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Panelist 1

Cathy Novelli

Thanks a lot, Jeff. It's a pleasure to be here with such a distinguished panel. Before I start, I'd just like to say that my remarks are not on the record, they're off the record. If there's any members of the press here who want to use quotes, they can work that out with the USTR press office afterwards.

[Remainder of remarks off the record]

Panelist 2
John Sullivan

Thank you, Jeff, and thanks to the Middle East Institute for inviting me here today to give you sort of a report on progress that's being made within the Middle East-North Africa region on a very exciting initiative that does tie directly into the development of a trade regime. What I'm going to be speaking to today is corporate governance, but corporate governance in the broad sense, not the narrow sense, which I'll mention in a moment.

First, let me thank our supporters in this initiative. First, the National Endowment for Democracy, and then also the Middle Eastern Partnership Initiative (MEPI), which has been very generous in supporting the activities that are being carried out in a number of countries.

Our Center, since the mid-1980s, has been working in the Middle East to try to develop and find partner organizations – private think tanks, that portion of the business community which is organized in private business associations – that are committed to market-oriented reform and democratic development. The number of partners that we have now far exceeds the number we started with, as might be obvious to those of you who are experts that are following trends in the region. In the early and mid-1980s, it was very difficult to find organizations that had that as their mandate. The first piece of good news is that the supply side of reformers in civil society, in the private sector, is growing substantially, in part because of some of the trends that you were talking about, Cathy.

The bad news, unfortunately, is that despite the economic assistance that's flowed into the Middle East for many years, there has not been much in the way of reform. It has been slow, and even in the leading reform countries it has tended to be at the policy level rather than at the deeper institutional level. As a result, there's little trade within the region and not much competitiveness. This shows up in any of the indices that you look at – those from the World Economic Forum or the World Bank, the UN, whoever it may be.

What we have discovered, and we posit, is that part of the problem here is the structure of business within the Middle Eastern countries. This is coming, by the way, from our partner organizations. This is not simply something that we have concluded. Groups in Egypt, like the new Egyptian Institute of Directors; in Morocco, the Confederation of Employers; a number of other groups – we've joined together over the last five years working on this concept of corporate governance and the deeper institutional environment.

This is my brief ad for the morning – we've produced a report called Corporate Governance in MENA Countries: Improving Transparency and Disclosure. This was done in partnership with the World Bank Global Corporate Governance Forum, as well as our partner organizations in the region. I only have a few copies here, but you can find it on our website, right on the front page on the right-hand side. So please feel free to take a look at it and give us your feedback. This is an ongoing effort.

Let me say quickly that when I talk about corporate governance, and when we are approaching the region, it's not to say that we should export Sarbanes-Oxley or indeed any other brand of corporate governance. Rather, there is an emerging international standard that is part of this twelve standards that have been adopted in the wake of the Asian financial crisis. The corporate governance standard comes from the OECD and it is a well-developed set of principles. Those principles have to be adapted and put into a country context.

Our first message to the business communities in the countries is, this is coming. The pressures on you to open up – [...], others – the demographic pressures to create jobs – are simply creating forces for change. The choices that you face are rather stark. You can either take something like the OECD standards, adapt them, put them in place in a way in which makes sense for you and will help your companies become more competitive and attract capital. Or you can see it happen between organizations like the World Bank, the IMF, OECD, negotiating directly with your governments. So far, the response we've gotten has been very heartening. The business community – not all of it, but large parts of it, and certainly the reform edge of it – recognizes this and has stepped up to the challenge quite well.

Let me also say quickly that when we're talking about corporate governance, we're not talking about just the internal governance of companies, as important as that is. We're talking about the nested set of institutions that branch out to, in the first instance, the capital markets, the stock exchanges and so forth, but quickly move from beyond that to enforcement in the legal system, but also the governance of family firms. By family firms, I mean the very large firms that are family-dominated, that tend to predominate throughout the Middle Eastern region. The adaptation of those family firms into more competitive, as they move into a second and third generation of owners, is one of the major challenges of modernizing the Middle East. In fact, we'll be sponsoring a conference on that next week in Alexandria, with the Alexandria Businessmen's Association.

The core goal is to create competitive markets, and in large part that means reforming what historically have been corporatist structures, structures where the linkages between the apex, if you will, of the business community and the state has excluded the broader base of the business community. We could go into all of the ramifications of that, but transparency is not something that flourishes historically under that kind of corporatist structure. So it has to adapt, and they recognize that.

