by Jeffrey J. Schott, Peterson Institute for International Economics
Transcription of comments at a joint meeting of the Institute for Global Economics and the Korea International Trade Association in Seoul, Korea
February 25, 2009
© Peterson Institute for International Economics
Thank you very much, Dr. Lee. It is a great pleasure to be with you again, and I appreciate the generosity of the Korea International Trade Association (KITA) and the Institute for Global Economics (IGE) in inviting me back. I feel a strong kinship with the IGE, which was founded about 16 years ago when one of my colleagues, Dr. SaKong Il, a visiting fellow at the Institute for International Economics, returned after a brief stay in the United States and wanted to establish a similar type of institute here in Seoul. We told him that he couldn't call it the Institute for International Economics, so he called it the Institute for Global Economics. It shows that we are really family, that we come from the same source. I greatly appreciate the opportunity to work again with the IGE.
I was asked today to make a few remarks about trade policy in the Obama administration. I think it is very important to convey a clear understanding about what is going on in Washington. It was only about one year ago, in February 2008, that Barack Obama and Hillary Clinton were arguing very aggressively about protecting US trading interests in general and whether the US should withdraw from the North American Free Trade Agreement (NAFTA) in particular. Those comments were carefully noted all over the world. Since then, there has been much less reporting about what is being said and done on trade, so the memories of a year ago are still very fresh in the minds of people when they think about US policy.
However, let me say one thing very clearly: We are not in February 2008. The world has changed dramatically since then, and those changes have had a very big influence on US policy. I think the election of Barack Obama and the appointment of Hillary Clinton, who just visited here last week, as Secretary of State indicate a dramatic change from the discussions the two had when they were vying for the nomination of their party. There is a big difference between campaigning for the selection among your own party and having responsibility for governing a great country. That is part of the reason why there is a new sense of urgency for the United States to engage with its trading partners. I hope that Secretary Clinton gave that message to both the Korean government and the Korean people during her visit here last week.
Now, it's important when describing US trade policy to make one thing clear: There has to be an understanding of who is shaping US trade policy before one can understand what is shaping trade policy and where it is likely to go. In the United States, even though we now have a President and a very large congressional majority from the same party, there is still tension between the two branches of government. In the Congress, which has constitutional responsibility for trade, there is a growing caucus of new members who are very skeptical of trade liberalization. Those Democrats, particularly in the House of Representatives, do not necessarily share the views of the more centrist, international-minded Obama administration. So in dealing with the Congress, which will want to continue to pursue narrower constituent interests from labor unions and rust belt industries, the Obama administration will have to be very careful and diplomatic and make compromises. One of the biggest challenges for President Obama is working with members of his own party, especially in the House of Representatives.
What Is Shaping US Policy?
If you look at the priorities of the Obama administration coming in, you will see a very clear focus on domestic policy: reforming various domestic programs, but most of all trying to revive the US economy from a very deep recession. There is concern about healthcare and the social safety net, which is quite weak in the United States. This causes great anxiety for workers, who worry about their jobs, their health care, and their pensions. These are the big challenges that President Obama wanted to solve coming into office. Trade was not a top priority; in fact, it probably wasn't in the top ten of the priorities of his administration. But as the Obama administration already discovered in the debate over the Buy American provisions of the economic stimulus package in the US Congress, our domestic policies have important international implications. If you had asked a body of experts six months ago about US trade policy, no one would have said that the first trade policy issue addressed by the Obama administration would be Buy American government procurement policies.
Six months ago, I participated in the drafting of a memo to the President-Elect by a group of experts and former cabinet members from both parties, including people like Carla Hills (former US Trade Representative), Clayton Yeutter (former US Trade Representative), Stuart Eizenstat (top Democratic official in several governments), and C. Fred Bergsten (director of the Peterson Institute and former top US Treasury official). None of these experienced men and women even considered that Buy American would be the first issue to frame US trade policy. When I got a call from the White House a few weeks ago asking what our advice would be on the Buy American provisions in the stimulus legislation, we worked all weekend to send some advice to ensure that the first actions taken by the Obama administration would not send the wrong signal to our trading partners. It was gratifying that the following week, President Obama came out with a clear statement that it would be critical for the United States to be able to work with our trading partners and develop a multilateral approach to the global economic crisis. In saying so, Obama indicated that it would be a mistake to pursue new protectionist policies. The White House then worked with the Senate to try to modify the Buy American provisions. The administration was not able to remove them because of the strong interest in those provisions within the Democratic caucus, but they were able to modify them in a way that made sure those provisions were consistent with international trade obligations. So that was the first story in the trade policy of the Obama administration, indicating what will follow.
