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Buenos Aires, 28 November 2000

Globalizing Regionalism: A New Role for Mercosur in the Multilateral Trading System

Ladies and Gentlemen,

There is a paradox in international trade policy today. Globalization is the word on everyone's lips, yet regional agreements have never been so popular. There are around 170 regional agreements in existence today, half of these concluded since 1990. Another 70 or so are under discussion. In Africa alone there are 13 different regional trade agreements, and by 2005 virtually all the Americas and the Euro-Mediterranean area will be involved in a regional arrangement of one kind or another. In fact, virtually every major country except Japan and South Korea is a party to one — and both those countries are looking to conclude preferential deals soon.

These developments raise important questions for the global trade system which should be debated. In the 1990s, it was widely assumed that building complementary regional and multilateral institutions was the only way to grapple with the complexities of a fast-changing international economy. But in the wake of Seattle — and our inability so far to launch a new global trade round — has the time come to question that easy assumption? Is there a risk that regionalism is becoming a stumbling-block, more than a building block, for the new WTO? Draining energy from multilateral negotiations? Fragmenting international trade? And creating a new international dis-order characterized by growing rivalries and marginalization and the possibility of hostile blocks?

Let me be clear: Regional trade agreements can be a good thing, as Mercosur has spectacularly demonstrated over the past ten years. Creating a single regional market can increase economic efficiency. Regional trade agreements, in tandem with multilateral liberalisation, can also help countries — particularly developing countries — build on their comparative advantages, sharpen the efficiency of their industries, and act as a springboard to integration into the world economy. They can also help focus and strengthen their political commitment to an open economy. One side benefit I see every day is that this process “skills-up” officials, that's why South America has so many first class ambassadors, it also educates the public and engages the business community. If groups of countries — like Mercosur — can move further and faster towards openness and integration, then so much the better.

But does this same logic still apply to the growing process of regionalism we have seen unfolding around us today? Surely it is increasingly difficult to claim that free trade is any easier in vast regional arrangements like the FTAA or APEC than in the WTO. The FTAA covers all but one of the 35 countries of North, Central and South America, boasting a combined market of well over half a billion people. APEC's ambition is even grander. Spanning both sides of the Pacific Ocean and incorporating three of the world's four trade superpowers — the United States, Japan, and China — APEC embraces 40 per cent of the world's population, 54 per cent of the world's GDP, and 42 per cent of its trade. Any one of these vast regional groupings contains countries as different in size, outlook and level of development as any we have in the WTO. So the trade frictions are likely to be no less challenging. Do we really believe that agriculture liberalisation would be any easier transatlantically than in the WTO? Can we really assume that trade disputes between, say, China and the United States could be more easily managed in APEC than in the WTO? Since we are talking about the same countries with the same interests and the same sensitivities — regardless of the context — it can be argued that overlapping rules and jurisdictions make international trade relations even harder to manage, not easier. However, I have no doubt, APEC is a force for good, their research on trade facilitation and their leadership on e-commerce has been of enormous assistance in Geneva. I believe that one of the reasons the region held firm during the Asian crisis was the commitment made time and time again to open markets in the APEC meetings.

There is a second reason for questioning the new race towards regionalism. If globalization underscores nothing else, it is the logic of global rules for global firms operating in a global marketplace. From telecommunications, to financial services, to data-processing, to electronic commerce — more and more the New Economy creates a single economic space which is indifferent to distance, time and geography. In this digital world — where Buenos Aires is as close to Singapore as Montevideo — the idea of regional preference and integration loses much of its rationale. What does it mean to have a regional agreement in e-commerce? Or preferential access to the Internet? Faced with a maze of differing standards, rules of origin and dispute settlement procedures, business may simply opt to ignore the trading system — preferring no rules to the tangled web we are weaving.

There is a third reason why the original argument for regionalism is less valid today. In the early 1980s, the United States, among others, took the regional road because they felt the old GATT system was faltering. That world has changed. Multilateral negotiations in the Uruguay Round succeeded, spectacularly so. There is a new World Trade Organization in Geneva empowered with a binding dispute settlement mechanism and a permanent institution to propel worldwide liberalization. Twelve countries have entered the WTO since 1995, bringing the total membership to 140. And many more should soon be joining — including of course, China, as well as Chinese Taipei and Lithuania. It is ironic that just as we are poised to create a universal trading system — a system which millions of people have worked to join – some governments at the regional and hemispheric level could unwittingly put that universality at some risk. I understand this need to make decisions, to move things forward. Officials will not sit idly by and do nothing. I know, when I was a Minister I advanced bilateral and regional deals while pursuing the Uruguay Round.