One of the key focal points for reform, in looking at corporate governance – the first step, of course, is the creation of some kind of a code of corporate governance. Again, as tempting as it may be to pick a code from a country and say, here, translate this and have at it, what really needs to be done is the market participants have to become familiar with a set of principles at the international level and then begin looking at their own environment by using, among things, the World Bank's reports on standards and codes, where they're doing country-level studies; their own studies; reports that are increasingly coming from places like McKinsey Consulting Co. and others – take a look at that data and say, how can we craft a corporate governance code that's going to guide our companies and which, in turn, at the first level, can become a real basis for developing what are fairly illiquid capital markets, building some depth into those markets.

Second step – and not necessarily sequentially – finding business principles for countering bribery, internal controls. We've worked with Transparency International, and an excellent chapter they have in Lebanon, to take that concept and put it into, again, the context of the region. It's beginning to spread as well. The private sector has got to be able to show that they don't just have a code, which is in many cases aspirational, but that it's implemented at the firm level.

Another step is to build the sets of institutions that then will guarantee to investors that these rules, codes, are enforceable. That somebody's not going to wake up the next day and say, we were doing that yesterday but the situation's changed and we're not going to do that anymore. You've got to have something that is some kind of guarantor that this is locked into the institutional fabric of the country. Often that means a securities exchange, but again, countries with illiquid markets or very thin liquidity, most family firms, most medium-sized companies – if they have minority shareholders, it's not through an exchange. So you have to find proxies for that, other kinds of institutions. One that is most promising is reforming of the banking institutions and encouraging banks to begin not only developing their own standards of corporate governance but in turn to look at their lending base, and say, this is a risk factor. Your lack of transparency, the way in which your company is governed, decision-making, internal controls – that's going to be a risk factor in evaluating the lending portfolio. We've gotten some substantial body of evidence now that in fact it is a risk factor, coming from the IFC and the Global Corporate Governance Forum, among others.

Over the last number of years, putting together all these factors, getting samples, getting ideas working, reports, recommendations from the country-level teams, coming up with this process – we are fortunate that in November we came together at the OECD and did a review of these OECD principles, which were crafted for international OECD countries, not necessarily appropriate for developing countries, be they in the Middle East or elsewhere. Thanks to an interactive process, these private sector participants – think tanks, associations, institutes of directors – had a role in recrafting and adapting those OECD standards, which is an extremely important step because it now means that they feel some ownership in the process.

I could go on about a large number of these in more depth on the corporate governance dimension – I won't. Let me simply say that this effort has now been folded into the OECD process, where they have created a Middle Eastern-North Africa Investment Task Force, which is looking at the investment climate throughout the region. Part of it does touch on trade agreements, both the ones with the US as well as trade agreements with Europe, which are very important for the Middle East countries, but also interregional trade, which is historically very low in comparison to other regions.

There are a couple of quick factors I will mention that are reasons for optimism, that this isn't something people are simply embracing because it's the cause du jour. Part of that is that we're seeing conceptual change. For the first time, these debates on corporate governance, on trade, are being conducted in Arabic. They're not simply being conducted by elites in English, which until recently tended to have been the pattern. Translating corporate governance into Arabic, just as one example, proved to be a Herculean task. We did manage to get that done – I should say, not we, but Minister Boutros-Ghali requested an official translation of an interregional linguistics body, and they came up with a definition, [in Arabic], which as it turns out we now have a corporate seal for from this commission. So we've taken a step forward from just debating what this means to putting it into the language of the region and a conceptual framework.

Other forces of change which are driving this center back on these free trade agreements. They are extremely important. We launched our Corporate Governance Task Force work recently in Morocco, in the wake of the signing of the Morocco free trade agreement. I can tell you, nearly every single speaker, be they from the government or the private sector, said, we've now got this free trade agreement, but if we're going to make it work, if we're going to make our companies good business partners, where we're transparent, where we can get access to technology, attract investment capital – we're going to have to put this stuff in place. So there's an interactive process here in that sense.

They also have a number of other drivers. I'm sure during the course of your meeting you've talked about the demographic challenge facing the Middle East. How do you move job creation from the informal sector, which is probably 50 percent of the population in many of these countries, to formal sector jobs? Absent a competitive, market-driven private sector, I don't believe it can be done. Access to technology, investment – all keys to making that competitive private sector.

So I think there is a lot of good news coming from the region. It is differential. Egypt, interestingly, is one of the reform leaders, as are Lebanon, Morocco, Jordan and Bahrain. Other countries now, though, are beginning to catch on. We'll be having a meeting next week in Tunisia, where the Tunisians recognize that they've got to move quickly on this. The Gulf countries will be coming in shortly, I hope.

Thank you.

