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PRESS/24
13 October 1995

Multilateralism is fundamental to US-LED strategy for Global stability and prosperity - WTO Director-General

“There is no opposition between a strong defense of the American interest and an open multilateral system...”

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“In the sphere of international trade relations, the fundamental, defining characteristic of the American-led strategy to secure stability and prosperity was multilateralism”, said Mr Renato Ruggiero, WTO Director-General, today (14 October) at the American Business Council in Williamsburg, Virginia, USA.

Speaking to an audience of American corporate leaders, Mr Ruggiero stressed how American vision and leadership had helped to make the non-discrimination, or most-favoured-nation (MFN), principle of multilateralism the cornerstone of the international trading system, first under the post-war GATT and now under the new WTO. He gave six reasons why governments had been guided by the MFN principle and why it was “vital to resist the lure of bilateralism for what look like gains in the short term”, and emphasized that "there is no opposition between a strong defense of the American interest and an open multilateral system."

The full text of Mr Ruggiero's speech is attached.

THE MULTILATERAL TRADING SYSTEM: AMERICAN VISION AND AMERICAN LEADERSHIP

Address by Renato Ruggiero, Director-General, World Trade Organization, to the BUSINESS COUNCIL, Williamsburg, Virginia, 14 October 1995

I am honoured to be here today and to address a few remarks to such a distinguished audience on the subject of the World Trade Organization. It would be difficult, I think - anywhere in the world - to match the commercial decision-making power represented here today. What you decide in the conduct of your affairs as leaders of American business, and the influence you exert on political decisions worldwide, profoundly affects us all. This makes me especially aware of the opportunity I have been given to participate in your deliberations.

When Europe, Japan and many others were emerging from the ravages of world war over four decades ago, the United States had already articulated and imparted substance to a vision of the new world order. This is the world order from which so many nations have benefitted so greatly through the years. It is the world order that laid the foundations of today's global economy. The collapse of Soviet communism - and economic reform in many developing countries - has brought closer the American vision of a community of democratic governments, dedicated to peaceful co-existence, respectful of the rights of individuals, and built upon a market-based economic system that raises living standards, safeguards opportunity and rewards effort. The challenge now is to seize this historic opportunity to complete a truly global economic system based on open trade and liberal economic principles. This is a time, I believe, when the pursuit of that original American vision is more vital than ever to world peace and stability.

In the sphere of international trade relations, the fundamental, defining characteristic of the American-led strategy to secure stability and prosperity was multilateralism. Multilateralism, or non-discrimination, is the cornerstone of the post-war GATT trading system, now the WTO trading system. It is the principle that has guided member governments through eight rounds of multilateral trade negotiations. These negotiating efforts have reduced developed country tariffs on industrial goods from more than 40 percent to less than 5 percent. And as tariffs have come down, negotiators have increasingly addressed non-tariff barriers to trade. The Uruguay Round has taken the multilateral trading system into uncharted waters, by extending its reach to trade in services and the protection of intellectual property rights. The round also secured further liberalization and strengthened disciplines in many areas of traditional concern. The new World Trade Organization that the Uruguay Round created has developed a stronger dispute settlement system, which, while in no way interfering with national sovereignty, will give governments effective recourse when they believe that trading partners are not living up to their contractual commitments.

The Uruguay Round was a concerted effort to update the multilateral trading system, and make it more effective as an arbiter of economic relations among nations - relations that have become more intense, more complex and more wide-ranging than ever before. As was to be expected, the inspiration behind the Uruguay Round and its extended agenda came, once again, primarily from the United States. In the WTO as in GATT, nothing important can be done without U.S. support.

It is already clear that other issues affecting the international exchange of goods and services await the attention of governments. I would mention, in particular, investment rules. The services agreement addressed investment in services, but broad-based rules aimed at doing for international investment what the GATT has done for goods trade remain to be developed. There is likely also to be room for work on competition policy, which was only touched upon in rather general terms in the areas of services and intellectual property.

I mention this new agenda to emphasize the continued relevance of the multilateral trading system to the needs of the world economy. Of course, the system has to be continually updated to reflect the growing globalization of the world economy. International trade has come to occupy a far more important place in virtually every national economy. While world production has increased almost six times over in real terms since 1950, world trade has grown thirteen-fold. In the United States, exports amounted to only 5 percent of national income in 1960; by the early 1990s, the share of exports in GDP had more than doubled. Unfortunately, we lack good statistics on international services trade, but we do know that trade in services is expanding even faster than trade in goods, and now represents some 20 percent of international trade flows. That 20 percent only relates to cross-border trade, and not to the transactions within national economies of foreign service suppliers, which are also covered by the General Agreement on Trade in Services.

As trade grows in importance, so does its contribution to the creation and maintenance of jobs. In the United States, over seven million jobs are supported by merchandise exports. Around one-third of all jobs created in the United States over the last ten years or so are due to increased merchandise exports, and practically all new manufacturing jobs emanate from export activity. If we had figures for services, these numbers would be even more impressive.

International investment flows have also grown dramatically in the last few years. Foreign direct investment inflows to all countries averaged US$ 50 billion per year during the first half of the 1980s, and had risen to US$ 194 billion by 1993. There was a time when international business persons tended to see trade and investment as alternative means of securing access to foreign markets. Today, firms often need to be able both to invest and to trade in order to do business - this is an important feature of globalized economic activity, and its success depends upon open, predictable trade and investment regimes.

