P R O C E D I N G S

MEETING CALLED TO ORDER

By Chairman J.W. Marriott, Jr.

CHAIRMAN MARRIOTT: Good afternoon, everyone, and welcome to our summer meeting of the President's Export Council. It's warm enough for you, I hope, in Washington. I will call the meeting to order.

I would like to welcome our two newest members of the PEC: Lee Styslinger of Altec and Sean Healey of Affiliated Managers. Thanks. Good to have you all here. On behalf of the entire Council, we look forward to working with you and appropriating your insight and knowledge.

The Council has remained very active in generating advice for the President and for Secretary Gutierrez. We are welcoming him back from Iraq. We are thrilled to have him and Secretary Lavin back.

At our last meeting in December, we approved seven letters of recommendation, and we continued our conversations on visa acquisition issues with Secretary Gutierrez and Secretary Chertoff.

I am pleased that, since that meeting, the State and Homeland Security have announced Secure Borders and the Rice-Chertoff Amendment, which has the objective of strengthening border security, while at the same time facilitating travel into our country.

In this initiative are measures to expedite business and temporary worker visa processing and to expand the length of time foreign students have to enter, and remain, in this country.

We look forward to seeing results as the initiative is implemented. The Council also met last month by conference call and approved a letter on Foreign Direct Investment, the SIFIUS form.

That letter underscored what our message has consistently been, that the United States does not benefit if we close the doors to investment, people, technology, and competition.

The letters we are going to discuss today will continue to support our message of economic and cultural openness. Up for consideration today are letters on Avian Flu Preparedness, Immigration, and the U.S.-Korea Free Trade Agreement, all of which are timely topics.

We welcome Secretary Gutierrez back. But before we call on him, we would like to ask Fran Townsend to talk to us today. One of the letters we are going to be discussing is on Avian Flu Preparedness.

Fran is the Homeland Security Advisor to the President, and chairs the Homeland Security Council and reports to the President on U.S. Homeland Security policy. She is the point person for the President on national avian flu preparedness. It is, therefore, fitting, and an honor, to have you with us today to talk about something that we are all concerned about.

THE U.S. AVIAN FLU STRATEGY

By Ms. Frances Townsend

Assistant to the President for Homeland Security

MS. TOWNSEND: Mr. Chairman, thank you--Secretary Gutierrez, thank you as well--for taking me a little bit out of order in accommodation of my schedule, and I very much appreciate the courtesy. It is a pleasure to be back with you. I was with you about a year ago when we talked about visa issues.

A lot has happened in a year on the President's homeland security agenda, so there are many things I could talk to you about. Immigration reform is at the top of the agenda. I was responsible for leading, for the President, the Katrina Lessons Learned Recommendations.

One of the things that we took away from Katrina was the absolute critical relationship and strength of that relationship between the private sector and government, and that government cannot do things, particularly in a catastrophic crisis, by itself.

So no where is that more true than if we applied that principle in the President's strategy in terms of preparing for the potential of a national pandemic.

The President released his national strategy regarding a potential pandemic in November. About two months ago, I then came out with the implementation plan. The implementation plan applies across the Federal Government.

It has more than 300 discrete tasks assigned to Federal departments and agencies, including, very uncharacteristically, government performance metrics and time lines. It was a conscious decision, both to do that and to share that publicly. We do not typically do that, particularly where there are threats that concern us.

The President felt strongly that we had to lead by example and we had to be willing to put our plan, our strategy, our implementation plan out there so that others around the world, others across the country could tell us how to improve it, could work with us, and understand exactly how we were going to integrate the various efforts of all the parties.

The plan which is available on the pandemic web site, which is www.pandemicflu.gov, also provides checklists for things to consider in preparedness, whether it is for the private sector and businesses, non-governmental organizations, schools, communities, and individuals.

You can imagine, as we worked through preparing the strategy and implementation plan, we went back and looked at the history. As you all know, the worst pandemic in the history of this Nation was the 1918 pandemic flu.

I might add, given the President's leadership on this issue, John Barry is passionate about the need to prepare the country. John Barry's book became required reading for the Cabinet and for the President's senior staff.

We understood that during the course of the 1918 pandemic, approximately between 20 and 40 million people were killed, 500,000 of those in the United States.

Now, the later pandemics that hit this country in 1957 and 1968 only killed 70,000, and 35,000, respectively. What we take from that is, it is impossible to predict with any real degree of certainty how fatal, what the rate of attack will be of a pandemic virus, so you have to plan for the worst and hope for the best.

But if the worst hits, you must have a plan in place that everybody understands so that they can anticipate the actions of others. So far, the World Health Organization has documented 230 human cases of the H5N1 influenza. That has resulted in 132 fatalities. That is a frightening fatality rate, so we take this planning effort very, very seriously.

I have staff devoted at the White House, and there is an inter-agency team. Every agency has devoted a point person to work within their agency to give effect to the implementation plan. I brought with me. Dr. Rajeev Venkayya, who is here and who has led that effort across the government.

One of the things we have learned, even since the publication of the implementation plan, is we knew from the very beginning that the pandemic influenza will travel from person to person across communities in our Nation. So we hear it often when we discuss the issue of crime in this country: all crime is local. The fact of the matter is, illnesses will attack communities and it will be a local problem.

I mentioned, when I first started to speak, about seeing that in Katrina. There should be no doubt, when you look at how the private sector rose to the challenge of Hurricane Katrina when America's citizens needed them most, the private sector really put aside business interests for the good of the country and said, what can I do to alleviate suffering in this country? They donated not only money.

One CEO said to me, if you come to me and ask me to write a check, that is easy. I write a check, I feel good about it, and I walk away from it. Ask me for what is hard. Ask me, what additional inventory you might have of blue tarps, what additional inventory do I have of water or food, and can I use my supply chain and business model to get it where you need it? If you can assess where you need it, I can move it there.

So we understand, really, not only can you be helpful, but you can be especially helpful if we can give you the parameters in which you need to plan.

Now, we have gotten a lot of positive feedback in terms of our implementation plan strategy. We have been asked for additional detail, especially when it comes to communities. Local communities do not have the resources, assets, nor the experience, frankly, to do this sort of planning on their own. So in addition to the checklists, we are currently working on two of the "How To" guides, the templates.

We have taken an interest in some new information that has emerged since it was issued in the implementation plan. What we have come to find is, based on historical data and sophisticated computer modeling, that there are steps that communities can take to reduce the rate of attack--that is, your people getting sick--and, therefore, fewer fatalities.

As I speak, the Federal Government, doctors, and CDC are working on developing a template based on that historical data to come up with a template to help communities understand how they can actually shield their citizens during a pandemic.

But what will that mean? Well, that is likely to have a very serious impact on businesses, so we need to work with you so you will understand, what do we mean by community shielding.

The fact is, what we have learned, is one of the techniques that was effective even during the 1918 pandemic was school closures. Sounds frightening. The consequence of that to businesses? I am the mother of two small children. It is most likely I do not have to be sick, but if I have to keep my kids home and I do not have a plan for that, I am going to stay home even though I am well.

That is right, but we can plan for it. We do it every year. My children are now out of school and I don't stay home with them in the summer. I have a plan for child care when they have to stay home.

So if we tell you that the likelihood is, without such a plan, up to 40 percent of the working population may be out for up to two weeks, if there is a way for us to reduce the attack rate, to reduce the amount of illness in this country, we actually then can plan for who needs to be where, what will the likely effect be on your population, what impact will that have on critical infrastructure?

There is more work that needs to be done--we are working with CDC; I met with Secretary Leavitt this afternoon--as we move forward to understand both the effectiveness and any potential impact of school closures.

Here is what we do understand. We do understand that we owe you clear and responsible guidance on which you can base your planning, and that is the guidance we are developing now.

In talking between your staff and the staff at the White House, we understand that you have other concerns, concerns on the issue of cross-border trade and movement of goods during a pandemic. Well, we share that concern.

