It is a great pleasure to be here with you
all. The connections between the WTO and Stanford run deep, and I can
say that on our part, we have benefited richly from this association.
One former Deputy Director-General and two Legal Division Directors have
been Stanford graduates and the important partnership on WTO archives we
have developed over the years ensures that the many brilliant scholars
can access the documents that reveal the origins and development of the
multilateral trading system.
It was a source of great encouragement to all of us at the WTO when Paul
Krugman was awarded the Nobel Prize earlier this month for his work on
the relationship between trade and inequality and the relationship
between multilateralism and regionalism. We all know the difficulties
inherent in econometric modelling for trade and the many conflicting
signals which economists must sift through as they formulate their
analyses. Which brings to mind the well known fable of the economists
hiking in the Alps. It seems that several hours after they had embarked
on their Alpine adventure, the economists became hopelessly lost. One of
them studied the map for some time, turning it up and down, sighting on
distant landmarks, consulting his compass,
and finally the sun. At last, he said “OK, see that big mountain over
there?” “Yes,“ responded the others eagerly.” “Well,” said the first
“according to the map, we're standing on it.”
I am fully aware this may be an unpopular thing to say in the United
States but opening trade is a healthy thing to do. The fact that the
country, and the world, face an unsettling period of financial market
upheaval and pending economic downturn will make it even more difficult
to convince some people that this is true. In fact, it is precisely
because economic insecurity so reinforces the tendency to turn inward or
consider protectionist measures that I feel so compelled to make my
case. Trade opening is not good for everybody in every country, every
time under every circumstance, but the evidence is persuasive that trade
openness delivers efficiencies and generates wealth. If trade opening
takes place in the right conditions, all countries can benefit from
international exchange. And here, we must make an important distinction:
trade opening is not synonymous with deregulation.
For 60 years governments have been making rules — regulating —
international trade. During those 60 years, this system of global
regulations for trade has done what it was intended to do — save
governments from employing the sort of policies that brought about
economic ruin in the last century. The multilateral trading system has
opened trade, to be sure. But just as important it has brought
transparency and predictability to international trade. Not so long ago,
entrepreneurs engaged in trade could not be sure what sort of duties
they would face in foreign markets or under what sort of trade rules
they would be operating. The creation of the WTO has furthermore
resulted in the establishment of a highly respected dispute settlement
system enabling countries to resolve often highly contentious commercial
disputes in a predictable, transparent and multilateral manner.
The WTO is founded on basic rules and principles, including
non-discrimination between countries, transparency and national
treatment. But our framework of rules is no one-size-fits-all paradigm.
It can't be. We have among our 153 members countries at every level of
development. The poorest are simply not equipped to take on all the
obligations of the rich. Throughout the Doha Round negotiations
developing countries have rightly insisted that they receive what is
known as special and differential treatment. Such treatment is mandated
in the Doha ministerial declaration and is woven throughout the complex
tapestry of these negotiations. The Doha Round is structured to produce
tailored accords which will lead to an outcome in which the
contributions countries make are based on their ability to pay. The
least-developed countries (LDCs), for example, will not be required to
make any reductions in their level of subsidies or tariffs. Nor would
they be required to further open their services markets. All developing
countries will pay less than their developed partners, and small and
vulnerable economies and recently acceded members will also receive
special treatment. There are provisions for other categories of
developing countries and for individual nations as well. All of this
makes the negotiations extremely complicated. It will also make the
result more credible and sustainable.
The credibility and sustainability of the system has been put to the
test before. During the Asian crisis in the late 1990s, the developing
countries of the Pacific Rim increased their exports to rich countries
by tens of billions of dollars. Those increased exports helped the Asian
countries stabilize their economies and regain prosperity. Trading their
way out of the crisis was as vital to the countries of the Pacific Rim
as the Marshall Plan was to Europe after World War II. But the export
surge did not play well in all quarters of Europe and North America.
Governments faced intense pressures to erect barriers which would have
disrupted trade flows and hampered Asia's recovery efforts.
North American and European governments resisted that pressure and the
result was that Pacific Rim countries were quickly back on their feet.
