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The View from Congress DR. PRESS: Congressman Lee Hamilton has represented Indiana's 9th District for 25 years and currently serves as chairman of both the Joint Economic Committee and the Foreign Affairs Subcommittee on Europe and the Middle East. On the Joint Economic Committee, Congressman Hamilton also serves as chairman of the Task Force on Economic Goals and Intergovernmental Policy. In addition, Lee Hamilton serves on the Science, Space, and Technology Committee, where he is a member of the Subcom- mittee on International Scientific Cooperation, an issue of great interest to us at this symposium. He served for two years as chairman of the Intelligence Committee during the 99th Congress. Often described as, and I quote, "one of the most highly respected members of Congress on both sides of the aisle," Lee Hamilton has served on the Foreign Affairs Committee since 1965, when he was first elected to Congress. Building a favorable reputation early in his House career, Congressman Hamilton was elected president of the huge and famous Freshmen Democratic Class in the 89th Congress. He studied at Goethe University in Germany, received his law degree at Indiana University, and was a practicing attorney before being elected to Congress. Lee Hamilton has been characterized in one biographical write-up as "a man who chooses his issues carefully and times his few speeches for maxi- mum impact." Hamilton, in the course of more than 20 years' service, has built a reservoir of respect that few members of Congress can match. MR. HAMILTON: My task is to give you a perspective of the United States Congress on the European Community. Those of you who are famil- iar with the Congress know how difficult it is to try to sum up the views of that diverse and representative body, but I will do the best I can. The long-standing position of the United States government has been that an integrated Europe is a more prosperous Europe and a stronger security 47

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48 EUROPE 1992 partner. With that in mind, the United States has very strongly supported the idea of European integration from the very beginning, indeed, since 1957 and the Treaty of Rome. Trade disputes such as "chicken wars" and "pasta wars" have irritated U.S.-EC relations over a period of years. But the United States and Eurone have. until now. always prevented these rlisn''tes from int~.rf~.rins' with our greater commitment to shared political and security goals. Congress's perspective on the European Community really revolves around trade issues. The key issues for members of Congress concern U.S. exports, the trade deficit, and the future of U.S. competitiveness. blunt political terms, jobs for our constituents. ~ D Or, to put it in When the Angle European Market was agreed upon in 1986, the reaction In the U.S. Congress was a big yawn. Why? _ ., For two reasons. First, Congress pays attention to the hot spots in the world. Nicaragua and E1 Salvador, at that time at least, were far more important to members of Congress than Brussels, Bonn, or Madrid. European integration was simply not a question on the congressional agenda. Second, because of the enormous internal disputes in the European Community about budget and agricultural subsidies, members frankly doubted at the time whether Europe would make much progress on 1992. The subsequent pace and intensity of the European Community integration caught everyone, including I might say the Europeans, by surprise. Begin- ning in 1987 members of Congress heard constituents and lower-level ad- ministration officials complain that 1992 would hurt U.S. access to European markets. This crescendo of concern grew through 1988 and early 1989 and became expressed in the term fortress Europe. The fears of our constituents that EC 92 was protectionist, exclusionary, and discriminatory came through for members loud and clear. In 1989 the rising cry caught the attention of higher-level U.S. officials, including Secretaries Baker and Mosbacher. The United States made its view clear that the 1992 project should be an initiative to open markets and expand free trade not to close markets. The European Community and the United States then began an intense dialogue on these questions. Today there's an acceptance in the Congress that Europe 1992 will take place. Members' fears have been partially addressed. They no longer assume that EC 92 means protectionism. But they will want to look carefully at the development of the nearly 300 EC directives guiding the 92 process of which, of course, more than half have already been adopted. Access by American high-technology firms will be particularly important in the minds of members. For now, then, the overall attitude in Congress is one of caution and warine.~.c Today congressional attention is focused on the European continent for the first time in recent memory. Members of Congress are watching devel- opments in Europe to see how they will affect the United States in the postwar world as we have known it. .

