www.washingtonpost.com By Stephen Friedman Sunday, January 12, 2003; Page B07

Last week the president announced a comprehensive plan to strengthen America's economy by raising our potential for long-run growth while providing near-term lift. It is a robust plan and, judging from the favorable response it is receiving from many economists and business leaders, it's what our economy and markets need at this time.

The economy has survived extraordinary shocks in the past few years: a dramatic market decline beginning in March 2000, followed by a recession, the Sept. 11, 2001, attacks and disclosures of confidence-shaking abuses by some corporate leaders. Yet thanks to the economy's resilience and to sound policies of the administration, growth has resumed, although not with the momentum we need.

Most private forecasters expect business investment to improve this year, and with it the job creation needed to reduce unemployment. The consensus is that we will have a rising rate of GDP growth over the course of 2003, and strong growth in 2004.

Still, we face serious challenges. Many who want to work cannot find a job. Many employers lack the confidence to invest, expand and create new employment opportunities. Concerns about future terrorist attacks, the possibility of war and rising oil prices brought about by disruptions such as those in Venezuela could undermine public and business confidence. If the recovery in business investment is delayed or anemic, the economy's ability to generate new jobs will be hampered. If families, feeling the wealth reduction of recent years, shift to a more cautious stance, they will pull back on spending.

That's why the president's plan is timely and essential. My Wall Street experience taught me to measure potential risks as well as likely returns, and this plan provides the economy with the growth insurance it needs at this time. It asks Congress to speed up the future tax relief promised to Americans in 2001 by accelerating marginal rate reductions; and it includes additional relief for middle-income families by reducing the marriage penalty, increasing the child tax credit (and accelerating payment of the increased amount) and expanding the amount of income taxed at the lowest -- 10 percent -- rate. Thus, for example, a family of four with earnings of $40,000 per year will be able to keep about $1,100 more of its money.

Upon passage, the Treasury Department will make withholding changes, so Americans immediately will be able to keep more of their paychecks. For the past two years, the household sector has held up while business investment slumped. The president's measures will help ensure that the household sector stays strong and will help families replenish savings. Also, small-business owners taxed on a "flow through" basis will keep more of their profits to reinvest, expand and create jobs.

The president's plan would also abolish the double taxation of dividends. Under current law, an investor's after-tax return from a dividend shrinks to as little as 40 cents for each pretax dollar earned by the paying corporation. As a matter of principle, the president believes it is unfair to tax earnings twice, a principle most Americans surely agree with. But abolishing the double taxation of dividend income is also good policy, for three other reasons.

First, it would eliminate what economists and scholars across the spectrum have for decades considered to be a distorting element in corporate finance. The United States is one of only three of the 30 Organization for Economic Cooperation and Development nations that offer no relief from this double tax. Double taxation of dividends creates a bias toward corporate borrowing, because the interest on debt is tax deductible, whereas dividends are at present neither deductible nor exempt from tax at the recipient level. Sound management and market forces -- not the tax code -- should govern decisions on whether to raise debt vs. equity capital and whether to retain earnings, buy back stock or pay dividends.

Second, this reform would make the fundamental financial health of firms more transparent. In the '90s there was a great deal of pressure to book manufactured earnings, and this hurt investor confidence. If a company pays regular dividends, investors will have checks in their hands and can be confident that profits are real.

Reaction from business people I talked with this last week indicates that the president's proposal could also lead many companies to start paying dividends or increase their existing dividend payouts if they don't have compelling uses for all their retained earnings. This would be a boon to the economy and to the more than half of all American households that own stock, directly or through pension plans. Investors can decide whether to spend this additional money or choose among the most attractive investment opportunities. Senior citizens, who receive half of all dividend income, will be important beneficiaries of this reform.

In fact, abolishing the double taxation of dividends will help all Americans -- not just stockholders -- and that's the third and most important reason it is good policy. To the extent that money paid out in dividends isn't spent on consumption, it doesn't get put under a mattress. It gets invested someplace. Over time, this reform will lead to a better allocation of capital, as money flows to the places where it will have the highest return. That leads to greater capital stock -- an economist's term that really means workers will get better technology and tools to do their jobs -- resulting in higher productivity and higher income for working families.