Panelist 3
William Reinsch

In many respects my job, which is to talk about sanctions, is the other side of the coin [...]. In fact, it's no accident that that part of the NFTC that works hard on opposing unilateral sanctions – which is my topic today – that organization is called USA Engage. It's called USA Engage because we wanted to make clear that we believe that the kind of engagement that actually both of the preceding speakers have talked about is the best way to define the relationship we have with other countries, and deal with particularly difficult situations with governments that are doing things that may cause us some discomfort.

So in that sense, I'm sort of providing you the other side of this – not entirely coincidentally. This is a well-timed session on this topic, because tomorrow BCIU, which is Jeff's organization, and the NFTC, which is mine, are going to announce, along with Cathy and Ambassador Zoellick, a Mideast Free Trade Area Coalition [...]. The commercial is that there's still a few seats left, so if you some of you haven't gotten your tickets yet and want to attend this luncheon, there's still time.

Let me talk about the sanctions issue first in general terms and then get a little more specific. It is, of course, appropriate for the Middle East Institute to get into this, in part because so many of the sanctions the US has imposed over the years have been directed at a number of different countries in the region. In general, our members believe that sanctions are not a free good. That is, they impose real costs on the US economy; that they are almost always ineffective in achieving their stated objective; and they're often counterproductive. Multilateral sanctions have a somewhat greater chance for success and have fewer commercial drawbacks, and we have not generally opposed those.

Let me start with one nearly categorical statement, and of course with all things in this area there are exceptions, and I'll immediately tell you an exception. But the nearly categorical statement is that economic sanctions are almost always driven by US domestic politics and not by foreign policy. That may in fact be one reason why they never really achieve their stated foreign policy objectives. That's not to say they don't achieve other domestic policy objectives.

I say nearly categorical because you can find a sanction or two imposed for national security reasons, the best example probably being those imposed on Pakistan and India following their nuclear tests in 1998, which was done by law and by the way created an enormously complex regulatory network trying to sort out exactly what it was that was controlled and what was not covered, a regulatory morass that we've only in the last probably year gotten out of, after an enormous amount of effort by the current administration.

The vast majority of US unilateral sanctions, however, are the result of intense political activity by a domestic constituency with a very strong commitment to an issue, an ethnic group, or a nationality. We may call them foreign policy sanctions, but ironically they are almost always in service of domestic political imperatives. Probably the most obvious example is Cuba, but if you want to look at Azerbaijan – which I hope now is a former sanction – and Syria – which is a current and recent case – I think they are also good examples of that point.

In these cases, political leaders, especially in the Congress, come under heavy pressure to "do something" to address behavior of another government that segments of the American population find unacceptable. When I was working on congressional staff, we used to refer to congressional sanctions proposals often as 60 Minutes bills. There would be an expose of something on 60 Minutes on Sunday night, and the next morning there would be three or four bills introduced to deal with that problem, as if the United States Congress can solve every problem in the world.

Imposing sanctions helps to satisfy that domestic political demand. In that sense, unilateral economic sanctions do work, in that they help to win elections and they help satisfy a political need. But at the same time, they ignore the indirect and long-term consequences for our foreign relations and for the American economy.

Simply put, unilateral sanctions are an attempt at foreign policy on the cheap, intervention in the internal affairs of another country to get it to do what we want, either in its foreign or domestic behavior, without significant costs in resources to the American people. At the same time, as I said, there are consequences for business. They fall into three categories, which overlap but I'm going to make an artificial distinction – cost, ineffectiveness, and counterproductivity. The NFTC and its affiliate, USA Engage, try to keep track of the economic and commercial costs of unilateral sanctions against the foreign policy gains of those sanctions, and have concluded that the costs far outweigh the benefits.

In the last half of the 1990s, the US put into place over seventy laws and executive orders against thirty-five countries that could be construed as sanctions. They include a diverse array of trading partners, from the obvious – Burma, Sudan – to the less obvious – China, Egypt, Indonesia, Laos, Nigeria, Pakistan, Saudi Arabia – to some that make you wonder a bit – Switzerland, Turkey. There's also Yugoslavia, Vietnam and a host of others.

Estimates vary of the monetary cost, but they suggest that the cost is actually quite high. The Institute of International Economics did a study of this subject and looked at unilateral sanctions that were in place in 1995, and concluded that they cost the United States $20 billion a year in lost exports, which translates into 200,000 lost export-related jobs. What that means is that the costs of American foreign policy are being shifted to private companies which, for a whole variety of reasons that I won't go into now but we can go into later, are ill equipped to try to be the arm of the State Department, if you will.

