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22 June 1995

Members of the WTO multilateral trading system must respect it and use it properly - says Director-General Ruggiero

Global security depends on a truly global trading system.

The multilateral trading system faces many challenges and it is vital that the newly-created World Trade Organization continues to receive the active commitment of those governments which did so much to bring it into being, said Mr Renato Ruggiero, Director-General of the WTO, today (22 June) at the Herbert Quandt Foundation in Bonn, Germany.

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Speaking on the theme “Trade Liberalization and the Rule of Law in an Interdependent World”, Mr Ruggiero highlighted some of the significant quantitative and qualitative benefits of the Uruguay Round results, but stressed that the full and effective implementation of the agreements was the first test of the commitments of the member governments. He pointed to two immediate and crucial priorities confronting the members: their commitments to the new rules and procedures, especially those for settling disputes, since they are the legal underpinning of the whole multilateral trading system; and the financial services negotiations where failure could lead to a weakening of the principle of non-discrimination - the keystone of the whole system.

“The burden is on the members of the system to use it properly and to respect it”, he emphasized. “What is at stake is first and foremost the credibility of the commitments they themselves have entered into”.

Turning to the more far-reaching perspective of trade liberalization, Mr Ruggiero pointed to the challenge of making the WTO a truly global organization by bringing into the system new members, including China and Russia. “This will be the real test of our commitment to open trade”, he said. “The alternative of keeping these countries outside the global market and outside the multilateral rules is unthinkable in any rational view of the future. It would make the world a much more dangerous place”.

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

The Choice for Openness: Trade Liberalization and the Rule of Law in an Interdependent World

Address by Renato Ruggiero Director-General, World Trade Organization
to the Herbert Quandt Foundation
Thursday, June 22, 1995

First of all let me thank the Herbert Quandt Foundation and my good friend Horst Teltschik for inviting me to take part in this most interesting discussion.

I would like to start by enlarging, with your permission, the scope of my remarks beyond the points set out in the programme. My basic theme is the necessity of maintaining and extending open markets in the increasingly integrated global economy of today. It is a necessity which is at once economic and political, and it is the key to most of our hopes for a prosperous and stable future. Germany has a particular rôle to play in insuring that this necessity is recognized and acted on. Within Europe, Germany has consistently been a force for integration and the removal of barriers, and it has helped significantly to keep Europe looking out beyond its borders in a spirit of engagement with the world. This force is now more than ever needed.

The multilateral system which is the guarantee of an open trading environment faces many challenges, and it is vital that the newly-created WTO continue to receive the active commitment of those trading countries - like Germany - which did so much to bring it into being.

The essential back-drop to what I want to say is the global market. This is not some economist's abstraction but a reality that we live in every day. You are living the global economy from the minute you are woken up by your Japanese-brand radio alarm made in Malaysia. On with your Italian suit made from Australian wool and drink a cup of Colombian coffee while watching American news on television; then get into your German car (assembled in Slovakia) to come to your office in a multinational firm whose headquarters were designed by a Chinese architect. There, your office equipment comes from Korea, Taiwan, the United States, Europe - or sometimes all of these combined in the one machine. You might have lunch in a Mexican restaurant run by Moroccans, and go back for a tele-conference meeting that links up half-a-dozen national telecommunication systems.

I don't think I need to take you all the way back through the Finnish sauna to your Japanese futon bed. The point is clear. And it becomes clearer every day, as interdependence between economies increases.

Much trade no longer fits the textbook model, in which goods are produced by one country and then transported to the buying country. Many firms make components in one country and assemble finished wares in another. UNCTAD has calculated that one-third of all trade consists of intra-firm transactions. Moreover, the best way for firms to enter foreign markets is often to set up shop in them. In many service industries it is hard to sell to locals any other way.

The integration which is the driving force of the global economy takes many forms - integration of companies, of products, of services and production processes - but its most profoundly important aspect is the integration of developing countries into the economic mainstream.

Developing countries as a group have increased their share of world trade enormously in recent years. They now account for an estimated 25 per cent of world trade, compared with 19 per cent two decades ago and 21 per cent one decade ago. A key feature has been the increasing share of developing countries in world trade in manufactured products; it was 20 per cent in 1993, double the level a decade ago.

At the individual country level, the most dynamic 15 trading nations over the period 1980-93 were developing countries. Export and import expansion has gone hand in hand with faster economic expansion. Among developing regions, economic growth has been consistently higher in Asia, where real GDP growth has averaged more than 8 per cent over the last three years.

Over time, dynamic exporters are also dynamic importers. For example, whereas in 1980 China ranked 29th and 21st, respectively, on the lists of the world's leading merchandise exporters and importers, last year it was the 11th largest exporter and the 11th largest importer.