In many ways, the trade policy agenda will be dictated by nontrade events and considerations, dominated by broad strategic concerns. First is the perception of the United States in the international community. President Obama has made it clear during his campaign and his presidency that it is important for the United States to again embrace multilateral approaches and work within the G-20 to solve global economic problems. In this vein, I should note that he has a wonderful ally in Korea. Dr. SaKong Il, when he was in Washington a few weeks ago, met with the leaders in the White House who are working on the G-20. It was clear that the Obama administration fully shares Dr. SaKong's desire for a strong result out of the G-20 Summit in London on April 2. The fact that the United States and Korea are working so closely together in this venture and the fact that Korea is part of the leadership troika of the G-20 and will chair the next meetings are encouraging for the world economy and will be helpful in deepening US-Korean economic ties going forward. Given the depth of the economic crisis, none of our problems will be easily resolved; working together on economic recovery is essential. It is incredibly valuable for the United States to have such a strong partner in Korea.
The second strategic interest that will shape US trade policy is foreign policy. Here, it is clear that no matter how various domestic constituencies feel about international trade or trade agreements, US foreign policy and security interests are overwhelmingly important and will temper the way the United States treats China and other important trading partners. Foreign policy concerns will also, of course, encourage deliberations on the US-Korea free trade agreement (FTA). You saw the beginning of that recognition in US policy when Secretary Clinton was here last week. I think the overall importance of the US-Korea bilateral relationship will be a positive influence on our bilateral trade policy. I will say a few more words on the KORUS FTA in a few moments.
Next, trade policy will also be affected by domestic recovery plans, particularly in the auto sector. What major trading countries are doing to support their domestic auto industries could well discriminate against foreign suppliers and distort trade and investment in this important sector. Trade policy will hopefully temper the more protectionist instincts that have already arisen in Europe, some of which have already been heard in the congressional debate over the bailout and the restructuring of General Motors and Chrysler. That saga is still being worked out, but it will have implications for US-Korea trade relations because each country has substantial investments in the auto sector of the other. How we treat our auto companies may affect the role of foreign subsidiaries. This is an important issue and will have a high profile going forward this year.
The last broader strategic interest that will probably dominate trade policy in the future is one that is a very high priority for the Obama administration. That is the need to develop a post-Kyoto global climate change regime. It is an issue where the environmental objectives are critical and where the tensions between achieving those objectives and meeting the competitiveness concerns of local industry are great. Particularly at a time of economic stress, when you already have declining employment, the thought that new carbon taxes or regulatory mandates may further impede the competitiveness of domestic industries will lead governments, not just in the United States but everywhere, to consider programs that support local industries and discriminate against foreign suppliers through border taxes or other means. This trend is already beginning to surface. The European Union has been discussing such measures against "dirty" American imports for several years. No action has been taken, but these types of concerns—using exceptions in the world trading rules under GATT Article 20, which provides general exceptions for reasons including environment, public health, and safety rules—could propel new restrictions, possibly legal under the WTO, that roll back a lot of the liberalization that we have seen over the past few decades. This is a very serious issue, one that could be damaging if not given adequate attention by national governments when they are framing their environmental and trade policies. It is also an opportunity, however, for trade policy to move in a constructive direction. To take the US-Korea example, while there are some concerns among members of Congress about provisions relating to the auto industry in the KORUS FTA, these concerns are minor compared to the broader concerns about climate change. The fact that Korea and the United States are working together on climate change will provide a constructive channel for finding a political solution to a number of more specific trade issues that have been part of the bilateral commercial relationship for some time.
