Legislature(2005 - 2006)CAPITOL 106
02/27/2006 05:00 PM House ECONOMIC DEV., TRADE, AND TOURISM
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| Presentation: Commercial Diplomacy | |
| Adjourn |
* first hearing in first committee of referral
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ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ECONOMIC DEVELOPMENT, INTERNATIONAL
TRADE AND TOURISM
February 27, 2006
5:09 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Co-Chair
Representative Jay Ramras, Co-Chair
Representative John Coghill
Representative Bob Lynn
Representative Nancy Dahlstrom
Representative Harry Crawford
Representative Beth Kerttula
MEMBERS ABSENT
All members present
OTHER MEMBERS PRESENT
Representative Ethan Berkowitz
COMMITTEE CALENDAR
PRESENTATION: COMMERCIAL DIPLOMACY
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
Harry W. Kopp
Washington, D.C.
POSITION STATEMENT: Presented information regarding commercial
diplomacy.
ACTION NARRATIVE
CO-CHAIR MARK NEUMAN called the House Special Committee on
Economic Development, International Trade and Tourism meeting to
order at 5:09:26 PM. Representatives Neuman, Coghill,
Dahlstrom, and Kerttula were present at the call to order.
Representatives Ramras, Lynn, and Crawford arrived as the
meeting was in progress. Representative Berkowitz was also in
attendance.
^PRESENTATION: COMMERCIAL DIPLOMACY
5:09:40 PM
CO-CHAIR NEUMAN announced that the only order of business would
be a presentation on commercial diplomacy.
5:10:55 PM
HARRY W. KOPP paraphrased his written testimony, which read as
follows [original punctuation provided with some formatting
changes]:
The two goals of American foreign policy are security
and prosperity. They are fundamental purposes of our
government, identified in the first sentence of the
Constitution. Diplomacy is one of the tools of
foreign policy the government uses to achieve those
goals. Most people, when they think about diplomacy,
think about what Condoleezza Rice does, flying around
the around world visiting mostly bad people and giving
them a few good reasons to improve their behavior.
The purpose of that kind of diplomacy is security.
Commercial diplomacy gets less attention. Commercial
diplomacy involves negotiations on trade, investment,
finance, patent and trademark protection, export
promotion, and the like. It's diplomacy that aims at
prosperity. One question I want to deal with right
away is whether the government should be doing this
stuff at all. Some of you may remember that there was
a move in Congress not so long ago, around 1995-1996,
to close down the U.S. Department of Commerce and stop
funding the Export-Import Bank and the Overseas
Private Investment Corporation. Support for U.S.
trade was attacked as corporate welfare. Along the
same lines, there were calls for the United States to
pull out of the World Trade Organization, which was -
and often still is - denounced as a tool of large and
evil corporations. I want to make the case for an
active commercial diplomacy. First of all, trade is
good for prosperity, and also for peace. Commercial
diplomacy has produced a lot of prosperity around the
world. The trading system put in place after World
War II has worked as planned. Since 1950, world trade
is up over 20 times, the world's output has risen 8
times, and world population has grown only about 2.5
times. Trade has made people richer. Of course
wealth is not evenly distributed. Neither is peace.
The countries that are most involved with the
international trading system are the countries that
are best off and growing most rapidly. They are also
generally the most peaceful places. The countries
that are least engaged with the international trading
system include the most dangerous places in the
world, and some of the poorest. The World Trade
Organization has 149 members. But look at who isn't
there: Afghanistan, Belarus, Bosnia, Iran, Iraq,
Lebanon, Laos, Liberia, North Korea, Somalia, Syria,
and Yemen. It's the roll call from Hell. In other
words, as the saying goes, when goods and services
cross borders, armies don't. Tom Friedman, who writes
about foreign affairs for the New York Times,
expressed the same idea a few years ago when he
pointed out that no two countries with a McDonald's
restaurant have ever gone to war.
5:15:50 PM
MR. KOPP continued his testimony:
So a more peaceful and prosperous world is one reason
why the government should work at commercial
diplomacy. Here's another: U.S. success in business
is a cause, maybe the most important cause, of U.S.
global leadership. The United States is the world's
largest exporter, the world's largest importer, and
the world's principal source of and principal
destination of capital for investment. We are the
engine of the world's economy. The numbers tell us
that the United States is one of the few really good
places in the world to do business: it's most
lucrative place in which to sell, the most reliable in
which to buy, and the safest in which to invest or
raise capital. More than military power, it's this
strength in business that makes the United States a
leader, because it's our business strength that other
people want to follow. People in other countries look
at U.S. prosperity and ask: How did that happen? How
did the Americans get where they are, and how can we
get there too? They know that American business
success owes a lot to the business climate and the
business infrastructure: our educated, mobile
workforce, our willingness to innovate and to accept
technological change, our reliance on contracts and
laws. The reliance on contracts and laws is really
important. We all tell lawyer jokes, but in the end
we're a much stronger country because we settle
disputes in court, and when a judge issues an order,
we obey. There are a lot of countries where that
doesn't happen - Russia, China, most of the developing
world. The legal system here is a very valuable part
of the business infrastructure. Other countries want
to copy it, not the laws necessarily, but the respect
for laws. It part of American leadership by example.