As you may know, we believe that closure or severe border restrictions are unlikely to have a significant positive impact to deter the spread of a pandemic virus. Therefore, we are working to develop policies which would preserve the movement of goods, and even people, across the border during a pandemic, with appropriate screening measures, in place for individuals.

I also know that you have concerns about support to American citizens overseas during the course of a pandemic. The State Department is in the lead on this issue and they are developing guidance that will be shared as the implementation plan is effected. Those are just a few examples.

There are a couple of others I would like to mention. We are now working on using the emergency funds that we had requested from Congress, and were appropriated, to move quickly to reestablish domestic vaccine production capacity that uses next-generation cell culture technology, and to expand our stockpile of anti-viral medications. We are working with our international partners to increase international surveillance of animal outbreaks and human cases of the H5N1 virus.

I should tell you, we had the privilege at the White House of working with Dr. Lee of the WHO, and we were very saddened by his passing. His leadership of the WHO was really extraordinary. This happens to be a positive example of our interaction with a policy body, with an international body, and it can be effective. It can be effectively done with appropriate leadership.

We have also implemented plans domestically to provide early warning and immediate response if, and when, the first bird with H5N1 arrives in the United States. We have crisis communication plans in place. We understand that this is incredibly important. The President, again, has provided personal leadership here to be sure that there is not an overreaction.

We do not control the media, but what we try to do is work to educate the media, the public in general, that a single sick bird does not make a pandemic, that a sick bird, properly cooked, does not make a pandemic and is not a threat.

So a lot of this is a matter of talking and communicating prior to the crisis, giving people a sense of confidence that we know what we are talking about and we are planning for it, and then making health professionals available to them, to the public and to the media, as experts.

These are some of the 300 actions that are in the implementation plan. We appreciate, Mr. Chairman, the work of the Council. We look forward to working with you on the issues your letter will outline. I know that the President appreciates the Council's work as well.

CHAIRMAN MARRIOTT: Thank you very much, Fran. Appreciate it.

Do you have time to answer some questions?

MS. TOWNSEND: Yes. I am happy to answer some questions. I also have Dr. Venkayya with me in case I get into trouble.

CHAIRMAN MARRIOTT: Betty?

MS. MANETTA: Fran, thank you. Fran, one of the things, recently, we have been asked from our corporate partners, my customers, to come up with a business continuity plan in case of pandemic flu. So I went through all the web sites and everything, and it was very difficult to find.

So I think, as a service provider, we are a supply chain management company, it is hard for me to have a redundant workforce backup. So I think we should be cognizant of the fact that there are small businesses and they can't afford to use their companies on the west coast in case the east coast gets sick.

So, just making sure that we have plans and guidelines in place for small businesses, where they can go. I think, Steve Preston, you are probably going to be working on that because it is something that is critical for businesses, right?

Number two, a lot of our resources are non-English speaking, so we have taken a lot of the documents and translated them into Spanish. So the more we can get the messages out there about the things that get transpired between people, making sure that health care and all that is understood, both in Spanish and English, so we are doing posters, and working with the Red Cross. So those are just two things that I would like to put out there for you.

Thank you, Fran.

CHAIRMAN MARRIOTT: Thanks, Betty.

Anybody else have questions?

MR. JAMES: Yes. Do you have an estimate of what the chance of a major pandemic is?

MS. TOWNSEND: It is very difficult. It is funny you should ask this; the President asked this question. I have yet to pin down a doctor, so we will see if you do better than I do.

DR. VENKAYYA: Unfortunately, we have no scientific way to run probabilities. We view this as a roll of the dice. Every time you have an animal infected with the virus, that represents a chance for the virus to mutate and/or exchange genetic material with the human virus.

So we do worry that the more animals, the more countries that have the infection, the virus will jump over. There is no scientific way to predict that, unfortunately.

MR. JAMES: But excepting that, do you feel that it is 1 in 20, or 9 out of 10? Really, just direction.

DR. VENKAYYA: I think if you asked the people that work in this field, they would tell you that the longer we go, having as many countries involved, with as many animals affected with the virus, the more comfortable we feel that there may be some biological or scientific barrier to this virus jumping over. You can never tell. I think many of us feel the risk is low, but certainly not low enough to warrant us taking our eye off the ball and not preparing for this.

MR. JAMES: Oh, of course not.

CHAIRMAN MARRIOTT: Thank you very much.

Did you have a question?

MR. PURAM: Is there any evidence from predominantly vegetarian countries that they are immune from this program?

DR. VENKAYYA: The answer is no, I am not aware of any evidence. I think of India, which has a lot of vegetarians, but they also eat a lot of eggs. So there is a huge poultry population in India, not just industrial poultry, but backyard plots. So, I have not seen anything that suggests that vegetarian countries have less of a risk.

MR. DICKE: Am I to understand, Doctor, that ultimately what will happen is that some human being, who is probably already ill with another virus, will get exposed to this poultry, and that the actual mutation will take place not in the bird, but in the individual?

DR. VENKAYYA: There are two ways that the mutation can happen. One, is that an animal--most likely an animal--is infected with the human virus and this H5N1 virus and allows genetic mixing of materials, so the human virus picks up the bad stuff from the bird virus.

The other way that it can happen, is the bird virus accumulates mutations on its own inside a bird, and suddenly it becomes a virus that somehow is able to get a foothold in a human host. So the mutations and exchange of material are likely to happen outside of a human host that leads it to become something that is a more effective pathogen.

CHAIRMAN MARRIOTT: Thank you. Thank you again. Appreciate it very much.

Mr. Secretary, welcome back from Iraq.

SECRETARY GUTIERREZ: Thank you.

CHAIRMAN MARRIOTT: We are thrilled to have you here. We will turn the time over to you.

OATH OF OFFICE AND REMARKS

By Carlos M. Gutierrez

Secretary of Commerce

SECRETARY GUTIERREZ: Thanks for coming to this summer meeting in DC. I thought what I'd do, is Ambassador Lavin and I just literally got off the plane a couple of hours ago. We were in Baghdad this week. We thought you would be interested in knowing what we saw. Not that you can get an expert's point of view after one day in the country, but we know more having been there for one day than we do here reading reports.

So, I will give you a sense of that, and then a couple of big items on the Hill that are taking place in terms of free trade agreements and immigration.

To say that Iraq is a challenge, I think, is not offering up anything new. I thought I would give you what we saw that I sensed was more positive than what you hear, than what you normally would think was happening.

Everything you do hear is absolutely true. The security is very tight. It is still a very risky place. You have to go with security. We spent all our time in green zones, so all of that is true. Time will have to transpire before you can say that it is safe to go into Iraq and invest and be there.

I believe that time will come. I do not think this is a permanent state of things. As conditions improve, people will have less reason to be part of an insurgency. That time will come.

What we saw, which was actually quite different than what I expected, is quite a few Iraqis that were outside of the country that may have left at the beginning of Saddam Hussein's reign have gone back to Iraq, and they have gone back to start businesses, to get into different types of businesses, to bring different skill sets to the country. So you see these folks who actually live there, and they are setting up their businesses. So that was very heartening.

There are some great success stories. One, is the cell phone business has gone from zero cell phones four years ago--I say zero, maybe some of Saddam Hussein's people had cell phones, but the public at large did not have cell phones--there were 7 million subscribers to date. Seven million subscribers in a country of 24 million. So it just shot up totally, and someone is making money selling cell phones in Iraq.

The team is strong. There is a new Prime Minister. You can see that he has a sense of purpose, that he wants to get things accomplished. He now has a full Cabinet in place. It is a little bit large, with 38 Cabinet members. But they are in place. Many of them have come back to Iraq, so they have brought back some skills.

We see the challenges that they have to confront from an economic standpoint over the next several years. To be quite clear, the challenge here is not to identify the problems. The challenge is to get them done. I will not mention oil here, because Sam Bodden was there the day after me. We haven't heard back from Sam. He may be on his way back, so he'll be reporting back on that.

