World Trade and Transatlantic Relations
American-German Biennial Conference
Toward A New Transatlantic Agenda
© Peterson Institute for International Economics
|Dr. Posen:||First off, I just want to say thank you to the Atlantik-Brücke and to the ACG. When Garrick first asked me to do this I thought, sure, great. And then I looked at the schedule and saw there were going to be three sessions crammed into one day, going well into the night and I wondered, "What am I getting into?" It turned out I got into a very interesting discussion, because we have a number of serious people, including Dr. Oetker, who sat through the entire thing and made real contributions, and I'm hoping that this report will reflect the views.|
But we were a challenging panel. We didn't stick with the world trade issues. We decided that was too small a topic for us. And so, we eventually sort of mutated into something, which I will call "transatlantic relations and global economic integration." We concluded that trade and trade disputes seem to becoming an ever smaller part of what the economic world is about, certainly for most of the international business people around the table there was a sense that the old trade disputes are very much just that-old. And for the policy types around the table, there was also a very strong belief that these are not the issues looking forward, though they are certainly things we have to cope with. So, I will, of course, report on the trade part, but as I said, we decided to take on a slightly larger challenge.
Taking off from where Minister Tacke and my colleague Fred Bergsten spoke yesterday, and then of course today we heard Charlene Barshefsky, it's interesting that our panel or group or Stammtisch or whatever you want to call it managed to come out with its own sort of independent thought. I think there were basically five parts to it, and let me try to set those out. The first one, as I already mentioned, is "Trade disputes are seen as the detritus of the old economy." We're back to a very basic truth that all of us know, which is that the disputes are about the sectors of the economy in the rich countries that have lots of labor, no real future, and that demand trade protection. So, be it coal, be it steel, be it textiles, be it agriculture, dare I say, that these are the things that, in an open world of competition, would largely disappear. There are exceptions, of course-specialized niche producers and the ones who also have the long-standing political ties and the very local interests that can affect politics. Now, of course none of us are so naïve as to say: well, just because they're old-fashioned, we can dismiss them. But it does mean that, as Peter Ammon from the German embassy suggested in his opening presentation yesterday, 98 percent of EU-US trade just sort of goes on. It's this 2 percent we keep knocking about.
Airbus is special in everyone's mind. There's even an economic argument why Airbus vs. Boeing is special. It's the only industry in which you can truly say there really is only room for one and a half producers. That, essentially, is the dispute. But, you know-if you leave that rounding error aside, we really don't think trade is a major conflict. Now, this doesn't exactly make people calm. We look at Seattle; we look at the types of conflicts that are out there. We are very aware that an open trading system is necessary to raise the wealth of the emerging markets and to stabilize the world economy-all the strategic reasons you're familiar with.
So, the question is, what can we say going forward? We clearly do not want another Seattle at Doha, where the next round supposedly will start. Which leads to my second point. I think we do have some new truths about old trade. That we-perhaps not unique to this group-but we are pretty strongly convinced that the WTO is getting overburdened rather than underused. And Roger Kubarych spoke about this-and also his colleague at CFR, Jagdish Bhagwati, has written on this. But, from a very practical perspective, it emerged from our discussions that you want a WTO that is concerned with its core mission, with settling specific trade disputes, with trying to have a new round every once in a while, with keeping the basic rules of the game, but not a WTO that is freighted labor, environment-all these other issues. It just isn't likely to carry the burden. That doesn't dismiss those issues. But it does indicate we're worried about a potential backfiring against the WTO, if you put too much burden on it.
