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GLOBAL MARKET TRENDS ON THE 21ST CENTURY: AN ECONOMIC PERSPECTIVE , DISCUSSION BY C. FRED BERGSTEN, DIRECTOR INSTITUTE FOR INTERNATIONAL ECONOMICS

FOR IMMEDIATE RELEASE April 3, 2001

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MR. BERGSTEN: Having heard those two introductions, Chairman Harmon whispered to me, You should quit now while you are ahead, rather than make the speech.

Let me thank Vanessa very much for your kind comments, Senator Hagel, and to Chairman Harmon for inviting me to share some thoughts with you today.

As the introduction said, we did at our Institute for International Economics hold a major conference last summer on the future of the Ex-Im Bank. Many of you participated in that and know about it. It was a very high-level conference. Bob Rubin, Secretary Summers, Secretary Daley, Chairman Leach of the House Banking Committee all participated. We had leading industrialists, leading financiers, the heads of a number of ECAs from other countries all participating, and the objective was to both honor the Bank on its sixty-fifth anniversary, but more importantly to look to the future and take up the challenge that has been laid out by Chairman Harmon, by others, to look forward and ask what should be the role of the Ex-Im Bank in the 21st century.

Our fundamental conclusions were certainly along the lines suggested by Senator Hagel just now, and what I want to do is suggest the broad global economic trends and U.S. economic interests within which those questions need to be answered and then lay out some very specific proposals for how the Ex-Im Bank should be moved forward to meet those challenges going ahead.

We have published both a large volume of the presentations that were made at our conference and a very short four-page brief that puts together our conclusions. Those were, I noticed, on the table for you as you came in. I commend them to you if you would like to look at all of this in more detail after I sketch some of these conclusions in my remarks this morning.

What I first want to do is set out the economic context within which I think decisions about the future of U.S. trade and Ex-Im Bank in particular need to be made in the years and, indeed, decades going forward. It is the backdrop against which to consider policy in this area, and I think it is essential.

As I consider it, I believe there are four dominant trends of most relevance for this area that I would like to briefly mention and be happy to answer questions on later if you would like to know more details about them.

The first, and to pick up a point stressed by Senator Hagel, is that the U.S. has not only become increasingly dependent on foreign trade, but will become even more dependent on foreign trade going forward.

He mentioned the crucial statistic that even many exporters and traders are not aware of that over the last generation, the share of trade in the U.S. economy has tripled, and that, I can tell you as a student of international history, is a stunning and rapid change for any country as mature and advanced as the United States.

Only a quarter century ago, it was fair to think of the United States as a largely self-contained continental economy, but that, of course, is no longer true.

Indeed, studies that we have done at my institute suggest that a very large measure of credit for the improved economic performance of the United States over the last 5 to 10 years can be attributed to that increase in globalization.

If you try to determine what has underlay the tripling of productivity growth in our economy over the last 5 years, from the miserable 1-percent-a-year productivity growth from the early '70s to the early '90s to the robust 3-percent-plus that we have been experiencing in the past 5 years, our calculations suggest that as much as half of that can be attributed to the increased globalization of the American economy, the competitive pressure it has brought to bear on American industry, the lower prices it has generated in our economy, therefore, the ability to create more jobs and bring unemployment down to unexpectedly low levels without inflation, all that due in large part to globalization and the increased interdependent of the United States with the rest of the world economy.

We have also published a number of studies that suggest that the kinds of firms represented in this room, firms who export do better than their compatriots.

If you compare American industries and individual American firms against their peers and allow for everything else except whether some are involved in trade and others are not, you find those that are involved in trade have 20-percent higher productivity, pay their workers 10-percent more, are 10-percent less likely to fail and go bankrupt, in short, are better providers for their own suppliers, their own customers, their own workers, indeed, the economy as a whole.

But the important bottom line for today is that globalization, as much as it has already advanced here in the United States and, of course, worldwide, is still at a very early stage, and unless governments do something catastrophic to foul it up, which they did a century ago, but assuming they don't repeat those errors, our studies all show that globalization is at an early stage.