Western governments resisted those protectionist pressures not only
because they realised that their future prosperity was linked to those
countries but also because they knew they had made international
commitments to which they had to abide. As the West weathers the looming
economic downturn, it can draw comfort from the fact that governments
elsewhere which may be tempted to curb European or American exports will
face the same constraints. Overseas markets will be of particular
interest because while the United States, Europe and Japan constitute
two-thirds of economic output, domestic demand in all of those economies
figures to be flat in the coming year. In the emerging markets by
contrast, the forecast is for 6% growth next year
Economic theory teaches us that trade opening increases efficiency,
reduces distortions and results in welfare gains. Precise calculations
of these gains are notoriously difficult because of the variables
associated with the many models used to determine the impact of trade on
national income. In a 1995 Brookings Institution study, Jeffrey Sachs
and Andrew Warner estimated that those countries which are open to trade
and investment have grown at a rate which is three or four times that of
countries which operate in closed economies. Jeffrey Frankel of Harvard
and David Romer determined that every percentage point rise in the ratio
of trade to GDP, increases income per person by between one half and 2%.
There have been roughly a dozen computable general equilibrium model
assessments of the Doha Round. All of them state that there will be
gains on a global level and that developing countries could be large
beneficiaries of reforms resulting from an agreement.
The models are all different. Some gauge solely the global benefits that
would accrue from reduced industrial tariffs and greater openness in
agriculture trade through lower duties and reductions in
trade-distorting subsidies. Others calculate the estimated benefits from
liberalisation of trade in services and a Doha agreement on trade
facilitation. Conservative estimates of the global income gains from a
Doha deal range from $116 billion to $55 billion with the average
predicted gains somewhere around $100 billion per year. But the
difficulty in measuring elasticities, employment effects, product
substitution and the impact of lifting barriers to trade in services
make predictions of this sort rather problematic.
Estimating the gains to developing countries, moreover, is rendered
difficult because much of the available trade data is of poor quality.
Also many models group countries and sectors together despite obvious
differences. Yet, all of the models suggest that the gains to developing
countries will be larger the more they open their markets to trade.
But if there are doubts about the precision of economic forecasting,
there are also things we know for sure. We know, for example, that no
poor country has ever become rich without international trade. We know
too, that since opening their economies the Asian giants China and India
have together lifted more than 400 million people from abject poverty --
an economic success story without precedent.
We also know this: since the multilateral trading system was created in
1948 global trade has grown 30 fold in real terms. This growth is due to
prolonged and unprecedented economic growth over the past 60 years,
significant advances in technology and the removal of trade barriers. It
is on this point that the WTO fits into the equation. In 1947, before
the GATT began operations, average tariffs in the industrial world were
between 20%-30% and trade was constrained by a myriad of quantitative
and exchange restrictions. Eight successive rounds of trade negotiations
succeeded in reducing average MFN tariffs on imports of manufactures to
4% in industrial countries. Quantitative restrictions were phased out,
at least for manufactured goods.
The United States, the driving force in the creation of the global
trading system, has been among its principal beneficiaries. US
merchandise exports have risen from $13 billion in 1948 to more than $1
trillion in 2007. In services trade the growth in trade is equally
impressive. US exports have grown from $408 billion in 1980 to nearly
$500 billion last year.
The Federal Reserve has indicated the United States may already be in a
recession and as the economy slows, strong export performance will be
particularly important to the US economy. On an annualised basis, second
quarter export growth and slowing imports were responsible for GDP
growth of 2.9%. Measured against the sluggishness elsewhere in the
economy, these figures stand out. But the reality is that over the past
50 years trade has grown consistently as a component of overall US
economic activity. Taken together, exports and imports were in 1970 the
equivalent of just over 11% of GDP. In 2007 international trade was the
equivalent of nearly 30% of domestic output, a record.
Keeping the engine of trade running smoothly will be essential because
the picture elsewhere is decidedly gloomy. Corporate profits have fallen
in every quarter this year. Last month, retail sales fell 1.2%, the
first drop in three years. Durable goods purchases are down the last two
quarters and private domestic investment has fallen the last three. And
yet, despite its considerable, and growing, contribution to the economy,
trade is viewed with suspicion in many quarters of the United States.
According to many recent polls, a majority of Americans now feel that
international trade does them more harm than good.
