chairman Armstrong introduced United States Trade Representative Charlene Barshefsky, who has been a regular PEC participant. Ambassador Barshefsky has also been on the forefront of changing the landscape and opening markets for the United States.

Ambassador Barshefsky began her remarks with reviewing the state of play with respect to trade policy and the larger challenges that the United States will face over the next couple of years. The real focus of her remarks were on the upcoming APEC meetings.

Trade Agreements
Since President Clinton took office over 260 trade agreements have been negotiated and concluded. Included in these were five agreements: 1) the close of the Uruguay Round; 2) NAFTA; 3) Information Technology Agreement, which eliminates tariffs globally on equipment that is associated with the information superhighway; 4) Global Telecommunications Services deal, which allows for U.S. investment in, or ownership of, major telecommunications operations, including to provide basic telecommunication services, as well as value added services around the world; and 5) Global Financial Services Agreement, covering domestic banking, securities, insurance, and data flow services, under which U.S. companies can, again, invest in or own a controlling interest in foreign banks, insurance companies, and brokerage houses. However, there are another 255 agreements out there, including, for example, 35 market access agreements with Japan, covering a number of major sectors in that economy, 15 agreements with China, 16 with the European Union, and so on. In total, the United States concluded about 81 or 82 agreements with our larger trading partners that have helped raise our exports by about $120 billion over the past five years.

In the last five years, over one-third of the growth in our domestic GDP has come from our export performance, and that export performance through 1997 had been up by about 50 percent, 53 percent, in the last five years. This year, the United States will see export performance diminish somewhat because of the Asian financial crisis, and exports will further dip next year until the economies bottom out and begin a growth path.

Ambassador Barshefsky said that as the United States looks ahead, there will be a number of very important opportunities. First, on the multilateral side, the U.S. will both host and chair the 1999 WTO Ministerial that will be held toward the end of 1999. This is the Ministerial meeting in the WTO that will help set the trade agenda for probably the first decade of the next century. This is the global agenda. It will be a very important series of outcomes for the United States, covering, at a minimum, resumed global talks in services, trade, as well as in agricultural market access. The PEC contribution in that regard will be very important because these really will be talks and meetings of an historic nature. As the United States works to expand and better perfect multilateral market opening, we will want to add those countries who are not in a rules-based system, most notably China, Russia, the former Soviet Republics, Taiwan, Saudi Arabia, and others. It will provide enormous opportunity for the U.S. and extraordinary challenges, particularly as we try and integrate non-market economies or economies in transition into a WTO regime, which is based on market economics, notions of transparency, and grounded in the notion of the rule of law. The challenge here should not be underestimated. The integration of former adversaries, like China and Russia, into a rules-based system is no less important than the reintegration into that system of Japan and Germany after World War II. This is a task of enormous importance, but it also must be conducted with great care.

Apart from the multilateral agenda that we see ahead, the United States' very aggressive bilateral trade agreements agenda will continue, with particular focus on Japan and China, as well as a number of other countries. Regionally is where some important gains will be seen in the next year or two. The United States has focused on regional market opening, first off, because often it's easier and quicker to move with countries that are more like-minded, or at least bear a close relation one to another if only because of logistics and geography, but also because we can't have a situation, for the U.S. especially, where market opening lays fallow in the interregnum between major global rounds. The United States needs to keep pushing the envelope to ensure that we have the kind of access to foreign markets that foreign markets have here.

With respect to Europe, the United States has come to agreement on the bounds of the Transatlantic Economic Partnership (TEP) under which we will be both negotiating and coordinating positions in a variety of areas: to expand further bilateral services trade; to reduce further regulatory barriers in Europe; and, to look at issues like biotechnology, intellectual property rights, and a number of others. In addition, the United States wishes to work more closely with Europe with respect to multilateral coordination, especially as we look to the 1999 WTO Ministerial, to the extent we and Europe have, at a minimum, compatible positions, if not identical or similar positions, then the further we can get in achieving our joint market access goals. While the United States has an extraordinarily productive trade relationship with Europe, it can be better. Our access can be greatly improved; Europe's access here can be greatly improved; and, we ought to work mutually toward that end.