Now, part of this concern is that the thing that was sort of the nose under the camel's tent in the previous trade round was intellectual property rights. For those of you who aren't aficionados of this-it used to be that the trade rounds were supposedly very pure. They were only about actual commerce and "stuff." They were simply about whether other countries lowered their tariffs versus another one, or reduced invisible tariffs. In the last trade round some rules having to do with trade and intellectual property rights and things like American movies and American pharmaceuticals were introduced-you can see where this comes from. And there is some feeling that this was, in some ways, not a full success. It was not a full success because it sets the precedent that the WTO can get tasked with things that are not directly on its mission. It starts the precedent that we're coping with now, that we now have to be a lot more conscious of when it's seen as the collusion of the rich countries. Normally, the G-2 of the United States and Europe is in essence forcing things on the emerging markets, and-even if we think forcing things on the emerging markets may at times be a legitimate strategy-that leaves a certain amount of technical assistance and technical transfer that has to be done. Someone here raised the fact that there are only ten employees at the WTO who are there to help all of China get ready for WTO accession, which includes new property rights and meeting all legal requirements. That's a lot of work. This gap leads to our worry that a large trade round is not going to solve our problems. We're not going to be able to fold everything in. We're not going to be able to get rid of the political resistance by simply having a good round.
Which led to the third point of our group-and I think, again, our group was very practical-minded. We had the idea of somewhat substituting for the WTO a lot of other incremental steps. It was suggested that we need to get quick wins-that this is something that works in a corporate context when you have a negotiation. You give the CEO something that they can quickly agree on and that people can see as a victory. And we thought in terms of things like that. So, there could be many informal relationships, there could be many bilateral deals, there could be many business-to-business creations of best practices that didn't require direct government intervention. None of this substitutes for the fundamental role of the WTO. But this does substitute for, perhaps, some of the panic if we do not have a trade round right now-this can make a difference in some of the areas we actually care about. And that this would be a very pragmatic way to go. Paula Stern, who also gave an opening presentation yesterday to our group, stressed very much the success she and others have had with the Transatlantic Business Dialogue, which, for all its warts, actually has made progress on a number of areas. We've spoken about convergence in accounting standards that is happening, which has enormous effect on capital flows and mergers and acquisitions, even without direct government intervention.
This will lead into the fourth point, which is that the action really is shifting to things about corporate governance, investment, mergers and acquisitions-we don't need to fixate on GE-Honeywell. There have been enough other examples out there. We can all think of Daimler-Chrysler-we can all think of the recent decision by the German government not to support the EU's initiative on mergers and poison pills and so forth. Now, this raised two issues in our group. The first one assumes we want a freer market, better mergers and acquisitions, easier transfer of corporate control between countries or at least, that it shouldn't matter whether it's within a country or across a border. What is the threat to that? Here we had a much wider range of opinion. There are some people who thought the threat was some round of escalating bidding by local governments. So, Alabama gets foreign direct investment from Mercedes-Benz for building the M Class. Probably no matter what, the M Class production was going to be moved to the United States, but why Alabama? Because they outbid five other states in giving away goodies to the company. And you can imagine similar things going on for a merger trying to close specific plants, and so forth. That was one source of threat. Another source of threat that the European members of our group stressed very much, and which we heard reference to early this morning, is that the United States is sort of arbitrarily putting up defense barriers to takeovers because, legitimately or not, the United States wants to restrict technology transfer, and then this is used as an excuse to prevent mergers and acquisitions. And since there are so many dual-use technologies today, avionics being a good example, when you start using military excuses, security excuses, it interferes with a great deal of world commerce.
On the flip side, there was a more inchoate feeling from some of the more American members of the group that there is still some basic unspoken inequity here. We could imagine and we did see Chrysler being taken over by Daimler. We could not imagine a world where anybody in Germany would put up with Chrysler taking over Daimler in the other direction. We could see and we have seen a world in which Bankers Trust was taken over by Deutsche Bank. We have a very great deal of difficulty imagining a world in which Deutsche Bank would have been allowed to be taken over by Bankers Trust. And this isn't just a matter of the finances. There's clearly no legal barrier there, but there is something else. So, there are a lot of concerns in this area.