Our business strength also gives us leadership through
economic power. The United States was 28% of the
world economy in 2005, more than the share of the next
four countries combined. That's an amazing statistic,
but it's nothing new. The US has dominated the world
economy for over a hundred years. This economic power
translates into military strength. US spending on
defense is almost equal to the defense spending of the
rest of the world. Yet spending on defense represents
a small share, about 4.2%, of the US economy, a lower
share than in years past. So a strong economy is
essential to security as well as to prosperity.
That's another reason why the government needs to be
involved in commercial diplomacy. Commercial
diplomacy comes in many flavors, like Baskin-Robbins.
I'm going to talk first about commercial negotiations,
which we can divide into macro and micro. Macro is
the big stuff, negotiations on tariffs, patents,
standards, subsidies, and so forth - rules that have
general application. These negotiations usually
involve striking a balance among many competing
interests. Micro is the small stuff, or really the
specific stuff, dealing with specific transactions and
specific companies - will China buy planes from
Boeing, or from Airbus? Will Kazakhstan bring in U.S.
or Russian companies to develop its oil and gas?
Macro diplomacy requires give and take, a series of
compromises. Micro often has just winners and losers.
5:21:57 PM
MR. KOPP continued his testimony:
Macro diplomacy belongs almost entirely to the federal
government. Only the federal government can negotiate
trade and investment rules on behalf of the United
States. Most macro diplomacy is handled by the U.S.
Trade Representative, with technical support from
other agencies, especially the departments of commerce
and agriculture, and oversight by the Congress,
especially the Ways and Means Committee in the House
and the Finance Committee in the Senate. I don't want
to suggest that states have no role in macro
diplomacy. They do. But the state's role is mostly
to deal with the federal government, not with the
foreigners. So if your constituents come to you and
say - I'm making up this example - "we're having
trouble exporting seafood products to Korea because of
Korean health regulations," you want to make sure the
federal government takes this up with the Koreans and
makes it an important issue. How do you do this? You
have to show the executive branch that the interests
of your constituents line up with a broad public
purpose. That's critical. For many good reasons, the
federal government wants to be consistent around the
world in the way it approaches trade issues, so it
wants always to have a basic principle at the heart of
its argument in any particular case. In this case,
the basic principle, which is part of international
agreements that Korea and the United States have both
signed, is that health regulations affecting trade
should be based on science. They should protect
public health, they can't be designed just to keep out
foreign products. Maybe in this example about Korean
health regulations your constituents can show that the
regulations are not based on sound science. So you
want to advise your constituents to put their
complaint together in this way, and maybe you can help
them do it. Then you and they can go directly to
federal officials, in this case in the office of the
U.S. Trade Representative. Federal officials will
almost always respond quickly and favorably if they
are given what they need to go to work. Of course you
can also look for support from the Alaska
congressional delegation, which is one of the
strongest and most able in Washington.
5:24:59 PM
MR. KOPP continued his testimony:
Or another example. Let's say that the government of
Japan gives big subsidies to its commercial fishing
fleet, subsidies that put Alaskan fishermen at a
competitive disadvantage. If the Japanese were using
subsidies to sell fish below cost in the U.S. market,
the U.S. could put extra tariffs on the subsidized
fish to offset the subsidies. But let's say that
Japanese subsidies hurt Alaskan fishermen not so much
in the United States, as in Japan or other Asian
markets. The basic principles and the appropriate
remedies aren't as clear in this case. But U.S. law
provides a way for private parties, like the Alaska
fishing industry, to petition the U.S. government -
the U.S. Trade Representative, to be exact - to act
against unfair foreign trade practices, even if there
is no international agreement that clearly covers the
situation. In fact the Alaska state government could
file the petition on behalf of the fishing industry,
so long as a substantial percent of the industry - I
believe it's 80% - supports the action. Engagement by
the state government would increase the political
weight behind the petition and increase the pressure
on USTR to take strong action. The state also gets
involved with macro diplomacy when state, not federal,
laws and regulations are at issue. I'll make up
another example. Let's say the state legislature is
considering a bill to increase user fees at the
Anchorage airport, with revenue earmarked for airport
improvements. No doubt you will hear from Federal
Express, both on the record in public testimony and
off the record in private communications. But you
might not hear much, especially on the record, from
foreign shippers and carriers who will be affected,
unless you ask them to comment. You might want to do
that - invite foreign companies to submit statements
for the record, or to present oral testimony,
regarding proposed legislation that is likely to
affect them in serious ways. Whatever happens in the
end, people usually feel better about a decision if
they've been part of the process and have had a chance
to be heard. You may also be able to use the process
to build relationships and a reputation for fairness
that will be helpful in the future. That's macro
diplomacy. Micro diplomacy happens when the
government steps in between U.S. companies and foreign
governments or government-controlled entities. This
is where U.S. embassies get involved. When U.S.