With respect to the western hemisphere, the United States has now formally launched the actual negotiation of the Free Trade Area of the Americas. The hemisphere is very much engaged in this exercise and committed to concluding it no later than 2005.

With respect to Africa, the U.S. has rarely had a trade policy toward Africa. The United States typically has had an aid policy toward Africa. But aid alone is not enough, if the economies of the African nations will not reform in line with international norms. The United States has embarked also on a trade program with Africa. This is a very important adjunct to foreign aid. It does not replace foreign aid, but it will make foreign aid contributions far more productive than in years past.

In the Middle East, the United States is striving very much to increase inter-Middle Eastern trade. If you look around the world, the level of inter-regional trade within Europe is very high in relation to their total exports globally, similarly, in the western hemisphere, similarly in Asia.  Only the Middle East stands out as a region in the world where the level of inter-industry trade is very, very low. The higher the level of inter-industry cooperation and dependency, the greater the adjunct to the peace process. In that regard, we will offer trade benefits to joint ventures, initially between Israeli and Jordanian firms operating out of a special industrial zone which we have helped to create in Jordan, but we look also to separate efforts with Egypt and the Palestinian authority, and others to increase economic interdependency in the region.

APEC
Ambassador Barshefsky concentrated most of her remarks on APEC. This year, APEC faces a time of great human suffering and of continued financial unrest in Asia. Four of the Asian economies in APEC are projected to contract by seven percent or more this year, and they are: Korea, Thailand, Indonesia, and Malaysia. It is estimated that Korea will lose 2.2 million jobs. Thailand has predicted that 250,000 children will have dropped out of school this year because the parents can no longer afford the tuition payments. There are a number of areas in Indonesia short of food. The World Bank has predicted that approximately 50 million Asians will fall below the poverty line in the next year. Japan remains in recession and the world is watching to see whether it will make the fundamental changes needed to restore vitality there. The financial crisis has had its contagion effects in Latin America and Russia.

The crisis hits home here as well. Our exports to Asia are down. They are off 12 percent to Japan alone. Exports to Korea halved by the end of this year. There are a number of important-sensitive industries in the U.S., among them steel, which are under enormous pressure because of import spikes in certain sectors of our economy. However, the United States approaches these meetings at a time of some significant difficulty in Asia, but there are some good signs. Thailand and Korea are implementing reforms agreed to, and their currencies have stabilized. In Thailand, the stock exchange has recovered most of the losses that it experienced earlier in the year.

It is more important than ever that APEC moves forward with the market opening initiatives covering such sectors as chemicals, wood, paper, fish, medical equipment, environmental goods and services, energy goods and services and so forth. The U.S. goal is to follow the ITA model, which means to come to closure as much as possible within APEC on the bounds of a good package on market opening, recognizing that negotiations, even within Asia, will not stop there.  Then shift the initiative to the WTO because, under our own laws, and common sense tells us that we don't want to engage in unilateral market opening measures and have a bunch of free riders, most notably the Europeans, enjoying our tariff cuts or the tariff cuts of the Asian nations.  With ITA, we first started in APEC, moved the initiative to the WTO, and then spent a number of months in the WTO bringing in other critical mass countries while we continued to negotiate the overall package, including with our Asian partners. Then subsequently we implemented, and are indeed still implementing, the tariff cuts there. That is the U.S. goal for APEC.

The chief obstacle at this point for APEC is Japan, which does not wish to participate in all of these sectors as a package, but wishes to leave out the only two sectors in which it could actually make a real contribution to the process, and that is the forestry sector, meaning wood and paper products, and fish, sectors that are very important, not only to us, but to the ASEAN countries in order to achieve a fully balanced outcome with respect to the costs and benefits involved. We have pressed Japan hard on this, other nations have as well, and we await to see whether Japan will become a constructive force in APEC or whether it will continue on a destructive path that it has thus far set for itself.