By putting more money in people's hands and providing more incentives for work and entrepreneurship -- while making the tax code fairer -- the president's plan will encourage consumer spending and business investment, boost confidence in our markets and promote job creation.

The writer is assistant to the president for economic policy and director of the National Economic Council.

www.thestar.com

New move to box in Central America So why not buy at The Bay, not Gap?

DAVID OLIVE Jan. 11, 2003. 08:20 AM

The Americans deserve a prize for chutzpah in trade relations with ostensible allies.

In Washington this week, Robert Zoellick, the Bush administration trade representative, launched official talks to bring five Central American countries into the ever-widening Western Hemisphere trade zone that already binds Canada and Mexico to the United States.

It must have been a humiliating moment for the foreign ministers of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, as they watched Zoellick rationalize U.S. altruism in Latin America, with his patronizing assessment of the region.

"This is more than a trade negotiation," Zoellick said, adding it is "a plan to strengthen democracy and promote development in a region that has known too little of both."

Civil unrest in Central America. Who might have played a role in that? Sponsored the overthrow of a democratically elected government in Chile? Exercised gunboat diplomacy in Grenada? Sent Ollie North to help the Contras in Nicaragua?

A diplomat would know better than to open old wounds. But Zoellick is no diplomat, notwithstanding his State Department credentials. He's the Bush administration's trade bully.

Brazil has its own ideas of hemispheric trade, modelled on the European Community, where there was no union until all its members were prepared to sign on. The United States prefers to recruit its trade partners a few at a time — first Canada, then Mexico, then Chile last month, none of them strong enough to negotiate with the Americans as equal partners.

Earlier this month, Zoellick told Brazil, by far the largest of the Latin American economies and the best managed of them under outgoing president Fernando Henrique Cardoso, that it had better join Team U.S.A. soon or risk trading exclusively with Antarctica.

Howls of outrage in the Brazilian press. These Americans, they're subtle as a brick. And dumb, too. Doesn't everyone know it's Argentina that claims the South Pole as its hinterland?

That's the context in which George Bush's commerce department issued another of its recent demands, namely that British Columbia and other Canadian provinces be stripped of the right to determine their own forestry policies.

No need to go into the details, which amount to a U.S. insistence that Victoria stop its alleged subsidies to Canadian softwood producers. The hoped-for result? Our wood becomes less competitive in the U.S. market. And Americans are forced to pay more for a new house — another of Bush's curious ideas for reviving a stagnant U.S. economy.

Never mind that Canada keeps winning the right for B.C. to manage its natural resources at a succession of international trade-dispute panels. Like separatist governments in Quebec that threaten to continue holding sovereignty referendums until they're satisfied with the result, the United States simply ignores world trade decisions that go against it, restates its original allegations and imposes more punitive duties on our exports.

That is also the context in which a few supine mandarins in our Foreign Affairs and International Trade ministries developed an early Valentine's Day list of steps Ottawa should take to develop a more affectionate relationship with the United States.

In a memo obtained by the Star last week, the authors propose that Canada go beyond the recent move to jointly manage our borders. In order to allay potential U.S. concerns about its energy security, Ottawa should invite the United States to jointly manage our energy policy, too.

"Such an initiative is increasingly enjoying analytical support," say the government policy advisers, citing as an authoritative source the free-market pamphleteers at the C.D. Howe Institute and other conservative think-tanks. "And the costs of not doing so are immense," they say, without explaining why, or justifying their alarmism with proof.

It must occur to Americans that we take some kind of masochistic pleasure in negotiating from weakness.

The United States projects its strength, threatening to close the world's most lucrative market to trading partners unless they submit to U.S. dictates on everything from drug-patent policy to intellectual property rights for software, music and Steven Spielberg epics.

We project our weakness. The starting point for our negotiators is that our centuries-old trading relationship will almost certainly be obliterated if we don't find a way to oblige U.S. demands as comfortably as we can manage.

The United States doesn't hide its bluster, a wise negotiating tactic; and we don't hide our fear, a bone-headed tactic.

