Stanford University


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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