Much of this anxiety stems from concern about the impact of greater
international competition on jobs and wages. The competition that arises
from trade opening tends to spur innovation and create greater
efficiencies. This in turn generates wealth. The other side of that coin
is that greater competition puts companies and indeed entire sectors of
the economy under pressure. No doubt about it, trade opening has led to
some job losses globally and in the United States.
Economists agree that some of the 4 million manufacturing jobs lost in
the United States disappeared due to overseas competition. They concede
that trade has also had a hand in cutting the non-agricultural civilian
workforce employed in manufacturing from 33% six decades ago to less
than 10% today. Moreover, some of the wage stagnation that has beset
American workers is due to competition from lower wage country
exporters. But in each case, the role of trade has been rather small
relative to other factors.
Were trade the culprit for the decline in manufacturing jobs, you would
very likely have seen domestic manufacturing output decline as foreign
products displaced local products in the marketplace. But this was not
the case. US manufacturing output rose to an all-time record last year.
Between 1978 and 2007, the Federal Reserve says real manufacturing
output has risen 124% — for big ticket items like cars, machinery and
aircraft, output has more than tripled.
Other factors have played a far bigger role in the loss of manufacturing
jobs and the downward pressure on wages. The biggest single factor has
been productivity growth brought about by advances in technology.
According to Bob Lawrence at Harvard, only about 11% of manufacturing
job losses this decade are due to international trade. Other studies put
the figure somewhere between 4%-15% .
In the United States today, productivity growth is at an all time high.
The US Bureau of Labor Statistics reports that non-farm business sector
productivity rose at an annual rate of 2.8% between 1950-73. Each year
from 1995-2000, average manufacturing productivity rose by 4%. Though
the rate has tapered off slightly since 2000 it has still risen at the
rate of 3.7%. When more goods and services are being produced with fewer
workers, job losses are inevitable.
Others elements have been a play in the stagnation of manufacturing
wages as well, according to Lawrence. Rather than trade, he says, the
principal factor in keeping wages flat has been the sharp rise in the
share of income going to the super-rich (the top 1% of taxpayers) and
the share that has gone to profits — which were at near record levels
until this year. The huge spike in health care costs means that while
overall corporate payroll contributions have risen steadily over the
past decade, the pay workers take home has not. Labour costs for US
corporations have actually risen 25% since 2000 but nearly the entire
increase went to pay the higher bill for health insurance, which is
twice as expensive today as it was at the beginning of this decade.
The WTO does many things but it does not involve itself in the question
of income inequality within a country's borders. Internal tax and
spending policies are a domestic matter for domestic politicians.
Likewise, the explosion in health care costs has its roots in domestic
policy. Policies aimed at trying to address job loss and stagnant wages
through trade measures will not fix the problem of manufacturing job
erosion and it could lead to a dangerous deterioration in the most
vibrant aspect of the US economy today. Bob Lawrence estimates that
America's engagement with the outside world adds at least 10% to US GDP
which indicates to me that an isolationist or protectionist response
would be highly counterproductive.
The presidential election is less than a week away so I don't want to
enter too forcefully into this debate, but I think it is clear that US
policymakers will need to find domestic solutions — rather than
protectionist trade measures — to tackle the problems confronting
American workers today. In my discussions with advisors to both
candidates, I have been reassured to see that both have indicated the
importance of concluding the Doha Round and both have rejected
protectionist solutions to US economic difficulties.
This is particularly significant because the last time the United States
was faced with a financial crisis of this magnitude, Sen. Smoot and Rep.
Hawley produced one of the most destructive pieces of legislation in US
history. The notorious Smoot-Hawley Act sharply raised already high US
tariffs, triggered retaliatory measures by trading partners and led to a
two-thirds contraction in the value of global trade. This trade
contraction deepened the Great Depression which pushed the US jobless
rate to 25%. It also shaped the thinking of the visionaries who created
the post-World War II system of multilateralism. Never again would the
world lurch toward blinkered beggar-thy-neighbour trade policies that
did so much to destabilise the world in the 1930s.