How do we know that? There have been a series of studies over the past 5 to 10 years which compare trade within countries and trade between countries normalizing for everything else. Now, some of those studies, most interestingly, have been done about the United States and Canada. If there are any two countries in the world where you might think the border did not matter, it would probably be the U.S.-Canadian border, right? Most Canadians live within 100 miles of the United States. Most of them speak the same language. We have got a free trade area going back over a decade. So the U.S.-Canadian border can't matter much, right?

Well, studies have been done comparing trade between Victoria and Toronto, Seattle and Toronto, or similar pairs of cities, provinces within the two countries, and the conclusion is that trade within the two countries is still 15 to 20 times as great as trade across that border between the two countries, and, therefore, the implication is that we have much, much further to go in terms of international trade and increased interdependence.

Similar studiers have been done within Europe. France and Germany, they are in a common market. They have got a single currency. They have got a full economic union. Yet, trade within each is still a heavy multiple of trade between them, normalizing for everything else.

The message is that globalization is still at a very early stage. We are likely to become increasingly interdependent. It is likely to be a dynamic positive force in our economy as it has been in the past. It does cause adjustment problems, dislocations, and anxieties that have to be dealt with by policy, and one can never short-circuit that element, but the bottom line is clear, persuasive, and very positive if we have the wit to take advantage of it as Senator Hagel indicated.

The second major trend is that in addition to the U.S. being likely to become more and more interdependent, other countries, of course, are in the same boat, and they particularly depend on trade, even more than we in an absolute sense, and particularly in periods like now where the world economy has slowed, where domestic demand growth has weakened, and, therefore, the emphasis on international trade and transactions becomes even greater.

That means that those other countries, even more than we, despite our increased attention to trade, are competing extremely, actively, and aggressively in world markets to maximize their national economic advantage.

In the case of export finance, we, of course, know that that is the case, again, as Senator Hagel mentioned. We know that many of our competitors have been developing wholly new techniques, market windows that try to blend the advantages of public and private enterprises in a new competitive vein, pseudo-untied credits which amount to providing new forms of government finance for sales into emerging market economies.

We know that there are new forms of competition which we have been slow to meet and thereby have undermined our ability to take advantage of the increase in global markets and the potential further payoff for increased trade and globalization for our own economy.

In short, the competition is getting rougher just as the need for the U.S. to compete more effectively because of its increased international dependence is rising substantially, and those two underlying trends are absolutely fundamental to consideration of all policy in this area.

A third mega-trend is the increasingly central role in the world economy of the advanced developing countries or what we now normally call the emerging market economies.

That, of course, is a central point for today's discussion because the great bulk of export credits from this institution, but its competitors around the world as well, are channeled into the emerging market economies, the rapidly growing, large population countries in particular, the Chinas, Indias, Brazils, Mexicos, and the like, who on all projections are going to become increasingly central players to the entire world economy over the next two to five decades.

There are various World Bank projections looking out to 2020 or 2050 which conclude that 12 of the largest 15 economies in the world will then be today's emerging market economies, or 15 of the top 20 will be today's emerging market economies. These are the countries with large populations, rapid economic growth. Even when they suffer temporary slowdowns, as they have through the Asian crisis--and some are today--they will almost inexorably become the world's major economic players, and those who participate actively and effectively in their markets and compete there for trade, for investment, for economic exchange will reap the major benefits of this increased globalization of the world economy.

That is why entry into those markets, successful penetration and competition in those markets, is so absolutely essential to the United States to do the kinds of things I mentioned before and to meet the competition because other countries are well aware of that and are trying to do it as well.

The fourth major trend I would mention is the big negative that has to be put into this picture. It is that the United States enters this period and enters this promising possibility for much further improved economic performance for the reasons I mentioned within massive international trade deficit.

