London, 16 January
The Multilateral Trading System at Fifty
Address to the Royal Institute of International Affairs in London, United Kingdom
The creation of the system owed much to British leadership and vision, and it is one of history's happier coincidences that its golden anniversary should occur while the United Kingdom holds the Presidency of the European Union. I very much hope the United Kingdom will play a leading r˘le in the anniversary event on 20 May, as I know it will in the future development of the WTO.
It would be difficult to exaggerate the contribution of the multilateral system to the remarkable changes we have witnessed in the world economy over the last several decades. The walls between East and West have collapsed, in part because the Soviet system could not meet the challenges posed by technological change and global integration. Divisions between North and South have also blurred, as developing countries have increasingly abandoned import substitution and protectionism in favour of freer markets and open trade. When China and Russia accede to the World Trade Organization - and I have every expectation they will - all major economies will be joined together in a single market system. If the challenge of the Cold War era was to manage a world divided, our challenge in the post-Cold War era will be to manage a world of deepening interdependence.
Asia's current financial crisis is, in many ways, the first major test of this new interdependent economy. The immediate focus is on the financial stability of a number of Asian economies - and recent efforts by the IMF, the World Bank, and national governments to restore financial confidence to the region. But it is clear by now that the impact of this crisis reaches beyond the countries initially involved - and indeed beyond Asia. A broader challenge lies with the global system itself - the pressing need to resist protectionist pressures and to keep markets open, without which no lasting confidence or stability can return.
The current situation is serious enough. But a greater danger is that we will make policy errors in response to these events which could prolong the crisis and even extend the difficulties. Nowhere is this risk more real than in the area of international trade. Turning inward in the 1930s in response to financial crisis - as epitomized by the infamous Smoot-Hawley Act - helped drive the world into economic depression and ultimately world war. If this experience has taught us nothing else it is that while financial crises can rise and fall quickly, trade crises can have a more lasting and damaging impact. What must be avoided above all is a vicious circle of economic reactions and counteractions leading to wider and deeper distress.
This is not a hypothetical concern. Exports from South East Asia can be expected to rise, perhaps significantly - both because of currency devaluations and the need to finance external debts. Not only will this result in increased import pressure on sensitive sectors and industries in the advanced economies. It will also pose a competitive challenge for other developing economies exporting similar products, especially those other regional economies which have not devalued.
At the same time, the imports of East Asian countries are projected to shrink overall because of slowing growth and declining purchasing power - though possibly not as much might be expected, as these countries are also highly dependent on intermediary inputs and raw materials from abroad. Any such decline will particularly affect the East Asian economies themselves because over half of their exports are within in the region. The effects will also be felt to some degree in the rest of the world - especially in the U.S., the E.U. and Japan. As export markets in East Asia shrink, growth in supplying countries will clearly be affected - though it is too early to predict with confidence what these effects may be.
The community of global institutions has a key role to play in keeping markets open and preventing global contagion. The immediate task is to restore confidence in the financial systems of South East Asia - and here the importance of supporting the IMF's efforts to preserve macroeconomic stability and to encourage financial sector reform cannot be exaggerated. But we must be aware that one important consequence of the current crisis will be in the trade arena. And part of the solution to the present problems must be a trade solution; our situation is very different from the nineteen-thirties when the absence of multilateral trade rules and commitments contributed to the downward spiral from financial crisis to trade crisis to generalized economic chaos.
First, and most obviously, the WTO provides a powerful bulwark against protectionist pressures. The strengthened rules and dispute settlement of the WTO system make it extremely difficult and costly for countries to ignore their bound commitments and obligations. A more real concern is what might be termed creeping protectionism - any unwarranted or excessive use of safeguards, antidumping actions or other discretionary policy tools to block out international competition. In the present situation there is a clear need to monitor and guard against such trends.
Second, the WTO can help to advance and anchor necessary economic reforms in the affected economies. An obvious and timely example is the Financial Services Agreement reached last December, at the height of South East Asia's crisis. One of the main causes of the South-East Asian crisis is financial sector weakness. Strengthening prudential regulation and supervision of the financial sector and developing open and transparent financial services sectors are seen as key for rebuilding confidence in the region. Here liberalization has a valuable role to play. If closed financial systems are inherently opaque and unresponsive, open financial systems have a built-in incentive to be transparent and prudential - if only because they are under the scrutiny of depositors and shareholders. The Financial Services Agreement offers a way for these countries to reinforce and lock-in financial restructuring - but without compromising their ability to pursue sound macroeconomic and regulatory policies.
A third priority is to continue the momentum towards universal membership of the system. And this means completing the 32 accession negotiations currently underway without compromising the system's basic rules, rights and obligations. The successful accession of countries such as China and Russia would obviously enhance the WTO's ability to provide a stable foundation for the global trading system - particularly during times of economic stress. At the same time, WTO membership would help these countries secure some of their key economic relationships in a rule-based system.