private companies are dealing with foreign private
companies, of course, the U.S. government and its
embassies stand clear. But you'd be surprised - or
maybe not - by how many private deals get tangled up
in some government regulation or requirement. That
can bring the embassy into play. An American embassy,
and especially an American ambassador, can be a very
powerful ally for American business. For almost every
country in the world, the United States is the most
important trading partner, the most important market.
For many countries, the United States directly or
indirectly provides security. Because of the
importance of the United States, the American
ambassador generally has excellent access to high
officials in the host country. A good ambassador uses
this access wisely. He builds trust and confidence.
He is someone that officials in the host country
listen to and take seriously. I should say there are
some bad ambassadors out there also. Some are lazy or
self-indulgent. They don't get out to meet the people
they ought to meet, they don't speak the local
language or understand the local politics. And some
follow their personal views rather than their
instructions from Washington, which makes them
unreliable as representatives of the president. But
most ambassadors and embassy staffs are competent,
highly dedicated people.
5:31:14 PM
MR. KOPP continued his testimony:
Just by indicating their interest, embassies elevate a
commercial issue and give it some political
importance. For example, when a U.S. power company
bid on a project in the United Arab Emirates a couple
of years ago, the company asked the embassy to get
involved. The company had French competition and
wanted to make it harder for the French to win the
deal with bribery or kickbacks. The U.S. company
thought that the Emirates would be much more careful
about sticking to their own rules, which prohibit that
sort of stuff, if they knew the United States
government was watching. The embassy did get involved
- and stayed involved throughout a year of
negotiations - and the company won the contract. Like
everyone else, ambassadors and their staffs work
better when they are well prepared. The best advice
to a company working overseas is to keep the embassy
informed, so that they are ready to go if there's a
crisis. And I would always tell anyone who is going
to brief an ambassador to tell the whole story, not
just one side of it. An ambassador going to see a
foreign official has to be credible, and he won't be
credible if he gets sandbagged because he didn't know
the other side of the story. Where U.S. relations
with a country are poor, embassy involvement in a
commercial issue may backfire. The host government
may see a chance to play up to nationalist sentiment
by saying no to Uncle Sam, in a loud voice. That's
why some companies don't want to be associated with
the U.S. government. When Argentina defaulted on its
debts, devalued its currency and imposed price
controls at the end of 2001, most U.S. companies
invested in the country came to the U.S. embassy for
help. But some stayed away. One of the big grain
traders told me: "We decided we had better relations
with Argentina than the U.S. government did, so we
handled our problems ourselves. We think we were
better off that way." That's a judgment call, and the
grain trader may have been right. The embassy and the
U.S. government have leaned on the Argentine
government for the past four year, so far with little
to show for the effort.
5:35:16 PM
MR. KOPP continued his testimony:
Can a state government get involved in this kind of
micro diplomacy, and if it can, should it? The key to
micro diplomacy is leverage. Generally it's the
federal government that has the leverage to negotiate
with foreign governments, and only the federal
government has the view across the whole range of
bilateral relations to reach a judgment on how to
handle any particular case. Of course state officials
can steer businesses with problems to the right people
in the federal government - to a U.S. embassy, to the
Departments of State, or Commerce, or Agriculture, as
the case requires. But frankly, most businesses can
figure out for themselves where they need to go. The
state government only adds value if it can provide an
introduction - if there is a state official who has
developed personal relationships with people in U.S.
