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10 September 1996

Managing a world of free trade and deep interdependence

Attached is the text of the address by Mr.Renato Ruggiero, Director General of the World Trade Organization, delivered today (10 September 1996), to the Argentinian Council on Foreign Relations (Consejo Argentino para las Relaciones Internacionales) in Buenos Aires.

“I want to begin by thanking the Council on Foreign Relations for inviting me to speak on the challenges facing the World Trade Organization in a globalizing economy...”

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“It has been said that most policy makers look for the future in a rear-view mirror. Generals tend to fight the last war. Statesmen and diplomats, tasked with building tomorrow, usually start with a blueprint of the ancien regime. This temptation to look to past is even stronger in today's globalizing economy where all the landmarks seem new and where the ground under our feet is constantly shifting. It's also far more dangerous. We live in a world which is already launched on a path towards global free trade -- it is a process which cannot be reversed or rolled back without unimaginable costs to our future growth and our future progress. The challenge now is to come to grips with a world of free trade and deeper integration, and to realize its immense benefits. It is a choice between building a global architecture which is open, universal and rules-based, or living in a system which is anarchic in the most literal sense of the word. If one chapter of world economic history ended with the technological revolution of the last decades and with the mammoth liberalizing efforts symbolized by the Uruguay Round, another is about to begin. How it is written will depend on the decisions we make in coming months and years.

“To argue that globalization is an evolving reality is not to claim that we are nearing the point of free trade in all sectors or in every region of the world. Clearly this is far from the case. Trade liberalization is incomplete in many key areas -- substantial tariff peaks remain; negotiations are still proceeding in critical sectors like telecommunications or financial services; and even the Uruguay Round's final results in agriculture or textiles or government procurement leave much to be desired. There's plenty on the liberalization agenda to keep us occupied into the next century. It is also true that not all countries are equally integrated into the multilateral system Globalization has gone considerably further in Europe, in the Americas and in Asia than in Africa. This is to say nothing of major economies like China or Russia which have yet to accede to the World Trade Organization.

“Yet, however imperfect our progress, the underlying trend is unmistakable. Multilaterally, regionally, unilaterally -- all paths are leading to freer trade. MFN tariffs in all countries, developed and developing alike, are on a sharp downward course, while applied tariffs in many cases are lower still. Much more than one third of world trade will be tariff free when the Uruguay Round is fully implemented. Most non-tariff border restrictions have also been abandoned; those that haven't are scheduled to be eliminated or converted to tariffs according to a strict timetable. Services trade has already been brought into the ambit of the multilateral system and investment, logically, cannot be far behind. Inside the border, many countries are undergoing equally radical fiscal, monetary, and structural reforms in an effort to hone their economies to an increasingly "open" and competitive international environment.

“But the most fundamental transformation of all is occurring at the level of awareness. Telecommunications is creating a global audience. Transport is creating a global village. From Buenos Aires to Boston to Beijing, ordinary people are watching MTV, they're wearing Levis jeans, and they're listen to Sony Walkmans as they commute to work. Perhaps in the present world we can still imagine some government blocking Levis jeans or MTV at the border. But if you stop goods and services the consequence would be massive migration of people and of investment. What is going on is a citizen's revolution on a global scale. And even those who do not like the direction globalization is taking us, have no realistic plan to put the Genie back in the bottle. It is in this very personal sense that we are all free traders now.

“These changes are reflected in the growing volumes of world trade. Trade flows have multiplied fifteen-fold in the last four decades -- reaching $6,000 billion last year -- while production has increased six-fold. The worldwide movement of foreign direct investment is even more striking. In the ten years to 1996, investment flows worldwide easily quadrupled, from around $60 billion to almost $300 billion per annum. In these statistics are revealed the new dialectic of globalization. The systematic reduction of trade barriers worldwide, combined with dramatic decreases in transport and communications costs, has paved the way for the emergence of a global system of production, distribution and consumption -- one in which firms are increasingly free to assemble inputs from around the world and to service an equally global marketplace. This in turn has accelerated the movement of global investment, as firms learn that the best way to achieve comparative advantage in production, in sourcing, in distribution, and in technology is to establish a direct presence in foreign markets.