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THE VIEW FROM CONGRESS 49 First, we realize that the European Community is becoming an increas- ingly important institution whose power will grow in the years ahead. The EC will play a key role in the new European order. In addition to promot- ing the process of economic integration, the EC will serve as an all-important anchor in the West for a new united Germany. It will be a central actor in coordinating western policies toward the newly emerging democracies in eastern Europe and toward a reforming Soviet Union. Closer EC coordination in the political and security areas presents a challenge for the United States. Increasingly the Europeans are consulting among themselves on matters that were previously left to NATO. In many respects this process has short-circuited trans-Atlantic cooperation. The United States is being brought into key decisions now, after the Europeans have decided among themselves what course they will take. This trend away from NATO coordination is likely to be exacerbated in the current transition to a new security regime in Europe. The nature of this new regime is, of course, uncertain. It may be based on the Conference on Security and Cooperation in Europe, also known as the Helsinki Process. It is important that the United States take steps to guarantee its role in whatever new security framework emerges. Second, we recognize that European integration can be a potentially positive- sum game, with advantages for the United States and for American business. By removing existing barriers to the movement of goods, capital, technology, and labor between the 12 EC member states, EC 92 should lead to new investment, more jobs, and faster growth throughout the EC. In fact, I expect that the revenues of EC 92 have already produced an investment-led economic boom in the European Community. As the Community's largest trading partner, the United States stands to benefit from that process. With 320 million consumers, a unified EC will have the largest single market in the world. If you include the rest of Europe, we're talking about a "European economic space" of some 500 million generally middle-income and well-educated consumers with a total economic output of $6 trillion, twice that of Japan and the four Asian tigers combined. The likely investment surge should benefit a capital goods exporter like the United States. In addition to greater trading opportunities, European integration holds out the promise of new technology for U.S. firms to acquire. The EC is committed to a strong program of technology development and collaborative R&D. These efforts, combined with corporate R&D performed by European firms, fortified with such a strong domestic market, should enrich the international storehouse of technology on which we can all draw. Third, there is a growing uneasiness in the Congress that the United States is being left behind in eastern Europe. The west Europeans, led by the Federal Republic of Germany, are moving aggressively to take the ini-

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so EUROPE 1992 tiative in eastern Europe. German, French, Italian, and British businessmen and bankers, building on historic ties between their countries and the East, are pursuing joint ventures and extending new credits in East Germany, Hungary, and Czechoslovakia. The perception is that U.S. firms have been slow to follow and that the United States has lagged behind its European allies in offering trade and investment incentives to companies interested in doing business in the East. This view has been reinforced by the new French initiative to create a European Bank for Reconstruction and Development for eastern Europe, with EC majority interest. While the charter of this bank has not been finalized, there is concern that U.S. interests will not be taken into account and that the EC will control the policy. Fourth, we are focusing attention on the impact of German reunification on the European Community and the EC 92 programs. There is some danger that Bonn's new focus on the East will slow the pace of European integration. Such a development would not be in the U.S. interest. European integration must keep pace with the process of German unification. This has become a tall order because of the accelerating pace of change in Germany. We are already beginning to see the jitters that German unity can give its neighbors. Unity within an integrated EC will be a key to future stability in Europe. Some EC officials have expressed optimism that the decision to move toward a common currency between the two Germanys will actually boost the EC drive for the European Monetary Union, rather than slow it as many feared. EC officials hope that by displaying how it can be done, German monetary integration will silence the critics of the European Monetary Union. Fifth, we note the issue of the future depth and breadth of the European Community and the importance to the United States of how this question is resolved. As the major economic force on the continent, Brussels will serve as a magnet for other countries on the continent interested in trade. The neutral countries, EFTA, and the emerging democracies in the East are already setting their domestic economic agendas to the tune of Brussels. Austria and Turkey have applications for EC membership pending, and Hungary, Czechoslovakia, and Poland are likely to be close behind. The European Community has not yet decided how it will proceed on these applications. For the time being, Brussels has said that there will be no expansion until after 1992. But the pressure to open its doors to new members will only build in the coming years. How the EC acts will deter- mine the future nature of the Community. Further enlargement is likely to limit political integration and security cooperation within the Community. Sixth, we are aware in the Congress that the new developments in Eu- rope are shifting U.S. relationships with our European allies. There's a growing recognition within the administration of the need to work more closely with Brussels on political as well as economic matters. In addition, the pace of developments in Germany has increased the urgency of U.S.

