FROM THE OFFICE OF PUBLIC AFFAIRS

I am happy to be here today. For forty one years, this organization has served to facilitate contacts between our government and the private sector in the United States and abroad. Your meetings, teleconferences, and your efforts to acquaint foreign service personnel with the needs of American business abroad, are constructive contributions to a necessary process of dialogue and mutual education.

Since we are approaching both the adjournment of Congress and the last months of an Administration. I thought it might be helpful to give you a sense of where we are on some of the international issues that are important to your companies, as major actors in the global marketplace, and also important to our mission at Treasury. No matter what happens or fails to happen between now and adjournment, I believe that in this area, the 106^th Congress will be remembered for one historic act: the vote to give PNTR status to China. The Chinese economy has been growing at a rate of 7 to 8 percent a year, and is already our fourth largest trading partner. The success of its application for membership in the WTO depended in part on the willingness of Congress to grant it normal status. Had China's application been undermined by a no vote on PNTR, it would have had adversely affected not only our opportunity to open markets in that country, but the development of the rules-based trading system upon which open markets depend. PNTR was not an easy vote. The business community, including many of you, made a strong effort to inform Members of the merits of the proposal. You did your country a signal service.

We are also investing a great deal of time and energy in the proposed new tax regime to replace FSC. We regard the current dispute between the U.S. and the EU over FSC as a major test of the rules based system The current FSC stood without challenge for some 15 years. Nonetheless, the EU successfully challenged it beginning in 1998 in the WTO. Notwithstanding our strong disagreement with the decisions of the dispute settlement panel and the Appellate Body of the WTO, the US has worked hard to respond to these rulings by developing bipartisan legislation that completely repeals the FSC and creates a new regime that excludes from taxation all qualifying foreign-source income, whether the goods are exported or produced abroad in U.S.-owned factories. This regime neither entails a subsidy nor is export contingent. As a result, we believe it complies with WTO rules. The Appellate Body has acknowledged that members are at liberty to tax, or not to tax, revenue as they wish. Our proposed legislation excludes from taxation qualified foreign sales income; such an exclusion is not a subsidy.

Significantly, the proposed legislation represents the first time that the US has changed a statute to comply with a WTO ruling. It is the product of an extraordinary bicameral and bipartisan effort whereby both houses of Congress and the Administration have worked together to draft legislation that enables the country to meet its international obligation to comply with the WTO decision. The legislation passed the House by an overwhelming majority and was approved unanimously last week by the Senate Finance Committee. The only difference between the House and Senate versions has to do with treatment of controlled foreign corporations through the dividends received deduction. We are working with the staffs of the relevant committees in both Houses , and with the business community, to find a fair way of dealing with this issue. The leadership of both House and Senate understand the importance of dealing with this legislation expeditiously, and we are very hopeful that it will be passed and be signed into law very soon.

We regret that the European Commission has not accepted our proposal or even agreed to sit down and work with us to resolve this issue. While it is clear that the US and the Commission have very different readings of the panel and Appellate Body decisions in this dispute, we continue to believe-as we have since the EU started the parties down this path-that negotiation rather than confrontation is the better way forward. We want to meet our WTO obligations. We want to avoid immediate confrontation with the EU.

Because of the high stakes involved in the FSC dispute, it is critical that we continue working together to resolve our differences in a creative and consultative manner.

Going forward, these sorts of disputes make it clear that in operating under a rules-based system, nations need to be more creative in how they solve the complex and difficult issues they encounter with their trading partners. First, they should not bring disputes to the WTO that might be better resolved by other means. Tax matters such as FSC may more suitably be handled in the Organization for Economic Co-operation and Development, which already has launched a useful effort to deal with harmful tax competition issues. Second, we should use mechanisms such as the US-EU Summit process more effectively to resolve trade disputes that cross into other policy areas. The U.S. has already used such mechanisms to mitigate EU concerns over unilateral US-EU sanctions and to try to diffuse tension regarding trade in genetically modified organisms. At a recent US-EU summit we reached a Safe Harbor agreement over privacy standards that safeguard data about consumers. Third, we need to involve the private sector to a greater degree in efforts to resolve trade issues. Consensus among American and European business leaders, for example, can be built through the Transatlantic Business Dialogue, which brings together both governments and their private sectors in order to reduce obstacles to trade. Increased use could be made of other groups such as the Transatlantic Environment, Consumer and Labor Dialogues.

Another priority for us before adjournment is the provision of funds and authorization for debt relief for Highly Indebted Poor Countries, or HIPCs as they are called. Because some of you may not be involved in this issue, I would like to give you some background. At their meeting in Cologne last year, the G-7 countries, prodded by the United States, agreed to forgive a portion of the debt owed by the poorest countries in the world to them and to international lending organizations, on condition that the country is implementing economic reforms and is using the debt relief savings for health, education and other basic social programs. There are 33 countries expected to benefit from this relief. The total cost of the initiative is $28 billion, of which the U.S. share, over a four year period, is less than $1 billion.