“It is estimated that production by foreign affiliates of multinational corporations (MNCs) now exceeds the value of world trade in goods and services, that intra-firm trade among MNCs accounts for more than one-third of world trade, and that MNC exports to non-affiliates account for another third. Where once trade was about the exchange of goods among national firms operating from national markets, today trade is as much about the movement of components, services, and technology within and among global firms operating in global markets. Where once foreign investment was seen as a way of substituting for trade -- a way of jumping over national barriers -- it is now seen by many firms as a necessary precondition. We are reaching the point where trade and investment are now part of a seamless web of international economic activity.

“One by one, trade and investment barriers will continue to be swept away by globalization, like leaves on an autumn day. But the force of these winds of changes is already testing our ability to adapt. The immediate challenge is to integrate a rapidly ascendent developing world. No one stands to benefit more from globalization than developing countries. Production is now mobile, capital footloose, technology diffuse. Developed and developing alike, we are all competing for the same investments, for the same markets, for the same innovative edge. In this sense, globalization has erased the old ground rules of economic growth, providing countries, once relegated to perpetual "third world" status, with the tools to fast-forward their development. Unprecedented growth rates of certain industrializing countries in Asia and Latin America are evidence that a huge shift in economic power is underway. Developing countries now account for a quarter of world trade compared to less 20 per cent five years ago. A third of the world's 25 leading exporters and importers are now developing countries, including Argentina. Twenty years ago, industrialized countries imported just 5 per cent of their manufactured goods from developing countries; by 1990 this figure had risen to 15 per cent, and by 1994, over 20 per cent.

“Already some fear that the emergence of key developing countries will send shock-waves through the system. They worry that rising exports from emerging markets will place growing pressure on open economies in the developed world -- pressure which, in sensitive sectors at least, could generate economic uncertainty and unrest. Others ask how we will manage an increasing complex trading system which is growing wider just as it is growing deeper. The short answer is that all these problems can be better managed inside the existing global system than outside of it. As developing countries become more deeply integrated into the global economy we have no choice but to involve them much more closely and transparently in international rule-making and institution building -- to ensure the stability as well as the evolution of the system. This of course underscores the critical need to get China, Russia and all candidates still outside the multilateral system firmly embedded in the WTO. No-one expects this to be easy. The accession of large transition economies in particular raises fundamental questions of substance which cannot be answered by compromising the integrity of the rules or the interests of existing members. Still we cannot long maintain a coherent system of global rules which is perforated from the outside. Without a massive economic player like China “inside the tent” we risk being a World Trade Organization in name only.

“Another major challenge is to channel constructively the growing international competition for export markets, for investment and increasingly for technology -- a competition which is being played out most visibly in an expanding web of regional and supra-regional trade areas. The logic of regionalism is that certain groups of countries can move further and faster towards liberalization than others. But one of the main forces driving regionalism forward so rapidly is the race to grab a bigger slice of the export and investment pie. Countries enter into free trade arrangements to increase their access to markets and investment, which in turn encourages others to join the race for fear of being left behind. Like falling dominos, free trade agreements beget more free trade agreements. Already some one hundred bilateral or regional groupings had been identified by the WTO last year, and each month we hear of new or expanded alliances.

“So far this has generally been for the good. Regional arrangements have provided stepping stones to global liberalization, they have served as important crucibles for trade policy innovation, and they can be a source of creative tension in the system as a whole, forcing the pace of other regional and multilateral initiatives. My concern is not so much that regional arrangements will turn inward, but that their very momentum will leave the multilateral system behind. If regional liberalization outstrips the WTO process, there is a danger that we will lack a common framework of rules and disciplines. If our economic interests are increasingly defined regionally and not globally, it will be more and more difficult to find the critical mass of countries need to sustain the multilateral system. The risk then is of a fragmented world -- one which fosters inter-regional frictions and rivalries, but lacks the global architecture of rules and procedures needed to manage them.

“The long-term solution is not to try to restrict regional agreements, beyond ensuring that they remain trade-enhancing and adhere to Article XXIV of the GATT -- this would be like trying to harness globalization. The solution is to ensure that regional and multilateral liberalization are mutually reinforcing -- that all paths eventually lead to the WTO. The solution, in other words, is to multilateralize regionalism whenever possible. One answer may be found in the principle which some of the newer regional groupings have enunciate -- the commitment to “open regionalism”. What this means in theory is convergence -- that the elimination of barriers within a bloc will be implemented at more or less the same rate as the lowering of barriers to non-members. What it could mean in practice is truly revolutionary -- that in committing themselves to “openness”, regional trade agreements could provide the catalyst for global free trade.