The immediate costs for companies include the obvious – lost export sales, lost export-related jobs, and lost opportunities for investment. The long-term costs, we believe, are more pernicious. One is that it tarnishes America's reputation as a reliable supplier, making it harder to reenter a market after sanctions are lifted and harder to win business that other countries have taken over. The classic example of this, of course, is not a Middle Eastern example. It was a Soviet gas pipeline case in the early 1980s, when the Reagan Administration attempted to prevent not only US companies but foreign subsidiaries of US companies from supplying the natural gas pipeline, which put, among other things, American companies in the awkward problem of being forced to either violate US law or violate French, Italian or German law, depending on where they were located. That's an impossible position for companies to be in. Ultimately, the United States government backed down on that, but the damage was done. US companies acquired a reputation as an unreliable supplier and that has followed us like a curse for more than a decade in many of these countries.

The power generation industry, for example, and that was related to this case, estimates that it takes seven to ten years to reestablish market share after sanctions have been lifted. If sanctions are unilateral, foreign competitors are likely to gain a firm hold on the market, which is happening right now with Europeans in Iran. This is especially damaging for suppliers of aircraft, construction equipment, equipment maintained in fleets such as trucks or rental cars, things like that, since purchasers want uniformity for downstream servicing and replacement. If you knock Boeing out of a country, for example, via sanctions, which we have done, you invite Airbus in, and you don't invite them in just for that sale, you invite them in for more than twenty years, because what you're inviting them in to do is not only sell a body of planes right now, you're inviting them to do all the after-market sales, all the maintenance, all the engineering, and in all likelihood the next sale, because airlines don't like necessarily to change products, if you will, in midstream and have to retrain all their pilots. They have to do a whole variety of things if they're going to do that.

So when you lock in a supplier on some of these big-ticket items, you're doing it not just for that single buy, you're doing it really for a generation, and the damage to American companies really becomes incalculable, because it's impossible to figure out on any rational basis how much that's going to cost you downstream with respect to purchases that haven't even been contemplated yet.

Add to that the fact that this is not a theoretical abstraction. We have to deal in a globalized economy, which is what we have, with the widespread foreign availability of most US exports, which means that our attempts to deprive a target country of a particular service or technology that it needs is rarely successful. The US accounts for only 20 percent of world exports of agricultural equipment and only 16 percent of world exports of telecommunications equipment. Most of the stuff that we interdict through sanctions are readily available from numerous other sources that have not imposed the sanctions and are happy to take over the market share.

Perhaps the most significant cost is the loss of trust in American suppliers and in America as a place to do business. Former Secretary George Shultz put it this way: "It takes a long time to go abroad, get positioned and learn about how to do things there. In the process of investment, a company develops what the government may regard as a bargaining chip, that if our government then takes the bargaining chip and spends it, where does that leave the company? The company has lost out and its commercial relationship deteriorates. Who wants to deal with an unreliable supplier, especially when the supplier is not the only game in town?"

Doubts about reliability are a particular handicap for infrastructure and resource extraction projects in the developing world, such as building and operating power plants or developing oil and gas resources, which take many years and require continual servicing, upgrades and replacement commitments. US companies have been excluded from strategic alliances to bid on those kinds of development projects when potential partners fear that sanctions may ultimately require the US partner to withdraw, even if that is not necessarily at that point a looming likelihood. Azerbaijan was a good example of that.

With respect to ineffectiveness, the most obvious reason that they're ineffective has already been cited – foreign availability of the vast majority of goods and services that the US can deny the target country. The deeper reason that sanctions are so rarely effective is that they actually play to the economic and political priorities of dictators. Most of the targeted leaders in sanction states will go to great lengths to avoid the domestic appearance of caving in to foreign pressure. In most cases, the dictator's greatest fear is losing power and the probable personal consequences of what that means in their situation. Their greatest fear is not losing their assets in foreign banks, not losing their right to send their children to college in the US, not losing their right to vacation here. That's why even targeted sanctions intended to punish the ruling group of a sanctioned country and spare the general population are unlikely to achieve their stated objectives.

We believe sanctions are a blunt instrument that are intended to execute a political bank shot by squeezing the population until they force a change in their government or their government's behavior. Cuba is the most obvious counterexample, as was actually Iraq. In the case of Cuba, we've been having a near total embargo for more than forty years, and guess what? Castro is still there. Likewise in Iraq, the multilateral sanctions opened limitless opportunities in Iraq for black marketeering, profiteering by the regime, while impoverishing the masses.

With respect to counterproductivity, my final point – obviously, as in Cuba, sanctions can provide the target regime with a marvelous excuse for its failures. If you look at the series of attempts that various administrations have made – not this one, but previous ones – to try to improve relationships with Cuba, what you find is that each time we tried to open the door, what does Castro do? He shoots down a plane or he executes somebody or he throws somebody in jail, and creates a political situation in which the United States – again, because these are really domestically pushed things – doesn't have any choice but to slam the door shut once again. It's obvious that in this case Castro the dictator is the person who really wants the sanctions to be maintained. Why? This allows him to blame all his problems on the United States. He doesn't have to accept responsibility for his own failures.

