April 29, 2008
HP-956

Remarks by Assistant Secretary Clay Lowery on Promoting Economic Growth
and Investment Through Free Trade Before the Charlotte Economics Club

Washington, DC-- Thank you for inviting me here today to speak about the importance of promoting open investment and free trade.  The implications of world trade policies are in the headlines everyday.  The benefits of trade are being questioned, the free trade agreement (FTA) for Colombia has been held up by Congress, and finalizing the Doha round has become more complicated as high food prices are exacerbated by export controls.  With such varied news coverage of trade, it is easy to lose track of the big picture - free trade will lead to growth for the U.S. and world economy. 

In simplistic terms, trade is contentious because trade is not just about the big picture.  Trade policy affects the everyday lives of people from the cost of food to how they earn a living.  As a result, I do not want to talk to you just as a policymaker with facts, but as a realist, about how trade improves the every day lives of Americans. And the first realistic thing to say is that we need to understand what free trade can and cannot do, and trade promotion must also be accompanied with targeted assistance to help displaced workers find training and new employment.  

In this speech, I will begin by talking about the topic of trade and investment in general and what it means for the United States.  Then I will look more closely at the benefits of our trade promotion agreements, and then closer still at financial services because of the importance of that sector to North Carolina.  Lastly, I will talk about programs to help with the adjustment that comes with freer trade.  Because we must face the fact, as my boss, Secretary Paulson says, that the global economy is here to stay.

Benefits of Trade – Exports and Investment

My former boss, former Treasury Secretary Larry Summers, wrote yesterday that it is very difficult to sell the benefits of trade, which is one reason free trade agreements are not more politically popular with the American public.  Since I am at the Charlotte Economics Club, however, let me try to discuss trade in the context of how economists and businessmen look at it and then in a way that I hope all North Carolinians see it.

It is easy to understand that free trade is the best way to maximize economic growth, as the market for goods is no longer limited to a country's borders but expands across the globe, creating opportunity.  Expanding markets through trade also promotes investment that fuels economic dynamism and innovation, as well as deployment of new technologies that raise productivity, and ultimately our standard of living. 

Benefits to North Carolina

What I just said has historically been the view of most economists, though as Secretary Paulson observed – he was surprised that it was with economists that he was having to argue the benefits of free trade more and more.  My view is that we should look at the evidence and why not start here in North Carolina.  Between 2001 and 2006, North Carolina's exports to the world grew by 30 percent. 

I guess one should ask, "what does that mean for the economy and workers here in North Carolina?" My answer would be to point out that that in 1992, trade supported just over 8 percent of jobs in North Carolina. Today, it is nearly 18 percent.  Over the last 15 years, trade supported over 60 percent of North Carolina's job growth and is responsible for more than 600,000 new jobs created in the last decade. 

Trade Agreements

Not surprisingly, the primary method for the federal government to assist businesses, workers, and farmers to take advantage of greater trade is to negotiate trade agreements.  That is what we have done under President Bush's leadership – negotiating ten new Free Trade Agreements (FTAs) with 15 countries – and our exports to these partners are growing twice as fast as our exports to the rest of the world.  And our exports to the whole world are at an all time high, representing 12 percent of GDP, and were responsible for more than a third of U.S. economic growth in 2007.

Exports are a key component of the economic equation, but trade agreements are not solely export focused.  They also help spur investment because they set transparent ground rules, give foreign investors rights to establish a local commercial presence, do business, and repatriate earnings, and – let's be frank – establish more of a rule of law in which arbitrary regulation and political risk is diminished.  In the United States, we sometimes take these rights for granted as we are a very attractive investment destination, but we need to secure the same rights for American companies investing overseas. 

For the United States, attracting international investment fuels our own economic prosperity by bringing new technology and business methods, and providing healthy competition that fosters innovation, productivity gains, lower prices, and greater variety for consumers. Of course, competition and investment can also have negative repercussions in certain industries, as American companies face competition from overseas firms with lower costs of doing business.  In the aggregate, however, foreign investment brings jobs. Over 5 million Americans are employed by foreign-owned companies, a third of these jobs are in manufacturing, and foreign-owned companies pay on average 25 percent more than U.S. companies.

Finally, FTAs represent more than just good economic policy.  Their strategic importance is enormous.  Countries with which the United States has or is pursuing an FTA – Colombia, Panama, and Korea –  have demonstrated a commitment to continued U.S. economic engagement, political support, and leadership in this Hemisphere and in Asia.  It is very difficult to deny that failure to approve these agreements sends the wrong signal to our friends in Latin America and Korea.

Now, I'm willing to believe that I may not have convinced all of you of the merits and benefits of free trade.  Nevertheless, even the most ardent opponent of free trade should agree these FTAs are good for Americans.  The fact is we have very low tariffs in the United States, and in many cases give duty-free treatment to other countries – like the Central American countries covered by CAFTA, Colombia, and Peru.  First and foremost, a FTA makes these partners cut their tariffs on American goods. 