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THE VIEW FROM CONGRESS 51 cooperation with Bonn. In contrast, Prime Minister Thatcher's opposition to the European Monetary Union and her more reticent position on German unification have set her apart from her European allies. It is too early to predict what the implications of this trend will be for the future of the Anglo-American "special relationship." While knowledge of the EC and opinions about it vary, most of us on Capitol Hill have genuine concerns about the impact that Europe 92 will have on American firms. Specifically, what are those concerns? Let me give you a flavor: . The EC standards-setting process does not allow sufficient participa- tion by U.S. exporters. For example, the EC mandated a battery cable standard for forklift trucks to which only European-manufactured cables were able to conform. . Government procurement rules favor EC products and services in cer- tain sectors. As a result, U.S. exporters of telecommunications and electri- cal equipment cannot sell to European governments. Local content requirements may result in American movies and televi- sion programs being taken off the air to reserve programming for "European works." Approval to market biotechnology products may involve a "fourth hurdle," in addition to the normal criteria of safety, efficacy, and quality. This fourth hurdle would take into account whether the product would cause economic harm to segments of European society, such as small farmers, that have received special concessions from national governments. The EC has recently tightened its guidelines for suspending tariffs on pharmaceuticals and electronic products. The guidelines appear to dis- criminate against a U.S.-made product if the firm's EC subsidiary could produce it. To many members of Congress these practices appear to add up to fairly strong encouragement that U.S. firms manufacture in Europe. Congress is less worried about American multinationals. Most members believe that the giants of American industry are well positioned to benefit from a single market. But we are concerned that American exporters, particularly small and medium- sized firms, could be hurt by a change in the rules. Until their access to EC markets and technology is assured, Congress will remain skeptical. Let me focus on one particular industry, one I'm sure is familiar to you semiconductors to illustrate our apprehension.* I'm no expert in electronics, but here's my understanding of what's happened. Thor more detail, see Kenneth Flamm's chapter on semiconductors in Europe 1992: An American Perspective by G.C. Hufbauer, ea., Washington, D.C.: Brookings In- stitution, 1990.

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52 EUROPE 1992 In February 1989 the EC approved a regulation that drastically altered the rules for determining the origin of semiconductors. That change, com- bined with the EC's implementation of recent antidumping settlements against Japanese electronics producers, means the following. Chips fabricated in the United States but tested and assembled in Europe no longer receive favorable treatment. As a result, EC-based firms are pressuring their U.S. chip suppliers to manufacture in Europe or, worse, are switching to Euro- pean suppliers altogether. Electronics industry representatives tell me that the use of antidumping regulations will become increasingly important as the 1992 deadline approaches for abolishing national quotas and voluntary export restraints. There are other problems for semiconductors as well. A 1989 change in the rules that will reduce the ability of member countries to suspend tariffs on semiconductors promises to leave higher walls around the market for semiconductors after 1992. Finally, let me mention the flow of public subsidies into joint research and development activities in information technology in electronics, including semiconductors. Projects such as ESPRIT and JESSI are highly commend- able as a way to overcome the inability of private firms to capture the full benefits of R&D. I believe the United States should itself be doing more to promote cooperative R&D in civilian technology. But subsidies to R&D can be problematic when used as a means of selectively helping national firms in world markets, that is, as an alternative to production subsidies, which are illegal under GATT. One way to avoid that problem is through reciprocal access to R&D, that is, by permitting firms from other countries to join one's own subsidized R&D programs in exchange for comparable access by the other country. This represents a departure from current practice in both the EC and the United States, and there are obstacles to implementing it. Nevertheless, it's an idea worth exploring in the name of creating a more open international trading system, from which we all would gain. Congress is also concerned about U.S. policy toward the EC. Sweeping changes in eastern Europe as well as the EC have underscored the need to update our own government's policies and priorities for a world in which economic strength is increasingly more important to our nation's security than military strength. First, we are concerned about the inadequacy of U.S. resources assigned to EC 92. The U.S. trade representative has only one person assigned to the U.S. mission to the EC in Brussels. The Treasury and Commerce departments have no one. Last spring the Commerce Department asked permission to assign three foreign commercial service officers to the mission in Brussels, but it took many months for the mission, which is dominated by the State Department, to agree, and the three officers are still not in place.