The further result is that the sanctions deepen the isolation of American society away from these other cultures and our opportunity to influence those cultures. As suggested earlier, most dictators know better than to make the potentially fatal mistake – and I mean that literally, fatal mistake – of displaying weakness and caving in to economic pressure, especially from the US. Sanctions weaken the very social and political elements in those countries that we should be strengthening, because they identify those elements with the United States, which then becomes in those populations – seen as the cause of economic privation and suffering that results from the sanctions. So the dictators often are able to perform a very effective transference – while actually welcoming the sanctions because it helps them to stay in power, it gives them a whipping boy – namely, us – and it allows them to marginalize the people in their country that are trying to reorganize the society and trying to do good things, by accusing them of being in bed with the Americans.

A sanctions regime does nothing to build any of the things that Mr. Sullivan was just talking about – civil society, rule of law, or civil liberties or domestic practice. They don't contribute anything to those goals and in fact detract from the positive international agenda that this country, the United States, has always pursued. That's why we describe sanctions as a lose-lose policy tool. They don't achieve their stated foreign policy goals at the same time they achieve substantial costs.

I think probably I'm about done. Let me just make one closing comment about two Middle Eastern cases that may start you thinking for the discussion after the conclusion of the presentations.

Sanctions in Iran have been controversial since they were first imposed during the hostage crisis. They virtually eliminated any US private sector presence in that important country. The judgment on those sanctions must therefore be rendered not merely in dollars and cents, although that cost is very high, but also by the test that I'd ask you all to consider, which is, are we better off with contact between our society and Iranian society, or with none? Given the great importance of Iran, there is a judgment to be made about whether we can afford to isolate ourselves from crucially important countries on the mistaken premise that by doing so we hurt them more than we hurt ourselves.

Some of those same arguments can be applied to the most recent case, which is Syria. It's true that the frequency of new unilateral sanctions has declined in the last few years. I'd like to take partial credit for that. But on May 11 of this year, President Bush implemented the Syria Accountability Act, which he signed last December. This is a good example of a lot of the things that I've been talking about. None of Syria's other trading partners are contemplating sanctions. Since third-country suppliers are available for all of Syria's imports from the US, it's difficult to imagine that depriving them of the 5.3 percent of their imports that come from the United States is likely to constitute decisive leverage over what they doubtless regard as their core foreign policy interests.

The Syria Accountability Act is also dangerous, in our view, because it differs from previous sanctions, or the norms for sanctions rules. First, because it requires no presidential finding or predicate or judgment about Syrian behavior. Sanctions are simply imposed by congressional fiat. There is no meaningful waiver clause, which is built into a lot of these sanctions, and there's no sunset. So what we have done is codify a policy that constrains the flexibility of the current and future presidents in dealing with a country that's going to be an integral part of any resolution of the political difficulties in the Middle East, that creates via sanctions a high barrier for future relationships with this country and any other country where we take the same kind of approach.

You can infer from my comments, I think, that we don't like sanctions. We don't think they work. We think that the alternative approach, which has been so effectively articulated by the two preceding speakers, is a much better one as a general matter, but particularly in dealing with the Middle East. Thank you.

Panelist 4
Thea Lee

It's a great pleasure to be here and on this panel in particular. Cathy Novelli and I are old friends and worked together very closely on the Jordan free trade agreement, and Bill and I have sat on committees together, and it's nice to meet Dr. Sullivan as well.

I wanted to open today just to say that – I have to start with a disclaimer, which is that I'm no expert on the Middle East. I'm a trade economist and I work on trade policy from the point of view of American workers. That's what I want to bring to the table today. But I'm really pleased to be here, because I think that the Middle East is such an important area, such an important region for the United States and certainly for the American labor movement. The AFL-CIO and our Solidarity Center are really increasingly reaching out to our trade union counterparts in the Middle East. We have a new office set up in Jordan, the Solidarity Center does, and we've sent AFL-CIO delegations along with the International Confederation of Free Trade Unions (ICFTU), our international umbrella group that we belong to, to Iraq and also to Israel and Palestine, working with trade unionists there. So we're very engaged in trying to strengthen ties between American and Middle Eastern trade unions, to work with our trade union counterparts and the governments there on strengthening labor laws and reforming labor laws, working with the ILO in that context, and also just really learning more about each other.

So that's been very important for us. We recognize both the political importance and the economic importance of the region, but also the unique challenges. I think with respect to the labor movement, those challenges are quite significant indeed. With respect to the labor movement, we all know – I don't think it's going to be a surprise to people in this room – that the problems of freedom of association and free speech are a big deal in the Middle East, but also the problems of migrant labor and discrimination at the workplace, both against women and against ethnic groups, create some pretty enormous challenges as we look at the future of that region.

