The road ahead: International trade policy in the Era of the WTO
Address to the fourth Sylvia Ostry Lecture in Ottawa, Canada.
It gives me great pleasure, therefore, to deliver the Fourth Annual Lecture of the Sylvia Ostry Foundation. Before continuing, however, I would just like to say one thing to Sylvia, whom I am proud to count as a long-standing friend: 'Sylvia, please go on doing what you do so well. We greatly value your insights, your capacity to interpret economic trends and events, and your eye for sound policy prescription. We need you now more than ever'
The Global Imperative
It must be true that practically every generation in history has lived through change - be it social, economic or political. And no doubt change has been viewed in every generation with a blend of apprehension and anticipation - apprehension at the discomfort it might represent, and anticipation at the opportunities it can offer. Some periods are more turbulent than others, but I wonder how many generations in years gone by have had to contend with the extraordinarily rapid change that characterizes our times.
What kind of change am I talking about, and what is driving it? The change I refer to is the dramatic internationalization, or globalization, of economic activity over the last two or three decades, and the profound political and social consequences that flow from this. A powerful confluence of forces drives globalization. Some of them no doubt reflect government policies, but more fundamentally, these are forces with a life of their own - forces unleashed by technological change, especially in the fields of transport and communications.
In economic terms, globalization means that production and trade have become inexorably intertwined. Production processes are spread across the globe. Producers must invest to trade and trade to invest. Most products entering the market today are either traded, or heavily reliant on traded components for their production. The fact that trade plays a greater role in economic activity than it ever has before is easily discernible from statistics - trade flows have multiplied fifteen-fold in the last four decades, while production has increased six-fold. At the same time, dramatic increases have been registered in flows of foreign direct investment - in the ten years to 1993, investment flows worldwide quadrupled, to almost 200 billion dollars per annum. More and more jobs rely on trade, on the side of both imports and exports. All this has taken place against steadily rising living standards in many, but not all, countries. The fact that the benefits of globalization are yet to be globally enjoyed presents a policy challenge to which I shall return. However, no-one should underestimate the extent to which global economic integration has helped, and is helping, to reduce poverty and marginalization. In the next few years two billion people in developing and transition economies are expected to enter the global marketplace, reinforcing the trends which have put a dozen or more developing countries among the world's most dynamic economies.
In political terms, globalization means that governments must learn to cooperate in more areas than in the past. Some of the distinctions we used to make between international policy and domestic policy look increasingly facile and irrelevant. Tensions naturally arise as governments are perceived as having an ever more intrusive interest in each others' policies, and these tensions must be managed with deftness and political agility. As the domain of international rule-making and policy coordination expands, and the notion of "domestic" policy assumes a narrower focus, adequate care must be taken to safeguard diversity and preserve democracy. At the same time, defensive arguments based on sovereignty must be recognized for the illusion that they are. The true expression of sovereignty in today's world is the capacity of democratically elected governments to articulate the interests of their constituents through negotiations and international commitments.
In social terms, managing globalization is also a major challenge. It is disingenuous to pretend that market-opening, continuing international economic integration, and trade liberalization will always be painless. Some people may well be displaced through the resource allocation shifts that occur as a result of these processes. But we should be clear about the whole picture. The efficiency gains from specialization through trade stimulate economic activity and create jobs, more than making up for what may be lost through job displacement. Managing this transition, and dealing with the distributional consequences of change is a fundamental responsibility of governments, but definitely not one that will be met by shying away from the world marketplace.
Globalization will not go away. Policy-makers could not stop the process, even if they wanted to. It is not something which is optional, but a part of our normal everyday life in countless ways. The only real question is whether or not we accompany its advance with domestic policies which will help us adapt to the reality of change without an unbearable social cost.
Internationally, the choice is whether this inevitable process will take place within a system based on agreed rules or simply on power. In the post-war period we have generally tried to follow the first alternative. To abandon it now would change the economic - and possibly political - history of the world in a dangerous way for all its people.
The WTO's first 18 months: highlights and shadows
Before turning to what I see as some of the major issues we need to address in the coming months and years, I would like to look briefly with you at the WTO's first year and a half. It is a picture of light and shadow, of commitments implemented and others which remain still unfinished business.
The highlights include:
* implementation of Uruguay Round agreements: it has been a good start, but there is no room for complacency. The full and prompt implementation of commitments is essential for the credibility of the WTO and for building confidence on which to explore the trade agenda that lies ahead.