In conclusion, Ambassador Barshefsky said that the United States will continue to work with the other Asian nations to try and move this initiative over to the WTO, and then begin the work with other trading partners as the U.S. continues the work with the Asian nations. She then opened the discussion with the PEC members.

Susan Corrales-Diaz of Systems Integrated asked Ambassador Barshefsky her views about fast track authority and the impact of not having the authority to date. Ambassador Barshefsky replied that it has been the intention of the Administration to move forward in early 1999 with fast track and thought that the vote taken in the House was unfortunate; but complicating the effort in as much as members now are on record, many of whom voting no who might in other circumstances have voted yes, and moving a member from a no to a yes is no easy feat, particularly on trade-related issues. Plus, pre-election versus post-election, added yet another complication. We know that by now we would have had, and would have liked to have had, an agreement with Chile, which we at this point do not have. As we look toward the 1999 WTO Ministerial meetings and particularly the vital importance of a good agricultural outcome to trade negotiations in the next several years, fast track will be very, very important to ensure that the playing field is leveled.

Dennis Picard of Raytheon Corporation asked the Ambassador to comment on how it has hurt the United States by not having fast track in areas such as South America where Mercosur has and the Europeans have gained ground. Ambassador Barshefsky said that a concern is that there are a web of agreements now, free trade agreements, throughout our hemisphere, more than fifty. The United States is only party to one, and that is the NAFTA. The United States is not party to any others. The effect of that is this. Let us suppose you produce a widget in the United States, and when you send it to Chile you pay an 11 percent tariff. That is what the Chileans pay. The Canada widget maker sends it to Chile and the Canada widget maker pays no duty because they have a free trade agreement with Chile. A widget is a widget. If you are a Chilean, who will you buy from, the guy you've got to pay another 11 percent to? No, you will buy from, in this case, the Canadian, because you are not paying another 11 percent. If you are an American company and you want to increase your sales to Chile, what do you do? You start sending widgets from your Canadian operation to Chile instead of from your U.S. operation to Chile. We are seeing this kind of pattern in agricultural trade, and we are beginning to see this in low-level industrial goods, substitutable goods from other sources.  This will be a trend that will continue. We are at a decided commercial disadvantage under the current situation. We need to be able to have access to all of these different economic groupings in our own hemisphere and on the same terms as everyone else has in our hemisphere. If not, we are going to see substantial loss of sales from the United States, and a greater shifting of productive capability from the U.S. to other outlets overseas. This, we do not want to see.

Arnold Donald of Monsanto asked Ambassador Barshefsky about China and its commitment to the WTO. The Ambassador replied that she didn't think that WTO accession bears upon China's willingness to keep a stable currency. China, first and foremost, will do what is in China's interests to do. The United States is very appreciative that they have held firm, but China is also holding firm because it's in their own interests to hold firm. For that reason, WTO accession does not affect that calculation. Over the last two years in particular, the United States has made some important progress with China, but not enough to put them on a par with other economies that have undertaken substantial market opening and rules-based commitments, and certainly not enough, given China's extraordinary economic strength in export markets. China is a global export leader and its obligations with respect to reciprocal market opening should reflect its stature as a major world exporter. China has gone through a series of reassessments on the desirability of moving forward with WTO because of several factors: their own internal reform process, which has captured much of the leadership attention and which is going slower than they would have hoped and in that regard, we see China backsliding on certain reform efforts; and, we see a bureaucracy in China that has become somewhat more entrenched as Julan Ge threatens to cut the size of government by 50 percent. So, both we and Europe have experienced much the same. That is to say, a China that, in terms of rhetoric, espouses that it would like to be a WTO member, but the offers are just not adequate and remain inadequate.

Chairman Armstrong thanked Ambassador Barshefsky for her remarks and then dismissed the PEC members for lunch.
 