The second threat I was mentioning, besides this idea of bidding wars by governments, and the German-side worry about national security excuses, is the American-side worry that there's some sort of invisible barrier. One interpretation, which was given by, I think, Dr. Oetker, is of the German government's move against the Hughes Initiative on poison pills. The German excuse for the legislation was that it was essentially a threat with a long fuse in hopes of getting other European countries to behave more reasonably. And this, of course, is reminiscent of a Steel 201 strategy-that is what some Americans have articulated during this conference, right? That the US administration-at least the Bush administration-doesn't really want to protect more steel, they just want to threaten this, because that will bring everyone to the table. This is a strategy that has a long history. Its history is mixed.
And with all good threats, as those of you from the National Security side know, the threat has to have some risk of getting out of control to be credible, but as long as you do have that risk, you may not like the outcome. The problem, which our group very concentratedly brainstormed over, was what would be the alternative? And, again, we fell back on these incremental, voluntary, private sector, decentralized attempts to get convergence-in hopes of rounding off some of the edges. But we did not have an obvious, full-out answer. We did not have a call to say, oh there should be a corporate round, and there should be a specific government institution that deals with corporate governance. Though it wasn't mentioned, I think many of us are aware of the failure of the multilateral agreement on investment that was proposed before the OECD and became the first--and we hope, perhaps last victim-of the anti-globalization folks.
But that leads into what I think is our fifth-and I'll make it for now-final point of what was a very rich discussion that I don't think I've given full justice to. The fifth and final point was a general question about what sorts of institutions you need to move economic integration forward. There was some brief discussion, which I tried very hard to squelch, of the idea of a TAFTA, a Transatlantic Free Trade Agreement. Let's just say no. But what was interesting, joking aside, is throughout our discussion there was very little distinction made on either the American or the German side between Germany and the EU. Now, obviously and strictly speaking, trade matters-that is law, that is the way the world works. In this vast range of other economic activities, that's not entirely clear. Yes, there is Mario Monti, the EU Commissioner for Competition Policy, but of course, there are also domestic government commissions and domestic government regulations. And so, there's a lot of room for bilateral activity, but this did not come up. This did not come up, even though we had the presence of some people very experienced in policy making at our table. We talked a little bit about whether the OECD, perhaps as a rich man's club or rich woman's club, could be the place to deal with these concerns that really are about the rich countries. We had some hope, but not a huge amount. So the question is, institutionally, where we could go forward and I think-now I'm going to sound like a Washington type-this is the material for writing one's next book or for one's next research.
But in terms of the short term, the bottom line, returning to our initial mission, the question of world trade in crisis, can the United States and Europe do anything about it? I think there was a sense that the tide, perhaps not of history, but of economic forces at this juncture, is very much in favor of integration between Western Europe and the United States. Many of the things that are going on right now-the technological gap between the United States and Europe (especially on the military side, but also in information technology), the movements of regional economic groupings (the Bush administration's initiatives of FTAA, the European Union's movement of enlargement to the East)-are things which are just going to happen, and can be played either prointegration or contra. And so it could be that FTAA becomes a building block, not a stumbling block. It could be that enlargement, as has long been my fantasy, and I gather it was shared by many people in the group, could be the thing that finally kills the CAP, the agricultural legislation in Europe. But equally, these could be played the other way. The blocks in FTAA could backfire with Germans, as was articulated by Herr Winter from the BDE. Germans or Europeans who feel shut out from NAFTA would try to compete with a direct outreach to Brazil or East Asia. The agricultural deal in Europe resulting from enlargement might not be something that pleases US farmers, let alone emerging markets. So, we're back to a very pragmatic, issue-by-issue, deal-by-deal approach involving a lot of business, trying to get convergence where you can get it, and trying not to oversell large-scale government action (and actually this is very consonant, I believe, with not only some of the things that the Bush administration has said, but also some of the things that Charlene Barshefsky articulated yesterday). And I think that's where we come out. So, thank you very much.
