29 september 1997
Charting the trade routes of the future: towards a borderless economy
Address to the International Industrial Conference (IIC), San Francisco, United States
This interconnected economy is transforming the world in more fundamental ways than is implied by the globalization of goods and investment alone. An information technology revolution - whose roots are here in the laboratories of Silicon Valley - has greatly increased the flow of information across the planet, making knowledge a more important production factor than labour, capital, or raw materials. Its influence will shape more than productivity growth - it will shape a new relationship between advanced and developing economies, a new compact between governments and citizens, and new ties among people that transcend cultures, classes, and nationalities.
No one can predict with certainty where these deep structural changes will lead us. What is clear is that this new information-based economy, free of many of the limitations of distance, time and resources, has the potential to add a new dimension to economic integration - a "borderless" dimension that could dramatically accelerate the growth and development dynamic in much of the world. What is also clear is that many of our old policy tools will no longer apply in this borderless economy - so that new instruments of international economic cooperation which transcend borders, like the WTO, will become all the more important. It is because we are entering a new world and a new kind of economy - with great benefits as well as risks - that we are "Inventing the Future".
Broadly speaking, the world economy has passed through two phases of development in the last fifty years, and is now entering a third, each of which is moving us towards a more integrated and - in some sectors - even borderless global economy:
The International Economy. The three postwar decades can perhaps best be defined as an international phase in the world economy - by that I mean, an era of growing trade among a set of interlinked but still predominantly national economies. In 1950 the vast bulk of economic activity still took place within the borders of the nation state - in fact, the ratio of trade to global output was only 7 per cent. International trade was mostly limited to raw materials or finished products, and investment was mainly limited to establishing foreign affiliates - or "branch-plants" - in otherwise protected national economies.
The Globalized Economy. Beginning in the 1970s and accelerating in the 1980s, the world economy entered a second phase of development - what is now typically referred to as a phase of "globalization". Rapid advances in information technologies and communications, together with the systematic reduction of global trade barriers, have allowed global firms to break up the production process and to locate its various components in different markets around the world. The surge in foreign investment flows represents the most unique feature of the globalization phase. Trade is no longer the sole or even the main vehicle for delivering products and services across borders; investment has become an even more powerful force for integration, as transnational corporations extend their global reach by establishing a direct presence in foreign markets. The cumulative assets of foreign investment have trebled since 1987 - to over US$ 3 trillion - while the annual sales which these assets generate have overtaken the value of world trade.
But trade is also growing as more and more crossborder transactions take place within companies or their affiliates, and as more and more trade encompasses all phases of the production process - from components and services, to design and engineering. Intrafirm trade within transnational corporations or related partners now accounts for about two-thirds of world trade. And trade as a share of global output has more than tripled since 1950 - from 7 to over 22 per cent. Businesses now trade to invest and invest to trade - to the point where both activities are increasingly part of a single strategy to deliver products across borders.
The Borderless Economy. Now, as we approach the end of the 1990s, there are signs that a new dimension is being added to the integration process - one where digital technologies and communications networks are creating the possibility of an increasingly borderless economy in key sectors. Over the last decade or so, the cost of telecommunications and computing has fallen dramatically, just as speed and capacity have risen. A transatlantic telephone call now costs just one and a half per cent of what it cost sixty years ago. And the World Bank predicts that by 2010 the cost will have fallen by another two-thirds - to about 3 cents a minute - making transatlantic telecommunications almost a free commodity. The cost of computing power has also fallen dramatically - by 100 per cent since 1960. A single transistor, which sold for US$ 70 in the mid-1960s, can now be bought for less than a millionth of a cent. This has in turn made computing power accessible to millions of ordinary people. In 1995 some 50 million personal computers were sold worldwide against 35 million cars.
This increasingly borderless, information-based economy is perhaps best symbolized by the Internet. At once global and local, a communications tool and a knowledge resource, the Internet has been steadily doubling in size each year since its creation a quarter of a century ago. Already some 55 million people worldwide have connections to the Internet; by 2000 this number could grow to 550 million, approaching 10 per cent of the world's population. Nor is the Internet the only channel available. Other technologies like computerized financial markets, E-mail, telephone banking, and electronic data interchange are all moving us towards a more borderless, information-driven economy.
Just as the globalization of trade and investment has changed the face of manufacturing since the 1980s, the advent of a borderless economy could transform services or "ideas-based" industries in equally dramatic ways - industries that already account for more than 70 per cent of GDP in many OECD countries, and up to 50 per cent in some developing countries. It was once assumed that most services were inherently non-tradable since the "product" was people - either their brawn or their brainpower - and exporting required a physical presence in foreign markets. For many services, this conventional wisdom has been turned on its head with the invention of the micro-chip.