This is also true in the North American context, where President Obama threatened to withdraw from NAFTA during one inopportune moment in the 2008 primary debates. Obama now sees that NAFTA can be an opportunity to upgrade trade agreements to expand the scope of bilateral cooperation to new areas like climate change, border security, and energy security. When there are issues on which countries have a tremendous need to work together, smaller disputes that seemed intractable in the past are more likely to be resolved amid this broader constructive discussion. This an area where we will see a positive influence on trade policy going forward.
What Will Be the United States' Priorities for Trade Negotiations?
Members of Congress allowed the President's trade promotion authority to expire almost two years ago, right after the signing of the KORUS FTA. There's little likelihood that that authority will be renewed soon, in part because there are few opportunities for new bilateral trade pacts going forward in the near term. The list of countries that want to negotiate with the United States is now very small. Our previous FTA policy has run its course. The countries that are still interested in an FTA with the United States primarily want a deal to enhance the bilateral political relationship, and that goal can be addressed through means other than trade pacts.
The one negotiation that the Obama administration may give priority to is the Doha Round, for several reasons. First, as I said before, Obama is interested in bolstering multilateral initiatives and ensuring the viability of the multilateral negotiating process. If the Doha Round were allowed to fail, it would be the first failed negotiation in the postwar history of the world trading system. This would deal a terrible blow to the multilateral trading system, severely undercutting countries' ability to use the World Trade Organization (WTO) as a forum for future negotiations. After all, if businessmen and government officials went through almost a decade of effort to try to resolve Doha and ended up with nothing, I think they would question whether it is worth the investment to try to do it again.
The Doha Round is also critical because of the symbolic importance of a viable trade negotiation round in response to the global economic crisis. Allowing talks to fail would send a signal that governments did not care about holding the line against new protectionism. As a result, we would then be more likely to adopt "go-it-alone" and "beggar-thy-neighbor" policies. We have already begun to see this trend surface in some of the major trading nations. Now, there has been concern, particularly in the US business community, that there is not much on the table in Geneva. Some say that a Geneva agreement is not valuable unless it creates new liberalization in the areas of agriculture, manufacturing, and services. That's a reasonable argument. However, I think it underestimates the value of maintaining the current level of openness, as many countries have unilaterally reduced their trade barriers over the past 15 or 20 years but haven't yet undertaken a legal obligation through the WTO to maintain those tariff levels. As a result, it is legal under the WTO to raise tariffs and impose trade restrictions that distort commerce and investment, and countries are beginning to do just that. The simple point here is that a failed Doha Round doesn't even sustain the status quo. If we don't achieve progress in the Doha Round, we are likely to see a trading system containing many more obstacles to trade and investment. That, of course, wouldn't be good news for the United States or Korea.
The final reason is that you do not have to spend political capital now to resolve the Doha Round. You merely have to establish a process, allow the negotiators to negotiate, so that political decisions can be taken, probably next year, on whether to change policy in sensitive industries and service sectors in order to achieve the final deal. It will take almost a year to get to the final stages of the negotiations, and, in the meantime, we hope that the world economy will have begun to recover. It is very difficult to conclude trade negotiations at a time of economic distress, but once countries begin to move back into positive growth, it will be easier for politicians to make these changes to invest in our future. And that is essentially what the Doha Round is: an investment in our future. It's something that will hopefully start paying dividends a year from now.
I think that for those reasons and because of the importance of taking a multilateral approach to international trade, the Obama administration will give priority to the Doha Round. Bilateral negotiations will not receive as much attention.
The other area of interest will likely be in North America with the "upgrading" of NAFTA. I like that word so much that I think we need to consider upgrading the KORUS FTA. It has almost been two years since negotiators shook hands on the KORUS FTA on April 2, 2007. Of course, a lot has changed, particularly in the auto sector, which has seen big changes in both countries. What I would advise to the new US administration is to quietly sit down with the Korean government and discuss what each is doing to help its domestic auto industry, and the implications for each other's trade and investment interests. The two governments also need to discuss what each is doing to promote growth and employment in their own countries and how the two countries may work together to bolster the global competitiveness of their industries. This type of discussion is very important for partners to have. It may yield some ideas on how provisions and agreements can be augmented to make sure that the KORUS FTA and US-Korea bilateral initiatives meet the needs of our economy in the face of very difficult times. Upgrade is a much nicer word than "renegotiate," which should perhaps be expunged from the diplomatic vocabulary.