The full participation of developing countries in the multilateral trading system is essential for their own economic growth and for that of the industrial nations as well. The fact that in 1994, Hong Kong, China, Singapore, Korea, Mexico, Malaysia, Thailand, Brazil and Indonesia were among the 25 largest world exporters, and that these countries also joined the list of the world's top 25 importers, points out the stakes of all countries in this process. World export-led growth will come above all from the emerging markets of the fast-growing developing countries.

The fact of the global market confronts governments with an historic choice: to respond by opening their economies and accepting the challenge of international competition, or, as some people appear to want, to retreat into national or regional protectionism. For me, and, I am confident, for German industry too, the correct choice is clear: to opt for openness and liberal trade régimes.

Short and long-term prospects for practically everything that our societies value depend on maintaining sustainable economic growth. One of the truly reliable means of stimulating growth without the risk of undesirable inflationary side-effects is increasing trade. This is what the World Trade Organization is all about: ensuring better competitive conditions for trade. We must remind ourselves that open trade is not an end in itself but a means to an end: creating an environment that will permit a more efficient allocation of resources, more rapid growth, and rising standards of living.

Recent international experience confirms that trade has consistently been the leading edge of the world economy, moderating the global slowdown after 1989, and now boosting recovery. For example, world trade expanded strongly in 1994 - the volume of world merchandise exports grew by 9 per cent - growing more than twice as fast as in 1993. The pace of global output growth was also stronger - 3.5 per cent - but remained well below the growth of trade. Higher trade growth than output growth is a reflection of the continuing integration of national economies. Countries are relying more and more on external markets as sources of economic growth; the domestic market is no longer sufficient.

Trade promotes growth through many channels: developing increased specialization; allowing the realization of comparative advantage; increasing the diffusion of international knowledge; and encouraging increased efficiency in the domestic economy as a result of international competition. Trade openness drives growth both directly, through its impact on resource allocation and efficiency, and indirectly, by raising the returns to investment. The trade liberalizing rules and commitments embodied in the WTO bring a new dynamism, through improved trading opportunities. They also bring a new stability, through reinforcing the rule of law in international trade.

All countries in the world, in particular major exporters like Germany - the world's second largest trading nation - gain much more from an open and stable trading system than a closed one. A stable international environment is crucial to economic growth. Trade and investment depend very much on clear multilateral rules that help ensure the business community a fair environment for doing business.

But there is a challenge for governments to reflect upon. Competition in the emerging global marketplace is bound to be intense. New entrants will challenge established enterprises. More emphasis will be placed on R&D, product innovation and cost control, in turn boosting growth prospects. Successful enterprises will expand employment and career development opportunities for their employees. But there may well be enterprises without the capacity to adapt. Their continued existence, already precarious in the home market, may prove untenable in the long-run in the face of expanded competition from abroad. These enterprises may turn to their governments for import relief, subsidies or other forms of assistance.

The resulting policy dilemma can be simply stated: to delay adjustment, and perhaps reap political benefits in the short-run, or to facilitate adjustment. To delay adjustment opens the door to protectionism, first at home, then abroad, progressively choking off the possibility for mutually beneficial trade.

To make trade the engine of global growth in the coming decade, all sides must co-operate in maintaining the more open and secure markets that are the hard-won result of the Uruguay Round. The challenge of adjustment must be responded to with policies aimed at facilitating it rather than preventing it. And priority should be given to sustaining the momentum of the world economy over the long term by continuing the process of economic and trade liberalization.

One case in point is the EC-Japan agreement, or as it is called “consensus”, on motor vehicle trade which is to expire at the end of 1999. The expressed aim of this agreement was to facilitate structural adjustment of EC manufacturers. The multilateral commitments undertaken in the Uruguay Round, in particular in the safeguards area, in the pursuit of freer trade in the global economy, will require opening up to international competition. There should be no illusion that Europe can seal off this important sector for ever. All restrictions should go by the end of 1999. Under the WTO Safeguard Agreement all grey-area measures have to be phased out by that date.

We should not deceive ourselves, however, - the existing pressures for protectionism in developed countries may intensify as the trade barrier reductions agreed in the Uruguay Round are implemented.

In some countries, there are still voices calling for protectionism, as part of a generalized attempt to hide from a new and challenging world. With high levels of unemployment, appeals to keep cheaper foreign products off the supermarket shelves and make the taxpayer help exporters compete may sound like a seductively easy way out. In fact, they are a trap. Resisting adjustment will impoverish our societies, rather than lay the grounds for creation of well-paid new jobs. What is really needed to make high living standards available broadly throughout society is steady, non-inflationary real economic growth. That will come from improving productivity and competing openly for a larger share of the global marketplace.

Protectionism is insidious; it is a constant threat to trade liberalization. Those in favour of protectionism ascribe the west's social ills to open trade with developing, low-wage economies. Hence the clamour for protectionism grows louder when unemployment is high and the pressures of economic adjustment are most pronounced. We need constant vigilance to combat it.