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THE VIEW FROM CONGRESS 53 Because of this staff structure, we rely heavily on U.S. multinational companies for economic intelligence and information. Their information is obviously important to us, but the private interests of U.S. multinationals may on occasion diverge from the U.S. national economic interests, including the interests of U.S.-based exporters. IBM Europe is arguably as much a European company as an American one, which is as it should be. Insufficient resources are not the only problem with U.S. colicv toward EC 92. We suffer from a common Washington problem: ~ ~ issue, it's often not clear who's in charge. Fragmentation of executive authority leads to turf battles. Different agencies, each with its own valid interest, invariably clash, and the internal conflicts sap our strength for the trade fight going on outside. Why did it take the Commerce Department six months to get approval to place three foreign commercial service officers in Brussels? I suspect that the State Department resisted sharing its authority toward the EC. As industry's watchdog, the Commerce Department clearly has a different view and a more critical view of EC 92 than does the State Department. On any seven This tension between departments may be unavoidable and even healthy, but it reflects the lack of overall direction concerning Europe 92. U.S. government actions to promote trade and investment in the EC have proceeded on one track, led by the U.S. trade representative, while our government's political dealings with the EC have proceeded on another track, led by the State Department. Various interagency groups are at work to coordinate one track with the other, but no single Cabinet member has responsibility for both. Among other problems, this results in a lack of accountability, and those of us in Congress don't know whom to call on EC policy. Industry officials, perhaps more than members of Congress, have been frustrated by the same problem. Finally, we are concerned with the dominance of military interests over economic interests. In the case of EC 92, many members of Congress are concerned that the United States is not getting the leverage it should from the memoranda of understanding that the Department of Defense maintains with European nations. Although these memoranda are the major bargaining chip we have in EC 92 negotiations, the Defense Department has been unwilling to let our U.S. trade representative use them as a bargaining tool. Military interests often dominate economic interests. Federal support for advanced technology development goes largely for defense technology. That approach, which relies on defense spinoffs to civilian technology, worked well during the 1950s and 1960s, but I question whether it does any longer. Military technologies have steadily grown more specialized and the defense sector more isolated from the rest of the economy. The direction of influ- ence has even been reversed in many areas, where military applications now

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54 EUROPE 1992 depend on advances in civilian technologies. Despite that the United States continues to spend a far smaller percentage of its GNP on civilian R&D than West Germany or Japan. Historically, the U.S. ratio of defense to civilian R&D was 50/50. In the 1980s that ratio became 70 percent defense and 30 percent civilian. In Europe the ESPRIT and EUREKA programs provide support for civilian technology development. In this country there is enormous debate over such support. Under the policy of the Bush administration, we do not support advanced civilian technology development unless there is a clear national security rationale. But what constitutes national security is not entirely clear. The Department of Defense, for example, recently funded R&D efforts on food processing and apparel. In conclusion, Congress is watching EC 92 developments carefully, and members are, in a word, concerned. Despite assurances from the administration that negotiations are moving in the right direction, members are frustrated about specific developments. My own view is that, on the whole, the United States has benefited from the past expansion of the European Community. These benefits have not been automatic. We were vigilant in the mid-1970s and again in 1981, and our vigilance was met with success in the form of trade barriers that were lower than they otherwise