A bit here about the financial upheaval confronting us today and its
impact on world trade. As I see it, the financial crisis raises two
potential threats to global trade -- the first more immediate and
perhaps more likely, the second more devastating but perhaps less
probable. The immediate problem we face is the credit crunch. Roughly
90% of international trade is financed with short-term credit. Trade
finance is one of the oldest forms of credit, dating to the Middle Ages,
and one of the safest since it provides creditors with obvious
collateral — a boatload of cargo. Yet today, trade finance is being
offered at 300 basis points above the London Interbank Offer Rate and
even at this high price has been difficult for developing countries to
obtain.
Trade finance has become so difficult to obtain from commercial sources
that the Brazilian government has been forced to provide some $20
billion of export credit to ensure their ability to sell goods overseas.
As Europe and North America face an economic slowdown, the Emerging
Economies of Brazil, India, Mexico, China, Egypt, Indonesia and South
Africa continue to grow and they continue to grow in large measure
because of trade. Should growth slow in the emerging countries, US
exports — the most vibrant part of the economy today — will be adversely
affected. In this ever more interconnected world, prosperity in India,
China, Brazil is very much in Washington's interest.
Serious concerns raised by developing countries over their inability to
obtain trade finance have prompted me to call a meeting on 12 November
of international financial institutions, regional development banks and
key commercial lenders. We will use this occasion to analyse the problem
and see if we can find ways to break through the trade credit
bottleneck. I have established a Secretariat Task Force to monitor the
situation and should things deteriorate we will consider holding a
meeting to bring together the heads of the international organizations
with responsibility for international finance and trade.
The second threat we face is a panic-driven slide towards protectionism.
In recent years, protectionist rhetoric has certainly increased and we
in the WTO have been keeping careful watch to see if such rhetoric leads
to protectionist actions. Politicians faced with deteriorating economic
conditions are fond of blaming foreigners for their woes. But the
anti-trade protestations have yet to translate into protectionist
action, at least as far as trade is concerned. Investment is another
story but one over which we have little jurisdiction.
An important reason why protectionist measures have not followed the
harsh rhetoric of some politicians is that WTO commitments restrict, in
a transparent way, the use of trade measures.
This safety harness against knee-jerk protectionism was developed
multilaterally over decades. It represents a triumph of
intergovernmental co-operation. As we witness the financial crisis bleed
into the real economy, the lack of such a safety harness in the global
financial system is glaringly apparent. The causes of the financial
crisis are complex and multi-faceted. What is clear though is that the
international financial system suffers from a lack of regulation,
transparency and accountability. Trade in goods and services represents
only about 2% of international transactions but it takes place in one of
the most internationally regulated environments ever created. No such
regulations exist for international finance and drawing them up will be
considerably more complicated than concluding the Doha Round — itself a
highly complex series of negotiations. There are a plethora of
regulatory bodies which oversee banking and securities at national
level. Central banks, which have a significant portion of the oversight
responsibilities, are in many cases independent of governments. There is
much merit in this independence, but it will create complications when
seeking international agreement.
Negotiations to combat climate change will be no easier. Decisions on
capping and trading emissions, on permissible border measures and on
enforcement will have profound consequences on the way people live, not
just in 20 years but today and tomorrow.
As policy makers go about creating multilateral architecture in areas
like international finance and climate change, they would do well to
consider the evolution of the trading system that has served them so
well. Moreover, they can learn from the lessons we have learned in the
Doha negotiations about making the concerns of developing countries
central to any reforms. No international agreement on finance or climate
change is possible today without China, India, Brazil and Indonesia on
board. This is why the importance of reaching the Doha agreement extends
beyond the confines of trade.
Compared with negotiations regulating international finance and climate
change measures, the Doha Round is low-hanging fruit and a failure to
pluck this fruit will send reverberations through other geopolitical
forums. The world has changed dramatically in the 15 years since the
Uruguay Round of global trade talks was agreed. There are a great many
more actors on the stage and they want a say in the future of global
governance. Developing countries have invested a great deal in the Doha
Round and many of them believe the WTO is one organization in which
their voices are heard and where they can negotiate an outcome that
reflects their interests. It's difficult to imagine them entering into
climate change talks in a mood to compromise if the Doha Round has been
scuttled.
As many of you know, the Doha Round has hit a bit of a speed bump.