Bush's $180 billion (U.S.) handout to American farmers last year has depressed world prices for agricultural commodities, cutting Canadian farm receipts by an estimated $1.3 billion Canadian.

Meanwhile, the U.S. relies on Canada, its second-largest source of imported oil, for 1.8 million barrels of oil each day. It is so strapped for oil that it's still taking 500,000 barrels a day from Iraq, of all places.

Georgia and other states have used copious handouts to entice automakers to build the North American industry's 13 newest plants there and not in Canada.

Meanwhile, the U.S. auto industry relies heavily on Canada for its total production. Several of the industry's most efficient and highest-volume assembly plants are here in Ontario, their output mostly destined for U.S. showrooms. A brief shutdown at a single Ontario parts plant not long ago crippled much of GM's vehicle production.

We don't play to these strengths. For instance, because we're not a banana republic — all right, a maple syrup republic — it doesn't occur to us to answer U.S. bullying with a seller's strike.

With riot-torn oil exporter Venezuela out of production, this would be an especially unfortunate time for the United States to contemplate an OPEC-like closing of the Alberta spigots. Or a not-unreasonable delay in shipping Ontario-made minivans, SUVs, land yachts, econoboxes and pickups across the border — until we're absolutely sure that the new border arrangements are fail-safe.

Oh gosh, Uncle Sam, we'll need another month at least, to determine if these new screening devices are working properly. Can't take a chance that any of those five suspects on the FBI list are strapped to the underbelly of these transports!

You wouldn't envy Zoellick that day.

"Mr. Zoellick, it's Bill Ford. Listen, we've got a problem here."

"Bill, I've got to put you on hold, I've got Rick Wagoner and a Dieter-something on the other lines."

That would be amateur hour in Ottawa, of course. And a clear contravention of the zillion bilateral and multilateral trade agreements to which Canada is a faithfully observant signatory. Funny how these sworn avowals to uphold free trade principles do not inform U.S. trade policy, or even awaken any sense of irony that U.S. protectionists might possess.

Hardball is not a specialty of Canadian governments.

But there's nothing stopping voters in our consumer society from taking up the cause on behalf of unemployed B.C. timber workers and subsistence farmers on the Prairies. Or of the Ontario autoworkers who've been warned they stand no chance of getting either of the two remaining new assembly plants to be built in North America unless the automakers succeed in extracting a sizeable dollop of corporate welfare from Canadian taxpayers.

So why not buy that next pair of jeans at The Bay, rather than Gap. Rent those videos at Rogers, rather than Blockbuster? Order an espresso at Timothy's or Second Cup, instead of Starbucks, and you don't need to be told that the burgers are way better at Harvey's than you-know-where. And at Rona, instead of Home Depot, you'll want the lumber stamped Canfor, not Georgia-Pacific.

Try it for a day, a week. They'll get the message. It's the only one they'd understand.

Sound juvenile? Insensitive to the United States, supposedly our best friend in the world? Yes, it would be juvenile, insensitive and, without a trace of ambiguity, self-serving. Now you understand U.S. trade policy.

www.nytimes.com

Presidents Vicente Fox and George W. Bush both took office two years ago promising to forge a new partnership bridging the Rio Grande, one marked by a once-unimaginable level of cooperation on a number of fronts. It hasn't happened, and as a result Mexico's enlightened foreign minister, Jorge Castañeda, has resigned.

The centerpiece of the new relationship was to have been a new accord on immigration. That encountered early resistance on Capitol Hill, and the terrorist attacks of Sept. 11, 2001, rearranged the White House's priorities. Washington has since failed to recognize that an immigration deal that serves American economic needs and diminishes the population living illegally in this country can be compatible with heightened security.

The White House's neglect has proved to be politically damaging to Mr. Fox's administration. The Mexican government had to overcome widespread public skepticism, and concerns about surrendering national sovereignty, to sell the idea of a new understanding with the neighboring superpower. Mr. Castañeda was the most outspoken advocate of closer ties with the United States. His frustration over the stalemate in the relationship contributed to his decision to resign.

Mr. Castañeda worked tirelessly to promote an immigration deal and closer cooperation in fighting drug trafficking and on other law enforcement matters. He ended Mexico's tradition of warm ties with Cuba in order to back American denunciations of Fidel Castro's human rights record.