Today's panel is about trade diplomacy. What I wanted to talk about was how we can use our trade relationship with the Middle East constructively to address some of the concerns that we have, and whether we're on the right track right now.

Just to start out, the labor movement believes in trade diplomacy. We believe this is one of the crucial – that the trade relationship between countries is one of the crucial economic nexuses, that this is a place where countries dialogue, where they raise their own priorities with each other and they somehow have to come to some agreement. One of, I guess, our disagreements in the past and in some of the present is whether our own government has set the right priorities, has the right set of objectives, whether they're balancing business interests, labor interests, human rights, democracy, appropriately. I guess what we would argue, to the extent that the AFL-CIO has been seen as an opponent of trade initiatives – our message to our own government is that they haven't done a good enough job overall in making sure that workers are protected through the context of trade agreements, that [[TAPE FLIP/AUDIO TO COME]] protecting intellectual property rights for businesses, that we haven't gotten that balance right to date.

But I want to start out with a more positive statement, which is to talk a little bit about the Jordan free trade agreement, which is where Cathy and I really got to know each other and work together. That is an agreement that I hope most of you know that the AFL-CIO was pretty enthusiastically supportive of, and in that sense is somewhat unusual. But we were supportive partly because we believed this was an agreement that really did make some significant progress, path-breaking progress, on protecting workers' rights and environmental standards right in the core of a bilateral free trade agreement, with the same kind of dispute settlement mechanism and enforcement mechanism for workers' rights as for all the commercial provisions in the agreement. That was really an important step. It wasn't perfect. There were loopholes in there we didn't like. There was language we thought was too weak. There were other parts of the agreements we might have had some concerns with. But overall, we thought this was a really important step, and I really do want to thank Cathy, because I think toward the end of the Clinton Administration we had many bitter trade disputes with the Clinton Administration, but I give them a lot of credit for coming to the AFL-CIO early on in the discussions with Jordan and working with us to figure out how it was that we could raise this issue constructively in the context of a bilateral free trade agreement with an Arab country. We worked with the Jordanian trade unions as well, and the Jordanian Chamber of Commerce for that matter. There was really quite a lot of openness and willingness to address these concerns.

At the end of the day, the outcome was that the commitments made in the Jordan agreement were for both countries to reaffirm their obligations and their commitments under the ILO Declaration on Fundamental Principles and Rights At Work. Those are the principles of freedom of association, the right to bargain collectively, and prohibitions on child labor, forced labor, and discrimination in employment. Both countries agreed to effectively enforce their own labor laws and not to derogate from or weaken those labor laws in order to increase trade. All that is in the core text of the agreement itself and was really a significant achievement.

You can see the Jordan agreement as potentially being something that could be the beginning of a coherent strategy around workers' rights in the trade arena. If the idea is to reward a country that is willing to engage in constructive dialogue about how to use a trade agreement to strengthen and protect workers' rights, King Abdullah stepped up to the plate and was clearly very willing and proud of the progress that he'd made. There had been a labor law reform in Jordan recently before the FTA negotiations that the Jordanian labor unions were part of and felt comfortable with. It wasn't perfect – it's never perfect. But it was something that they felt was a reasonable step in the right direction, reasonable progress. I think the same thing is true with the environmental groups, that they were part of a process, however imperfect.

Most interesting, just in telling my story – I talked about the Jordanian Chamber of Commerce, the Jordanian labor unions, the American labor movement. The one group that really didn't like the Jordan FTA was the US Chamber of Commerce. I was at the Senate Finance hearing with John Sweeney, the president of AFL-CIO, who testified, and Tom Donahue, the head of the Chamber of Commerce, testified. It was just one of these moments that sticks in my mind. Donahue pounded the podium and said he would put the resources of the Chamber to oppose the Jordan FTA if we didn't strip out the labor and environmental provisions in it. That was really a chilling moment for me, and I thought pretty outrageous, in the sense that I think it's pretty normal in Washington for people to categorize or pigeonhole labor as protectionist and business as free trade. That moment there was really Tom Donahue saying the American business community – at least as represented by the Chamber of Commerce – is not interested in free trade, in lowering tariffs to zero between two countries, if that commitment comes with an obligation to enforce your own labor laws and low up to your international obligations. That was a pretty despicable moment, I think, for the Chamber of Commerce, and at the end of the day that was kind of all bluster. As you know, the Jordan agreement passed the House and the Senate unanimously. So if the Chamber of Commerce put all of its resources to opposing the Jordan agreement, it was pretty ineffectively done.