Fourth, we are approaching the WTO's Ministerial Conference and the 50th anniversary of the system - an occasion which provides a valuable opportunity to lift our sights to the challenges of the next fifty years. In addition to the negotiations already scheduled for the new century in agriculture, services and aspects of intellectual property, some are already looking to widen the scope of future talks. It could be argued that the current difficulties in Asia provide a further rationale for injecting new momentum and confidence into the international system by setting our sights on a new trade agenda - and the prospects it can open up for reviving and sustaining economic growth.
All of this underscores a broader and more fundamental role of the WTO - providing a foundation of rules and structures to help manage our growing economic interdependence. Modern economies work on a vast and complex network of interrelationships which in turn depend on an infrastructure of rules, laws, and institutions to underpin and secure these relationships. More and more, this fragile web is expanding across national frontiers - through flows of trade, capital, technology, information, ideas, and people. More and more, global stability will rest on the ease and security with which economic activity can move across borders to the benefit of industrial and developing economies alike.
John Jackson has described the multilateral trading system as a "constitution" for the world economy. This constitution has always been expected to play two roles: To help move the international economy consistently in the direction of freer trade. And to provide a coherent and non-discriminatory set of rules, resting on the twin pillars of National Treatment and MFN, to manage the interaction among distinct and often widely different national economies and systems. It is this astute blend of principle and pragmatism that gives the multilateral trading system its strength. These strengths will be even more relevant to the emerging global age - as technology and economics continue to knit together very different countries, with very different background, at very different levels of development.
The central governance challenge of our new global age is perhaps this: whereas governments answer mainly to national constituencies, increasingly the economic system must answer to global needs. The experience of the WTO, and the way it works through binding commitments reached by consensus, gives us some guidance as to how these systemic gaps might be bridged. Building upon this experience - and expanding it to other policy areas which now transcend borders - will of course not be easy. Yet if Asia's current turmoil is any indication of the risks of inaction, then the challenge of building a more stable international system is clearly well worth the effort.
Current problems notwithstanding, I remain optimistic about the future of the global economy. I am convinced that there is a growing understanding of the importance of openness - especially in this new knowledge-driven economy - and a strengthening consensus that open trade offers the best available path to growth and modernization. Events in South East Asia are of such immediate concern to the world precisely because of the remarkable economic development of the region, a path on which other regions - including Africa - are now launched. While no one should underestimate the challenges posed by globalization, at the same time no one has yet found a rational alternative.
I believe we are also coming to recognize the realities of interdependence. In 1950, only 7 per cent of world output was trade related; today the figure is 23 per cent, and the OECD predicts it could approach 50 per cent by 2020. And these figures cannot capture what is perhaps the most powerful force for integration in the new world economy - the borderless flows of knowledge, information and ideas. This level of global interdependence does not make protectionism impossible. But it has transformed the world economy in ways that makes turning inwards - retreating behind protective walls - infinitely more difficult and immeasurably more costly.
Lastly, we have taken important steps towards building a post-Cold War international system, where the WTO is a key element. Over the past twelve months alone, we have launched an important initiative to integrate the Least-Developed Countries into the mainstream of the world trading system. We have reached an historic pact on telecommunications representing 95 per cent of the global market. We have agreed to remove tariffs on information technology products, one of the fastest growing sectors of the world economy. And we have reached an equally sweeping agreement to liberalize global financial services, bringing trade in banking, insurance, securities, and financial information in the realm of multilateral rules for the first time. Taken together, these achievements amount to the equivalent of a major trade Round. In the face of economic turbulence and uncertainty, our members have shown the vision and courage to pursue policies of liberalization - policies which are essential to global stability, growth and development.
I began by observing that this year marks the 50th anniversary of the trading system. I hope that this will be an occasion for political leaders to come to Geneva and reflect together not only on the system's achievements but also on its future directions and its place in the international architecture. Looking at the multilateral trading system at fifty, it is clear is that we have not reached the end of a process - rather we stand at the very beginning of a whole new phase of internationalism. We are all of us living through a time of deep and rapid transition towards a very different world. No doubt there will continue to be periods of instability and turmoil. No doubt we will continue to feel uncertainty and apprehension - in both advanced and developing countries alike.
This year, at the fiftieth anniversary celebration, we have an occasion to send a political message about the reality of global transition, but also about the unprecedented opportunities this offers. An opportunity to reaffirm our political will to move towards a better system of global governance - for developed and developing countries alike. And an opportunity to be as creative in shaping the institutions of an increasingly borderless economy as our forefathers were a half a century ago in building the postwar international system. The great promise of the new global age demands nothing less.