As I have been, at least for two of these three sessions, participating in this panel, I want to congratulate you on summarizing really the good points on behalf of the members of the group. This is the legitimization, as this seems to be one of the key issues for the whole conference. I'd like to disagree to a certain extent on your comment-I wasn't present at least at that time of the judgment-of whether it's unthinkable, the takeover of German companies by Americans. We had that for a long time for General Motors, or Kraft Foods, or Proctor & Gamble-I mean there are so many-for decades, for centuries, almost-yes, sure, some of them were created in the 19th century, and we're so well used to it. The astonishing thing was the opposite that happened-that Daimler got to take over Chrysler, Deutsche Bank-Bankers Trust-that didn't happen before. And so, there are only two reasons why there haven't been, in the last decade, or maybe decades, too many takeovers by American companies recently. And they are labor market restraints in Germany and tax burdens. But maybe that one is going to change, and maybe we will have lower taxes here, and we'd like to have more American investment in the coming years, and maybe more takeovers will be welcome. But that's just a comment.
If I could raise a question on the subsets of the agenda that were there as well. Now that was a brilliant summation of-what I would say-the main and most important threads of thought, certainly from what I've heard as well-but we did throw into the mix, in that list, a couple of other issues, just to sort of expand the protests and to give other directions to look. And there was one sort of, very short-what I would call a north-south question-the impact of the things that we do in the industrialized nations of the Third World. Did you get into that to some extent, and what was the gist of the thought?
Ehrlich gesagt, frankly speaking, in my role as co-chair, I tried on occasion to nudge us with that. And what would happen, as I interpret it, given the very practical-minded group, was everyone saying yeah, that's kind of a tough problem-and well, we can do something about this more soluble problem instead. I don't mean any disrespect to my fellow panelists. All of my own research, for example, is concentrated on rich countries, because I believe rich-country problems are more easily soluble. It would be much more fun to be doing research work traveling to Latin America, than constantly traveling back and forth to Frankfurt and Tokyo, right? But the problems are easier in rich countries. I guess my point is that if I can summarize the intermittent discussions of the group on this-I think there were two very strong feelings of constraint.
The first one was political, which is: How do you get what you want for the emerging markets or, even more, for the non-emerging markets, without bringing them into governance? There would be all these demands to have a voice, to have their seat at the table. The green room at the WTO suddenly becomes the green mansion and has lots of people in it. And I don't think anybody had a principled objection to that. I think, in fact, the opposite-we all feel guilty that they're not represented there. But there was the practical-minded thing that if you put more people at the table, it's just that much harder to get an agreement. And it is true that generally you need an agreement from certain central characters to move forward. Now, in my own opinion, and in some of the discussions we have at our Institute, you can talk about things pragmatically-you try to get India and Brazil, say, at the table, and not anybody else. But that wasn't part of our discussions here yesterday.
I think the second reason we didn't get into it as much, was because there is a sense-especially for people who have been doing investment in emerging markets, that most of the major determinants of lack of investment and development are domestically driven. If you look at Russia, at Indonesia, at a prototypical sub-Saharan African country-the reason you don't get investment there, or the reason you only get very specific investment, has to do with the domestic policies and political scene of that country. Whereas, there are a few hundred mark bills on the table if you can get development, and only a couple of $50 bills on the table between the United States and Europe or the United States and Germany, in terms of the benefits from progress. But for the rich countries it's much more clearly win-win-there are, of course, domestic opposition groups, but it seems like in their external relations it's much more manageable. So, I think those are two reasons why we didn't confront emerging markets as directly as it seems we might have. Now, is this something that the group should think about? Is there a message implied here that perhaps transatlantic relations, at least as this group is seeing them, might not be the driving force in north-south relations? I don't know, but it's an interesting idea.