would have been. We need to approach Europe 92 with the same kind of vigilance. DR. PRESS: We wanted the views of Congress and we got it straight from the shoulder. Thank you, Lee. We have time for three or four questions, and Congressman Hamilton has consented to respond. DR. REMBSER: Do you in the U.S. Congress have contact with the European Parliament? MR. HAMILTON: Yes. we do on a number of occasions during the year, and different members have a variety of contacts. We also have contacts with other European organizations of parliamentarians. For example, this afternoon I met with 15 members of the Council of Europe. I think those contacts are improving. After a kind of dry spell, they're becoming more substantive and vigorous and I hope more useful. PARTICIPANT: At times we are our own worst enemy. What can be done to give a more unified U.S. government approach to negotiations with the EC? MR. HAMILTON: My own sense of that is that we're improving on it. The real key is raising the level of visibility of the European Community problem in the government. We're moving in that direction. Secretaries are beginning to pay more attention to it now. And I think the president is. If that happens, you'll see some of these areas that I referred to as being problems beginning to be ironed out. We had better get it through our heads that we're in for the economic fight of our lives. The competition is going to be very tough and keen for

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THE VIEW FROM CONGRESS 55 American businesses, and we're going to have to reorder our house and become more aggressive in asserting the American national interest in these economic matters. So I am pleased to see the moves that I think are now under way to raise the priority and the visibility of these matters within the government and to assert that interest more directly and strongly. PARTICIPANT: Isn't the best way to improve our competitive position to get the budget down and thereby, of course, increase our savings? MR. HAMILTON: I thoroughly agree with you. I'm not sure all of my colleagues do. The question is what are the prospects for that, and the answer is not very good, I'm afraid. We are temporizing with the problem of the deficit. We are dealing with it on the margins. We are not hitting it foursquare. We had a disappointing year in 1989. We are headed for a disappointing year in 1990, unless things change, so I don't think we have yet gotten the message that the deficit has to come down. As you all know, the Gramm-Rudman targets require a reduction each year, not in the deficit but in the projections for the deficit. We have become so skillful in this town at game playing and accounting tricks that we persuade ourselves that the deficit is in fact coming down, when it is not. The deficit has for the last three years been at the $150 billion level; if you include the Social Security surplus funds, it's $220 billion. You're going to hear an announcement in a few days increasing the deficit projec- tions for this fiscal year in a very substantial way. ~ ~ ~ So, while we tool ourselves and maybe that's not so badabout getting the deficit down, what is happening is we're eroding the economic strength of the country and that's serious. PARTICIPANT: I wonder if you could tell us about the views of the Congress about the kind of research in SEMATECH? MR. HAMILTON: I guess the views in the Congress with regard to that are very much split. You would have, I think, very solid support for it across the ideological divides of the Congress, if it has a national security rationale. If it doesn't, then I think you very quickly move away from consensus and you get a very divided view within the Congress. As you know, we've backed away from using the term industrial policy, but there's enormous concern in the Congress on the whole question of U.S. competitiveness. Like others, we look intently at the trade deficit figures month by month and year by year. We recognize that U.S. competitiveness is not a matter that is going to be solved by the United States government and certainly not by the United States Congress, but I think we also recog- nize that our responsibility is to provide an environment in which our American business community can compete. Many of us think we are not really doing that as well as we ought to be doing it. DR. PRESS: Please join me in thanking Congressman Hamilton. Thank you all for being here this evening.