“This leads to the third challenge facing us in the years ahead -- ensuring that the multilateral trade system is truly universal. We may be moving in the direction of freer trade, but the progress is uneven. Residual barriers and discriminatory practises distort trade and investment flows, which can in turn cause uncertainty and friction. This situation is made worse when trade rules don't keep pace with deeper economic integration. What most impacts on the shape and direction of economic activity today -- particularly the rules of competition and the movement of global investment -- is not so much the barriers at the border, but the domestic economic structures inside. Here there is growing room for trade friction, not because of differences over rules, but because rules don't exist.

“We've successfully dealt with the issues of 1986 in the Uruguay Round. We now need to tackle the issues of 1996 and beyond. But these new rules will not necessarily come easily. For almost fifty years, multilateral negotiations were focused almost exclusively on the removal of barriers at the border according to a score-card which was fundamentally mercantalist -- the trading of one tariff “concession” for another. But the new challenge will be less to regulate relations among national economies, than to establish the rules and structures of a transnational economy. Its not clear that we yet fully understand how to be rule makers as well as tariff negotiators. Nor is it clear, when negotiating services or standards or investment, that we yet know how to measure a “trade concessions” or “market access” -- or whether these concepts still have the same meaning in a transnational economy. The fact is that in emerging areas like financial services or telecommunications or investment there is a growing coincidence of interest between producers and consumers, exporters and importers, developed and developing. Trade has always been a win-win proposition, but it is all the more so in a world economy where competitiveness and innovation increasingly hinge on openness to the flow of technology, know-how and ideas.

“It is against this background that we must also begin to grapple with the really big challenges facing us as we head into the next century -- jobs, growth, sustainable development, and so forth. These challenges increasingly demand global solutions simply because of growing global interdependence. It is unfortunately true that we are still a long way from correcting present imbalances in the world economy -- just as we are far away from correcting imbalances even within the wealthiest countries. It is also true that these imbalances at the global and national levels are absolutely unacceptable.

“But let me be clear about one thing: liberalization remains the single most important engine for growth at the world level. This fact is reflected in studies like the recent Human Development Report which observes that while 1.5 billion of the world's people are poorer than in the past, over 3 billion are better off today than at any point in history. The overall trend is towards a “slow but significant improvement in human development in almost all countries in recent decades”. Free trade cannot be responsible for the distribution of the wealth it generates. This is the main task of government at the national and -- because of the increasingly global dimensions of the problems -- at the international level. If countries seek greater protection from the global economy in the name of seeking greater socio-economic equality, they will be throwing out the baby with the bath water. But, by the same token, if we do not find solutions to the problems of poverty in the least developed countries or unemployment throughout the world, then I am certain we will put global growth and global progress at grave risk.

“The global community has every reason to feel proud as we approach the end of the century. The walls between us are falling down -- economically, politically, and ideologically -- after a bloody century of national conflict. The vast developing world is being lifted up by trade and technology, erasing one of the most unsightly scars left by the first industrial revolution. And we are embarked on a deep process of global integration and ever-widening economic growth -- a process that carries with it our best chance yet of achieving lasting world peace. This should be a time, on the eve of the Fiftieth anniversary of the creation of the GATT, for us to celebrate our achievements and to focus on the road ahead.

“If some of us feel anxious today, it is perhaps because we still lack a clear idea of where this new road is taking us. In one sense we are victims of our own success. The collapse of the Berlin Wall and the conclusion of the Uruguay Round did not just symbolize the end of a long struggle, but also the end of a common purpose. On the brink of achieving that global community of nations which seemed so elusive a decade ago, we suddenly lack a unifying goal. Everest has been climbed. Gone as well is the sense of ideological purpose that propelled us forward. The cleavages of the last half century did not just reflect a clash of economic or political interests, but the clash of ideas. In economics, the struggle of free markets against inward-looking statism. In politics, a struggle of liberal democracy against totalitarianism. But this two-headed dragon has now been slain. Big ideas can give way to the slow working out of technical details. Grand alliances can be eclipsed by petty squabbles and endless disputes.