Ministers came to Geneva in July with a view towards concluding
agreements in agriculture and industrial goods trade which would have
provided the springboard for agreement across the Doha agenda. As you
will all be aware, we didn't get there. We made a great deal of
progress, we reached tentative accord on something like 17 of the 20
topics on our agenda but we hit the wall on a technical matter — how to
provide safeguards to poor country farmers when imports rise — that was
also highly political. Some countries, including India, Indonesia, the
Philippines and China, believe existing agreements do not yield
sufficient safeguard protection, while others, including the United
States, Thailand, Uruguay and Paraguay, find it difficult to accept that
a negotiation designed to bring trade barriers down, could result in
some tariffs going up.
Work continues on this issue, known as the Special Safeguard Mechanism,
in Geneva and on several other questions including the high levels of
trade-distorting subsidies extended to cotton farmers.
In the media, the July meeting was portrayed as failure. I see it a bit
differently. This meeting was a setback true and a serious
disappointment but it was not a failure. Over the course of those 10 or
11 days, negotiators solved riddles that had vexed us for years — how to
address differences on trade in tropical products, on the erosion of
preferential trading arrangements and how to offer some special
protection for certain crops grown in the developing world. An agreement
is in place for cutting farm tariffs and for slashing trade-distorting
domestic farm subsidies. We have known for some time direct export
subsidies will be eliminated. Likewise, it was agreed years ago that in
the rich countries duties will be eliminated on at least 97% of the
exports from the poorest countries. An emerging consensus has appeared
on how to open markets to trade industrial goods. The July meeting also
included a meeting of ministers at which we, for the first time in the
Doha Round, held productive discussions on opening services markets.
In short, there is a great deal on the table. The majority of the work
has been done. We can see the finish line of this marathon, but in trade
negotiations the last mile is always the most difficult. The foundation
for concluding the Round is in place and we are engaged in worthwhile
technical work in Geneva, as we wait for the political climate to permit
another attempt at concluding.
It has been heartening to hear the expressions of political commitment
coming this month from G-8 leaders, from the leaders of Brazil and India
and from the leaders at the Asia Europe meeting this weekend in Beijing.
The meeting of the G-20 in Washington on 15 November may provide another
occasion for providing political impetus to the Doha negotiations. But
what is vital is that any expressions of good intent be translated into
concrete progress at the negotiating table.
I mentioned at the beginning of my talk the importance of trade opening
in the framework of international regulations. In this rapidly changing
world, though, it is necessary that rules be updated to reflect current
conditions. Negotiations in the WTO are launched every 15 years or so
and take many years to conclude thanks to a system of decision making by
consensus and the principle that no element of a negotiation is
concluded until all elements are concluded. Agreements like Doha result
in the liberalisation of trade and that, as we have said, holds
undoubted economic value. But modernising rules that were negotiated in
another era is just as important.
We all agree that rules written nearly 15 years ago do not fit the world
of today. Rules which permit rich countries to pour billions of dollars
into agriculture programmes which impoverish developing country farmers
are seen by many as inequitable. Many find it unjust to have a WTO
tariff system where tariffs in rich countries are three or four times
higher on exports from the poorest countries than they are on products
from other rich countries. Rules on the movement of goods through
customs, which date back to a time before bar coding and laptops, seem
antiquated. Failing to help Africa reform customs policies which require
40 documents and 30 days to clear shipments is difficult to explain. But
failing to address fisheries subsidies, which contribute to serious
depletion of fish stocks, seems downright irresponsible.
The United States of America was founded on the rule of law. This
principle is so deeply ingrained in the American system of values that
it inspired great statesmen more than 60 years ago to create an
international system of rules to better manage relations between
countries. Now the world faces different sets of problems. A different
and larger array of countries insist that they take part in drafting the
solutions to those problems.
Can we meet the pressing challenges of the 21st century? Can we find
solutions to climate change, poverty alleviation and instability of
international finance? I'm convinced we can, but only if we pursue these
solutions collectively through the rules-based international system all
of us have worked so hard to create.
The debate is no longer about the merits of global regulation, it is
about putting in place the right sort of global regulation for the
problems of today.
Thank you.
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