Could I raise a point that is back on the question of investment and corporate governance? I think we are a very long way from having the ability to have important transatlantic negotiations on this issue for domestic reasons. If we talk about trade, in the United States we have the US Trade Representative and the Europeans have two or three things in the European community. If we talk about development issues and international monetary issues, it's pretty clear that the US Treasury is the lead agency. Additionally, lots of other agencies have an interest and I'm not so clear about how it works in each of the European countries, the EU seems to have less of a role there. But when you get to investment, consider all of the agencies-just in the United States-that would be involved and what they think their role is. I don't believe the Securities and Exchange Commission has it as their function in their own mind to promote investment across the Atlantic. And the Anti-Trust Agreement, I think they would find it vaguely improper to be part of an overall negotiation about promoting investment. Likewise, I'm not clear that Mario Monti would find it exactly comfortable to be thought of as part of European foreign policy. I just don't know how we would even organize a United States side to do something major. So, incremental may be fine, but it's not too clear how much we can accomplish. And I think that the European situation is even more complicated, because in this area, some of the powers are still pretty clearly in the heads of national governments, so at least it's a question of dispute. Some of the regulatory problems are very similar to those in the United States, where the key agencies don't view their role as being part of the Executive Branch even, in the full sense. It would be subject to coordination by the National Security Council, for example. So, I think we have a long way to go in even how we look at these issues domestically, and I think the same is true of Europe.
Thank you very much. I'd like to comment on that very point myself. Maybe that's an issue the Transatlantic Business Dialogue should take up. That's where I personally have been involved. Second, the International Chamber of Commerce did a lot of work in that respect. That's not a big body, maybe not as powerful as it should be, but I know that they have been doing some work on that. And finally-I think as we heard at the outset, maybe partly the answer of Charlene Barshefsky--that it is still the Finance Ministers, who on national levels will have a big role in this respect. Perhaps the usual finance institutions, World Bank, IMF, the Central Bank Governors talking on economic relations, usually don't deal as much with investments. So maybe there is a lack of institutional power in driving that issue and I think we should really cope with it.
Obviously there are a lot of people out there who want to come into the discussion, but I just want to make an observation. That just as there is indeed more disorganization, decentralization, on the institutional side for decision-making about investment than for trade, there are also fewer wholesale blockages or legal barriers to investment. I mean, in a sense, we do have a lot of cross-quarter activity already, and we do have a huge amount of portfolio investment going on. So, I guess I don't get as concerned as I do about the business sector being able to make progress on investment, even in the absence of government initiatives, the way I would in trade. Before there was a common European trade policy and we had a lot of small deals to cut institutionally it was a real problem. This comparison doesn't deny your point, it just makes my outlook a little more optimistic.
I think the leading distinction is between general consensual takeovers and hostile takeovers. In terms of hostile takeovers, I would like to point out, that in November of 1997, when the Daimler share price was at its greatest height, the Chrysler Corporation almost got taken over before that by Ford Motor Company in the United States in a hostile deal (Goldman Sachs was acting as investment bankers, people who know the market know about this). I would believe that Deutsche Bank is incredibly vulnerable at the moment, given the tax reform. Anybody who wants to take them over, they would be able to refinance the acquisition price by selling off shares and real estate holdings next year.
The reason hostile takeovers in the financial services sector are so popular is that Bankers Trust was a friendly deal, but they still didn't do so well. The senior people have a choice to walk and the best people walked. It happened to First Boston when they bought DLJ, and the best people walked, although it was a friendly deal. At the moment, however, even the best bankers have no place to go, so when you want to buy a bank right now, because the capital markets aren't doing so well, it can work. There's a new rule by the SEC that greatly facilitates cross-border acquisitions of companies that have 10 percent or more shareholders residing in the United States. So, I think it's probably wise to withdraw the intuition that everything has to be regulated by agencies and instead let the markets decide . . .