But five things that they need to do. They have 192 state-owned enterprises. The state is involved in everything from production of carpets to cement factories. Iraq was as Marxist in its approach as North Korea. Perhaps we do not think about it that way, but this was a centrally-controlled Marxist economy. So, 192 state-owned enterprises. We believe they are going to start selling. They are not going to get what they want for them, but just start getting ready, get the private sector coming in, buying them, employing people.

They get out of that business and you start getting some momentum and a sense of rhythm. But there is a tremendous amount of work to be done. And this could be taking place five years from now, because it's not going to be easy to sell of 140, 150 companies.

They have what they call a public distribution system, where they distribute, to 70 percent of the population, 10 food products on an ongoing basis, highly subsidized. This is just like a rationing card system.

So the government buys the food or imports the food, and in every household the cost is 16 cents per person, per month, and they get a basket of 10 food items that have what the government believes is the right caloric intake.

So we believe they need to get rid of that and transfer that to a private sector distribution, and let the private sector take over the business of food. Obviously getting out of that--you have people on rely on it--is not going to be an easy task but you have to do it.

Financial services. There is no banking system. We hear stories about people getting on, people having to deliver money to their home, and if they happen to be working away from home, they'll get on a train or on a bus and travel for five days to deliver the cash, and then go back, because that's the way the system operates. That's the way the economy operates. There is no banking system. It is an economy of cash.

So you can imagine the impact that the banking system would have on the efficiency of the way the country operates. Construction and housing. They need five million homes. They need construction companies. They need companies who can design homes.

But, today, there is a need for five million homes, which can do a lot to calm people and give them a better lifestyle. The homes today that are built for one family, you would have four or five families living in the same household.

Then, finally, the area of government transparency, which we believe will come. If they do the first four, government transparency will be just an outcome of that. So that's the agenda. It's going to take some time to pull off.

As the security gets better, they'll be able to focus more on the economy. But again, I was quite taken aback by the commitment of people who have gone back to Iraq and have shown a commitment to stick it out and start a business.

The other thing is, Ambassador Lavin was there the whole time. You can't go there and come back without being overwhelmed by our military, the professionalism, the poise, the calm with which they approach what they do. We were never very far away from an M-16, some very high-caliber weapons. But they are calm, they are smooth and collected, they know what they're doing. They just make you feel proud. It is the best of our country that is there, the very, very best, the very finest.

Anywhere you look, anywhere you go, you can see them. Their presence is overwhelming, and their confidence, and their sense of mission. You talk to them, and they're proud to be there. We met some in the hospital. They want to get back. It is absolute commitment to finish the mission.

We have a couple of things going on right now, as we speak, on the Hill. Immigration is a very hot topic. I am going to be on the Hill tomorrow. I have nine meetings on the Hill. I believe that there is a consensus developing in the country that we do need comprehensive reform. In what shape that takes place, is still part of the debate.

But at least we can move beyond that, where people believe that you can close the southwest border and solve the immigration problem. It gets a lot of applause when you're giving a speech, but it doesn't solve the problem.

You realize, you have to do something, a temporary worker's permit, you have to do something about recognizing that the people in the country are not going to get deported. I believe that there is movement in that regard, and the sooner you can get the House and Senate talking, the quicker we'll have comprehensive reform.

My prediction is--and I truly believe this in my heart of hearts--that we will get comprehensive reform passed. When it does get passed, I think the credit will go to the President, who had the guts to stand up and say, this is what we need, in spite of what many others, regardless of the political party, may think.

Also, we have the Oman Free Trade Agreement going to the House. It passed the Senate. It is not a guarantee, believe it or not. Oman can actually be a heavy lift, but it's going to require some work. In a strategic sense, it allows us to get one more country in.

Eventually, we'll have the 29 countries that voted in favor of the FTA, we will have a free trade agreement. Then you will have the 5 countries that voted against--Venezuela, Argentina, etc cetera--they will be on their own. We will have, essentially, a Free Trade Agreement of the Americas.

Peru is an important part of that, but Peru will not be an easy vote. As in the past, we can't afford to not pass Peru. So anything that any of you can do to support that, we'd much appreciate it.

For the WTO, the G8 has consensus that it's important. Once again, the U.S. showed leadership. We put the most on the table. The President put a very aggressive and ambitious target on the table. We want countries to follow, we want countries to match it. We're not going to negotiate with ourselves. No one has contributed as much to the debate as the U.N.

Apparently at the G8 meeting, there was some agreement that this is very important, that people need to get on it and tell their folks to do something to reach an agreement. We hope that's the case. Sue Schwab is going to Geneva next week, and we hope to see a bit more commitment and less rhetoric on the part of our trading partners.

We can move a lot of people out of poverty with a good WTO agreement, a heck of a lot more than we will by giving aid to countries. So we are hoping that Susan comes back with good news. She, by the way, is doing a tremendous job--a tremendous job--in her negotiating expertise, and just her knowledge of these issues. So we are very, very proud that she's representing us.

That's all I have. Ambassador Lavin is going to add to that. We are going to swear you in.

(Whereupon, Sean Healey was duly sworn.)

(Applause)

SECRETARY GUTIERREZ: I would like to welcome Lee Styslinger, who was sworn in a couple of weeks ago. This is your first meeting. I want to thank all of you for your service and for your commitment, especially during these times when there is so much going on.

I found it interesting, during this week, with the complexity of what's going on the Middle East -- you know, when we were in Baghdad, nobody paid any attention to Baghdad anymore because all the action was someplace else. But one of the things that I'm sure you noticed, is that there is incredible clarity around what the problem is.

There isn't much discussion about, how did this happen? There isn't a lot of finger pointing. People know this was Hezbollah crossing the border and picking a fight with Israel. We have got Middle Eastern countries, Arab states, that are supporting that position.

I can't remember a time when that's ever happened. So, it's a very significant strategic moment, and just one more reason to feel optimistic about our place in the world and what we're doing.

What you're doing, of course, is helping us keep this the most vibrant and economically viable place in the whole wide world. So I can't tell you how much the President appreciates it, how much we appreciate it, and we thank you for your service.

I will turn it back to the Chairman.

CHAIRMAN MARRIOTT: We appreciate you being here. We're glad to have you. Thank you for your great contribution.

SECRETARY GUTIERREZ: Thank you. And Ambassador Lavin will have some riveting comments for you.

(Laughter)

CHAIRMAN MARRIOTT: We will now take up the subcommittee reports. After the report has been given, I'll open it up to the floor for comments. Copies of these letters are in your binder and posted online. They're available also outside this room.

I'd like to call upon Mike Eskew, Chairman of the Subcommittee on Services, to give his report.

SUBCOMMITTEE ON SERVICES REPORT

By Michael L. Eskew, Subcommittee Chairman,

and Sharon Allen, Subcommittee Member

MR. ESKEW: Thank you, Mr. Chairman. The Services Subcommittee would like to present a letter. To do that, Sharon Allen will present the letter.

MS. ALLEN: Thank you, Mr. Chairman. Ms. Townsend's remarks certainly provided context to this topic. Today, the Services Subcommittee is pleased to present a letter on Avian Flu and Pandemic Influenza Preparedness.

The National Strategy for Pandemic Influenza Implementation Plan will: "Have sustained and profound consequences for the operation of critical infrastructure, the mobility of people, and the global economy." Now, with all due respect to our previous experts, there are U.S. health experts who believe there is a 100 percent certainty that there will be a pandemic.

What is not known, is when it will occur and how severe it will be. Even with a mild pandemic, it is projected that the loss of life could be in the millions.

As business operations have improved over the years, the global supply chain has become incredibly efficient. Just-in-time inventory and the rapid movement of goods and people has made our global economy more interdependent, and more vulnerable in the event of a disruption to that supply chain.

With estimates of absenteeism as high as 40 percent in a pandemic, there will be no part of our society or economy unaffected.

It is also important to consider the interdependencies of our critical infrastructure. For example, our financial systems need telecommunications. Telecommunications cannot operate without power. Power plants need water. So it is easy to envision just how a disruption to our water supply would impact our financial system.

While the enormity of a pandemic challenge is being addressed by the government, our letter today focuses on four specific areas which we believe will stability and reduce economic impacts in the event of a pandemic.

