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Overview An Overview of the Issues: What, If Anything, Needs To Be Done? Alan Wm. Wolff, STEP Board As a point of departure, Ambassador Wolff recalled Senator Bingaman's statement that the status quo is unacceptable, because the costs to the U.S. economy are too great to continue accepting offsets as a business necessity. Insofar as his views presumably represent a sampling of Congressional sentiment, it is evident that a real set of issues exists around offsets. While recognizing that a synthesis or summation of the day's proceedings could not do justice to the breadth of opinions represented by the panelists, several observations were nevertheless in order. A first question: Is there room for improvement? Most of those who spoke were opposed, in varying degrees, to the use of offsets, which were seen as burdensome to economic transactions. The major reason for engaging in offsets is straightforward: there is great benefit in securing a sale. On the other hand, offsets can be harmful to the health of the sub-tier supply base, to aerospace employment, and to the broader competitive edge. Wolff observed, moreover, that there was no representation at the conference of the "innocent bystander," the type of non-defense company whose economic interests may be sacrificed by indirect offsets that distort the normal operation of its market. The credibility of international trade agreements is challenged by the existence of a significant portion of trade lying beyond the reach of agreements that are designed to ensure that trade occurs on the basis of commercial considerations. Cartels, Wolff noted in passing, are another weak point in the trading system, and discussions are beginning in Geneva on the degree to which cartel behavior distorts normal market operations. Referring to parallels in the current intense debate about the desirability of regulating the Internet, Wolff observed that there is a widespread feeling that the issues surrounding offsets may be too complex to resolve through government intervention without causing unintended harm to trade. Company goals and missions are, after all, relatively straightforward—chief among them is maximizing returns for stockholders. However, U.S. national goals, and thus the U.S. government's missions, are necessarily broader: national defense, a rising standard of living, and social and economic equity. For other countries, such as Japan, national government missions may come closer to an identity of interests with the corporate and public sectors. Wolff noted one panelist's observation that offsets are not currently on the U.S. trade negotiations agenda. However, the accession of China to the WTO is on the table, and China is a major offsets practitioner. This underscores the fact that for the WTO, China's accession raises a number of larger questions. These include: Market access. What exactly is the value of an open market commitment in a nonmarket economy? State-owned enterprise (SOE) behavior. What will be the response of these state enterprises to a Chinese government "Buy Chinese" policy, since the stockholder is also the government? What will be the consequences for fair trade and China's reliability as a trading partner? Does this problem also occur with recently "privatized" entities in other economies? Forced technology transfer. Nothing currently in the WTO (GATT) addresses the issue; it might be handled as a Trade-Related Investment (TRIM) issue, but the rules do not cover it. Subsidies. The existing rules do not reach nonmarket economies. The international system does not effectively address many forms of subsidy. Non-market economy (NME) dumping. How do we treat excess capacity that results from nonmarket transactions? The size and political-diplomatic clout of China. As a new member with its own—different—agenda, China will affect WTO interpretations and enforcement actions in ways a smaller new member might not.
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There is a window of opportunity now, opened by the White House, to pull together suggestions on creating a national strategy to deal with offsets. Although a national strategy may be lacking, individual agency interests are clearly articulated, and other U.S. "players" have defined their interests as well. However, reliable data is limited and subject to differing interpretations, and there are no obvious conclusions to be drawn from current data. One suggestion would be to create a mechanism, as the European Union has, to funnel comments from industry (on a confidential basis) into a computerized database on obstacles faced in selling abroad. In the absence of a private sector consensus on what approach government should take, what actions to employ, broad government intervention is not likely. However, a variety of public interests—many of which were expressed during the conference—should be recognized and catalogued, and brought into the discussion. Wolff noted the need for monitoring of foreign industrial policies. These policies go well beyond offsets, which are for some countries just one aspect—one tool—of a multifaceted approach to economic development. This conference demonstrates the importance of having the analytical ability to understand how those countries view such tools as industry-building measures, in order to determine what type of response, if any, the United States should take. An effective response requires consensus, and building a consensus is best attempted domestically first, and only subsequently at the international level. There is hope for creating the necessary consensus. The export credits race was greatly dampened, if not extinguished, through building an international consensus. The process, however, proved that domestic agreement was needed to present a solid U.S. front in the search for a common set of interests on the international level. The U.S. recently agreed with the European Union and countries representing 90 percent of trade in information technology products on duty-free trade in those goods. The consensus was achieved because the participants became convinced that it served their best interests to eliminate tariffs. A similar, common realization of enlightened self-interest underpins the recent agreements on trade in telecommunications services. So there is precedent for finding international concurrence on offsets, but equally so, precedents for establishing it domestically first. In the case of offsets, this workshop has demonstrated the value of a balanced exchange of views. It has helped many of us understand the pressures industry faces in the international competition for large contracts, rich in follow-on work. We now have a better appreciation of some of the trends in countries' demands for offsets. And equally interesting questions have been raised about the cumulative and long-term consequences of these offsets, particularly when integrated with the other industrial policy tools of U.S. competitors for this and other strategic industries. The discussion has also underscored the challenge these practices and policies represent for current multilateral agreements and, more broadly, for the multilateral trading system as a whole. Integrating countries with different assumptions and priorities into the WTO is a significant challenge, and one that can only be addressed when the U.S. is able to identify its own long-term economic interests. On behalf of the STEP Board, Wolff noted that it was the Board's hope that today's discussions represent a contribution towards a better understanding of the issues we were asked to address. This type of forum, and indeed more informal gatherings, represents one of the best means of building a consensus among the stakeholders in this industry as to what would constitute appropriate U.S. policy on offsets. At the very least, it could contribute to a better exchange of information, which seemed to be one of the principal needs emerging from today's discussion. In closing, on behalf of the STEP Board, Ambassador Wolff thanked the panelists, the other participants from the Academy, in particular the president of the National Academy of Engineering, Wm. A. Wulf, and the project director, Charles Wessner and his able assistant, George Georgountzos. Most particularly, the Ambassador thanked all the participants in the conference for their interest, contributions, and attention over the last nine hours.
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