Remarks by Franklin L. Lavin

Under Secretary of Commerce for International Trade

California Council for International Trade
9th Annual Trade Policy Forum

San Jose, California
April 19, 2007

As Prepared

I would like to thank CCIT for having me here at your annual international trade policy forum. I’d like also like to thank the sponsors, including Wells Fargo, Bank of America, The National Foreign Trade Council, and special appreciation to eBay for hosting us.

What I would like to talk to you about are some of the important trends and issues being discussed in Washington that are re-defining the international trade landscape not only for American exporters, but for the global international trade community, of which you here in Northern California play an important part.

International Trade Trends

This is the right time to be engaged in international trade. 95 percent of your potential customers- and competitors- are outside of the U.S., and they are more accessible than ever before.

I believe we are at a defining moment in international relations, with the mechanisms of the Cold War largely dissolved or re-oriented, but without the emergence of replacement architecture that helps provide stability to the international system.

I would like to offer some general thoughts on the economic dimension of these issues, and then talk about specific challenges we have in front of us this year.

In economic terms, there are three large-scale, systemic trends unfolding that you should be aware of.

First, we have seen the emergence of three billion new customers- many along the Pacific Rim- as China, India, and other nations that have come on stream over the past 25 years. Some might note this could also imply three billion new competitors. This is effectively a doubling of the world’s population connected to the global economic system, creating a global operating environment that is very different than even a generation ago.

The second trend is the death of distance, in other words the emergence of a global business model that assumes distance is no longer central to business decision-making. The adoption of e-mail, global integrated logistics, web-based management, and an international trans-national managerial class means that businesses have unprecedented flexibility as to what activities they undertake and the countries in which they can operate.

The companies here in San Jose and Silicon Valley have been at the forefront of making the world a more connected, real time place.

EBay is one example of a company here in San Jose that has been a catalyst for and a beneficiary of this trend. Its international presence has grown so that now more than half their revenue is coming from outside the U.S. through its 36 sites scattered around the world. As users around the world learn about eBay, the more they come shopping here in the U.S. As a result a significant number of domestically generated auctions end with an international buyer.

The third trend is the revolution in trade liberalization since the GATT was established in 1947. The implications of this is that today it is easier for foreign companies to do business in the U.S., and it is easier for U.S. companies to do business abroad than ever before. In 1947, the average weighted tariff of the U.S. was about 40 percent, and now it is less than four percent. This is a net positive for the world economy, for innovation, and for the creation of dynamic markets.

The U.S. has been a leader in global trade liberalization, not just through GATT and WTO, but also with Free Trade Agreements, bilateral agreements and through the application of market forces wherever possible. Each of these activities makes our country stronger and keeps our economy the most competitive large economy in the world.

These three trends together help explain why there has been extraordinary growth in international trade and investment in recent years.

Global FDI flows have more than doubled in the past three years, from $558 billion in 2003 to $1.23 trillion last year. U.S. exports have doubled in the last dozen years, from $720 billion in 1994 to $1.4 trillion last year. Indeed if you look at exports share of the overall U.S. economy, they comprise 11.1 percent of U.S. GDP last year, the highest ever in dollar terms. It was 9.6 percent in 2002 and 5.2 percent 50 years ago.

The world is spinning faster, and it has never been easier for U.S. businesses to enter other markets, and at the same time it has never been easier for foreign businesses to enter our market. This helps explain why at a moment of a global economic boom, we are also seeing a consistent strain of economic anxiety.

The Administration’s Economic Policies

Let me touch on that economic point for a moment, because regardless of ones view of trade policy, we have a strong consensus in favor of economic growth. The Bush Administration is firmly committed to this path through policies that lower taxes, encourage innovation and promote free trade.

Consider what the numbers have to say.

Today, we have unemployment of 4.4 percent, by far the best of the major industrialized nations. More Americans are working than ever before, with more than 7.8 million new jobs created in the last four years.

We have double-digit export growth, and a U.S. economy that grew over 3 percent last year, also the best of the major industrialized nations. The tax cuts have returned more than a trillion dollars to the pockets of working Americans.

We continue to be the most dynamic and innovative economy in the world. We are the world leader in patents and in Nobel Prizes. I don’t think the government can take credit for corporate success in innovation, but perhaps we can take a bit of credit for a tax policy that rewards research and development, and an economic policy allows the process of discovery to be set in motion.

Beyond the research and development tax credit, innovation is also helped by our strong commitment to intellectual property rights worldwide. Companies are not going to invent unless they can benefit from their work.

And when it comes to opening up foreign markets, this Administration has signed Free Trade Agreements with more than a dozen countries since 2001. Countries with which we have a FTA represent only seven percent of the GDP of the world (not including the United States), yet these countries take more than 42 percent of our exports. FTAs work for America, and when you take down barriers to competition, U.S. companies do very well.

This year, the Bush Administration will be submitting FTA’s with four countries to Congress for approval: Peru, Columbia, Panama and Korea. These represent an important step ahead for the U.S. economy as well as an important political step. Whether we are looking at policies to undercut narco-traffickers in this hemisphere, or to show support for an ally in Asia, our FTAs carry with them an important policy message in addition to economic benefits.

In addition to FTA’s, there is the Doha Round at the World Trade Organization. The Institute for International Economics tells us that a successful Doha Round would raise U.S. household income by an additional $100 billion a year. The IMF tells us that it would lift millions of people around the world out of poverty. Yet consensus in Geneva remains elusive. The historic breadth of WTO membership, with virtually every country in the world a member or in the process of becoming a member, combined with the significant domestic political ramifications of agricultural reform in many societies, contribute to the difficulty of reaching an agreement. But the United States is firmly committed to exploring every avenue to reach a successful conclusion.

Let me touch on China for a minute as I wrap up. All three major trends I mentioned at the beginning of my remarks can be seen most acutely in our China trade policy: millions of new customers an competitors, the death of distance as China’s manufacturing strength has become integrated into global manufacturing networks and the decline of trade barriers as China acceded to join the WTO.

This presents a sharp challenge and an opportunity for the U.S. economy. It is in the strategic interest of the United States that China be integrated into the world trading system. That means a China that develops an internationalized, rules-based, market based economy.

The United States has developed a multi-faceted approach to this challenge, with negotiation and dialogue being our preferred approach. But we also have other options, such as countervailing duty mechanisms and the WTO dispute settlement mechanism. All of these approaches add up to a comprehensive strategy to continue helping China become a mature, full partner in the international trading system.

Conclusion

In conclusion, we are in the midst of a global revolution in international business practices. Many of the companies here in the bay area are at the forefront of that revolution. The technology you have developed, deployed and put in the hands of billions of users worldwide has added fuel to the fire of market economics, with the potential to take the world to the highest levels of prosperity ever seen in history.

At the same time, we may see protectionist backlash to the policies that support and sustain this movement, both in the U.S. and in other countries. We may see the emergence of transnational threats, such as computer viruses or terrorism that have the ability to disrupt this evolution. And leaders in business and government, both here in the U.S. and around the world are going to have to make a lot of hard choices as we attempt to guide our countries and companies ahead.

The fact that you are here means that you understand what is at stake and are committed, as am I, to overcoming these obstacles, so that the vision of a more prosperous and secure world can become a reality. So I want to thank you for your conviction and your partnership, not only to keeping the American economy strong, but to enhancing global prosperity through trade.