As we state in our letter, it is our belief that wholesale coordination by the Federal Government will, and must, assure the American public of our Nation's ability to care for and respond to this potential crisis. Preparation efforts we undertake now will enhance the safety of the American people and will ensure that full commerce continues.

The first issue we raised has to do with the movement of imports and exports. With the production of many critical supplies residing outside the U.S., the potential exists for foreign governments to nationalize products previously designated for U.S. consumption.

Our recommendation is to identify those products and services that will be considered critical and necessary to responding to an influenza pandemic, and develop specific crisis policy agreements to ensure production and movement of them.

Our next issue addresses the need to identify critical business infrastructure from a pandemic response. We recommend further defining and identifying specific institutions which would be deemed critical infrastructure, and developing specific actions to provide protections.

A related issue is the role of our critical infrastructure. We believe clarity and consistency in requests and plans is critical in order for businesses to support Federal, State, and local response efforts and suggest model State and local plans could serve as examples to ensure that consistency.

Finally, we have recognized the great number of U.S. citizens who work or travel overseas. Brad mentioned this before. We need to protect and assist them, including their return to the U.S.

We are encouraging the administration to build on its National Strategy for Pandemic Influenza Implementation Plan by enhancing and refining critical components. Unlike many other crises, we have an opportunity to prepare for this one.

The Federal Government's ability to provide clarity in response, ensure the availability and movement of critical supplies, and clearly communicate with the American people will improve the country's readiness in an otherwise chaotic situation.

We thank you, Mr. Chairman, for this opportunity to present this letter.

CHAIRMAN MARRIOTT: Thank you very much.

Are there any comments, questions from anyone?

(No response)

CHAIRMAN MARRIOTT: Any objections?

(No response)

CHAIRMAN MARRIOTT: If not, then we'll assume that this is approved and we'll pass it on to Secretary Gutierrez, who will hand it to the President. Okay. Thank you very much.

I'd like to ask Betty Manetta, Chairman of the Subcommittee on Technology and Competitiveness, to give her report.

SUBCOMMITTEE ON TECHNOLOGY AND COMPETITIVENESS REPORT

By Ms. Betty Manetta, Subcommittee Chairman

MS. MANETTA: Thank you, Mr. Chairman.

Well, it's a little easier, as Secretary Gutierrez mentioned today. This is one of the hottest topics, which is immigration reform. Our letter to provide to the President is to urge the delivery and passage of a comprehensive reform bill that addresses and resolves the problems of the current immigration system, upholds the ideals of our Nation, and provides a fair and practical way to move forward.

There are five tenets our letter:

1) Securing the borders

Again, this is critical and something that is a must-have. But there are ways of doing it. Technology is one of them, which we'll talk about in a moment.

2) New rules for businesses

Making business more accountable, making sure that their employees are legalized or have all the proper documentation.

3) H1B visas

Making sure that the process is streamlined so that H1B visas are attainable and easy to access.

4) Temporary worker programs

Secretary Gutierrez talked about this, and many of us heard this earlier today. This creates a clear and legal path by which employees can get the seasonal and permanent immigration labor that they need, both new and in the future.

5) Path to legalization

Addressing the reality of our incumbents here that are living here may not have the proper documentation, however, they are a special and important part of our economic growth, so something we can't lose sight of.

As many of us are sitting here, myself, Cecilia, we are all immigrants from other countries and we were able to obtain the American dream of starting our own businesses. So to not allow others to do the same, I think, would be problematic, and certainly a major problem for our economy. Clearly, the legal and law-abiding immigrants are important.

Making sure that the security and homeland security issues are not forgotten is very important, but again, something that we stressed to the President, making sure that this letter moved forward.

So with that, Mr. Chairman, I would like to submit the letter for Secretary Gutierrez.

CHAIRMAN MARRIOTT: Thank you very much.

Any comments or questions?

MR. JAMES: Yes, I have a question. Did the subcommittee consider the possibility of having different standards, applying some judgmental standards on some immigration questions? So for example, people with a certain educational level, a doctorate in physics, or medical doctors, and so on and so forth? You could have a wealth standard of some kind, because it brings in wealth to this country and creates economic growth by doing so.

Health standards, so you're not inheriting people who are going to be a burden, or over-burden the health care system. Frankly, almost an encouraging, wide open, very different standard for people who foster economic growth and development of the United States than -- and I'm not shutting the door on the others, by any means. I'm trying to open it, without closing it for the others.

MS. MANETTA: Right. And something that we did talk about, again, you have the professionals, which a lot of them are able to come without the problems that many other immigrants do have. So, certainly not a problem. I think it is something that is working today for many of the professionals.

However, it's the non-professionals, the people that are doing the manual labor, some of the lower income people that are generating a lot of revenue for our country and helping with the economy are the ones that are probably -- it's the 80/20 rule, if you will. So 80 percent is what we're talking about, then the 20 percent is certainly, to your point, something that is currently being looked at.

MR. JAMES: Well, this country can use more engineers, more nurses, more a lot of things. Frankly, there are issues for professionals, too, coming into the country now. We hear it all the time, particularly in our industry. I would just note, it is not like this is a radical idea. In the early days of America, educational and health care standards were applied to immigration, so it's not like we're inventing new ground.

MS. MANETTA: Absolutely not.

MR. JAMES: And it's not inconsistent with America's history or democracy. But I suggest that we, or the committee, or someone think about opening the doors wider to value added classes of immigrants.

MR. CHEN: This is obviously the crux of the debate. If you look from the PEC point of view, we're looking to increase the competitiveness of the country to facilitate trade. You just focused on that.

MS. MANETTA: Right.

MR. CHEN: So I have a question and a commend. The comment, to Tony's point, the issue we'd have is the legal path. If you had gone through this, to the extreme, the legal path would take much longer than the so-called "illegal" path. So one should think about that.

I'd encourage the committee to think about that, because we do need to may facilitate, expedite, increase, and enhance -- of the legal path, which are the doctors, the nurses -- I mean, I know there are health standards. I know there were educational standards. I never heard we had a wealth standard. But that's a different point.

MR. JAMES: We don't, but Switzerland, and many countries, do.

MR. CHEN: I know. I know that. That's different.

My question is, really, I know the DHS and the States are also working on very similar things, like SBI, or whatever. So has this actually been cross-coordinated with those two organizations? I think they'd have a lot to say about this. Or does it even matter?

MS. MANETTA: I guess I don't understand your question, John. Are you saying that --

MR. CHEN: Has this been shown to the DHS?

MS. MANETTA: The Department of Homeland Security?

MR. CHEN: Yes.

MS. MANETTA: I think a lot of it -- and Alan, you are here. You can --

MR. MARTINEZ-FONTS: We received a letter a couple of days ago and ran it by our folks. I wanted to mention, Secretary Chertoff would be supportive of the issues that are on here.

MR. CHEN: Okay. Good. Thank you.

MS. MANETTA: But again, Tony, to your point, I think you raise a very important issue, again, making sure that we get the right transfer, if you will, through different -- if the engineers and doctors -- I don't know. I came from Bell Labs, so I saw a lot of non-U.S. physicists. I thought we were there, but you're right.

MR. JAMES: It's a nuanced thing. But a lot of your letter focuses on managing a flow that's happening now, and controlling it, and keeping it positive and under control.

MS. MANETTA: Right.

MR. JAMES: And I'm suggesting actually priming the pump and encouraging another flow.

MS. MANETTA: Okay. Good point.

MR. PURAM: This letter does not address --

MS. MANETTA: Right.

MR. CHEN: It does not encourage the P categories.

CHAIRMAN MARRIOTT: Okay. Any other comments, questions?

(No response)

CHAIRMAN MARRIOTT: Are there any objections to the letter?

(No response)

CHAIRMAN MARRIOTT: Okay. We'll assume the letter is approved and we'll pass it on to the President.

MS. MANETTA: Mr. Chairman, just one quickie. The other part of this was on technology. Today, we heard Fran, Secretary Gutierrez, and others talking about the importance of technology, especially border crossing or with pandemic flu. With technology, we streamline all of this.