VIRTUAL TRADE MISSION NATIONAL TOWN HALL MEETING
The PEC members met with President Clinton for a private meeting and then proceeded to the Virtual Trade Mission (VTM) National Town Hall Meeting for a live interactive discussion with a national audience of students, teachers, employees and small business leaders. President Clinton was formally introduced by a student representative and gave an address on his Administration's trade policy agenda. When the President concluded his remarks, Secretary Daley then proceeded to open the national town hall meeting for a free-flowing discussion on "Building a New National Consensus on Trade" with members of the national audience.  [The VTM was created in 1996 by the private sector members of the PEC and is a nonprofit educational organization dedicated to educating students, teachers, and employees about the challenges and opportunities the new global economy presents for America's future. The goal of this PEC is to make the VTM a lasting legacy and part of its list of priorities for educational outreach.]
 

REPORTS FROM THE SUBCOMMITTEES TO THE FULL COUNCIL
Chairman Armstrong opened the afternoon session to hear reports from the PEC subcommittees to the full council.

PECSEA
Michael Jordan of CBS, who is the PECSEA Subcommittee Chair, presented the report on activities over the last three to four years, and some of the issues that are going forward. The PECSEA is a little different from the other groups because it is a specifically chartered subcommittee to advice on the areas of export Administration and export controls. It is a group made up primarily of professionals in the field of export controls. Of the twenty members, eight are new to the subcommittee. The major areas of activity over the last four years has been the whole area of unilateral economic sanctions. PECSEA has submitted two separate reports to the Administration through the PEC and tried to raise the visibility of the problems in this area in terms of both the formulation and the implementation of foreign policy-based unilateral economic sanctions. While not commenting on the actual effectiveness of these sanctions from a foreign policy basis, they do impose serious costs on our economy, especially if our allies do not join in. In the two reports PECSEA sent to the President, we have made a number of specific suggestions on improving the process, improving the evaluations, the post hoc evaluation, the effectiveness of these sanctions, and we have also talked some about the implementation. For example, there has been a move to have the implementation and regulation of these sanctions done by OFAC, which is a body of the Treasury, mainly there to control foreign assets. This group has gotten involved in trade-related items and it probably does not have the expertise to handle that, and there have been a lot of delays in terms of implementing regulations. So, we have made a number of recommendations to strengthen that particular area.

Also, PECSEA has wrestled with the change in the commodity jurisdiction area, as to which elements of the Administration should be involved in dual use items, ones that have both potential military, as well as civilian, applications, such as commercial satellites, encryption, and the hot sections of aircraft jet engines. We worked with the Administration on reforming this process. Many items from the munitions list that were controlled by the State Department were moved to dual use within the Commerce Department where there was a jurisdiction, and this was done with full consultation of members from other federal agencies. Unfortunately, we are seeing some moves in Congress to try to reverse this.

PECSEA has also spent a lot of time working on the whole area of computer controls. This is a whole area that has been a tremendous burden on U.S. industry because of the imposition of specific limits on the export of a certain level of computing power to certain elements in certain countries and certain agencies within those countries. PECSEA has worked with the Administration to get these limits raised to a more realistic level given today's technology, but there has been rollback in this area as well. PECSEA recommends that the Administration consider adopting a totally new structure based not on performance, but on a specific listing of prohibited end users or end uses that might make it easier to maintain over a period of time.

Another area of concern for PECSEA has been the proliferation of state and local government sanctions on trade. This has become a very significant international issue and has been referred to the WTO. There has been a suit filed against the State of Massachusetts, a group of U.S. businessmen, and a U.S. business organization. PECSEA has been urging the Administration to support challenges to its constitutionality, but so far nothing specific has happened.

