TEXT: AMB. DAVID AARON 10/27 REMARKS ON SOUTHEAST ASIA TRIP
(U.S. no "fair weather partner" to Southeast Asia)Washington -- The United States is not a "fair weather partner" to the epicenter of the global finance crisis -- Southeast Asia, according to Under Secretary of Commerce for International Trade David L. Aaron.
Aaron spoke at the Wall Street Seminar October 27.
Citing an $80 billion drop-off in investment in major developing countries and a 30% decline in U.S. exports to Asia as signs of the seriousness of the economic crisis besetting Asia and the world, Aaron said the United States has been directly impacted by the crisis.
This year, he said, export growth is expected to contribute nothing to the growth rate of the U.S. economy, when previously export growth had been one third of the overall economy's growth.
Aaron expressed optimism about the underlining fundamental strength of the Asian economies, but warned, "Recovery will not be easy."
While some countries may try to thwart globalization, Aaron said, "There is no alternative." Countries that cut themselves off to global capital flows would also be hampering their access to global trade, transportation, telecommunication, and cultural exchange.
Capitalism works, Aaron said, because through the struggle of profit and loss, it rewards good decisions and punishes bad decisions.
Aaron cited President Clinton's admonition that the United States could only help countries willing to help themselves. He warned that practices such as winking at cronyism and corruption would result in loss of investor confidence and withdrawal of investor funds with consequences both "swift and severe."
"At the APEC Leaders Meeting in Kuala Lumpur in November, the President will emphasize the critical link between trade liberalization and economic recovery," Aaron said.
"The tendency in times of economic stress is to draw inward," Aaron noted. "This is precisely the wrong prescription. We must accelerate the pace of liberalization to help restore trade and capital flows. We will be pushing for greater liberalization both in APEC and the WTO."
Japan, Aaron said, "holds the key to the region's recovery."
China must open its markets to U.S. exports, Aaron said, and continue to act as a stabilizing economic force in the region.
Aaron noted that China was projected to run a $60 billion surplus with the United States this year, second only to Japan's $62 billion surplus. The problem of market access looms large, Aaron said, and the United States has proposed means for addressing the problem.
"As yet we have not received any adequate response," Aaron said, from the Chinese government. "There are signs China is building trade barriers."
Following is the official text of Aaron's remarks:
(begin text)
Amb. David L. Aaron Speaks at the Wall Street Seminar: Report and Comments Following Trip to Southeast Asia October 27, 1998
Introduction
It's a pleasure to be with you today. I recently spent three weeks in Southeast Asia -- the most troubled region in our troubled world economy. I led a high tech U.S. trade mission through the region. During my trip many people asked me why we were coming to the region during this time of turmoil and economic difficulty? I answered that this is exactly why we took this trip to show the people of Southeast Asia that we are not just fair weather partners and that we still believe there are business opportunities in the region.
This morning I would like to begin our discussion by offering a few comments on my Asian visit and the overall dimension of the economic crisis. I would also like to focus on China and Japan -- the two keys to the region's recovery.
Trip Update
Recent developments highlight the magnitude of the crisis. The International Monetary Fund has announced world output will increase only two percent in 1998, with little improvement expected in 1999. At the same time, net private capital flows to 29 major emerging markets are estimated to total only $160 billion in 1998, down from $240 billion in 1997.
We are also feeling the effects of the crisis in the United States. Our exports, after years of vibrant growth, increased only one percent in the first half of 1998. In the same period, U.S. exports to Asia dropped 30 percent, while U.S. sales to the rest of the world rose only seven percent. Over the past several years, one third of our economic growth was generated by exports.
This year exports are expected to contribute nothing to our growth, which in turn will have a serious impact on our overall economic performance.
Although pessimism seems to be the order of the day, I have no doubt the economies of East Asia will recover. The underlying fundamentals of their dynamic economic growth have not changed. But recovery will not be easy.
At a time when many nations -- not only in Asia but also worldwide -- are competing for scarce capital to restructure their economies, East Asian countries will have to take steps to become more attractive to foreign investors. During my trip, I was struck that both public and private sector officials clearly understood the importance of restoring foreign investor confidence.
They also understood that the only way to do this is through economic reforms.
But countries must be careful in their actions. At a time when many nations throughout Asia are in need of capital to help restructure their economics, measures that make countries less attractive to foreign investors are likely to carry a significant cost.
Following Malaysia's imposition of exchange controls, which itself followed a sharp fall in global markets, many editorialists and pundits pronounced the death of globalization.
Not only is such analysis wrong but it also exposes a profound misunderstanding of what happened and what is needed for recovery.
In answering the pundits, I want to emphasize that globalization is not just about global capital flows. It also is about trade, global transportation, global telecommunications and global cultural exchange. Globalization is about all of you in this room. It is about better jobs and greater economic and political security. Indeed, globalization is the reason for much of the economic success we have enjoyed over the past decade.
Countries that seize the opportunities flowing from globalization and apply its disciplines will be better equipped to weather the difficult times and recover the fastest. Why? Because today, there is no alternative.
We have learned that the so-called alternatives -- exchange controls, import substitution, and state management -- do not work. Capitalism is a system of profit and loss. That is why capitalism works. It rewards good decisions and punishes bad ones. The President observed last month: "We will only be able to help those countries which are willing to help themselves.
If a nation chooses to print money indiscriminently, to wink at cronyism or corruption, or hide bad loans....then investors, foreignand domestic, sooner or later will withdraw their investments, with consequences both swift and severe."
Political Recovery
While economic reform is a key to sustained recovery, vigorous implementation of complementary political reforms increases the chances for success. Asia's challenge is not only economic but also political.