The other letter we were supposed to present today was a letter on technology, specifically RFID, EPS, or other technologies that could expedite the flow of data, secure our borders, secure or be able to give us more information on epidemic and pandemic flu outbreaks, et cetera, and secure our borders relative to immigrants.

Unfortunately, we do not have that letter today. We are working. I think there was some tweaking on the language, and I think that we all have kind of rallied around it now. Next session, or in a couple of weeks, we will be presenting that letter, because I still think technology is really the foundation and the economic impetus for us to grow our economy. So it's still very critical.

CHAIRMAN MARRIOTT: Thank you, Betty.

MS. MANETTA: Thank you.

Mr. Lee Raymond, Chairman of the Subcommittee on Trade Promotion and Negotiations. Please go ahead.

SUBCOMMITTEE ON TRADE PROMOTION AND NEGOTIATIONS REPORT

By Mr. Lee Raymond, Subcommittee Chairman

MR. RAYMOND: Mr. Chairman and Council members, I appreciate the opportunity to present the Trade Promotion and Negotiations Subcommittee report on the U.S.-Free Trade Agreement negotiations with the Republic of Korea.

Before doing so, I would like to recognize the contribution made by PEC members in the adoption of a letter on June 26 on the U.S. foreign investment review process. National security reviews for inward investment must be fair, objective, and not overly burdensome or else we run the risk of needlessly harming our own economic interests.

I appreciate that the PEC was able to move quickly with our recommendations on that issue. Much of our input was timely with respect to the legislative process.

On today's topic, the President's Export Council strongly endorsed the comprehensive FTA negotiations with Korea that will provide U.S. exporters greater market access to the world's tenth-largest economy.

Korea is already America's seventh-largest export market. Removal of the remaining trade and investment barriers through a high-standard agreement will further solidify our bilateral economic relationship.

This FTA negotiation is important to U.S. exporters, for a number of reasons. I have cited the WTO's Doha Round negotiations. An FTA with Korea has the potential to bring more benefits to U.S. businesses and farmers than any negotiation in over a decade. Korea has a strong and growing economy, yet still maintains significant barriers to U.S. goods and services.

For example, Korea's applied tariffs are three times greater than those of the United States. Removal of Korea's tariff and non-tariff barriers to trade, including those on U.S. automobiles, beef, and pharmaceuticals, will serve to boost U.S. income by $20 to $30 billion, according to several studies.

Second, a free trade agreement with Korea will help secure U.S. economic competitiveness in the region. Korea has already negotiated several FTAs with countries in Asia and around the world, and is studying deeper relationships with major economies such as India and China.

The United States risks becoming disadvantaged in terms of market access if we decide to retreat from our traditional role as a leader in global economic liberalization.

Finally, a U.S.-Republic of Korea FTA would serve to strengthen the important political relationship between our two governments. Regional stability in East Asia depends on a prosperous and democratic South Korea.

Although our letter highlights the FTA benefits to the U.S. economy, the rewards are reciprocal. The Korean economy stands to grow significantly from increased trade with the United States.

The President's Export Council, therefore, urges the administration to focus efforts over the next several months to bring a successful conclusion to the U.S.-Korea FTA negotiations. Thank you.

I submit the subcommittee's letter for discussion and adoption.

CHAIRMAN MARRIOTT: Thank you, Lee.

Questions? Comments? Anybody?

(No response)

CHAIRMAN MARRIOTT: Okay. If there are no questions or comments, we'll assume that this is approved and pass it on to the President.

Now we have concluded our letters. I want to particularly thank the subcommittee chairs and the staff representatives for their hard work. A lot of work goes into these letters. They are well done, and we appreciate it very much.

We have another professional guest with us today, the President's Chief Economic Advisor, Dr. Ed Lazear. He is the Chairman of the Council of Economic Advisors. An accomplished and well-published economist, he has advised many governments throughout the world. He was most recently a member of Governor Schwarzenegger's Council of Economic Advisors in the great country of California.

(Laughter)

ECONOMIC OUTLOOK

By Honorable Edward P. Lazear

Chairman, Council of Economic Advisors

DR. LAZEAR: Thank you very much, Chairman Marriott. I appreciate the invitation by Secretary Gutierrez to come and speak to you today.

He asked me to spend a few minutes talking about the current state of the economy and our outlook for the next year or so.

So what I will do, is just kind of briefly run through that, give you a sense of where we think we are and where we think we're headed, and then just open it up for 10 minutes for comments, questions, or thoughts that you may have.

Where we are right now. Well, as you know, we have had very strong economic growth for the past couple of years. Last year, GDP was at 3.2 percent. We're actually forecasting 3.6 percent this year. We've had a very good first quarter; it came in at 5.6. So we have even pretty decent quarters for the rest of the year, we ought to get pretty close to that.

Inflation rates. We're expecting about 3 percent, and actually lower rates going forward. The big deal in inflation, of course, has been energy costs. We think that a good bit of that has already played itself out.

If you look at the futures markets, look at oil futures, gasoline futures, indications are that the prices should be pretty stable there. In fact, some indications are that they'll be declining.

The labor market is very strong. Many of you were out there in the labor market, trying to hire people. I go home on occasional weekends to Silicon Valley. My colleagues out there tell me that the conditions are kind of similar to the talent wars of the late 1990s and 2000.

Things seem to be booming in the labor market, 4.6 percent unemployment, about 150,000 jobs per month. We expect that to slow down, by the way. When you get to full employment, your ability to create new jobs declines because you can't create a job unless you have a person to fill that job. A job needs a person in it.

As the labor market gets tighter, it gets tougher to do that. As you go way out into the future, we know that job creation is going to decline. Why is that? Because of demographics. We have an aging labor force. We have baby boomers retiring.

On the supply side, that will decrease so you will not see as many jobs. But that's not a bad thing. The economy is still going to be growing at a rapid rate. We expect productivity, which has been at record rates for the past five years, to continue.

By then way, productivity, over the past five years, has been about 3.5 percent. In the late 1990s, which was viewed as a very strong period, it was 2.5 percent. As you look at the area between '75 and 2000, it was 1.5 percent.

So having growth rates and productivity at about 3.5 percent, are really quite remarkable. We're encouraged by that. The reason we're encouraged by that, is there is a very close relationship between productivity growth and wages. It's virtually one to one.

So if you look at this over the long run, for every 1 percent increase in productivity and growth, you get 1 percent increase in wages. Those things can diverge, and we've actually seen some divergence in the past few years.

While productivity has taken off, wages haven't grown at quite the same rate. That happened in the 1990s, by the way, as well. Some of my colleagues who served in my position under President Clinton were kind of scratching their heads in the mid-1990s saying, productivity growth is going great, what's happened to wages? Then in the late '90s, wages took off.

So nominal wage growth right now is actually at the same record pace that we had in the late 1990s. We're about at 4 percent nominal. The problem is, we've had a couple of years--actually a year--of unexpected inflation due to energy costs, and that's eaten away the real wage gains. But the nominal is about the same.

What are the dangers? Well, obviously, if we looked forward, the one thing that is slowing, and slowing significantly, is the housing market. Housing starts were down again this month. Actually, it basically ate away the gains that we had last month, so we're down about 17.5 percent in housing starts since the beginning of the year.

But that should be put in historical perspective, because we are at a rate of about 1.85 million housing starts per year. If you compare that to the 1990s, the 1990s were about 1.5 million per year. So we're down, but we're down from an extremely high level.

Actually, the highest level--it was kind of surprising when I went back and looked at the data--was actually in the 1970s. That was about 2.5 million per year. So we're not as high as we were in the 1970s, but we are still very high by historic levels.

The other good news on the construction front, is that although residential construction is down, commercial construction is up pretty strong. Additionally, business investment has been very strong. So while we see some declining residential construction, business investment is strong.

A slight decline in consumption, but at the same time, exports are up. So we see what I think of as kind of a generalization of the strength of the past couple of years to other sectors of the economy. I actually view that as a healthy development, and one that suggests a robust future.