For banks and firms in the private sector, writing off debts owed by those who will never be able to repay them is considered sound financial accounting. For countries as well as companies, an excessive overhang of debt can stifle growth and investment to such an extent that an economy will never be able to grow out from under it. In that case, discharging or reducing that burden of debt that will never be repaid stands to benefit debtor and creditor alike. The alternative is to lend the borrower more money simply to service previous loans, as international financial institutions have been doing with many of these countries. At best this is simply running in place.

The G-7 plan now has a new mechanism to ensure that the cash benefits of debt relief flow directly and reliably into increased national efforts to combat poverty, invest in people and combat particular threats such as AIDS and environmental degradation. To be eligible for debt relief, the country governments must prepare, with the help of the World Bank and the IMF, specific strategy papers, which are precise concerning economic management, transparency and state targets against which performance can be measured and monitored. These become part of the conditions for receipt of further international loans.

We are urging Congress to authorize and appropriate $435 million to finance our share of the debt relief program and to authorize the use of the remaining earnings from off-market gold sales by the International Monetary Fund to finance that organization's share of the cost of debt relief. Because we have so far failed to provide the requested funding, HIPC debt relief has now stalled. Several countries which, acting in reliance on our G-7 commitment, met the requirements of the program have been denied relief for which they have qualified. For example Bolivia-a model of economic reform and a strategic ally of ours in the fight against cocaine production will not receive the $850 million in debt relief it has qualified for if the U.S. contribution is further delayed. Honduras is one of the poorest countries in our Hemisphere. Over half its people live in poverty. For every dollar the government spends on health care, it sends $4 to its creditors to pay off old debts. Honduras has qualified for $556 million in debt relief, but without Congressional action it will not be able to bring all of these resources to bear on attacking poverty.

The United States is the most prosperous and economically successful country that has ever existed. No country has a greater stake in successful economic development of the poorest nations. As countries escape from poverty, they become the fastest-growing markets for U.S. products. Already, developing countries account for some 42 percent of U.S. exports. We also know that conflicts growing out of poverty and disease tend to spill over boundaries, requiring us to engage with the rest of the world to protect our own security. That is why we have made debt relief for the poorest countries part of the overall strategy of promoting U.S. interests abroad and we hope Congress will fund this effort so that we can do our part.

There is legislation pending in the Senate, sponsored by Senator Hollings and others, which would bar entry into the U.S. telecom market of companies which have more than 25 percent foreign government ownership. While nations, even in a globalized world, impose restrictions on foreign investment that are necessary to preserve competition in their home market or to protect the national security, the Administration does not feel current law should be changed to bar such participation based purely on an applicant's level of government ownership.

We begin with the premise that foreign investment benefits the U.S., even investment by foreign-government owned companies. Foreign investment is an engine of economic growth. Like exports, it brings capital into our country, raises national income and supports the balance of payments. With a current account deficit as high as the one we have now, we are intensely aware of the value of foreign investment.

The United States has led the way in the worldwide liberalization of telecom markets, producing tangible benefits for both us and our trading partners. Our government has been very successful in identifying and gaining elimination of laws of other nations which restrict the entry of U.S. companies. Proposals to ban government-owned telecom firms from our market would likely diminish our leadership role in this effort and could cause other countries to believe they could limit foreign investment, in telecom and possibly other sectors, either in retaliation or for protectionist goals. We have already received strong expressions of concern from the EU and other trading partners regarding the compatibility of these proposals with our obligations in the WTO. For all these reasons, we would be putting at risk the significant benefits we have derived from years of work in opening up these markets.

U.S. law already provides effective tools for addressing the concerns raised by the proposal in the Senate. The Federal Communications Commission, in applying its statutory public interest test, examines in public proceedings whether a particular transaction raises these issues. Telecommunications mergers are also subject to antitrust review by the Department of Justice under section 7 of the Clayton Act, which prohibits any merger likely to substantially lessen competition in any market in the country. The standards for review are the same for all mergers, including those involving foreign firms or firms owned in whole or in part by a foreign government. In addition, Section 721 of the Defense Production Act of 1950 provides that the President may suspend or prohibit an acquisition if he finds that there is credible evidence to believe that the foreign investor might take action that threatens to impair the national security and that existing laws do not provide adequate and appropriate authority to protect it.

We will not let these tools we have for dealing with national security and competition concerns be turned into an improper screening mechanism, or a semi-automatic ban, on foreign-government owned investors. But we believe these tools can, and have, been used effectively to address authentic concerns as they arise on a case by case basis. We do not foresee any drastic changes in these processes or the way in which they are applied. That said, competition and national security issues do arise, and government ownership does add to the likelihood there may be valid concerns with respect to a particular transaction. We will be paying close attention to these issues, as we have typically done to now. I suspect that Congress will also be paying close attention to how we handle these issues.

These are some of the issues important to us at this time. I would be happy to take questions on these and other matters, and to hear your views in the time available.