PECSEA believes that significant progress has been made within this Administration to reform a lot of the export control processes. There has been, in general, a willingness to approach these issues to try to create greater transparency and sort of rationale within the whole export control process, and PECSEA applauds that. However, PESEA is seeing some disturbing trends in the Congress right now that is a bit remanent of the Cold War era, especially in areas such as commercial satellites and computers. There is still the belief in Congress that we are still back in the COCOM regime when a particular body could impose very significant restrictions on the transfer of certain technologies to our major enemy, as it was in that period of time. Today, the situation, both in terms of the source of the technology and the nature of the potential enemies, is so different that PECSEA thinks that one of the areas for trade education should be in educating the Congress in this whole area of export controls. The technologies we are talking about today are primarily commercial technologies and the leadership of these advanced technologies comes from a world market share position. The military takes advantage of these advance technologies by buying off-the-shelf technology, rather than developing the old mill spec way; and, therefore, to try to suppress the development of commercial technology is really very shortsighted in terms of both America's long-term competitiveness, as well as national defense. The Congress attempted to reverse the liberalization of computer controls. The recent change in the commodity jurisdiction, the communications satellite, are all indications that the new era of technology and technological strength of this country are not very well understood in the Congress. As the PEC thinks about trade education, the reversal of computer controls will be a major issue that needs to be addressed.

Chairman Armstrong asked the PEC members for any questions or comments about the PECSEA report. Chairman Armstrong said that it will now be a responsibility of the PEC to respond to or help construct the response to the Administration on implementing the terms of a new procedure on unilateral sanctions, and all agreed that he PEC should work with the Administration to try to help take the lead in that process.

Subcommittee on Market Access and Negotiations
Frank Savage of Capital Alliance Management International delivered the report on the Subcommittee on Market Access and Negotiations for Subcommittee Chairman Dr. Ray R Irani. Dr. Irani and other subcommittee members have begun to consider priority issues to be addressed in the coming year. There are four main areas that the subcommittee proposes to address: the ongoing financial crisis in the Asian economies; to analyze government policies and options regarding the negotiations of new trade agreements and fast track authority for the Administration in 1999; non-tariff barriers that hinder U.S. exports; and, to work on specific recommendations regarding ongoing trade negotiations.

The primary goal of the subcommittee during the coming year will be to address the impact of Asia's current financial crisis on the prospects for U.S. exports. Many leading American firms are already suffering significantly from the drop-off in Asian demand. It is vital that the Asian economies do not close off their markets to imports in order to eliminate the external trade deficits. The subcommittee intends to gather information that will enable the PEC to assess the risk of American exports and to suggest ways of managing the crisis. Another key element of the subcommittee's work may be to analyze the role of the International Monetary Fund in the Asian crisis. The fund has encouraged countries to remove structural barriers to trade as part of their reform programs. This is a new role for the fund and it is appropriate to evaluate its performance carefully.

The subcommittee intends to analyze U.S. Government policy and options regarding the negotiation of new trade agreements. Trade negotiations are currently ongoing in several different settings: the World Trade Organization, the APEC, the Free Trade Area of the Americas talks, and the U.S.-EU discussion for a Transatlantic Economic Partnership. For all of these negotiations, it is critical to give the President fast track negotiating authority. The lack of this authority hinders the ability of the United States to lead in these negotiations. Providing this authority will ensure that the deals that are struck will benefit American firms and workers.  A primary focus of the subcommittee is likely to be the issue of fast track authority for the President in 1999. In addition, we will work on specific recommendations regarding the ongoing trade negotiations.

The private sector has a vital role to play in these negotiations by creating and sustaining political momentum and exploring potential areas of agreement with our counterparts in other countries. As shown by the excellent work by the Transatlantic Business Dialogue in removing trade barriers between the United States and Europe, the private sector can lead the way towards free trade. The subcommittee intends to assess the significant non-tariff barriers that hinder U.S. exports. With the greater discipline on traditional trade barriers such as tariffs and quotas, countries have increasingly turned to more sophisticated ways of protecting their domestic industries. These techniques include investment restrictions, regulatory barriers, bribery, and corruption and inadequate protection of intellectual property rights. The subcommittee believes it is important to continue and broaden the past efforts of the PEC in combatting bribery and corruption. Eliminating these corrupt practices is essential to create a level playing field for American exporters. There has been significant progress, evidenced by the agreement at the OECD, to prohibit bribes of foreign government officials and to eliminate tax deductions for bribes. The 1999 inter-American Convention is also a significant step. But many countries are not parties to these agreements and many countries have not taken the necessary measures to implement the agreements. In the meantime, American exporters lose business every day to these unfair practices.