Perhaps the most contentious FTA is the agreement with Colombia, which has met resistance on the Hill despite its clear economic and political benefits to the United States.  First, the FTA demonstrates support for Colombia's democratically-elected government, which has made significant progress in combating violence and instability in the face of a long-standing rebel insurgence.  Second, the agreement will remove barriers to U.S. services and provide a secure and predictable legal framework for investors.  Just as importantly, more than 9,000 U.S. companies export to Colombia, most of which are small and medium-sized firms, and 80 percent of U.S. exports would immediately receive duty-free status. 

As one of my colleagues puts it, we already have free trade with Colombia – it just so happens to be one-way free trade.   Over 90 percent of goods from Colombia comes into the U.S. duty free.  The purpose of this agreement is to make that a "two-way" free trade street, so American goods made by American workers enter Colombia duty free. 

I would like to return again to North Carolina to think through free trade agreements.  In the first four years (2004-2007) of the U.S.-Chile FTA, North Carolina's exports to Chile increased by 79 percent. Since the North American Free Trade Agreement's (NAFTA) entry into force in 1994, North Carolina's exports to Canada and Mexico have grown by 150 percent. I have no doubt that the state, which exported $181 million worth of exports in 2007 to Colombia, not to mention almost $550 million in goods to Korea, will equally benefit from free trade agreements which will reduce tariffs on agricultural products and the states' burgeoning chemical manufacturing industry.

Financial Services Industry needs Free Trade

Of course, I cannot come to Charlotte without talking about financial services and trade.  Over a quarter of North Carolina's economic growth of 4.2 percent in 2006 was attributable to the financial services industry.  In the United States, when one thinks of the financial services industry, one thinks of New York and Charlotte, North Carolina.  As the second largest financial city in the United States, Charlotte stands to gain from trade deals that promote services.  I can tell you that since Treasury is responsible for the financial services negotiations, we are fighting hard for a good deal in the Doha round – and we have already fought hard in the current FTAs. 

As the U.S. economy develops its service industry, it is critical that services are given appropriate treatment.  In financial services alone, employment has increased by about a million jobs, or approximately 20 percent, over the last 10 years. 

In an increasingly globalized world, FTAs help keep the United States at the cutting edge in financial services as trade opens up new opportunities and spurs innovation in the provision of cross-border services.  With respect to cross-border trade, the FTAs ensure that nationals and residents of our partners can purchase financial services cross-border from providers in North Carolina, including portfolio management services to fund managers.

When speaking about trade, there is often little attention on the industries where the United States stands to gain the most, and financial services is one of them.  The United States is a world leader in finance and approving the remaining FTAs will only help continue our competitive advantage.

Trade Adjustment Assistance

While trade improves the health of our economy, generating income and opportunities for advancement, the transformation of an economy from one industry to another creates dislocations and anxieties that need to be addressed.  Unfortunately, for many workers trade agreements have meant that they need to find new jobs in new industries.  For the benefits of trade to be maximized, there needs to be a commitment to ensuring trade works for all Americans, not just those who live in the regions with the next hot industry.

This of course is not easy to do, and making it work depends on the ingenuity and entrepreneurship of the American people. For example, Charlotte did not become a banking town overnight, but the city's leadership, through a combination of measures, saw that there was room for competition and attracted banks by reducing their cost of doing business.  It is this kind of strategic thinking that can help mitigate the impact of our increasingly international economy. 

Success also depends on support from the government, and the Administration is supporting this through the Trade Adjustment Assistance program.  This program helps workers who lose jobs due to increased foreign competition or relocation of work abroad.  The program isn't perfect and it could do a better job providing the right incentives.  But it is a way to channel resources to people in order to re-train and re-tool for dislocated workers and families. 

The Administration supports a reauthorization and reform of trade adjustment assistance so we can help displaced workers learn new skills and find new jobs.  But the current design of the program makes it harder for participants to take new jobs for a number of reasons.  The income support lasts longer than regular unemployment insurance, but, in order to receive training assistance a worker must remain unemployed.  Administrative costs are high, accounting for about 15 percent of total costs.  More of the programs benefits should go directly to worker training.  Legislation should focus training benefits on workers in industries affected by technological change or international competition, and low-income and unemployed workers without resources to finance their own training, even at relatively low-cost community colleges.

Conclusion

Let me repeat the single most important fact from this speech: the global economy is here to stay.  It is up to us to find a way forward that helps all of us prosper, and to avoid making a scapegoat out of trade or to demagogue the issue.  Economic isolationism that would potentially cut the United States off from exporting goods and services would mean fewer jobs, lower incomes, and a lower standard of living.  Were we to take the protectionist road, we would find ourselves alone while all the other major world economies continue to grow.

I will close by reaffirming the Administration's commitment to the trade agenda because it is what is best for the United States, and it is what is best for the economic prospects of North Carolina.  The benefits of these agreements to exports and investment, including our services industry are high and we collectively need to become more vocal to ensure their realization.  As I see more and more protectionism in the news I am worried that we are about to lose an historic opportunity to reap the economic and political benefits of trade through the passage of the remaining trade promotion agreements.  This Administration is dedicated to pursuing that course while also enhancing adjustment services and assistance to help build a workforce for the 21st century. 

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