Much of the argument for protectionism simply equates to interest-group politics: it comes from well-organized groups that fear the loss of an entrenched and often privileged position and want protection, whatever the consumer or the national interest. All too often in trade politics, producers count more than consumers. The benefits of a trade restriction are usually concentrated on a relatively small, well-organized, and well-informed group of producers, while its costs are usually spread thinly over a large and diffuse group of consumers. As a result, the beneficiaries of a trade restriction are usually much more effective politically than its victims.

Protectionist views also feed on misinformation concerning the effect of trade liberalization on employment. The facts point the other way. In the G7 countries, close to 23 million jobs are supported by merchandise exports, and many more by exports of services, for which reliable figures are not available. In Germany, France, Italy and the United Kingdom, export-dependent jobs are estimated at around 7 million. Governments may try to preserve some jobs in uncompetitive industries by using trade barriers, but they will do so at the cost of jobs in the efficient export sectors. Studies also indicate that the annual cost of protecting a job by import barriers is typically anywhere from three to eight times the annual wage of that job.

In the end, it must be seriously doubted whether efforts to protect uncompetitive industries and their jobs can succeed more than temporarily. Experience suggests that protected industries fail to adapt quickly enough and they come more and more to rely on costly protection. Alternatively, countries should accept that trade liberalization can stimulate inefficient industries to become more competitive, and also create jobs in more efficient export industries.

Open trade helps to create jobs. Trade creates jobs in the export sector and, via the income gains, throughout the economy as a whole. And jobs in the export sector pay more on average than jobs in the inefficient import-competing sector (17 per cent more in the United States, according to recent estimates), since on average they are higher-skill jobs.

Protection also costs jobs in unprotected industries, although we never see these job losses directly reported. It is a fallacy to believe that the only effects of protection are the visible effects - jobs apparently saved in protected industries. The jobs lost in other industries are just as real. Protection increases costs, reduces sales (because it taxes consumers) and leads to fewer jobs in unprotected industries.

More fundamentally, if countries limit their economic relations with world exporters and importers, they are limiting their possibilities to grow.

Trade is vital for all countries. For example, in 1994, European Union merchandise exports reached US$1,503 billion and imports US$1,525 billion. Around 42 per cent of these exports went to countries outside the EU, and more than 40 per cent of these imports came from countries outside the EU. Over the 1991-93 period, intra-EU exports declined by 5 per cent, while exports to Latin America, North America, Central and Eastern Europe, and Asia rose by between 9 and 23 per cent. There is thus no room for doubt that the emerging markets are very important to the European Union.

For Germany, as well as for the European Union and all countries in the world, both exports and imports are a source of economic growth. Trade is not a zero sum game.

It has indeed been known for a long time that protection given to some industries actually taxes exporters. But it is not just exporters that pay. We all do. Protection means everyone loses income. Protection reduces our income because of lost opportunities. This loss is invisible; it does not appear in the national accounts, and that is one of the reasons why protectionist arguments can be seductive.

There are also some broader considerations that argue decisively against denial of the global market. More and more developing countries and economies in transition have opened their economies or are in the process of implementing autonomous trade liberalization measures. These countries have realized that opening their trade régimes was in their own interest, and are now willing to participate in an international market economy. We should facilitate and encourage their full participation in the multilateral trading system. If we close our markets to their products, the risk is that the progress painfully achieved so far can be eroded. The political stability of these countries can also be put at risk if we do not let them reap the benefits of increased trade. And economic growth is crucial to assisting the consolidation of stable political and economic structures of the economies in transition, including some of Germany's near neighbours.

So, economic and political considerations both combine to prove that the only rational choice is to maintain and increase the openness of our economies. This is not only the enlightened option - it is the option of enlightened self-interest.

The case for openness in trade is, I think unanswerable. But let me be very clear: this openness cannot mean the absence of rules and disciplines in trade. On the contrary, it needs a firm framework of internationally-accepted rules and disciplines in order to survive; without such a framework, openness would degenerate into anarchy. Open trade must be trade within the rule of law.

This is why the WTO and the system of multilateral trade rules it embodies and administers is so vitally important to the world. This system is the only body of agreed trade rules whose coverage approaches the global - and the more economies become global, the more they need global rules. The outstanding achievement of the Uruguay Round is to have set up, in the WTO, the framework for ensuring that trade rules and their effectiveness can keep pace with the evolution of the world economy.

It is already apparent that a fundamental shift is occurring in trade policy from the quantitative to the qualitative. As the efforts of GATT negotiations over fifty years to reduce tariffs have borne fruit, and industrial countries' tariffs have dropped from an average of over 40 per cent to under 4 per cent, other obstacles to trade have become more prominent.