The best way for Asian countries to build the broad public support needed to implement difficult reform measures is to initiate an open dialogue with all segments of society. It is not surprising that we are beginning to see signs that the crisis is being contained in Thailand and Korea. The leadership in both countries has underpinned its economic restructuring with firm commitments to strengthen democratic institutions and the rule of law. In the Philippines, political and economic reforms implemented previously have helped the country avoid the most serious effects of the crisis.
In Indonesia, debate on the political shape of the post-Suharto era is underway and concerns about political stability persist. Decisions on the nature of political reform and the timing of elections are matters for the Indonesian people and their government to decide. We are lending support to the reform process by providing bilateral assistance and working with the international financial institutions to alleviate the hardship of those Indonesians most affected by the crisis. Our humanitarian assistance will help give Indonesia's citizens the breathing room they need to follow through on badly needed reforms.
Both from a political and economic perspective American leadership is necessary for these reforms to take hold. But we can't do it alone.
Japan
Our G-7 partners, and in particular Japan, must assume their share of the burden. Japan, as the world's second largest economy and the source of seventy percent of Asia's GDP, holds the key to the region's recovery.
After numerous false starts, the Japanese government seems to have recognized the magnitude of its economic problems. It is beginning to take the steps needed to boost domestic growth and implement financial sector reform. Success, of course, will depend on sustained, vigorous follow up on the reform measures agreed to by the Diet.
To have credibility, Japan's banking reform measures will have to hold management and shareholders accountable for failures and ensure truthful transaction disclosures by Japanese financial institutions. The Japanese government needs to tackle its economic problems with a sense of urgency. Recent assertions by senior Japanese government officials -- that economic recovery could take two to three years -- are cause for concern.
We are encouraged nonetheless by the Diet's recent announcement that it will reconvene for a special two week session in early December. The supplemental budget and tax cuts may now be implemented in early 1999, as opposed to April or March.
China
China is the second key to Asia's recovery.
It has two tasks in this regard. One, for its own good, China must remain a stabilizing economic force in the region. Two, it must further open its markets to US goods and services. Although China accounts for less than two percent of our exports worldwide, the United States is China's largest export destination -- more than 30% of China's total exports this year. We estimate our trade deficit with China in 1998 will reach $60 billion -- almost as high as Japan's $62 billion.
The Administration is committed to a policy of engagement with China.
However, progress in addressing the trade deficit is absolutely essential. It is central to maintaining support in Congress for MFN renewal. MFN, now referred to as a Normal Trading Relation, will become even more of an uphill struggle if the Chinese do not agree to increase market access.
The slowdown of our discussions on WTO accession and the lack of progress on bilateral trade issues, during an otherwise successful Presidential Summit last June, add to the challenge of redressing China's trade surplus. We have put forward serious proposals that we believe could form the basis of China's WTO accession.
We have not yet received any adequate response.
We still believe WTO accession provides the best avenue to assure further dismantling of Chinese market barriers. This is becoming more urgent as even as we seek to strengthen our commercial ties, there are signs China is building new trade barriers.
For example earlier this year, China decided to restrict imports of power plant equipment. This had a direct impact on U.S. businesses. In another case, China's State Development and Planning Commission announced a proposed schedule of price and profit controls. The regulations, if enacted, will impose discriminatory price controls on imported pharmaceuticals.
We also are concerned that China's aggressive use of export subsidies will make its products more price competitive than those of other Asian countries. These subsidies have the potential to "crowd out" exports of China's Asian competitors -- exports that Korea and the countries of Southeast Asia need, to help boost economic recovery. They amount to a "hidden devaluation."
We are approaching an important crossroad in our commercial relationship with China. I am not pessimistic but I am concerned. China must act decisively and demonstrate it is committed to fully integrate the global trading system. If they like the U.S. being their biggest customer, then they need to treat our exporters and investors better.
Next Steps
President Clinton has pledged to maintain the fiscal discipline and open markets that have created new investment and tens of thousands of American jobs. In a speech before the Council on Foreign Relations last month, he proposed a multilateral initiative to help Asian corporations service debt, to increase humanitarian lending by international financial institutions, and to activate a $15 billion IMF emergency fund.
The President followed his September initiative by calling on the G-7 and the IMF to develop new mechanisms for curbing any further contagion and mobilizing contingent financing. He observed that when building the new international financial system it will be important to ensure that open markets are a "powerful positive force" for prosperity and that ordinary people worldwide "benefit from economic growth."
He also encouraged American companies to continue participating in emerging markets, instructing the Export-Import Bank to establish new credit facilities for Latin America and OPIC to develop new instruments to help troubled economies access international capital markets.
At the APEC Leaders Meeting in Kuala Lumpur in November, the President will emphasize the critical link between trade liberalization and economic recovery. The tendency in times of economic stress is to draw inward. This is precisely the wrong prescription. We must accelerate the pace of liberalization to help restore trade and capital flows. We will be pushing for greater liberalization both in APEC and the WTO.
At the same time, we must recognize the human costs the economic crisis is exacting and take steps, both bilaterally and with the IFIs, to ease the economic hardship.
As the economic reforms begin to take hold, I am confident Asia will return to a path of economic growth. This year of economic turmoil has demonstrated that nothing can be taken for granted. Difficult reforms will be needed to ensure that Asian economies realize their vast potential.
In addressing these challenges, we want to work closely with American companies. U.S. firms must stay engaged if they intend to participate in Asian markets as they recover, and once they resume a growth cycle. Asian leaders and corporations will remember who remained with them and who turned their backs to them. Your continued engagement will be an important contribution to achieving renewed economic growth. It also can help influence the shape of reforms and create a business environment based more on transparent regulations and the rule of law.
The challenges we face are formidable. But they can and will be met if we avoid the trap of self-fulfilling negativism and build on the positive realities of the world economy.
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