More and more countries have become actively involved in the international trading system. GATT had 23 members in 1948; WTO membership today comprises 109 countries and is climbing fast. Among those countries negotiating their eventual WTO membership are China, Russia and numerous ex-Soviet republics. These negotiations must ensure that the new members meet the requirements of WTO membership; clearly all must respect the rules. But it is equally clear that exclusion of a country such as China is not a sound long-term basis for the multilateral trading system - or, I would argue, for global political stability.

It is hardly necessary to extol the advantages of international exchange to this audience, but I should like to say a little about why I consider it so important to preserve non-discrimination, or the most-favoured-nation principle, as the centrepiece of international trade and investment relations. It is clear that the international trading system is built on several levels: there is an appropriate level for bilateral approaches, an expanding regional level, and then there is the multilateral level. It would be unrealistic - even wrong - to hold that trade relations should be dealt with only at the multilateral level. But it would be equally wrong to see bilateral or regional approaches as an alternative to the multilateral system. There is not, and there should not be, an opposition between the three layers, but a natural complementarity under the primacy of the rule-based multilateral system. I should like to offer six reasons why - taking into account the existence of the other layers - a multilateral approach is essential if nations are to reap the full benefits of international specialization.

First, non-discriminatory trade policy allows business to buy and sell on the most advantageous terms available, free of government-imposed distortions on sourcing decisions. Thus, MFN is an efficiency principle, both in the sense of ensuring access to low-cost supplies, and of allowing producers to sell in foreign markets without a policy-imposed disadvantage relative to other suppliers. Second, in a world of differentiated, discriminatory trade regimes, doing business across frontiers becomes more complex and time-consuming, raising costs and undermining competitiveness. So MFN also reduces transactions costs.

The third reason for preserving MFN turns on the importance of ensuring that developing and transition economies remain within the system. A notable change in the fairly recent past has been the wholesale acceptance of market-based policies by these countries. They have recognized the advantages of an open international trading system, and they want to share in its benefits. More than 70 developing countries have undertaken unilateral trade liberalization initiatives during the last decade. It would be ironic, not to mention costly, if these countries were to embrace the international trading system just at the time that its leading protagonists began to adopt a discriminatory and exclusive approach.

Fourth, the discrimination inherent in trade relations built upon reciprocity requires that economic relations are defined fundamentally, if not exclusively, in bilateral terms. This makes links between economic interests and political dynamics inextricable - in other words, bilateralism politicizes trade. Negotiations emphasize power-based relations over rules-based relations. Mutual self-interest no longer guides outcomes, as countries end up doing what they are forced to instead of what they believe will serve the national interest. Commitment to international cooperation is weakened, and international arrangements become less stable. There is no longer a system, only ad hoc bilateral fixes, often short-lived.

Fifth, while it might appear attractive in specific circumstances to extract market access commitments from trading partners by threatening to exclude their products, it is a dangerous game to play. Other countries may well follow this example, with uncertain consequences. The prospect of numerous combinations of trading partners locked in reciprocity-based bargaining must surely daunt even the most ardent sceptics of the case for multilateralism. What would be the consequences of this scenario for income and growth, not to mention business prospects, in our interdependent world? Once again, it is the absence of clear and predictable rules for conducting international trade relations that would threaten disarray and the costly disruption of orderly international economic relations.

Finally, a valuable feature of the WTO system that is frequently unavailable or ineffectual under bilateral arrangements is impartial dispute settlement. Too often, reciprocity-driven bilateral agreements cannot be enforced. In the absence of a structured dispute settlement system whose legitimacy is beyond question, disagreements arising from bilateral deals can seriously damage broader trading - not to say political - relationships.

These are the main reasons why governments have been guided by the MFN principle throughout the post-war period, and why it is vital to resist the lure of bilateralism for what look like gains in the short-term.

During my short tenure so far as Director General of the WTO, we have been engaged in a number of negotiations in the field of services. Two of these negotiations - on financial services and basic telecommunications - are, I believe, of particular importance to the international business climate. They illustrate well the challenges facing the multilateral trading system, as well as the scope for the system to make a valuable contribution to increased prosperity. Access to low-cost, efficient financial and telecommunication services must surely be a precondition of international competitiveness in almost all sectors.

The negotiations on basic telecommunications are to be completed by the end of April next year. If they are successful, they will open up significant new trade and investment opportunities. The negotiations coincide with industry trends towards liberalization, attributable both to pressure from user industries and rapid technological development. But there is strong resistance to the eradication of monopoly supply arrangements in many countries, and concerted multilateral action offers the best hope of securing far-reaching results. If the negotiations succeed, telecom operators should be able to offer a broad spectrum of competitively priced services, in both national and international markets. The United States is in the vanguard of this negotiation, with one of the most liberal and low-cost telecommunications markets in the world. It is to be hoped that its commitment to a genuine multilateral result remains unambiguous. We need a strong result from the WTO negotiations if we are to make the vision of the Global Information Society a reality.

In closing, I should like to emphasize my view that there is no opposition between a strong defense of the American interest and an open multilateral system. On the contrary, the multilateral system has been tried and found rewarding, both in fostering American prosperity and in defending American rights under its rules. This system is now better than ever equipped to meet that basic US objective - the rule of law in international trade. It would be tragic if narrowly-focused reciprocity concerns, and the seeming attractiveness of immediate sectoral gains built on discriminatory deals, were allowed to jeopardize continuity and stability in the international trading system. This would be in the interest of no country.