You also do know that when Bob Zoellick became the US Trade Representative after 2000, he exchanged letters with the Jordanian commerce minister or trade rep, saying that they both agreed they weren't going to enforce anything in the agreement with trade sanctions. I guess that was a way of dampening some of the opposition in the Congress. Although at the end of the day, that didn't change the agreement as written. As far as I'm concerned, the Jordanian agreement is what it is. If this administration chooses not to enforce anything in the agreement with trade sanctions, that's their business, but the agreement itself didn't change and it still passed unanimously.

Cathy talked a little bit about the jobs that have been created in Jordan. Certainly we continue to work with the Jordanian unions after the passage of the Jordan FTA. We do see that there are some issues, some problems, that this administration hasn't been particularly interested in pursuing in the labor front. One of them has to do with migrant labor. We hear from the Jordanian unions that have been continuing abuses of migrant labor, that companies are bringing in groups of migrant workers who are being treated really atrociously – kept in dormitories, separated from the rest of the workers, not really allowed to form unions, not being paid the minimum wage, and when there are complaints they just get sent back. But these kinds of things are things that we hope that an administration that really had a priority on workers' rights could use what's in the agreement to empower workers, to make sure that countries – to be honest, we see these workers' rights provisions in trade agreements as clearly double-edged swords. It's very legitimate for other countries to challenge whether the United States is living up to its ILO obligations or enforcing our own labor laws. We certainly know, we in the AFL-CIO are as well aware as any, that we're struggling, in the richest country in the world, to protect our own rights at work, to protect our own freedom of association, and to make sure that labor laws are being enforced. But we don't see this as something which is punitive against developing countries, we see this as something that's very much a two-way street.

But let me just say a little bit more broadly that the strategy of competitive liberalization [...]that Bob Zoellick has talked about, seems to us one that only works if your goals are coherent, your priorities are clear, and if you've got the content right. We would certainly argue that the Bush Administration has taken what was a very good beginning with the Jordan free trade agreement and has squandered some of that progress, has failed to follow up on the progress of the Jordan free trade agreement. Without a different content of free trade agreements, a Middle East Free Trade Initiative is not likely to yield the kind of benefits and gains that we would like to see. [...] in the context of the Morocco FTA, that there were discussions, sort of ad hoc discussions that went on, and there was some pressure to do labor law reform. That's really important. This needs to be not something that happens fortuitously, but it has to be a clear part of the US government's strategy and a pre-condition. I think the strategy in terms of free trade agreements in the Middle East has to some extent been a little premature, that if you get the free trade cart in front of the democracy cart and the human rights cart, then I think you're putting a little too much faith in the power of free trade. Free trade and investment can bring certainly economic growth and some wealth, but if you don't have the building blocks of democracy, free speech, freedom of association in place, I really don't think you have the guarantees that the kinds of jobs that are being created are going to be good jobs, that you're empowering workers, that you're building a middle class, that you're building a strong democracy.

For that reason, it's essential that we not fall into a trap of seeing free trade and free trade agreements, whatever the content, as the answer to all the problems in the Middle East or in any region, whether it's the United States. So let me just specifically what the issues are.

On the labor rights situation, as I said, I don't think there's any issue that's more important, in terms of the future of democracy in the Middle East, than the ability to form free trade unions. This has been the case in many parts of the world. If workers don't have a voice at their workplace, they don't have a voice in the political system, they really can't stand up for themselves and they really aren't going to be able to build the kind of structure that can endure and that can ensure that any benefits of trade are being broadly shared. Bob Zoellick and the Bush Administration have backed down from the progress made in the Jordan agreement, and the provisions that are being put into the new free trade agreements essentially have only one enforceable component, and that is that countries need to enforce their own labor laws, whatever they may be. They can change those labor laws if they need to – they can eliminate those labor laws if they choose to do so, with no recourse being taken under the FTA. So even though the Jordan agreement had the three components -- the commitment to the ILO core labor standards, the effective enforcement of own laws, and the non-derogation – the only one that remains and is subject to any enforcement mechanism whatsoever in the Bush model is the effective enforcement of own labor laws. And even that is now not under the same dispute settlement rubric as the other provisions in the agreement, but has its own separate and – we would argue – inferior dispute settlement mechanism.