But make no mistake. Regionalism carries real risks, the impact of which we are only beginning to see. The immediate danger is that coherence and predictability offered by multilateralism will be weakened as governments increasingly turn to regional arrangements to manage their trade interests. It is striking, for example, that 90 per cent of Canada's trade takes place within NAFTA and that intra-MERCOSUR trade has jumped from 9 per cent in 1990 to over 20 per cent in 1999. Europe is focused on expanding its Union southward and eastward, although the WTO will actually assist this expansion because of the cost to the EU budget that this will entail. The United States' two most important trade relationships are within NAFTA. We should be clear about where all of these actions — and counter-actions — can lead. As we saw in Seattle, regionalism risks diminishing the incentive to advance multilaterally; failure to advance multilaterally in turn drives countries even further into the arms of regional blocs; and before we know it we're in a vicious circle whose outcome no one can really predict.

The darkest future would be a repeat of the 1930s and a world spiralling into defensive, even hostile, regional blocs. Is this really so far fetched? Watching the drive towards regionalism today it is hard to escape the conclusion that some of these initiatives are less about advancing regional economic efficiency and cooperation and more about staking out regional preferences, even regional spheres of influence, in a world of intense competition for markets, investment and technology. Even as global tariffs are falling – thanks to successful rounds of multilateral liberalization – a maze of conflicting regional regulations, standards and rules of origin risk becoming the new “walls” between blocks. Most worrisome is the reality that the world's two major economic players, the United States and the European Union, are often the main drivers of this competition — two “hubs” with preferential trade “spokes” radiating outwards.

This race to see who can establish the greatest number of preferential areas the fastest is in turn forcing those left outside of the blocs to look to bilateral and regional arrangements of their own. Debate has already started in a number of Asian countries about the potential costs of being left out of a regional bloc. Similar debates are no doubt being held in capitals around the world, including here. Already Mercosur's horizons are expanding on a continental scale. You have concluded individual free-trade area agreements with Chile and Bolivia, and are negotiating a similar arrangement with the rest of the Andean Pact. Some have even suggested that Mercosur could serve as the cornerstone of an eventual South American Free Trade Agreement spanning the entire continent. If the goal is to widen trade liberalization and to advance a WTO-consistent agenda then the initiative is to be applauded. But if the goal is defensive — to counter-balance an expanding NAFTA from the North — then we all have reason to be concerned for the stability of hemispheric trade.

I have painted a bleak picture. Purposefully so. It is because I believe that there is an uneasy balance between regionalism and multilateralism today, and that some of the recent trends could lead in a direction which is ultimately in no one's interest, least of all the developing countries. The logic of regionalism alone, without complementary multilateral liberalization, leads not towards an open world economy, but an unbalanced system of hub and spokes — with rich countries at the centre, holding all the cards, and developing countries on the periphery. Towards a world of rival blocs and power politics, of more conflict, uncertainty and marginalization.

I must speak for the small and vulnerable economies, those Members who don't have large markets of consumers or large multinational enterprises. I know that in the politics of instant gratification its easier to mobilize support for a preferential trade arrangement or for a specific market which is measurable, and could even offer privilege for a business. Self-interest is easier to engage and direct. But as much as anyone, or more, developing countries have a major stake in multilateralism. They need stronger global rules, not weaker ones. Wider markets, not more restricted. The development goals of all countries are best served by a strong and forward-moving WTO because in the end, it is the WTO which guarantees that law — not force — will rule in international trade relations.

The fundamental point is this: While regionalism can be a positive force, both politically and economically, and provide an important complement to the multilateral system, it cannot be a substitute. Our multilateral goals must remain as ambitious as our regional efforts. This means above all that we need to push hard for a new round which is the surest way ensure that regional and multilateral interests converge. We also need to find new and creative ways to channel the energy of regional arrangements — like Mercosur — into multilateral negotiations. From trade and finance, to global warming and the Internet — more and more regionalism's success will be measured by its ability to manage global challenges. If the goal for the past ten years was to define your role in Mercosur, the goal for the next ten years should be to define Mercosur's role in the world. In the balance of history MERCOSUR has been a good thing, and should be celebrated and acknowledged. I do so today.

Thank you.