embassies and in the Washington agencies and is known
and trusted by them. Alaska is such an export-
oriented state that you may already have someone on
the payroll who fits that description. If not, maybe
you should. State governments have a larger role in
two areas, promotion of exports and attracting inward
investment. Alaska is especially well positioned to
make export promotion a state function, because the
range of goods and services available for export is
not too large, and because some them - tourism
obviously, but I would guess also seafood and maybe
some wood products - can be Alaska branded. I don't
have to tell you about export promotion. The state
knows all about trade missions and trade fairs and the
other standard techniques. I would offer only one
piece of advice. I think it's a good idea to charge
companies to take part in state-sponsored promotional
events, maybe on a one-for-one matching basis. It's a
good idea because the companies are the biggest
beneficiaries, so fairness indicates they should pay a
higher share of the cost. But more important, if the
fees are high enough, companies will make sure they
get their money's worth. They will set a standard
that the government has to meet, and they will know
how to measure success. Programs that don't produce a
return won't find support, and the ones that do work
will be heavily subscribed. The government can't get
that kind of feedback in any other way. Promoting
inward foreign investment is controversial. The
federal government doesn't do it at all. One reason
is that the government doesn't want to do anything
that would favor a foreign investor over a domestic
investor. Another is that the federal government
doesn't want to favor one state or region over
another. So federal policy tries to be strictly
neutral. I don't know what Alaska does about foreign
investment, but I'll bet you follow the same policy of
neutrality between foreign and domestic investors that
the federal government does. Probably when the state
goes out promoting investment in Alaska, you're at
least as eager to go after investors in the lower 48
as in the rest of the world. The best thing the state
can do to attract foreign investment is to create a
business climate that is friendly to investment,
domestic or foreign. I mentioned near the beginning
of this talk that the United States attracts more
foreign investment - I mean direct investment,
ownership of businesses, not just foreigners buying
stocks and bonds - than any other country. That's
because of the business climate here, the blend of
good return and low risk. Investment promotion is
education, making the opportunities here known to
investors who otherwise wouldn't think about Alaska,
whether those investors are in Taipei or New York.
5:41:41 PM
MR. KOPP concluded his testimony:
One way to get the attention of foreign investors is
to put Alaska on the itinerary of touring diplomats,
including American ambassadors to countries of
interest, and ambassadors from those countries to the
United States. You can show the diplomats the
grandeur and beauty of the state and also teach them
something - I'll bet they know very little about the
range or scale of opportunities or the legal framework
for resource development. Diplomats will repeat your
message to people that count, they'll get press
attention overseas, they are good multipliers of your
message that way. There are a few organizations that
have put tours by diplomats together, using a blend of
public and private funds, and you might be able to tap
into their experience. Representative Coghill asked
me to talk about what the states can do in diplomacy,
on their own or by making the country's national
resources work for them. I hope I've come up with a
few ideas, but I'm sure I haven't exhausted the topic.
I'd be happy to take questions.
5:43:53 PM
REPRESENTATIVE CRAWFORD acknowledged the argument regarding free
trade, fair trade, and balanced trade. He said that trade
becomes problematic when there are large imbalances. He relayed
the idea of the U.S. unilaterally ending its tariff and quota
system and replacing it with certificates for purchases from
other countries. The U.S. would then issue a tradable credit
that could be sold to countries with a large imbalance. As a
result, countries would only be able to export goods they had
certificates for to the U.S. He surmised that it would give
smaller countries/economies more money to buy more goods from
the U.S. In addition, it would make the crude from Saudi Arabia
or the manufactured goods from China or Japan more expensive and
have more of a leveling effect. He asked, "What would you think
about a leveling effect like that in world trade?"
MR. KOPP surmised that Representative Crawford was suggesting
raising prices to countries that currently have trade surpluses
with the U.S. and somehow lowering prices for certain other
countries. He continued that it's a way to make the dollar a
lot less fungible than it is now and characterized the idea as
terrible.
REPRESENTATIVE CRAWFORD stated that the U.S. exports $1.1
trillion and imports $1.8 trillion and that there is a really
large imbalance, which tends to "foul up" the currency. Small
countries/economies purchase more goods from the U.S. than they
sell to the U.S. He suggested that the U.S. issue these small
countries/economies a certificate that they could sell to other
countries/economies in order that they too export manufactured
goods to the U.S.
5:47:45 PM
MR. KOPP surmised that instead of selling products for money,
the U.S. would introduce a new currency called a certificate.
The U.S. would provide those certificates to countries with
which it has a trade deficit and those countries could sell
their certificates to countries that are in the surplus. He
asked, "Why will those countries that have a surplus with us
want to buy them?"
REPRESENTATIVE CRAWFORD responded that those countries wouldn't
be able to export their goods and services to the U.S. unless
they had a certificate.
MR. KOPP surmised that the benefit from the certificate would go
to the small country, or the country in deficit, not the U.S.