Finally, it is important to consider how we can broaden the U.S. political consensus in favor of free trade. As Chairman Armstrong noted in his letter to the PEC members in May of 1998, it is essential to broaden the free trade consensus in order to sustain support. Groups opposed to free trade are actively working to persuade Americans that trade is a threat. If we do not reach out, we risk the long-term erosion of popular support for open markets. We must convince all Americans that, in President Clinton's words, "We must compete, not retreat." A critical element of this task is reaching out to workers. We need to do more to show workers how increased exports promotes American jobs. We also need to address the justified concern of American workers about the need to improve labor standards abroad. When countries fail to honor the core worker rights agreed to by the ILO earlier this year, they are not only competing unfairly, they are also failing to meet basic standards of decency. The United States and the PEC need to do more to improve labor standards abroad.

Chairman Armstrong then thanked Frank Savage for presenting the report on behalf of Dr. Irani, and asked Frank to convey to Dr. Irani that the issue of fast track authority, which is a market access issue, be taken on as a first priority of the subcommittee.

Subcommittee on Technology and Competitiveness
Susan Corrales-Diaz of Systems Integrated is the Subcommittee Chair and presented the report to the full council members. An evolving topic which the subcommittee can have a voice in, is in regards to electronic commerce. The Internet commerce, as well as the policing of Internet-related services, will be an important issue for the upcoming Congress. Recent Congressional action has placed a three-year moratorium on any new Internet commerce taxes. As part of the Congressional mandate, as worded in S. 442, is the establishment of the Commission on Electronic Commerce, tasked to make specific policy recommendations to Congress in the field of Internet access and commerce taxes. Proponents of Internet commerce argue that the rapidly expanding medium provides countries and businesses around the world with an affordable way to share and exchange information. Opponents of unrelated Internet commerce suggests that the lack of Internet regulation allows competitors an unfair advantage in conducting business by avoiding taxes and fees. The subcommittee is planning to play a role by examining this issue and ensuring that the new legislation would not disadvantage American businesses conducting international trade via the Internet.

A subset of this particular area with the Internet commerce is the EU privacy agreement. There is great concern with our American companies as to how exactly to address that and what is the best way to handle this.

Another topic is WIPO. On October 28, 1998, the President signed P.L. 105304, which implements the World Intellectual Property Organization Copyright Treaty, and the Performances and Phonograms Treaty. These treaties will help ensure that U.S. intellectual property-based industries get adequate protection around the world. However, the treaties do not go into effect until 30 nations ratify them, and only 7 countries have ratified these treaties to date.  There is nothing more important than having a level of predictability that we can depend upon with these types of agreements, so I think it is very important that the Export Council looks at how we can help the President in convincing other countries to sign onto this type of treaty.

The last issue that the subcommittee has been involved with in the very short term is the Year 2000 (Y2K) problem, and with that Ms. Corrales-Diaz asked subcommittee member, Dennis Picard of Raytheon Corporation to address this issue. We all face a serious problem with Y2K. As you travel around the world, you will find out that some people are paying no attention toY2K, especially in the Asian region. Dennis Picard then handed out to the PEC members a copy of the subcommittee's draft letter on Y2K approval to be sent to the President, recommending that the Y2K issue be emphasized at the upcoming APEC meeting this month. It is recognized that the cost to fix all the Year 2000 associated problems will be tremendous, and that this issue must be dealt with in the context of economic issues facing many APEC member nations. The PEC recommends that all countries focus on priority areas, such as financial, transportation (which includes air traffic control), telecommunications, utilities, and medical services sectors.

Ms. Corrales-Diaz then asked for the PEC's input and agreement on the letter. The PEC has an opportunity to put this issue again before the President and to press with the other leaders in the Asian economies early next week.