Let me just say a couple of words on trade, since that's kind of the heart of what you guys are up to here. The global imbalance is obviously the question that we always get hit with. You know, we have got an $800 billion current account deficit and it's been growing over time, and there's no question that that's an issue.

At the same time, that also means a capital account surplus of $800 billion, which means that we are attracting capital from abroad at that rate. That capital is extremely important to this economy.

The saving rate in the United States has been negative for the past year. Without foreign capital coming in, we would not be able to sustain the kind of growth, and growth in productivity, that we've seen. So, this is a very important part of our economy.

The other thing I would say, is that, historically, countries have run large current account deficits or surpluses for very long periods of time. These things don't necessarily reverse in short order. New Zealand and Australia have had deficits for decades.

Australia, in particular, has run a very significant current account deficit and it has created foreign indebtedness of about 72 percent of GDP. Our foreign indebtedness is about 21 percent of GDP. Australia has had terrific growth over the last decade; they have been growing about 3.5 percent per year.

Closer to home, if you think of the two most extreme economies in this respect, they are the United States and China, which have very large deficits and very large surpluses on the other side. We lead our respective categories in terms of economic growth.

The United States is the fastest-growing industrialized country in the world, despite the fact that we lead the world, which is really quite remarkable, and China is the fastest-growing developing country in the world; one side is in surplus, one side is in deficit.

So there is no strong correlation between these two. I think the big danger that we would worry about is that these things could reverse, and reverse quickly.

If for some reason there were declining confidence in the investment climate and business climate of the United States and that caused a contraction in funds coming from abroad, that could cause some significant damage to the economy. We do not see that happening, but if I were going to say, what could actually cause problems for us, that would be it.

One other thing that I'll mention in that context, then make a couple of more remarks, then turn it over to you, and that is, that the Federal budget deficit--I'm not talking about the current account deficit, but the Federal budget deficit--is moving in a very positive direction, and to be honest, an unanticipated direction.

The President had vowed to cut the deficit in half by 2009. Our critics laughed at that, thought that was a ridiculous statement, that it would never happen. In fact, it looks like we're going to be actually a year ahead of that target. So, we're quite encouraged.

The reason for it, is economic growth. The truth is, revenues are tied very closely to what happens with GDP. If GDP is growing, if profits are growing, if money is coming into the economy, money is coming into the Federal coffers. So that's the answer. That's what happened. That's it, in a nutshell.

Economic policies. As we go forward, I think the most important economic policies are to keep tax rates low. I think that was a major component to the economic growth that we saw over the past couple of years. Primarily, I would say it's the dividends and capital gains tax cuts that were the most important.

When we think about responsiveness, the investment community is the most responsive to tax cuts. That doesn't mean that tax cuts on wages aren't important, but if I had to pick one thing that was the single most important ingredient to the economic growth, it would be cuts on capital taxation.

It is important that we do not discourage human capital. Human capital is the bulk of capital in the economy, so we have to make sure that we do continue to encourage human capital.

If you have too progressive a tax structure, if you tax high wage earners or moderate wage earners at too high a rate, what you do is discourage investment in education and capital formation, and that's not a good thing. So we have to resist the temptation to do that.

It's always potentially attractive to particular groups--particularly politically--to get in there and say, let's tax the rich, let's get at the high wage earners. They're the ones that can afford it. That may be true, but in the long run that's detrimental to investment in capital markets, so you have to be careful to resist those temptations.

Finally, on the other side, it is extremely important that we bring everybody along in this economy. The big problem that we continue to have, is at the K-12 level. Our colleges and universities are excellent. We export education to the rest of the world. Thirty-five to 50 top universities in the world are in the United States. We are very good at that level.

Anybody who makes it through college basically makes up for any of the problems that they've had in acquiring skills up through high school. But the problem is that not everybody goes to college, and we can't just simply ignore the rest of the population.

We have to get those skills up. The President's No Child Left Behind agenda that he came in with at the beginning of the administration is clearly a step in that direction. The American Competitive Initiative is another step, community colleges are another step. But we have to keep pushing on that front. I think that is a very important component to economic growth, and economic growth in the future.

Why don't I stop there and simply conclude by saying, we're encouraged by what we've seen over the past couple of years. We think that the future is bright, and look forward to another few years of good, continued growth, growth in productivity and growth in the GDP, and a strong labor market.

I would welcome your comments and questions.

CHAIRMAN MARRIOTT: Yes, sir.

MR. TAUREL: Do you have an assessment up to now, after a couple of years, of the impact of the Jobs Creation Act in terms of economic growth, in terms of job creation, in terms, also, of the effect on the dollar?

DR. LAZEAR: Okay. Three things there. In terms of job creation, I think of job creation as being determined in the short run primarily by capital investment. So again, I would say, what is the single most important thing you could do in the short run to create jobs?

It's to create an environment where you have a positive environment for capital, for investment. That's what we did with JEGGTRA, the 2000 -- I can never get the letters right. But the 2003 capital gains dividends tax cut that brought us down 50 percent.

If you look at what happened after that tax cut, you basically just an abrupt turnaround in the economy in terms of investment levels, in terms of productivity, in terms of GDP. Everything kind of turned around, and almost immediately. It was almost too good to be true. So if I'm thinking in terms of job growth, I would say that's probably the primary ingredient.

Now again, as I think in the long run, I don't think in terms of the demand side, I think in terms of the supply side. So if I wanted to know how many jobs there are going to be 50 years from now, if you tell me the population 50 years from now I'll tell you how many jobs there's going to be. It's basically a function of the population. Just go back 100 years ago and do the same experiment, and you'll see it.

So in the long run, it's population trends and demographics. In the short run, I think it is primarily capital.

MR. TAUREL: Sorry. I was not talking about job creation. I was referring to tax repatriation and foreign dividends.

DR. LAZEAR: Yes. Okay.

MR. TAUREL: The impact of that.

DR. LAZEAR: Yes. I think that's a positive development. I think, again, it's not the main thing in terms of the actions for the past few years. The main thing in terms of the past few years, I would have to attribute to dividends from capital gains.

But certainly being able to repatriate profits and lower tax rates, that's beneficial. Bonus depreciation is beneficial. You can point to a lot of specific things. I think the tax cuts in 2001, lowering marginal rates and wages, is beneficial. All of these things are positive ingredients.

Whenever I am on CNBC or Bloomberg, one of these guys are always trying to say, what one thing, you know, and go for it. In this group, I would tell you that if I had to pick one thing, it would probably be the capital gains dividends tax cuts. But that doesn't mean that the other things aren't important. We like those, too.

In terms of the dollar, to be honest, we defer to the Treasury Secretary whenever we're asked about the dollar. That's his bailiwick. The Council of Economic Advisors actually is not authorized to speak to the dollar.

MR. CHEN: Productivity growth of 3.5 percent, that's pretty high.

DR. LAZEAR: Yes.

MR. CHEN: Where does it come from?

DR. LAZEAR: It comes from three things, actually. It's interesting that you should ask. I was just talking about that with a few of my colleagues this morning.

It is physical capital, human capital, and what we call efficiency. Now, if you look at the components we have, how much does each one explain differences in productivity? The way that you do this, is you look across the countries of the world and say, okay, the are five top countries in the world are literally 30 times more productivity than the five bottom countries in the world.

Why is that? Well, about a fourth of that can be attributed to physical capital and human capital. The other three-fourths is attributable to what is called efficiency.

Now, where does efficiency come from? Well, efficiency comes from things that you might think of as competitiveness: ease of starting a business, labor market flexibility, low tax rates, rule of law. All the kinds of things that you think of as making the investment climate positive and stable are the things that actually account for three-quarters of the differences in productivity.

These are not government estimates. This actually comes from a very large literature that's looked at these growth rates over time across a wide variety of countries. The consensus tends to be that most of it has to do with this efficiency. The word that's used in the academic literature is total-factor productivity, which essentially is efficiency.

MR. CHEN: So technology is an indirect?