That, of course, introduces me to one of the more difficult problems that the Obama administration will have on trade policy, and that is dealing with unfinished business. I've already talked about the Doha Round, which will be given priority. There is also unfinished business in ratifying free trade agreements with three different countries: Colombia, Panama, and, of course, Korea. Each one poses difficult problems. The least difficult is Panama, because the political problems that lead to the delay in the ratification of the Panama agreement have been resolved. There are a number of American companies that are interested in Panama because the Panamanian government is planning on digging a new Panama Canal, and US companies would like to provide the equipment to dig that hole. I see that agreement being completed sooner rather than later.
Colombia provides a more difficult challenge. Congressional concerns about Colombia do not involve provisions of the agreement but rather the environment in which the agreement is implemented. In particular, there are concerns about the murder of trade union leaders in Colombian society. This is part of the broader problem of insurrection and drug trafficking in Colombian society that the Uribe government has been trying to expunge. Resolving this issue will require a political deal to allow for greater prosecution of suspected criminals and greater transparency in the judicial process in Colombia.
This is very different from the situation with the KORUS FTA, where there is a vocal constituency in the Democratic party that is concerned about the auto provisions. President Obama has supported their concerns and said that we need to fix the problem. If one looks at the trade and investment data, one can see that the public debate has been somewhat distorted. However, at a time of massive unemployment in the US auto industry and troubles with the Big Three, political concerns make it very difficult to pursue a solution until there is greater clarity on what will happen with the major automakers. For that reason, I think there will be some delay on consideration of the KORUS FTA by the US Congress, at least for the first half of this year. The auto bailout program is still being elaborated, and its domestic and international consequences will have to be analyzed. I would think that once that plan is clarified, with the growing recognition of Korea's work with the United States on the global financial crisis, there will be a better atmosphere for pragmatic discussion in the second half of this year.
Clearly, President Obama recognizes the critical importance of resolving this issue successfully so that the KORUS FTA can be implemented. Chairman Rangel, one of the key officials in the Congress who will be responsible for the implementation of the agreement, also wants to see the Congress say yes to the KORUS FTA. It is inconceivable that the Congress would say no. The cost to the United States and the damage to our bilateral relationship would be too great. So the question is: What can be done to get the Congress to say yes? I think this will be a task that the administration could possibly take on in the second half of this year. Hopefully, they will find some constructive approach so that the agreement that was signed in 2007 can be implemented and both countries can begin to reap the dividends of our hard work and benefit both our companies and our workers.
Let me note one final area where trade policy might have implications for Korea. One of the difficulties we have in implementing trade policy during an economic recession is that domestic industries and workers want to play defense. They want to use the tools available in the trading system to limit competition so that they have an easier time adjusting to the more difficult conditions in the marketplace. We are likely to see more antidumping petitions and WTO complaints filed by the US government in Geneva, and many of these will be directed against China. That is part of the process. It is also important, as Secretary Clinton discussed during her visit to China, to maintain a constructive dialogue so that we continue to work together on a variety of issues of common concern. Climate change is critical. There won't be a resolution on greenhouse gas emissions unless China plays a major part. The United States will have to contribute substantially as well to ensure that China is part of the solution. China is also critical to discussions on North Korea, to dealing with Iran, and to other areas. It is important to have some balance to the bilateral discussions, which at times will be as contentious on trade as they have been in the past.
George Yeo recognized this link between trade and foreign policy in a speech at my Institute in the 1990s. He said that we should think about a "P-5" where countries that have common trading interests get together to begin to integrate more closely. This would provide a core for other countries in the region to join, moving toward the vision of free trade and investment in the Asia-Pacific region. In that speech, Yeo suggested that this group might include Korea. Well, Yeo's argument is even more powerful today then it was when he originally made the speech.