Let's clarify that. The first point to be made is, as great as your joys were during the acquisition wave and as deep as your sorrows are now, the individual experience is not the same thing as the aggregate data. And if you look at the aggregate data, the number of cross-border takeovers going in the direction of takeovers in Germany versus our leading US companies takeover is smaller, full stop. Second, if you look at what happened to Vodafone Mannesmann, with which I am quite familiar, though I made no money on the deal, the political chill that came out of the initial reaction to Vodafone Mannesmann was very palpable. And there was a temporary curtailment of US interest or UK interest moving into Germany in the aftermath of that. This is what always happens in cross-national discussions. People get defensive and they say, "Oh well, we're just as open as you are." I mean, I remember sitting across from some Japanese trade negotiators and they said, "Well, you protect agriculture, too." Well, yeah, but who cares? I think what I don't want to lose is your basic point, which I think is absolutely right: That if we have safe accounting standards, if we have people with actual money that they are putting on the line, if we have prudential standards for depositors back in the banking system, there is no real reason we can't let companies have open play. And I don't think there's anybody here who's going to disagree with that.
I would actually like to add one aspect. If you ask trade ministers, representatives of trade unions, and the press, I would assume that there's a shared belief that free trade is fundamentally a good thing. I would actually like to make a hypothesis that this is different than the case of free investment. If I asked finance ministers, trade union representatives or the press, whether the free market control is a good thing, I am not sure that I would have the full support from either the United States or in Germany-or in the European community. This will change. In the panel, we actually had a couple of business people, most of them working for international institutions, where I would sit in Germany, and the headquarters are in the United States, or we sit in the United States and the headquarters are in Stuttgart. This is going to change the fundamentals, because this is day-to-day integration.
I would just like to add an optimistic note to talking about integration through trade, the panel topic, as well as integration for investment. And that actually is happening, policy or politics or not. Actually, last spring I wrote a little piece in the Harvard Business Review about the new transatlantic century, focusing on those issues. And if you look at how the companies in Deutschland, the German corporate culture of takeovers, and those who change policy yes or no, it is changing and it's changing rapidly. We have massive amounts of American venture capital now in Germany, in Europe, so we're heading in the right direction.
My comment is neither pessimistic nor optimistic, but if the source of so much of the trade or investment resistance in the United States is at the local level, it's driven largely by the appearance of the loss of jobs through environmental and labor standards. One of the topics that has been left out of the discussion is the need for more engagement by the actors themselves, the large local companies who have so much at stake. Having been with Daimler-Benz, I can tell you that we realize how little use we were making of the context we have through shareholder communications, to our communications at local levels with our workers, and with the communities with which we were involved. I can point to an example where Congressman Dorman from Illinois, at one of his annual picnics in an airplane hangar, asked his constituents-there were a couple thousand there-to separate, and by pointing at them, he separated one-third to one side of the hangar and two-thirds to the other, and he simply made the point that the jobs of the one-third, as the other two-thirds looked across the room, were dependent upon open trade and investment. And many representatives from labor unions and from environmental organizations were simply unaware of the impact on the local level of trade and investment. So I do think that, you know, there's a tool out there. I don't know how to galvanize that into action, that tool has to come primarily from the actors with the most at stake and with the easiest access to large constituencies out there, who then need to inform often very provincial elective representatives.
I think I just want to stress one point. Anyone who goes back and forth from Europe now or who lives in Europe, you're aware of the emergence of this trans-European class, right? That would be the group of very well-educated younger people who, for example, are typified when a German marries a French woman who goes to school in the UK and works for a Portuguese company, right? And that is becoming commonplace in Europe, and that, of course has also had very great benefits in foreign relations and security. Now, I'm not suggesting matchmaking for all your children. What I am suggesting is, in the spirit of what Herr Bierer of Booz Allen, Frankfurt, was saying, that it's important we keep these-I don't want to say elites-these integrated groups of decision-makers transatlantic rather than just intra-EU. And if we do that, if the gentleman from the M&A firm in Germany actually hangs out as well with the people from Skadden Arps in New York, and they're doing deals together, this is a very useful small thing-and that, in the end, as much as some of us get cynical about these types of conferences, they actually do matter, because they do provide the networks that lead to those sorts of things. So that's where I'd leave it.