Now any service which can be digitized and transmitted electronically can be produced and delivered almost anywhere in the world in a matter of seconds. Hundreds of thousands of consumers are already "electronic shopping" for books, on-line newspapers, videos and even cars while sitting at home in front of their computers. But the more revolutionary impact will be on intra-firm or business-to-business trade. Computer software, medical information, educational programmes, data processing, legal and architectural services - all of these industries could become part of an increasingly borderless and competitive environment, where every country, every business operates in a "virtual" world market.
I just want to mention several key features that will define this new borderless economy: One is its increasing indifference to geography, time and borders. Trade used to be shaped by the realities of geography as one element in a nation's comparative advantage. Now, in important sectors, trade will be shaped by the absence of geography. This technological conquest of time and space will have far-reaching economic effects. Transaction costs for consumers and businesses will fall rapidly as many steps that intervene between buyer and seller - distribution, sales, retailing - are compressed. Transaction times will fall even faster, adding a whole new dimension to "just-in-time" production processes. Perhaps most significant of all will be the falling barriers and costs to market entry - or starting a new business- allowing a far greater number of suppliers to enter a market. Not only will consumers benefit from this increased competition, but small and medium-sized enterprises - as well as large multinational corporations - will now be full participants in the global marketplace.
Borders will be the other potential casualty of electronic trade. The electronic exchange of software, services or information takes place in the closest thing yet to a single, world market - one defined, not by products, paperflows and border checks, but by electronic bytes and laser beams. Several years ago Robert Reich asked the question "Who is Us?" in an age of global integration. In other words, will economic nationality matter any more in a world where the web of global value added can't be unravelled?
Reich's question is even more relevant in a digital economy, one which operates in cyberspace and has no physical reality, let alone nationality. What, for example, is the nationality of a software package upgraded in Delhi for a corporation in Seattle and downloaded over the Internet in Beijing? More and more of these kinds of questions will arise in the time ahead, posing significant policy challenges for national governments - from the relevance of rules of origin, to the enforcement of regulations and standards, to the collection of taxes from retailers and consumers operating in cyberspace.
A second feature is that information is increasingly the critical resource and a main driver of the integration process. Information is now key to the global economy. Just as surging trade and investment first fuelled globalization in the 1980s, now it is access to - and competition for - technology which is shaping the borderless economy. This diffusion of technology is of course not a new process - the story of human progress down the ages is in large part the story of the development and widespread application of technology. What's new is the way an expanding network of computers, telephones, and fax machines is accelerating the process, and widening its scope. This information-driven economy differs from the traditional economy of land, labour, and capital in fundamental ways. It is not bound to any one region or country. It is mobile. And it can be developed anywhere - erasing many of the distinctions that defined economic potential in the past.
This knowledge-driven economy is not replacing other economic activities - factories and farming are not going to disappear, software is not going to substitute for the food we eat or the cars we drive. But technology is changing the way we produce things - sometimes in quite dramatic ways. Take even the most traditional of economic activities, farming, which has been with us since the dawn of time. Mechanization, biotechnology, transportation, and information technologies are utterly transforming agricultural production and distribution to the point where modern agriculture is sometimes closer to a service industry than it is to traditional farming. And much the same transformation is underway in mining, forestry, transportation, and other industries.
One result is a blurring of many of the old distinctions between manufacturing and services, products and processes, so-called "high-tech" economies and more traditional industrial or resource economies. The most important result, however, is more growth and more jobs. In the United States, for instance, high-tech jobs accounted for 20 to 25 per cent of the growth in real wages and incomes in 1996. On the output side, high-tech's contribution to GDP totalled US$ 420 billion in 1996, up 15 per cent from 1995.
This leads to a third characteristic: the borderless economy's potential to equalize relations between countries and regions. Bill Gates has predicted a coming era of "friction free capitalism" - the idea that free and equal access to information will move us closer than ever before to a perfect market. I would add that it also has the potential to introduce a new dimension to equality of opportunity. At the level of the individual, old divisions between capitalists and workers are blurring as more and more ordinary people increasingly own the new "means of production" - that is, the education, skills and know-how needed to run an advanced, information-driven economy. And at the global level, old divisions between North and South are being superseded by new distinctions - between those countries embracing technology and globalization, and those that remain behind; or, as Jean-Francois Rischard of the World Bank suggests, between "fast and slow countries, learning and static countries, plugged-in and left out countries, 100 per cent reliable countries and those that are not".