A small group of countries has entered a P-4 agreement: Singapore, New Zealand, Brunei, and Chile. Because these countries are small, the agreement initially did not gain much attention. But other countries gradually began to take note of the strengths of this agreement. Now, Australia is going to join the discussions next month, and Vietnam has said that they want to participate at least in the discussions. Mexico, Canada, Japan, and Korea are beginning to consider the initiative, due to the many trade agreements they have with the P-4 countries; so is China, which has free trade agreements with Chile, New Zealand, and Singapore. The expansion of the P-4 agreement could produce a new forum for interaction on a regional level and offer an opportunity for the Obama administration to help frame the new initiative and use it as a basis for expanding regional cooperation. While this proposal has not been fully elaborated, it has the potential to serve the interests of the United States and Korea as we deepen our bilateral partnership. Also, we could use the partnership to improve relations and opportunities in our broader neighborhood. On that optimistic note—I wanted to end my talk on US trade policy on an optimistic note, which is hard to do sometimes—I want to thank you for your attention and would be very happy to answer your questions on whatever subject is of interest.
Questions and Answers
Question: Four years have already passed since the conclusion of the negotiations. In the United States, the Obama administration is positioning itself to renegotiate the KORUS FTA. Could you please comment on this?
Answer: Charles Rangel, chairman of the powerful House Ways and Means Committee and a Korean War veteran, has very strong feelings about Korea and wants to see the KORUS FTA enter into force. He will work very closely with President Obama on a strategy to do so. The key is to find a way of accommodating the interests of Korea and the interests of the United States. If you look at the current state of trade and investment in each other's auto sector, which is the area of great concern, we already have a vibrant relationship. Korean firms have invested in the United States and produce and sell a large number of cars, even in our declining market. US sales of vehicles, however, declined from a peak of about 17 million cars a year to about 12 million cars last year, and will be down to about 10.5 this year. So there is a huge drop in demand. Yet, in January, Hyundai was one of the only companies producing in the United States that had an increase in sales, as consumers reacted very positively to two events: one, the naming of the Hyundai Genesis as the North American Car of the Year; and two, a marketing strategy that said to Americans concerned about unemployment, "If you lose your jobs, you can give us the cars back." It seemed like a risky strategy, but many Americans said, "Well, in that case, we'll buy a Hyundai." Hyundai's guarantee gave us an insurance policy, much like a long-term warranty on the car's maintenance. For these reasons, Hyundai has done very well and has great support among members of Congress in the parts of the country where Hyundai produces. So there is a big fight in the Congress between representatives from the part of the country that has foreign subsidiary plants producing Mercedes, Hyundai, and Toyota, and representatives from the northern part of the country where GM, Chrysler, and Ford produce many of their cars. Part of that is going to be resolved because of the restructuring of GM, Ford, and Chrysler and the concessions that have been made by the labor unions in the context of the efforts to restructure the overall industry. But the problem of unemployment will remain a political concern. Politicians in the affected areas will continue to work for improved benefits for their citizens. Now, if you think about it, the Ford, Chrysler, and GM workers are not going to benefit very much by exporting cars from Detroit to Seoul. First of all, the market in Korea is relatively small. It's less than one-tenth the size of the US market. More importantly, US producers don't export very many cars from the United States. The strategy of the big three, except in the NAFTA region, is essentially to produce and source their cars for a particular country from foreign subsidiaries. So GM sells many cars in the Korean market, but they are produced by GM Daewoo, which until very recently was doing very well. GM and Ford sell a lot of cars in Europe, but they are produced in Europe.
The politicians, at the end of the day, will want a solution that addresses the needs of their constituents. That will require a domestic response. Part of it is being developed in the stimulus package. More will have to be done in terms of healthcare benefits, pension benefits, and other job programs that will be an immediate benefit for constituents in those areas. Once the administration takes care of the domestic problem, I think the international issue can be more easily managed. That is an important point that is difficult to translate to an overseas audience. At the end of the day, the important thing is that politicians want to take care of their constituents. There is no way the auto provisions can be adjusted to resolve the problems of workers in Detroit, Columbus, and other cities in the United States. Hopefully, providing for workers will be a priority of Obama's domestic policy that will then make it easier for him to manage our international trade relations.
Question: Thank you very much for your enlightening presentation, Dr. Schott. I have a very short and quick question. Yesterday, I read an article in the newspaper that said that the US government would give subsidies to American buyers of new cars. I wonder if this will apply to imported cars. And what about cars made by foreign manufacturers in America? Thank you.