Beyond its failure to deliver on immigration, the Bush administration largely missed an opportunity to collaborate with Mexico and Latin democracies in dealing with a number of thorny hemispheric matters, most notably the crisis in Venezuela.

Angry calls by Mexican farmers in recent weeks for their government to renegotiate the North American Free Trade Agreement in response to the ill-advised agricultural subsidies passed by Congress last summer would serve no one's interest, as Mr. Castañeda has pointed out. But they are indicative of a broader disenchantment with the United States that cuts across Mexican society. The Bush administration should take note of Mr. Castañeda's frustration, and seek to improve ties with our neighbor to the south.

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www.falkland-malvinas.com Brazil’s new Foreign Affairs Minister and former Ambassador in London Celso Amorim said that doing everything possible to help Argentina, Brazil’s main partner in Mercosur, is a matter of solidarity but also of interest.

“For investors in foreign pension funds, Brazil and Argentina are the same, so the new Brazilian administration will have a more active participation in regional affairs, so long as we are asked to do so; we have no desire to interfere, but the current Brazilian process could be of inspiration for others”, said Mr. Amorim in an interview with the Argentina press.

Regarding Mercosur Mr. Amorim indicated that the ideal model should be based in a customs union, with free movement of people, capital, technology, so “we effectively become not only an economic space but a social space. This will enable us to jointly negotiate with other blocks and countries”.

Mr. Amorim anticipated the agenda for the coming visit next week of Argentine president Eduardo Duhalde to Brasilia to meet with counterpart Luiz Inacio Lula da Silva: “it’s an open agenda but priorities are the recovery of Mercosur, how to further advance in the integration of Mercosur with other blocks such as Free Trade Association of the Americas, the European Union, the Andean Group”.

“Distortions in Mercosur must be transitory, we must rapidly return to harmony, if not it won’t be a block. With out a clear understanding between Argentina and Brazil, there’s no Mercosur”, emphasized Mr. Amorim, adding that the Mercosur project is not only commercial but also political, and this means mending distortions in the Common External Tariff and creating supranational institutions such as a Mercosur parliament.

As to relations with the United States and the coming discussion involving FTAA, Mr. Amorim revealed that in talks with US Trade Representative Robert Zoellick Brazil pointed out that the incoming administration “can’t sacrifice the content of our proposal to a rigid timetable. We have to consult with industry, Congress and other sectors”.

However Mr. Amorim said the Lula administration was open to negotiate the FTAA, but Brazil is concerned about the size and of its industrial capacity, and “we’re going to defend our interests in the same way as the United States defends its own interests”.

Finally regarding the Lula administration’s foreign policy, Mr. Amorim stressed that a greater emphasis will be given to South America; a stronger stand in trade affairs, be it with the FTAA, European Union or the World Trade Organization, as well as reinforcing relations with other large developing nations such as South Africa, Russia, India and China.

www.falkland-malvinas.com US President George Bush announced this Thursday the naming of hardliner Otto Reich as “special envoy” to Latinamerica. Mr. Reich, born in Cuba and who until last November was Assistant Secretary of State for the Western Hemisphere, will report directly to National Security Advisor Condoleeza Rice.

This way Mr. Reich’s nomination avoids legislative confirmation. Last November Mr. Reich was forced to resign as Assistant Secretary after a powerful group of Democrat Senators refused to accept his nomination.

Mr. Reich is a recognized anti castrate, former Ambassador in Venezuela who was also an outstanding figure in the Reagan administration as coordinator of efforts and resources, (some illegal) in support of the “contras” with the purpose of derailing the Sandinista government in Nicaragua in the eighties.

In private business Mr. Reich has worked for the Bacardi group, a company belonging to exiles Cubans and as a representative of Lockheed during the recent sale of jet fighters to Chile.

In his new post as presidential special envoy Mr. Reich will have an office adjacent to the While House and direct links with Ms. Rice and therefore quick access to President Bush himself.

Another hardliner, former advisor to Senator Jesse Helms and currently Ambassador in the Organization of American States, Roger Noriega, will take the post of Assistant Secretary of State for the Western Hemisphere.