He said that if the U.S. wants those countries to have more
money, why doesn't it just give them money instead of going
through a complicated scheme which would screw up U.S. trade.
REPRESENTATIVE CRAWFORD responded that the U.S. wants those
countries to buy more goods from the U.S. and it doesn't want to
just hand the money to them. He explained that this would give
those countries more money with which they would be able to buy
more goods and services from the U.S.
MR. KOPP surmised that if a scheme like that were introduced,
the U.S. would export and import less and the net result would
be less trade. He said that he suspects that these certificates
would turn out to be not quite saleable. He noted that
countries that have deficits with the U.S. have a lot less in
deficit than countries that have surpluses with the U.S. have
surplus. He remarked that he's real skeptical that something
that substitutes certificates for dollars and "mucks about" in
trade this way would have a positive result.
5:50:52 PM
CO-CHAIR NEUMAN, in regard to investing in a foreign industry,
asked, "Is there any specific or recommended protocol that we
should follow besides just going to our ambassadors?"
MR. KOPP replied that it's always a good idea to keep the
Department of State informed, specifically the desk officer
who's principally in charge of bilateral relations with every
country.
5:52:27 PM
CO-CHAIR NEUMAN relayed that a group of foreigners would like to
build a small nuclear plant in an Alaska village.
MR. KOPP replied that it would be a good idea for someone to
call the Office of Japanese Affairs in the Department of State
and inform them of a Japanese delegation coming to Alaska to
discuss building a nuclear plant. He noted that the office will
share the information it deems necessary as well as be able to
react earlier and more wisely.
5:54:29 PM
REPRESENTATIVE DAHLSTROM referred to page 51 and identifying
underused assets. In regard to security and securing borders,
she requested that Mr. Kopp comment on the port situation and
potential contracts.
MR. KOPP, in regard to the Dubai ports, relayed his
understanding that the Dubai Ports World has agreed to buy P&O,
which is a British firm. Some of the assets of P&O include
contracts to operate terminals in five or six U.S. ports, mostly
on the East coast. He remarked that Dubai Ports World would
take over the operation of these terminals from P&O. The role
of a terminal operator is to bring a ship in, unload it or
arrange to have it unloaded and loaded, and send it out again.
The terminal operator owns the dock, cranes, and container
transport facilities, but doesn't have anything to do with
security. The U.S. Coast Guard and U.S. Customs and Border
Protection, in most cases, will have checked that container
before it left the foreign port. They're notified by the master
of the vessel before the ship enters U.S. waters. They oversee
the unloading of the vessel after it docks in the U.S. and check
the seals. He remarked that the owner of the terminal is
irrelevant.
5:59:21 PM
REPRESENTATIVE COGHILL discussed the importance of an educated
and extremely productive workforce, welcoming innovation,
transparent rules, and open borders. He asked, "Can you give me
a idea of some of the things that have worked well, maybe that
haven't worked well, as far as that being an asset?"
MR. KOPP explained that his list is derived from what investors
in the U.S. say they find attractive about the market. He noted
that output per worker in the U.S. is very high and growing very
rapidly. The educated workforce in the U.S. is intelligent and
has the necessary technological infrastructure. He emphasized
the importance of transparency in laws and good regulation. In
further response to Representative Coghill, he clarified that
diplomats are only one tool that can be utilized. He added that
one also needs to work with businesses as well as investors who
buy and sell goods, services, and assets. He characterized
diplomats as very useful "go-betweens."
6:06:43 PM
REPRESENTATIVE LYNN asked, "How do we safeguard national United
States defense interests if we have foreign companies, which may
or may not be owned by the foreign state, making critical parts
that have a potential military application?"
MR. KOPP answered, "We shouldn't put ourselves in that
position." He added that the U.S. has critical components which
are part of a supply chain that is at severe risk of a political
event overseas. In further response to Representative Lynn, he
explained that the reason the Dubai ports was examined at all by
the Council on Foreign Investment in the United States is
because of the Exxon Florio amendment that was passed in the
late 1980s, which exactly goes to that kind of an issue. It
deals with investments in foreign purchases of U.S. assets that
may pose as a security question. He added that there's also a
provision of trade law, called Section 232 that allows the
federal government to inhibit or block the import of products
that would compete with U.S. products that are critical military
components. This provision of trade law was created to keep out
imports and protect the American industry. He concluded that
there are a number of provisions that allow needed action to be
taken to protect U.S. supply chains.
6:11:19 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Economic Development, International Trade
and Tourism meeting was adjourned at 6:11 p.m.
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