Answer: That issue came up last month during the debate on the stimulus package. In the House of Representatives, one member of Congress proposed giving a subsidy only to people who buy cars from Chrysler, GM, and Ford. Mazda made a statement that the proposal was illegal under the WTO, a blatant violation. They also said that they would file a complaint, and that America will be found guilty and there would be retaliation. The Congressman didn't have a response to that; all the lawyers said that Mazda was right, and the provision was dropped. I don't know what was worded in the paper yesterday, but it could be that there is an interest in subsidizing the purchase of new cars. This is why I mentioned previously the story of Buy American because as a result of the Buy American incident President Obama made a strong statement that the United States will abide by its international trade obligations. When these proposals come forward, the first test is whether they are consistent with US international trade obligations. The only way that such a provision can be consistent with WTO rules is if the subsidy is applied to all sales in the US market. It cannot discriminate against imports. It cannot discriminate among producers in the United States. It would have to apply to someone buying a car from Hyundai produced in Alabama or buying an imported Hyundai landing in Seattle or Los Angeles.
The concern is how to ensure that the entire infrastructure of the auto industry—not just the companies, but also the parts suppliers and service suppliers across a wide range of activities in our economy—maintains a level of activity that allows them to survive the current downturn. In that sense, it might make sense to have that broad-based subsidy, but if you're subsidizing 10 or 11 million sales, that can get expensive. One idea that has been pursued in France and Germany is to provide subsidies for people who take their old cars that are highly polluting or fuel-inefficient and scrap them for new a car that is more fuel-efficient. That is an opportunity to replace the old fleet and create demand for new durable goods, and that is an idea worth investigating as well. But there are many ways in which people get around those rules for a financial advantage, so one has to construct that program very carefully.
Question: Thank you, Mr. Schott, for your poignant and timely presentation on US trade policy in Korea. My question is: In order to make the WTO function and run more effectively, do you think that it is necessary to reorganize or rearrange the WTO to cope with the world trade expansion problems, which will be helpful in alleviating the global economic crisis and more beneficial to both developed and developing countries than protectionism? Will it be more effective to change or shift WTO activities to a new international trade organization under the banner of the United Nations Economic and Social Commission (UN-ESCWA)? We appreciate your views on this issue of converting the WTO into part of the UN organization.
Answer: Thank you for your question. I agreed with everything you said until the last sentence. It is very important for the WTO to play a constructive role in the current crisis and to restructure so that it better addresses the needs of international trade in the 21st century. On the first point, Pascal Lamy is working very closely with his counterparts in other international organizations and with national governments to do what the WTO can do to contribute to the multilateral solutions that are needed to get us out of this deep economic hole. I understand that he met with your president and with other ministers during his visit here and will continue to stay in close touch. I know that he has had long meetings with Dr. SaKong Il about what the WTO can contribute to the G-20 process. I am trying to facilitate further discussions of that type.
Clearly, if you look at the Doha Round, the agenda seeks solutions to problems of the 20th century. It does not address many of the new challenges and opportunities that have arisen in the past decade. However, if you do not complete the work of the Doha Round, as I mentioned earlier, it will be very difficult to get the political support for using the WTO or restructuring it to meet these new challenges, including climate change. These new challenges will require the WTO to change the way it works and with whom it works. To change the way it works, there have to be institutional reforms to bring in the views and expertise of other groups including civil society and parliamentarians who have a stake in the development of international trade disciplines. Importantly, the WTO has to rearrange its institutional structure to work more closely with other institutions. Right now, on an informal basis, the WTO is working closely with the World Bank, with the International Monetary Fund (IMF), with the International Labor Organization, with the Organization for Economic Cooperation and Development (OECD), and with a number of other international institutions. Many of these linkages are built on past working ties among the leaders of these organizations. That's very good for now, but it's a coincidence of the moment. Those relationships need to have an institutional structure, so that when the next generation of leaders comes into these organizations, they don't have to rely on personal relationships but can rather build on the work that has been done in the past by their institutions. With an institutional structure, there will be some continuity in effort. This is one of the reasons, I believe, that Pascal Lamy agreed to run for a second term as Director General of the WTO. I think that he has strong commitment to WTO reform to deal with the types of concerns that you raised.