DR. LAZEAR: Technology is part of total-factor productivity. So if we're thinking of all the stuff that R&D would use as intangibles, but turns human capital and physical capital into output. That's in the efficiency.

So I apologize for using Silicon Valley, but I'm a bit chauvinistic on that. I think about all the stuff that went on there in the last 10 to 15 years. That is all reflected in what I would call efficiencies.

But again, you have to ask, what created the environment that allowed that to happen? That wasn't just this exogenous event, it was because the United States had some very positive fundamentals that allowed that to happen.

CHAIRMAN MARRIOTT: Anything else?

MR. STYSLINGER: One other question here. What do you see as the greatest exposure for going forward to the economy, given the current strength?

DR. LAZEAR: FDI. Limitations on FDI, if I had to pick one thing. What's the big danger? The big danger is that we will become isolationist and that we will limit the ability to get capital from abroad.

I think taxes, high taxes, are obviously a danger. I think that's less likely. The kind of rhetoric that one hears sometimes around this town is not positive. If I had to worry about one thing, that would probably be it.

CHAIRMAN MARRIOTT: Thank you.

DR. LAZEAR: Thank you very much. Appreciate it.

(Applause)

CHAIRMAN MARRIOTT: I wanted you to know that there is a letter that has been attached to the Korean subcommittee report by Congressman Phil English, and it is outside the room. You can get your copy on the way out.

I'm sorry, but I have to leave, as we are opening up our 700th courtyard hotel in southeast Washington, where nobody wants to go. So I've got to go and be with them there, I guess.

But I thank all of you, and I thank the great job that's been done by the staff.

I would like to introduce my good friend, Ambassador Lavin, who will wrap up the meeting.

REMARKS

By Honorable Franklin L. Lavin

Under Secretary for International Trade and

Executive Director, President's Export Council

AMBASSADOR LAVIN: Thank you, Mr. Chairman. Good luck with your 700th hotel.

(Laughter)

AMBASSADOR LAVIN: I wanted, in this session to lay on the table a topic which -- three or four weeks ago, which most people participated in. I mentioned in the course of that conversation the National Export Strategy, which is a statutory requirement. Congress has charged Department of Commerce that we follow, annually, a National Export Strategy, and we are doing so this month.

But I wanted to just give you a foreshadow of it. Let me just develop two or three themes that are in this. I'd be happy to take questions on it, or any of Secretary Gutierrez's points as well.

But what we're trying to do is put our export activity in a sort of broader economic context. In fact, some of Ed Lazear's points would be a basis for some of what we're doing.

But look at two or three big economic trends of the last 50 years or so and try to establish what implications that has for export policy, and what we're trying to do differently because of these trends.

I see three trends that affect how we export, how we do business. One, is the substantial--even dramatic--drop in trade barriers, formal and informal barriers, since the multilateral process started in 1947. But we have had eight rounds of GATT, and now WTO. We have had a series of FTAs, and we've had a lot of other non-tariff barrier work.

The average industrial tariff barrier in 1947, when this started, was 38.5 percent; now it is 4 percent. So there's been an enormous reduction in those barriers. That's one big trend in the last 50 years.

The second trend is sort of a functional trend, which you could just sum up by saying that death of distance. But it's the Internet, it's e-mail, it's express delivery firms, it's global supply chain management, it's proliferation of air traffic, it's the advent of containerized shipping. What distance meant as an impediment to business decision making activity, it's just a very, very different world now than 50 years ago.

The third trend, is the emergence of China and, on a slower pace, India, and some other countries into the global economy. So we call it three billion new customers, three billion new competitors.

We put all of those trends together, the conclusion is, it's never been easier to export and it's never been more consequential to business success to export. But imbedded in that is maybe as much of a challenge as the opportunity, because we see, despite all these phenomena, a substantial lag among U.S. businesses in the export gain.

This is disproportionately among the small- and medium-sized enterprises. We think it is for several reasons. One, is because we have such a huge domestic market. We think it's sort of a cultural or a question of business orientation that many U.S. businesses do not think of themselves as exporters, do not think internationally.

They are, perhaps wisely, trying to develop their domestic market, but we think there's a long-term challenge if we don't do something about that. So that just sets the stage of what the National Export Strategy is trying to do.

What we want to do, is harness some of these terrific business service providers and work with them. I'm talking about the banks, the web platform companies, the express delivery companies that do just a phenomenal job of helping companies expand, and to help companies expand internationally.

But the fact is, these companies have enormous reach with the SMEs, enormous credibility with marketing the brand of credibility, and can migrate with the SMEs. I'll give you one example. We're working a lot with E-Bay. We've been doing this over the last six months or so.

There are over 700,000 Americans who make most of their living through income earned through E-Bay. These aren't people who work for E-Bay, these are self-employed or small proprietorships who earn their living through sales through a web platform.

About 15 percent of the sales volume through E-Bay is export sold overseas. You could say, with all respect to E-Bay, which is a phenomenal company, this is almost entirely accidental. There's no systematic international marketing, there's no language use, there's no Customs integration.

It's simply, if you have a phenomenal web platform--arguably the best in the world--guess what? People like it. People come to it, people use it. So that's about $5 billion in exports from the U.S. a year, just because people have E-Bay web sites.

You look at what happens with express delivery companies when they take large customers or emerging customers and work with them in one market and take them to another market. Mike could talk more about this than I could.

But the point is, let's harness some of that customer connectivity and help companies migrate, help the companies who have never exported at all, get into the export business. Let's help companies who are in one market get into multiple markets. Let's help companies develop export strategy.

From my experience in banking, the magic number was about 10 percent, meaning if your export sales accounted for less than 10 percent of your total sales, you usually didn't take exporting very seriously. You were the accidental exporter. But once you started to get up to double digits, you started to think about what this meant to your business, how to systematically approach markets, and how to think it through.

That's a real reach for SMEs. They don't have overseas offices, they don't have overseas staff, they don't have overseas sales representatives, they do not have overseas orientation, they don't have anybody in their company who's done it, so it's a real leap for them. But we're kind of excited about some of the discussions, some of the partnerships, some of the things we've been doing over this year and we think that's where the future lies.

And by the way, I might say, there is sort of a "small p" political dimension as well, because this is back to Ed's point, and I will close on this note. He said his greatest concern about the U.S. economy, it came off of Lee's question, was the sort of undercurrent of protectionism, which I think is always there.

It's usually not dominant. The dominant view is usually internationally oriented. But it's out there and it can shape decision making. It can be quite harmful when it does become dominant.

But to my mind, one of the reasons for this anxiety about trade and our position internationally, is from companies who do not think they can compete. Because if you've got a significant strata of the U.S. corporate community--by the way, it's a majority who do not export, who have never exported--their entire world view toward international trade is defensive.

Their entire view is, bad things are going to happen to me. Somebody's going to come and take some of my market, and there's nothing I can do about it. But we know, actually, there are things you can do about it. You can go take somebody else's market.

So part of what we're trying to do, is help these SMEs get their game up and become successful in this business and get into some other markets. We think that will help improve people's attitude for internationalization of the economy as well.

So that, just in a five-minute summary, is sort of an overview of the themes we're trying to outline in the National Export Strategy.

I'll open up for questions on this, or other, points. I'll mention two other things the Secretary wanted to mention, and I know people here have expressed interest in this.

I do not think we have formally announced it or promulgated it, so there's always a government dimension to this. But I think the Secretary will be taking a business mission to China at the end of this year, and I will be taking a group to India. I am going the last week of November.

I don't know if we have dates yet for the Secretary's trip, but I will anticipate getting that out. It has to go through a Federal Register notice, and so forth. But the point is, in terms of the PEC, I think it would just be terrific to have PEC involvement. If companies are interested in participating, we need to talk and follow up on that. So, I just wanted to sort of preview that point with you.

So that concludes my remarks and I'll be happy to take questions.

GENERAL DISCUSSION

MR. JAMES: And how do we follow up on that?

AMBASSADOR LAVIN: Start with Al, Al Frink. Start with Sarah, because Al ducked out, I guess. He realized I might be calling.