The United States has been running large and essentially growing trade deficits now for over two decades. This year, the trade deficit will probably hit something like $500 billion, 5 percent of the GDP, rising by 50 percent a year for the last 3 years.

What that trade deficit requires is that we attract $2 billion of foreign capital every working day to keep our books balanced. Just like an individual who runs up debt on his credit card, if we spend $500 billion a year more than we earned, we have to borrow an equal amount to finance those purchases and keep things running in a relatively smooth way.

So far, we have fortunately been able to do that, but unless all economic history has been repealed, we know that we are moving very close to the danger point at which two things based on our own history will happen.

One, as the trade deficit grows and particularly if our domestic economy slows down and unemployment begins to rise, trade protectionism will break out in a vicious way.

The best example of that is the early Reagan administration. No one doubts that the Reagan administration believed in open markets and free trade. Yet, its own Secretary of the Treasury, Jim Baker, said at a speech at my institute in 1987 that the Reagan administration applied more trade controls, import quotas and the like in its first 5 years than any other government in the 20th century.

The reason was that the U.S. trade position went from a surplus, when I left the Treasury, to a deficit equal to 4 percent of the GDP in 5 years, and the result was enormous political pressure to restrict trade in autos and steel and machine tools and a whole host of other things which even the free-trade, open-market Reagan administration had to capitulate to. We know it will happen again, just like night follows day, if we do not correct the external imbalance.

Secondly, a financial crisis will emerge. At some point, when the rest of the world decides it does not want anymore to put $2 billion a day into our economy, does not believe that our economy will outstrip everybody else and, therefore, deserve that kind of investment, the dollar will crash. I do not think it will fall by 50 percent, as it did in 2 years in the mid-1980's, but it could easily fall by half that amount, and if it did so, inflation would shoot up, interest rates would shoot up, 200, 300 basis points. That, of course, would tank any prospect for early recovery from the current slowdown and put the economy in deep trouble.

In short, the trade deficit is the one big imbalance and one big Achilles' heel in an economy which, despite its current slowdown, I believe, is still quite strong in fundamental terms, but it is a huge risk both in the short run and in the longer run for the reasons I mentioned.

Now, obviously, there are only two ways to correct a trade imbalance. One is to cut imports, and that is why the protectionists pressure comes to bear when nothing else has been successful. The obviously constructive way to deal with the problem is to expand exports. A lot of things go into that, faster growth abroad, probably a more competitive exchange rate for the dollar, negotiating down barriers to services trade in a new multilateral round in the WTO, but obviously we have to do everything we can through our own devices in order to promote those exports.

As many of you know, because you suffer from it, we often do the contrary. We often provide disincentives to exports and block our own trade.

I just got back from a week in China, and among other things, always talking with the Chinese--fortunately not about airplanes--that had not happened yet--but about the U.S.-China bilateral imbalance, and the Chinese say, Well, you know, if you would just let us buy some of the things we want to buy from you, the deficit would not be so bad.

We did a big study on this in my institute several years ago and concluded that the earlier era of export controls and inadequate export finance from Ex-Im Bank and other disincentives were costing us 30- to $40 billion a year of potential exports that we would otherwise make to the rest of the world.

Now, Ron Brown and his colleagues made some changes in those earlier controls, but others have come back on the board. We are re-doing the study now. We suspect the numbers are at least as big, if not worse.

But on the positive side, we have to do everything we can to make sure at a minimum our exports play on a level field and that we are able to compete in world markets so as not to make the situation worse.

The new Bush administration, quite commendably, wants to renew U.S. leadership in opening world markets, reducing trade barriers around the world, and negotiating new agreements, the Free Trade Area of the Americas, a new World Trade Organization, multilateral negotiations, and the like, and I think that is absolutely critical for all the reasons the Senator mentioned and that I am mentioning now in my remarks, too.