An increasingly "wired" global economy has the potential to further reduce the gap between those regions and countries which, in the past, had access to technology and information, and the many others which didn't. Access to telecommunications is expanding rapidly - to one billion, or almost a fifth of humanity, by the turn of the century - creating the real possibility of a "telephone in every village". The dozen or so global satellite schemes now under construction will virtually eliminate bandwidth constraints and reduce connections costs to a few dollars per station in a decade. Many developing countries will be able to "leap frog" entire stages of development into the newest generation of wireless telephony - avoiding the huge costs involved in building an older, copper-wire based infrastructure. Today more than 80 per cent of the world's population can't make a telephone call; soon they will have access, not just to leading-edge communications, but to the educational programmes, medical services, and technical information which flows through these networks.
These are not predictions for some far-off future - such changes are already underway now, today. Already we are witnessing a significant shift in economic power towards the South and the East - a shift that will have as dramatic an impact on world politics as the collapse of the Berlin Wall. The World Bank projects that developing countries will grow by 5 to 6 per cent a year between now and 2020. This means that the developing countries will almost double their share of world output, from around 16 per cent in 1992, to 30 per cent in 2020. What these numbers demonstrate, among other things, is the accelerating pace of development. A level of industrialization that took 150 years to accomplish in Great Britain, or 100 years in United States, has been achieved by the Asian tigers in less than a generation - the most rapid development process in economic history. These distances continue to shrink. Ten developing countries, accounting for almost 30 per cent of the world's population - or over 1.5 billion people - more than doubled their average per capita income levels between 1980 and 1995! With the spread of information technologies this process of industrialization is poised to accelerate and broaden even more.
This remarkable record of economic and technological progress is having a real impact on the everyday lives of people. The UNDP reminds us that poverty has been reduced more in the last fifty years than in the last 500. Since 1960, child death rates have been almost halved. Malnutrition rates have declined by almost one third. By the end of the century, adult illiteracy will have been reduced by nearly three-fifths and about 4 to 5 billion people will have access to basic education and health care. Even more remarkable, the UNDP talks about the potential for eradicating global poverty in the early part of the next century - a utopian notion even a few decades ago, but a real possibility today.
The WTO will - and must - play a leading role in this interconnected world. There is a clear and indivisible relationship between the dynamic of technological progress in our time, and the dynamic of liberalization in the world economy - the WTO's future agenda is key to keeping this trend on track. There is also a clear link between deeper economic and technological integration, and the global rules need to manage our interdependence - rules which only the multilateral trading system can provide. This Conference Programme identifies several areas where economic change presents new opportunities but also new challenges. Let me outline some of the ways in which the WTO system is charting the path ahead:
Managing the Technology Frontier. First there is the progress that has been made in liberalizing new sectors of the world economy - helping to widen and deepen the flow of technology and information around the world. This year alone we have reached agreements to liberalize global telecommunications services and information technology products, the trade coverage of which is the equivalent of global trade in agriculture, autos and textiles combined. Taken together, we have in effect concluded a new Round by another name. But more important, we have taken an important step towards bringing the technological trade of the next century inside a rules-based system, with an enforcement capacity. This is the unique contribution of the WTO to a more predictable economic evolution.
But the "technology frontier" is advancing continuously - in turn generating new pressures for the trading system to keep pace. In a recent speech, President Clinton has called for the negotiation of a free trade zone on the Internet. This represents an important step in our efforts to debate the trade agenda for the 21st century - and to expand upon the global trend towards free trade in information. Nevertheless, just because the Internet offers a bright and beneficial new frontier where business can be done across a seamless global web of electronic connections, we should not think that governments have no legitimate concerns and responsibilities in relation to it. Governments cannot simply abdicate in this area. Among the most important policy issues facing governments in relation to electronic commerce are privacy questions, the protection of intellectual policy, tax policy, and regulation for public policy reasons. But a careful line will have to be drawn between legitimate intervention and distortions motivated by protectionism. The implications of electronic commerce for governmental responsibilities in these areas will then need to be considered carefully.