I am more concerned about your suggestion that the mandate be changed to become an agency of the UN system, because the last thing we need is a bureaucratic overlay in organizations that have to respond more adroitly to rapidly changing conditions in the world market. Layers of bureaucracy bog down some of the old UN institutions, and reform is very difficult because of the large numbers of countries that have to be accommodated in any decision. The UN does have a trade organization in Geneva, UNCTAD, headed by former Director General of the WTO Dr. Supachai Panitchpakdi. Dr. Supachai and Pascal Lamy work closely together. I would worry about merging the two organizations in a broader UN system. It is much better to have closer institutional ties and formal arrangements between the WTO and select UN agencies that would bring the needed expertise to the problems that are interrelated.
One can't just talk about trade, one has to worry about employment consequences, development concerns, and finance, not just trade finance but the overall role of trade in development strategies. This requires a greater integration of work at the international level than we have seen so far. I should also note, and this is a criticism of my own country, that it requires a greater integration of policy at the national level. Too often there have been bureaucratic firewalls between ministries or agencies of government that are trying to work on these big global problems. One of the interesting things in the Obama administration is that he has set up a number of coordinating offices in the White House to integrate policies on cross-cutting issues such as energy, environment, and climate change. He has independent groups such as one headed by Paul Volcker to provide independent advice across a range of financial issues. I think this is the future direction for international agencies and I also hope that it will be echoed at the national level.
Question: In Korea there is a very sharp confrontation between the ruling party and opposition party over the KORUS FTA. The ruling party would like to ratify it immediately, preferably during the current session. The opposition party urges them to wait until the bill is submitted to the US Congress. If you were an advisor to the Korean National Assembly, what would your view be on this issue? Would you support trying to ratify it as soon as possible or taking a wait-and-see stance?
Answer: At the end of the day, the strategy that is most useful for Korea to pursue or for the United States to pursue is the one that will achieve the greatest political support domestically for moving forward with the trade agreement. But perhaps even more importantly, one should pursue domestic policies that allow you to take full advantage of the trade agreement, which is why essentially you have this trade agreement: to encourage the type of policy reform that boosts productivity in your economy and creates more economic growth and employment. There are a number of factors. My advice to the National Assembly would be very simple, and that is: Do what is in the best interest of Korea by looking at the risks and opportunities in the political debate in Korea. There are a number of advantages in moving quickly. There are a number of advantages to having a deliberate approach. There are risks in both options.
One thing that I have found, working on trade for the past 35 years, is that when there is a delay, a number of things can happen that you didn't anticipate. These things don't have to be trade-related. They can be political events, security events, or other developments that distract attention away from the legislative agenda. So that would imply that when there is an opportune time to make progress, you should make progress. Also, delays provide an opportunity for further criticism in society: Until the deal is ratified and implemented, critics can focus on the perceived adjustments without having to say that they are losing the gains that will come once the agreement enters into force. It's a one-way bet. We saw that in the United States when President Clinton delayed the ratification of NAFTA. During the eight months in which we negotiated side agreements on labor and the environment, the opponents of NAFTA had an open field to attack the agreement, and no one responded. I would argue for action as soon as there is a good opportunity, and the benefits greatly outweigh the risks.
The bottom line is, this is a political decision in the context of Korean politics, and consideration of the United States should be secondary. Hopefully, the US Congress will have the same overall perspective as the Korean National Assembly, seeing the agreement as a highly valuable accord that is one piece of a very important bilateral relationship, and will agree to implement it as soon as possible. I'm hoping that it can be done in the second half of this year. I think the best we can do is to create an atmosphere that makes it more amenable for congressional approval in the United States. When the United States does act, I hope we have a partner that firmly supports the agreement like we do.
Question: This morning, I saw Mr. Bernanke on TV saying that the economic downturn in the United States will end at the end of this year. I would like to know what predictions economic experts in the United States are making about the business cycle in America. I hope that American business improves, because the bad economy in the United States has affected Korea very seriously.