But I can speak from my own experience in Government and watching this process for now several decades that any administration which attempts to get congressional and public support to reduce barriers abroad had better be supporting U.S. exports here if it wants to put together a coalition that will support a continued opening of trade policy because, if it does not, there will be many pressures for the reasons I already mentioned to go the opposite direction and close our market rather than open theirs. That is not theory, though theory supports it. That is history, and it has happened about once a decade in the United States in the last 30 to 40 years, and it will predictably happen again unless we mount a coherent internally consistent program on tarde as a whole, including support for our own exports.

So the bottom line is that for a variety of big-picture as well as very precise political, as well as economic reasons, the United States simply must have a strong export promotion program, and the Export-Import Bank must be at the center of that program.

As Senator Hagel said, it would be a huge mistake--repeat, a huge mistake--for the United States to reduce its export credit program, its Ex-Im Bank program at this point in time.

As those of you who have been in the game for a while know, similar proposals had been made before. There were efforts in the middle 1970's to reduce significantly the Ex-Im Bank, and indeed, when I became responsible for Ex-Im Bank policy and the U.S. Government at Treasury in 1977, the program had been cut to a mere pittance. I quadrupled it in 4 years with the support, of course, of the Ex-Im Bank leadership at the time, brought it back into play, but then in the 1980's, there was another effort to truncate it, indeed on some people's watch even to eliminate the bank.

What is instructive is that every one of those efforts not only failed, but was quickly reversed because the national consensus developed that it would be crazy to do it, but time was lost. Time would be lost again by such an effort. Backsliding would occur, and when time is of the essence in today's just-in-time world economy, we would lose further in this highly competitive game that I have already described.

So point one is simply do not move backward, it won't work anyway, but it would be extremely costly in a whole variety of terms, including the broad trade policy terms that I mentioned.

Now, let me then revert back to the conference we ran last summer, the results that we tried to synthesize in the book, particularly the policy recommendations and conclusions that we derived that are in the short policy brief prepared by my colleague, Gary Hufbauer, which was on the table for you to pick up.

The first conclusion was that far from cutting the size of the Bank, the size of the Bank needs to be increased substantially going forward, and we would judge something on the order of 50 percent.

The annual program budget, in other words, should rise from the current level of something like $13 billion to around 20. The annual appropriations should rise from under a billion dollars to something like a billion and a half. The new authorization ceiling should take the Bank from its current $75 billion to well over $100 billion in order to give room for the kind of scope and expansion that is needed.

Only with that kind of magnitude, do we believe, will the Bank be able to carry out the functions that are necessary to implement the objectives and take advantage of the opportunities that I mentioned before.

Second, the Bank needs legal authority to broaden its activities in several major ways. The principle is to enable the Bank to match foreign competition, match it tit for tat, then perhaps negotiate a reduction of those practices, but unless we are able to match in the first place, we know, again, from history that the rest of the world will not take us seriously and there will be no chance of getting them to reduce egregious practices.

The first of those new authorities would be to match the market-distorting market window activity of other countries in their competition with us in third markets, and incidentally sometimes in their competition with us in our own domestic market as well.

The market window option does provide highly competitive new export finance practices in other countries. We know that practice will spread to additional countries. We know that we will continually lose opportunity if we fail to do it as well, and the new authorizing legislation should make clear that the Ex-Im Bank can do the same.

The second specific is to authorize use of the war chest funds to match so-called untied aid by Japan and other foreign competitors.

The whole war chest concept, of course, was created in the 1980's to cope with tied aid by other competitors. That was quite successful, and indeed, it subsequently led to some negotiated reductions in the whole practice of tied aid to the extent that a paper in our conference suggested that that was no longer much of a problem, but it revealed the basic truth that only if we match them can we then fight them successfully in getting a reduction in the practices themselves.

Now it needs to be done vis-a-vis pseudo-untied aid so the Bank can fight fire with fire in that area, too.

The two-fold purpose of changes in both the quantity and quality of the Bank's programs would be then to enable us to match what the competition is doing and to credibly go to that competition and seek new cease-fire rules that eliminate the most egregious practices.