In the WTO, our immediate priority this year is a successful conclusion in December to the global financial services negotiations. Financial liberalization and the creation of a strong and stable global financial system are really two sides of the same coin. Liberalization invites investment, which means greater access to capital, to know-how, and to an interactive global financial network. Commitments to liberalize financial services under the GATS will not in any way compromise the ability of WTO members to pursue sound macroeconomic and regulatory policies. On the contrary, commitments to liberalize require the adoption of sound macroeconomic and regulatory policies - the sine qua non of a healthy financial sector. Clearly we can't do everything at once. And many countries are only beginning their process of domestic reform. But trade liberalization, with forward commitments, even if in certain cases these commitments will be phased in, can help tie in a broader process of reform, and give that process a credibility that is essential to success and stability.
There is another point to bear in mind as we begin to define a liberalizing agenda for the next century. While recognizing the great potential for borderless trade, we must not forget the many areas of international trade where borders are all too real - like agriculture, textiles, or industrial goods - and the many countries which depend on more open trade in these sectors for their economic well-being. Unless we can move forward in a way which addresses long-established concerns as well as new ones, developing countries as well as developed, we risk a fragmentation of the global economy, and a further widening the gap between countries "plugged-in" to globalization and those left on the margins.
Integrating Emerging Markets - Opportunities and Challenges. The second key element in the WTO's agenda is expanding the membership. The borderless economy is not just deepening our relations - it is broadening them as well. With intensifying ties to fast-emerging countries in Asia, Latin America and now Africa come enormous opportunities, but also enormous challenges of integration, adjustment, and stability. Your conference document rightly argues that the future growth of China, India, or Mercosur will hinge on "maintaining economic and political stability and continuing the reform process". All of these countries face major challenges of economic and social adjustment. China's modernization alone will require imports of equipment and technology of about US$100 billion annually, and infrastructure expenditures during the latter half of this decade could amount to about US$250 billion. For China and for the other 27 applicants, WTO accession is a key element in the domestic reform process - providing security of access to world markets, binding dispute settlement, and a seat at the table as we continue writing the trade rules of the 21st century.
Helping Those on the Margins of the Global Economy. There is another important dimension to universality. The need to ensure that everyone is included in the new information-driven economy - not only to prevent the poorest from becoming more marginalized, but also to help all of us to benefit from the opportunities which technological and economic integration presents. Today's shift from industrial production to knowledge production requires newer - and far more sophisticated - skills than last century's migration from the farm to the shop floor. So governments also need to find new approaches to the development challenge which extend beyond investments in industry and infrastructure, to investments in people.
Next month the WTO is holding a High Level Meeting with UNCTAD, the ITC, and the major multilateral financial institutions to develop a new integrated approach to the problem of marginalization of the least-developed countries. One objective - which the WTO is well on the way to realizing - is to use new technologies much more extensively to extend the reach and effectiveness of technical assistance and information. The broader objective is to integrate our policies and harness our efforts - linking technical assistance with capacity building and market access to design a mutually reinforcing strategy for development.
There is a window of opportunity, as we approach the 50th anniversary of the multilateral system, to be as creative in building this increasingly borderless, global economy as our forefathers were a half a century ago in building the postwar international system. "Inventing the future" really demands nothing less. It would be wrong to undervalue the many competitive and structural problems of the present world economy: They need to be addressed in a cooperative way by national governments and by international institutions.
But it would be equally wrong to ignore that, if present trends continue, we have the real potential to double world trade within a decade - and to double the world's output and resources within two, with the growth rate of developing countries double that of advanced countries. We have the potential to create equality of access to education and information - especially for the developing world - which will in turn create equality of opportunity. And behind all this, we have the potential to overcome the barriers, not just of geography, but also of politics, wealth and knowledge that for too long have separated our different worlds. Never before has there been such a coincidence of major opportunities, where the market economy, in all its variations, dominates the progress of the entire global economy. Never before has a generation held greater power to create a better world.
But with great power to shape the future, also comes great responsibility. We lack a clear message about the great opportunities of our changing time -while our prevailing message is too narrowly focused on the challenges. We have to reverse this trend. I hope that the High-Level celebration of the 50th anniversary of the multilateral trading system in Geneva next May will give us this opportunity. The alternative to all of this is a world divided. Not international cooperation based on rules, but international anarchy based on power. Not inventing the future, but returning to the past, with its conflicts, its divisions, and its tragedies. The path we choose will depend on our vision, but also our wisdom in the time ahead.
Our moment in history is not unlike the moment seized by Columbus half a millennium ago. Just as the conquest of the oceans in the 17th century began a period of rapid development in Europe and the New World, I believe our latest conquest of geography could launch an equally dynamic period of development for the world. But to discover this new world, we will have to find new ways to harness our collective energies - as visionary and as adventurous as those intrepid explorers who opened up the trade routes of the past.