(Laughter)

AMBASSADOR LAVIN: But send Sarah an e-mail so we could at least get the dates, and swap information, and so forth.

Questions?

MR. CHEN: The National Export Strategy. Anything we could do to help?

AMBASSADOR LAVIN: Yes. I'd be delighted to get your ideas.

MR. CHEN: That thick executive summary you sent us?

AMBASSADOR LAVIN: Yes.

MR. CHEN: Okay.

AMBASSADOR LAVIN: Well, we'll send out the whole paper. You know, what's impressive to me --

MR. CHEN: That's even worse.

AMBASSADOR LAVIN: What did you guys end up getting? Did you get the whole thing?

MR. CHEN: No. I'm just kidding.

AMBASSADOR LAVIN: It doesn't capture, I think, what I tried to express. But think of a terrific company like UPS and its reach and connectivity with the client base.

I think, conceptually, every customer of UPS who exports into Canada ought to, at least conceptually, be exporting into Australia; a homogeneous market, FTAs with both countries.

But naturally, if you're an SME, you're thinking of Canada as an approachable market. It's accessible, you've been there, you can connect there. I think you might be a bit intimidated by Australia, so I wouldn't naturally think of that as a market. But we know from a business perspective, functionally, it's an identical market. They drive on the other side in Australia, but that's it. That's it.

So the point is, they'll listen to UPS. When the sales representative starts talking about, I'm looking at your numbers in Canada and you've got a lot of good news there, and why don't we see if we continue this good and let's find another market that's somewhat similar, and let's come up with an approach so we can find more good news, I mean, that's a very powerful message.

So it might be the express delivery company, it might be the bank, it might be other intermediaries who have that customer contact that can take trade missions, and sponsor events, and work with us to do things. So, we're doing that. That's what we're looking for in partners out there.

I used the E-Bay example, but amazon.com, as you know, has a very similar kind of program where they work with SMEs to use their brand and their web platform. So, it would be terrific to have your help.

MR. SMUCKER: Frank?

AMBASSADOR LAVIN: Yes, sir?

MR. SMUCKER: It was interesting, what the Chairman of the Economic Advisors just said and what you just said. It sort of hits the "sweet spot" of the technology letter that we have tabled and would like to follow up with. It is about technology. It's about RFID PC. This organization is about standards, and standards facilitate commerce for the SMEs.

AMBASSADOR LAVIN: Absolutely.

MR. SMUCKER: There's no question about it. And one of your points, the three points, the distance, clearly, going forward, it's going to be increased by a huge multiple by what's happening with the application of RFID to UPC. So I think I would sort of vote for really getting our committee together, working on that as much as we can.

AMBASSADOR LAVIN: Yes.

MR. SMUCKER: We had interesting dialogue and there's different themes, but clearly this organization is about standards, and that facilitates SMEs better than anything else.

AMBASSADOR LAVIN: I think you're absolutely right. I mean, the ability of products to move is just revolutionized. What we're seeing, is almost a disaggregation, I think, of business practices where we have, historically, that integration between the customer contact, the sales, the market and distribution, and the manufacturing and production R&D. There's no reason, intrinsically, why those should be integrated.

We can, I wouldn't necessarily say outsource, but you can disaggregate or disassemble that package. If you can make a product, if you make a great product, there are plenty of people who will help you get that around the world, get that to the right customer, and find that customer and do that.

You focus on what you do best, make that fantastic product. Don't be intimidated by the work, because there are plenty of other organizations, institutions, and service companies that will make sure that product gets to that customer.

It doesn't matter whether he's a mile away or 10,000 miles away, it's irrelevant. The customer is going to get that product and RFID is going to be a part of that solution for that company. That's a terrific point.

MR. PURAM: Frank?

AMBASSADOR LAVIN: Yes?

MR. PURAM: Let me second Tim's point. That is, this is not about the standards which we want the government -- this is about -- moving very fast. 3M, Wal-Mart have decided UPCs that -- we just want to make sure that the government acts as a catalyst and provides additional resources where needed to support that.

AMBASSADOR LAVIN: Yes. I'd almost frame it in the negative, Prakash, which is, we want to make sure that other countries don't deliberately or inadvertently come up with standards which are effectively a barrier to trade.

So we are looking at China, coming up with the Universal Product Code, to say, now, why would you come up with a code that's not integrated into the global system? Whose helped by that? It's not even in China's interest to come up with a stand-alone system, not to mention the fact that it's detrimental to everybody else here in the room. So that's really the goal we're trying to do.

MR. PURAM: Actually, Wal-Mart has told the Chinese vendors, you need to use UPCs. So that helps.

AMBASSADOR LAVIN: Absolutely. Absolutely. No. I mean, the paradox is, China plays a leadership role in so many of these production processes. Why would they want to segregate themselves from global supply chain activity when they're benefitting so richly from it? But you see that streak of nationalism in China, which just sometimes comes up, even if it leads you to a suboptimum decision.

MR. CHEN: I appreciate the problems. I think it is true. But you've got to realize that, even today, the high definition and DVD, they're two different formats. I'm not suggesting that the government get involved in choosing one. I just want to make sure that all my colleagues around the table know that. We are going to have to give them space so the market chooses one.

AMBASSADOR LAVIN: Right.

MR. CHEN: The platform that the government could do, is to provide an investment platform or incentive.

AMBASSADOR LAVIN: But government has got an enormous capacity for making wrong decisions. I've got a lot more faith in the market over time winnowing out a better decision.

MR. CHEN: That's all my point is.

MS. MANETTA: I think the market has made that decision, and Wal-Mart is a big part of that, that UPC is the way to go.

AMBASSADOR LAVIN: Absolutely. No question about it.

MR. PURAM: Qualcom and Nokia caught it out in the market. This was an industry-wise --

AMBASSADOR LAVIN: Yes.

MR. PURAM: If we do not seize the opportunity, you will end up with multiple standards.

AMBASSADOR LAVIN: I take your point.

MS. MANETTA: And Frank, to your point, too, make sure that it's attainable by the SMEs.

AMBASSADOR LAVIN: Yes. Sure.

MS. MANETTA: Whatever standard is provided or whatever is out there, making sure that the small businesses --

AMBASSADOR LAVIN: The point of these standards is to reduce costs, to eliminate costs.

MS. MANETTA: Absolutely. Absolutely.

AMBASSADOR LAVIN: There should not be a domestic barrier or an international barrier.

MR. PURAM: Frank, a question.

AMBASSADOR LAVIN: Yes.

MR. PURAM: Are we doing anything to provide around these platforms and strategy -- putting in the small business SMEs -- scaled economies -- combined. So that's an area where the government can -- at least -- some platforms. E-Bay is a facilitator for that.

AMBASSADOR LAVIN: Right. Well, I think you're keying off of Betty's point, which is, look, these regulatory burdens can disproportionately punish the SMEs, because they just don't have the wherewithal to navigate through. So be very careful of what you do.

Government does this all the time, where it puts a burden on the economy, ostensibly for some noble purpose. But there's a cost to all these noble ideas. Watch out, because you're punishing people at the bottom of the pyramid disproportionately.

I would not have said that was a trade issue. That's just a general regulatory issue. But I think Washington needs to hear that voice all the time.

MR. PURAM: So John Chen is going to India and I'm going to China.

(Laughter)

AMBASSADOR LAVIN: May I just close by offering a word of thanks to Al, to Sarah, to the PEC team, and staff who helped put this together? I think it was a terrific meeting.

(Applause)

AMBASSADOR LAVIN: Are there additional comments?

(No response)

AMBASSADOR LAVIN: If not, I will reach over and grab Bill's gavel.

(Whereupon, at 5:22 p.m. the meeting was adjourned.)

C E R T I F I C A T E

This is to certify that the foregoing proceedings of a meeting of the President's Export Council, held on Wednesday, July 19, 2006, were transcribed as herein appears, and this is the original of transcript thereof.

_______________________________ LISA L. DENNIS

Certified Verbatim Reporter