Again, going back to my own period in the Treasury over 20 years ago, we inherited a similar situation, a weak Export-Import Bank, foreign competition that had broken into new areas on, at that time, rather rudimentary things like maturities, interest rates, some of the basics of export credit. So we launched the two-pronged program that I am essentially suggesting today.

We quadrupled the size of the Bank in 3 years. That made the U.S. credible again. We launched the practice, particularly through my deputy, Gary Helfbower, at the time which led to the first OECD guidelines and consensus underlay the cease-fire which has held in large part on the issues that it has considered for almost a quarter of a century, but the lesson is you cannot do one without the other.

Secretary Summers appeared at our conference last summer and spoke quite strongly and tellingly against some of the new foreign competitive practices and essentially warned the other ECAs to cut it out. The problem was his words were not very credible because we did not have enough competitive firepower ourselves to convince them that we would fight tit for tat, therefore giving them a motive to reduce the kinds of practices that we all want to see eliminated.

So a two-track strategy is absolutely essential. Both the quantity and quality of the Bank's programs have to be changed if we are going to succeed in that area.

The final point that we make coming out of our conference, our analyses, and the publications you have in front of you is to take the opportunity of the new reauthorization legislation to get rid of some of the serious constraints on Ex-Im Bank policy that have crept in over the last 10 to 20 years.

It is easy to understand why many of those barnacles were put in place. They always promote a seemingly desirable policy objective at the time, whether it is an economic objective, a foreign policy objective, an environmental objective, or some other, but what they have cumulated to is a significant body of constraints which limit the flexibility and scope of our own export credit agency to meet the competition, things like the local content requirement which Chairman Harmon has already made important progress in dealing with, but which has to be dealt with further because, in a world of global production and outsourcing, products are now seldom produced in one country and exported to another market, but rather the value chain is divided up. Different componentry, different shares come from different countries, and new devices need to be put in place to recognize that in terms of export finance, perhaps through consortia of the ECAs working together on individual products, recognizing that their shares of an individual deal can best be financed if they work together rather than require some restrictive content rule here, which is not required elsewhere, and, therefore, again, puts us at a competitive disadvantage.

The use of the Bank to carry out purposes of foreign policy sanctions has become another area as in the Tuman Oil case that the chairman mentioned at the outset which become not only a deterrent to trade in a given case, but add to the international concern that the United States is an unreliable supplier, and that hurts not just sales that are financed by the Ex-Im Bank, but they hurt American exports overall.

At my institute, we have done extensive studies of economic sanctions. Indeed, we have studied every single case of sanctions of the 21st century. We are about to publish a new volume that updates that with all the cases of the past 5 years, and the conclusion is that sanctions in the broad, not just vis-a-vis Ex-Im Bank, but all U.S. economic sanctions have become a terribly ineffective tool, a tool of declining utility where now, even on generous interpretations, less than one in five cases works out in terms of achieving anything like its initial foreign policy goals.

Those numbers have declined very sharply as the world has become more multilateral and other suppliers are available, as the U.S. has increasingly resorted to unilateral sanctions which are particularly ineffective. That, too, needs to be changed, particularly in the case of the new Ex-Im Bank legislation.

Finally, the Bank needs to have a beefing-up of its administrative capabilities. It needs more flexibility in the kind of people it hires, the pay it can offer, the incentives to bring in staff who can enable it to compete with the market windows and more private sector-oriented competition that it faces around the world.

In short, the agenda is a large and ambitious one. I know some people will suggest that I an Senator Hagel and Chairman Harmon and others talking at this conference are singing to the choir, and that is correct, but it is also true that the choir needs to sing from the same song sheet and needs to have its act together if it is going to be effective.

In addition, the choir once in a while needs to learn a new anthem and go into a new mode in carrying its message forward.

I certainly hope that the efforts that we have developed at my institute from the conference last summer running forward, my comments today, Senator Hagel's remarks, what I know Chairman Harmon will be saying, and others in this conference will help point the way to a truly new era for the Export-Import Bank.