So this has been a pretty enormous weakening of the progress that had been made in the Jordan agreement. Just to put it into context – what does this mean? If the only commitment is to enforce your own labor laws, it means that if a country, let's say, is challenged under the trade agreement for failing to enforce child labor laws, they could just eliminate the child labor laws and then they wouldn't be subject to any challenge anymore. Okay, they're not likely to do that. But why would you write a trade agreement that encouraged and incentivized them to do that? I think we wouldn't do that in another context where it was important to the business community – for example, if it was intellectual property rights (IPR) protection. If you're the pharmaceutical lobbyist and you go home to tell your boss that in the new free trade agreement with whatever country, the provision on IPR is that countries should enforce their own copyright and patent laws, but they don't have to have any copyright or patent laws, I don't think your boss would give you a raise for that. We in the labor movement don't consider that a particularly useful provision. It's actually, in fact, weaker than what we have today under US trade law, the generalized system of preferences and several other trade preference agreements, where we can in fact withdraw trade benefits from GSP recipients if they're not meeting internationally recognized labor standards – not if they're just failing to enforce their own labor laws. We had an international standard already in US trade law and we're weakening it as we go forward.

There are many other issues. I don't have time to talk about them all, but in terms of what the US agenda has been in the FTAs – the very strong investment provisions, the investor-to-state dispute resolution, the very strong language on expropriation – our view, and the view of many of the trade unionists in the developing world that we speak to, is that this is an anti-development provision and something which gives tremendous power to corporations but weakens national governments and certainly weakens the voices of environmental or public health regulation advocates.

The intellectual property rights provisions, Cathy mentioned, have been controversial. Our view, again, is that our government is pressing for provisions that are too strong and that in fact are undermining the ability of developing country governments to provide affordable medicines to people dying of life-threatening diseases and so on.

Government procurement, we have an issue with this. This is something that affects us both domestically but also affects trade unionists and social activists in other countries. We believe that the government procurement provisions that the US has been pushing for in FTAs are too restrictive and that they don't allow governments to use their tax dollars proactively for social objectives, to create jobs at home, or even to promote environmental or human rights objectives, and that we should have that kind of flexibility.

So taken together, the perception of the US agenda in the FTAs in much of the developing world is that this is a corporate agenda and an anti-development agenda. I raise this issue because I think it's important. If we sit in a room like this where everybody's kind of on the same page and engaged in some of these debates, we shouldn't kid ourselves that the trade agenda is non-controversial or is uniformly welcomed, because there are issues around it and there are issues around how our own government is balancing its objectives, and whether they are doing a good enough job looking out for the social dimension as well as the corporate interests. I would argue certainly this government has not.

Finally, the job creation issue is an important one, because that's what we always talk about when we talk about free trade, and it's so appealing sounding, certainly for a developing country. If you can create a couple thousand, tens of thousands, hundreds of thousands of jobs – and the predictions are always very rosy about how many jobs are going to be created, and the predictions are rosy at home about how we're going to open markets and create a lot of jobs.

All I really want to say on this front is let's just be realistic here. First of all, if you talk about job creation between the two countries, there's not going to be a huge amount of net job creation, if both countries are supposed to be moving forward. Sure, one country could get much better access to the other country's markets and have an increase in net exports, its exports over imports. I think it's the underlying theme or maybe the unspoken theme of what's promised at home, that the US has low tariffs, other countries have high tariffs, we open their markets, we're going to sell more stuff, we'll create jobs at home. Then maybe it's what's sort of unconsciously promised in the developing countries as well. But we're not going to both grow and create jobs by increasing net exports. That's not going to happen.

So let's just say it's balanced out, exports and imports more or less balanced. Then the net job creation is fairly small, because then you have jobs that are created through efficiency and faster growth and so on, maybe. But you have to remember that you're losing some jobs in inefficient sectors, like agriculture and the informal sector and so on, so there's balances that are happening. But there isn't actually a guarantee. Even Carla Hills said – she and I were at a Council on Foreign Relations meeting a few months ago about NAFTA – she said, maybe we made a mistake selling NAFTA as a job creator.

I just raise this because I think it's important not to oversell the potential of these agreements in terms of net job creation in both countries, telling different stories in both places.

Finally, when we go out and we're negotiating the competitive liberalization, new free trade agreements with dozens of countries, each one of those countries is promised better access to the US consumer market, to one of the richest consumer markets in the world. Of course, that's a very attractive prospect. But you have to see also that the United States is sitting here with a half-a-trillion-dollar trade deficit, our current account deficit at 5.7 percent of GDP in the second quarter. Every country in the world is not going to get rich by selling more stuff to the United States over the next five or ten years. It's just not going to happen. So again, we just need a little bit of realism in how we talk about the potential for free trade, creating wealth and improving relations.

So to conclude, the AFL-CIO is deeply interested in improving relations, in dialogue. We work with the Middle East in being able to raise these important issues of freedom of association, migrant labor and discrimination. Trade is one possible tool through which we're going to be able to achieve that, but of course that tool needs to be wielded intelligently, and we can't assume that more trade and investment is automatically going to address those very serious problems. I thank you for your attention.
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