The need to develop rules on international investment and competition policy for example, becomes more apparent the more business enlarges its scope beyond national or regional frontiers. The same point applies to improving the multilateral harmonization, or the mutual recognition, of standards. These are issues where the multilateral system needs to make progress if it is to stay relevant. They are clear candidates for discussion in the preparation for the WTO's first Ministerial Meeting, which will be held in Singapore in December next year.

Before concluding my remarks, however, I want to focus on the immediate priorities that the WTO faces. The way they are handled will have a profound influence on the shaping of the new multilateral system and on its fitness to meet the challenges of the global economy.

Beyond the purely economic gains from the Uruguay Round Agreements, effective implementation of the commitments to new rules and procedures - especially those on dispute settlement - is crucial. They are the legal underpinning of the whole system. This is the light in which present and future trade disputes should be seen. One dispute in particular is holding the headlines at present, that between the United States and Japan. I do not want to comment specifically on this case, other than to note that both sides have brought it to the WTO and have said that they will respect its rulings.

More generally, I would like to make the point that it would be a mistake to see the existence of disputes, even of difficult ones, as a failure of the system. Disputes, unfortunately, have occurred in the past and will occur in the future - in trade as in other areas of life. This is precisely why we need a dispute settlement mechanism, and why it has been strengthened in the Uruguay Round. The burden is on the members of the system to use it properly and respect it; what is at stake is first and foremost the credibility of the commitments they themselves have entered into.

There is also unfinished business to complete, such as negotiations to liberalize market access in a number of services sectors. The most urgent is financial services, where the negotiations are due to finish in just over a week, on 30 June. I want to emphasize how important it is to get a good result in these negotiations.

For one thing, it is the first important test of the new system and the commitments of its members to making it work. Failure in the financial services negotiations would surely damage the WTO's prospects - in my judgement this risk presents a more serious threat to the system than bilateral disputes do. For one thing it could lead to a weakening of the generalized most-favoured-nation principle - the principle of non-discrimination, in other words - which has been the keystone of the GATT system as it is of the WTO.

Any reversion to bilateral or discriminatory approaches in a sector which is so important for the future economic health of both industrial and developing countries, would send all the wrong signals to governments and investors alike. Furthermore, a failure in financial services negotiations would cast a deep shadow over the negotiations on basic telecommunications, which are due to be concluded next year.

It is in no-one's interest to let these negotiations fail, and certainly not in Germany's, or Europe's. In recent weeks I have met with governments in many of the countries involved, from Asia to the United States, and urged them to show the flexibility and the breadth of vision necessary to achieve a successful result. I am repeating this call today, knowing that in Germany it will not fall on deaf ears.

In conclusion, let me put the liberalizing imperative in its broader perspective. This perspective must be a dynamic one, not a static one, for the multilateral system is still far from complete. I have mentioned sectors which are still wholly or partly outside it - but there are also certain countries which are not yet within the system. And as long as the multilateral system is not complete - in other words until the World Trade Organization really is the World Trade Organization - then the global market is not complete. The challenge is to bring into the system the 25 applicant countries - including giants such as China and Russia - and then reach out to the similar number of potential candidates beyond them.

This will be the real test of our commitment to open trade. It means bringing these countries under the rules and disciplines of the multilateral system -with all its benefits and obligations - as the guarantee that their markets will open up and stay open. This could create an unprecedented prospect of growth - but certainly also some major challenges of adjustment. We must be prepared to meet these challenges, because the enlargement of the WTO system is both essential and unavoidable. The alternative of keeping these countries and their huge populations outside the global market and outside the multilateral rules is unthinkable in any rational view of the future. It would make the world a much more dangerous place.

If China or Russia, for example, remained outside the mainstream of economic growth and multilateral rules, it would be almost inevitable that they would feel forced to use their weight to extend their influence unilaterally. The implications of this could be considerable, and they would not necessarily go towards creating a more stable world.

These questions go far beyond the specifics of trade or economic policy. In the world of the 21st century, access to the sources of growth will be a fundamental political issue which will determine the kind of world it is. In Asia recently, a respected statesman told me that European concerns about employment, serious though they undoubtedly are, relate essentially to questions of technological change and the distribution of resources; keeping European markets open, on the other hand, could in the long run be a choice of peace or war.

Here in Germany, I am reminded that at the end of the Second World War, we Europeans were also faced with an historic choice: to follow the old balance-of-power scenario again, or to build a new foundation for security and peace through the integration of markets. Beginning by opening our borders to goods, then gradually to services, capital and labour, we have created the growing sense of European solidarity which was at the heart of the vision of men like Adenauer, De Gasperi, Monnet and Schuman. From a basis in free trade, we now have a European Union which is a secure and stable partnership.

On the global scale, the problems are clearly more varied and more difficult than Europe's. But the logic that we must follow to build a more peaceful and secure world has to follow the same path. It will not be easy, but it is worth the effort.