It has lived for 65 years. I do not know how many more decades we will need it, but we are certainly going to need a beefing-up of its performance both quantitatively and qualitatively in the years and, I suspect, decades ahead, and I am delighted to have had a chance to share some of these thoughts with you.

Thank you very much.

I was told that I could now take a few questions, and if there are any, I would be delighted to do so. The chairman says I was so thorough, but I can't believe it. So I am going to give 30 more seconds to see if anybody has any questions. Right here. There are microphones, I guess, right here. Maybe you could identify yourself just for the audience.

QUESTION: Thank you, sir. Mustafa Salim Nyang' Anyi, Ambassador of Tanzania.

My small question would be from the African perspective, Sub-Saharan African perspective. We have for the last 3, 4 years been battling on how to increase U.S.-Africa trade. Finally, come the end of last year, we succeeded. We have now the Africa bill.

I would like to hear your thoughts and probably President--Chairman Harmon to tell us how the Ex-Im Bank has positioned itself and whether the resources have been made available to be able to meet the expectations of the African entrepreneurs in utilizing the opportunities offered to Sub-Saharan Africa through the Africa bill. Thank you.

MR. BERGSTEN: Mr. Ambassador, I would certainly defer to Chairman Harmon, who I know has taken very active initiatives in Africa, traveled actively in Africa himself, to try to do exactly what you said. He can give you the details.

I would simply note that enabling the Bank to do exactly what you rightly said will require the kind of increase in resources that I was talking about.

Inevitably, the Bank is going to spend a lot of its money on big-picture sales to big countries, China, India, Russia, and the like.

To have the resources to deal effectively with Africa where the projects are smaller, the countries are smaller, and there is a large multiplicity of them is going to require both the quantitative and qualitative improvements that I spoke of, and I think that is a powerful argument for the kind of reforms that I was suggesting. I hope all of those who are deeply interested in expanding trade and overall relations between the United States and Africa will work hard for these kind of changes for exactly the reasons you suggest.

Jim, do you want to answer that one specifically now?

CHAIRMAN HARMON: We made a concerted effort to try to expand in Africa, which was in a way mandated by Congress. It was really, as I say tomorrow in some of my comments, Congress' leadership that pushed us towards focusing on Sub-Saharan Africa, and many of us travel there and we work very hard.

As you know, Mr. Ambassador, we have expanded. From 1998, we supported about $50 million of exports to Sub-Saharan Africa, and in the calendar year 2000, that number grew to slightly less than $1 billion. That is a very significant increase in several years, and with the continued focus, it is a very good lesson to learn.

Ex-Im Bank did not have the resources, as Mr. Bergsten said, to do what we really needed to do in order to reach around the world. We had been maintained in our administrative costs at such a conservative level that we just do not have the people or the funding to have representatives around the world. One could argue we should have someone in Sub-Saharan Africa, and had we been there, we could have competed with the Europeans more effectively because there is good business to be done in Africa.

So I come back to what Mr. Bergsten said, which I think is very valid. If you look closely to Ex-Im Bank, you have to conclude that we, in order to compete with the other countries, need to have representation. We need to be focused in other parts of the world. Africa is a very good illustration of that, and look how much more business we were able to support and how much we will be able to support in the future.

A lot depends--and that is where I started my comments on saying how important a year it was. A lot depends on the response in Congress and in the administration to much of what Mr. Bergsten has said and what Senator Hagel has said and what I will say tomorrow. This year is a critical year for Ex-Im Bank, for the future of exports from the United States, and Africa is really an example of how much more we could do with adequate resources.

So I thank you for the question. I turn it back to Mr. Bergsten.

MR. BERGSTEN: Other questions?

MR. BERGSTEN: Well, I guess you are right. I answered all the questions. Let me thank you all. It is a great pleasure to have been here, and I wish you best of success in the rest of the conference.