“But our current malaise goes deeper than the feeling of emptiness that comes at the end of a long voyage. Through liberalization and technological advance, we have utterly and irreversibly changed the economic landscape. We've made the great leap into globalization. But it is a world for which we have as yet no clear answers and few guideposts -- save for the old policies and institutions of the past. Perhaps the major imbalance is that the really big economic, social and environmental problems we face at the end of this century are truly global problems demanding a global vision and global answers. But governments are national. And the tendency is often to listen only to local concerns and pressures, and to reach for local solutions. Worse, in the absence of global answers, there is a danger that the future will come to be viewed as somehow beyond our control. Technology will be portrayed, not as a tool to help us progress, but as a machine driving us aimlessly onwards. Globalization will be seen, not a process which is fundamentally liberating, but one which is constraining and deterministic.

“Fortunately some of the global answers are already at hand. The WTO was the first major international institution to be created in the post-Cold War, post-Uruguay Round era. This is significant because I believe the WTO offers a promise of the kind of global architecture we need in the coming decades. It grew out of bottom-up pressure for free trade and deeper integration; it was not handed down from on high -- centralized and bureaucratic. The WTO's culture is firmly rooted in the tradition of consensus-building and cooperation among sovereign countries. Most important, the WTO embodies rights and obligations that are enforceable, not through the crude exercise of economic power, but through the rule of law.

“The success of our new organization will hinge largely on the work we do in the time ahead. We have to consolidate what we have achieved in the Uruguay Round. We need to agree on a workplan for the remainder of the century -- a workplan which had already been envisaged at the end of the Uruguay Round in the so-called build in agenda. And we need to begin to meet the really big economic and geopolitical challenges presented by a globalized world. But more than just a plan, we need a guiding idea. That idea is the realization of global free trade -- the demolition of the last walls of the old economic order. The goal of barrier free trade was accelerated in the Uruguay Round by expanding the so-called zero-for-zero negotiations. And it is being realized regionally in Mercosur, NAFTA, APEC, the EU and the many other customs unions and free trade areas spreading throughout the world. Now is the time to draw all of these disparate threads together. Using the timetables we have already established in the various regional agreements, lets move towards a world free of economic borders. The first WTO ministerial meeting in Singapore will be the first major step towards answering these questions. What we can demonstrate is that the WTO is focused clearly on the future, that we have a working plan, and that the road from Singapore is a bright one.

“Because in Singapore we cannot afford to fail. In the absence of success, the temptation will be to look to the “Good Old Days” -- however ill-defined -- and to return to the old methods and models of the past. Are we talking about the days before 1914 when world trade was shaped by a cat's cradle of overlapping and discriminatory bilateral deals? Are we talking about the Good Old Days of Smoot-Hawley with its prohibitive tariffs and reciprocal trade fixes? It was precisely because of these Good Old Days -- and the economic chaos which followed -- that the post-war community of nations chose the path of progressive trade liberalization under the umbrella of a non-discriminatory multilateral system. But the biggest problem with this prescription is that the Good Old Days no longer exist. Protectionism in today's world of deep interdependence is not a recipe for easing the pain or shutting out globalization. It is a recipe for greater pain and greater suffering -- a road, not to some mythical Good Old Days, but to conflict and violence and war. If liberalization is a difficult enough process to sustain, the cost of returning protection in this new globalized world would be unbearable.

“The role of choice in history is dealt with by Karl Marx in his famous aphorism: “Men make their own history, but they do not make it just as they please”. Marx was partly correct. We cannot stop the future. But nor should we be swept along before it. Globalization, as I have already said, is an evolving reality. Our choice is between managing this reality and taking advantage of its immense potential, or attempt to resist the inevitable. The issue is not how fast we move towards further globalization, but whether we want this process to unfold under mutually agreed rules of the game or in the wilderness of power politics -- power politics which will probably no longer be defined along national lines -- whatever the dimensions of that power may be -- but along regional or even continental lines. None of us is big enough any longer to maintain our economic security in such a wilderness. Deeper interdependence means that all of us -- great powers and small -- have an interest in keeping the system firmly on track.

“What is at stake as we contemplate the future of the multilateral system is much more than trade or economics. It involves questions of political and economic security. It is about how relations among countries and among peoples are to be structured. It determines whether we foster international solidarity or descend into a spiral of global friction and conflict. Fifty years ago, in the crucible of war and economic ruin, statesmen set their sights on a free community of nations co-existing in a borderless world. At the end of the century and the end of the millennium their vision is becoming a reality. At the moment of victory, let's not lose the strength of our convictions.”