Answer: Some of my colleagues have worked very closely with Mr. Bernanke in the past. Our Deputy Director has coauthored a book with him on inflation targeting. So we are fairly close to his thinking. I think his projections and those of the Federal Reserve, which has some of the most able economists in the country who devote a lot of resources to their analysis, are usually very credible. They reflect the common view among American economists. This current quarter will be the worst one that we have had. We will then see a gradual improvement: a weakening of the economy through the year, a bottoming of the economy toward the end of the year, and a recovery next year. The concern is that the recovery won't be as rapid as one would hope for, and so we are still looking at a prolonged period of softness in the economy. Now that, I think, is a view that many of my colleagues share. We have among us former members of the Council of Economic Advisors, chief economists of the IMF, treasury officials, and others.
Others are more pessimistic and their views cannot not be totally discounted. Last year, their forecasts were more accurate than those of mainstream economists. The downturn has spiraled downward faster than Bernanke had predicted. I think that we have more information now about the fragility of the banking system and the transmission mechanisms that have spread the recession around the world. I am cautiously optimistic that we'll see modest growth in 2010 and hopefully stronger growth in Korea as demand begins to recover. One thing that we are concerned about is the response in Europe. That's why the G-20 process is so important, and why we need to ensure that all of the major economic regions contribute to the global stimulus that is needed to recover from this deep recession. China has done quite a bit. Now, the United States has put in a large amount of money. Other countries including Korea have also committed substantial resources for recovery. We need to see that in Europe.
Answer: Well I'm glad that we pushed for one last question, because that is a wonderful question to pose. This is an area where US and Korean industries can work more cooperatively. We are already beginning to see that in the development of new engine technologies. LG Chem has been a major developer of new battery technologies. This is one area where working together can boost productivity in both economies, and it is one of the things that I had in mind when I suggested that we should look into ways in which we can work together to boost the global competitiveness of our industries. This is important for the future. GM, Chrysler, and Ford are not going to go back to making a lot of SUVs and go back to the production profile that they had 5 or 10 years ago. They are going to have to look at a new business model, one that will have to accommodate the new regulatory environment in which carbon will have a price and will affect the way things are produced, what is produced, and where it is produced.
That is why, in essence, climate change is such an overriding challenge for our economies, because if we want to price carbon, which has been free, we are essentially saying we are going to redistribute wealth both within countries and between countries. If we want major developing countries to participate in this global scheme to reduce greenhouse gas emissions some of the wealth or technology will have to be transferred to them as part of the global bargain. A price on carbon will change the competitive climate of many industries that have a large carbon footprint, depending on how the schemes are developed and whether you have carbon taxes or whether you have emissions permits or whatever type of regime is established to reduce the level of greenhouse gas emissions.
This regulation will be new. There are lots of economic issues and legal issues. But we are already beginning to see the regulation take place. I was in Canada last summer, and in one of the provinces, in Saskatchewan, they are imposing a carbon tax on electric utilities. That tax is also going to include regulatory mandates that require upgraded facilities that would cost on average $1 billion for a medium-sized power plant. Well, someone is going to have to pay for that, even if that cost is spread over the twenty- to thirty-year life span of the power plant. It will be the taxpayer, the shareholder of the electric utility, or the consumer of the electricity. If you're paying more as a consumer of electricity and you're an industry, then you're going to be at a disadvantage against competitors on the other side of the border who don't have that carbon tax or added fee. So it's going to create competitiveness challenges that politicians are going to want to address right away to defend their local industries and workers.
So, this is a huge challenge. That's why I think climate change is one of the issues that Secretary Clinton talked about in terms of the need for broad cooperation between the United States and Korea and many other countries. It is also something that individual industries have to think about as they go forward, probably none more than the auto industry, because transportation has such a big carbon footprint. Transportation is one of the biggest sources of greenhouse gas emissions in the United States. The ability to work together on this problem could yield great benefits and breakthroughs for the auto industries in both countries and give us both a competitive advantage going forward. Depending on the skills of the companies, researchers, and scientists, Korea and the United States clearly have a good advantage given the wealth of human resources and expertise that we have in these areas. So I see climate change mitigation as an area of opportunity. And I'm very pleased that you raised that question, because it is such a central issue going forward.
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