Mr. Picard then asked Chairman Armstrong to consider also putting the OECD anti-bribery initiative on the President's APEC agenda as well. Chairman Armstrong agreed saying that this subcommittee will be right in the middle and that there has been good movement on the anti-bribery issue.

Subcommittee on Trade Promotion and Education
Chairman Armstrong gave the report on the Subcommittee on Trade Promotion and Education and thanked the members and the companies who have contributed significantly to our Virtual Trade Mission activity and reiterated how important it is for the business community, the labor community, the Administration and the Congress to get behind the education on the importance of trade to this country. Chairman Armstrong then offered a suggestion to this committee: making the VTM part of the PEC's heritage. VTM sessions with the business community at schools across the country can improve the educational outreach on trade. This has been a priority of the PEC for over four years, and although we do not know who the next President will be or the next Secretary of Commerce, or even who will be on the next PEC, it is still a worthwhile endeavor. The PEC staff representatives have agreed to meet on the first Wednesday of each month to help with this effort in making trade education, the Virtual Trade Mission, something that lives on beyond us.

Subcommittee on PECSENC
Bruce McConnell, Chief of Information Policy and Technology at the Office of Management and Budget (OMB), gave remarks on PECSENC. The PECSENC, the President's Export Council Subcommittee on Encryption, was chartered in May of '97 as a separately chartered subcommittee of this body. Until just recently, it was chaired by Joseph Adorjan, the Chairman and CEO of Borg-Warner, who had done an excellent job in making it go. Obviously, in some of these things there's a certain amount of start-up, so the early efforts focused on issue briefings, on the very complex aspects of encryption. PECSENC heard from a wide variety of government agencies, FBI, NSA, Justice, as well as some of the technical side in terms of the standards that deal with encryption products, and some of the international implications with respect to how export controls fit into the overall problem; because it is a problem in this area, as with all export controls, of balancing the commercial interests with the national security.

There is a law enforcement interest in terms of getting access to plain text information that might be encrypted using commercial products. So PECSENC completed a series of briefings and, in particular, set up a working group within the subcommittee called the International Working Group, which looks particularly at the availability of foreign encryption products overseas and tries to get a sense of what the international competition is. PECSENC has posted on the web, the BXA web site in mid-September, a fairly detailed analysis of some of the international competition issues, while maintaining national security and law enforcement interests.

On September 16th, Vice President Gore announced a major update in our encryption policy which was widely supported by the private sector. The private sector reaction is generally that it was a good start and appreciates those kinds of liberalizations, but the private sector wants to see more. The PECSENC has now forwarded to the PEC for approval a letter to the President suggesting exactly that this was a large step forward and that the Administration should continue to review the policy, to try push for more liberalizations where possible, to implement the regulation, and to publish the implementing regulation as soon as possible. The interagency group that does the work inside the Administration on encryption is busily working with the Commerce Department on this regulation, and the goal is to publish it in November. The PECSENC and other industry groups has been helpful in getting the Administration to listen to industry input into the policy and making it more doable and more useful, while at the same time balancing all the equities. Bruce McConnell concluded his remarks by saying that he hoped that the PEC members will approve the letter and send it forward to the President.
 

PEC PRIORITIES AND ACTION ITEMS
Chairman Armstrong once again reiterated the priorities of the PEC and actions to be taken, and stated his belief that this PEC has the chance to get the agenda that has been set forward accomplished, especially given the current economic climate. He asked that when the PEC staff representatives meet on the first Wednesday of the month to get a date in April for the next PEC meeting in order to accomplish the goals set forth by the PEC.

Commerce Secretary Daley, in closing, agreed with Chairman Armstrong that the PEC should meet again early in 1999 because, given the current economic environment, it should be an active year for the PEC. He then thanked the PEC members for all of their work and for participating in today's meeting.
 

ADJOURNMENT
Chairman Armstrong adjourned the meeting at 4:45 p.m.