* dispute settlement: we now have a more effective and credible mechanism for the resolution of trade disputes. So far, 38 complaints have been brought to the WTO; and a significant number of cases have been settled "out of court" - that is, resolved at the consultation stage which is an essential part of the procedure. This is strong testimony to the deterrent effect of the system.
* establishment of the Appellate Body, whose first decision has just been handed down - a very difficult decision in view of the numerous criteria involved.
* increasing membership: the WTO now has 121 Members. The fact that 29 countries are negotiating to join (including China and Russia) shows the vitality and the attraction of the multilateral system. Individual countries may join the WTO seeking economic benefits, but the global gain will also be more stable international relations. Clearly, we are close to realizing the long-sought goal of a multilateral trading system of universal membership, based not on weakened membership requirements but on a strengthened desire on the part of governments to participate fully in the globalizing world economy.
* trade and the environment: The WTO's Committee on Trade and Environment has a wide-ranging agenda, which has been examined at some length by the Committee. This discussion has provided a good basis for further progress in this important but often controversial area, both clarifying the issues at stake and bringing formerly divergent views closer together. In its report to the Ministerial Conference in Singapore, the Committee will be in a position to better define areas for further examination and might be ready to suggest certain policy improvements to promote environmental concerns while at the same time enhancing or facilitating international trade.
The shadows appear when we recall that implementation also includes the commitment to continue negotiations in four important sectors of trade in services which were made at the end of the Uruguay Round. Now that we have at least an interim result on three of these - financial services, the movement of natural persons (those who provide services) and basic telecommunications - I would like to say something about what has been achieved - and what remains to be done.
You will remember that last July a negotiation on financial services ended with a muted or mitigated success: 29 countries agreed to improve their commitments under the GATS, but the US found the package unsatisfactory and was unable to make any offer as to future access to its financial services market. The negotiations will be resumed in 1997 and then I hope, and expect, an improved package, with the US as a full participant, will be agreed. In the negotiations on basic telecommunications, which ended on 30 April, a very interesting and worthwhile harvest of market opening offers, plus substantial progress in the area of competition and the behaviour of state monopolies, was achieved. But again it was impossible to finalize the deal, because the US considered the result unsatisfactory. The negotiators agreed to preserve the results achieved so far with the objective that they can be improved further in a brief period of renewed negotiations in January/February next year, and to maintain the date of 1 January 1998 for their entry into force. I believe this process too will be brought to a successful conclusion in 1997.
The fourth sectoral negotiation, on maritime transport, is now in progress. It too is facing difficulty, following a statement by the US that it will not make an offer, in the light of its assessment of the offers made by others. We must ensure that an acceptable result can nevertheless be reached by the end of June, but it will not be easy.
It is too early to draw up a balance sheet. But I think one preliminary conclusion, at least, can be drawn. It is not impossible for a negotiation in a single sector to produce worthwhile - even surprisingly good - results. The telecoms negotiations proved that - and in my opinion the results in financial services were also much better than might have been expected from a short negotiation in a single, highly sensitive sector.
Of course we should not underestimate the impact of missing the date of 30 April for the formal conclusion of the telecom negotiations, or of the result so far in financial services. But it would be equally wrong to overstate the case. The history of international negotiations - especially trade negotiations - is full of missed targets. If we allow every such instance to become a drama we only make it harder to go on to eventual success.
One final comment: these negotiations became classed as unfinished business because it was not possible to bring them to resolution even in the magic moment of the end of the Uruguay Round. So by definition they must be considered among the hardest cases. It is thus no wonder if they could not be settled in one further attempt - but up to now none has been an outright failure. This is all the more reason why we cannot accept a failure in the maritime sector.
The Road to Singapore
It is against this background of light and shadow that preparation is underway for the WTO's first Ministerial meeting, which will be held in Singapore in December. Certainly the Ministerial will provide a chance to take stock of what has been achieved after two years, but the concentration of political force it represents could be wasted if we do not also have more ambitious goals. Let me outline some possible areas where I think it is realistic to expect Singapore to help the multilateral system to move forward as it must.
One such area is further liberalization in goods and services trade - and through improvements in the trade rules. There is a debate on what further liberalization can really mean. Some delegations do not want to change the commitments already taken at the end of the Uruguay Round, and prefer to remain with the time-horizon of 1999 or 2000. Some others, on the contrary, suggest considering possibilities including accelerated or additional tariff reductions; undertaking further work on professional services; and working towards the harmonization of technical standards and the simplification of rules of origin. Other possibilities will no doubt emerge as we continue the preparatory discussions.
The discussions that are going on among a number of countries about liberalizing trade in information technology are a particularly encouraging development, one which should also complement and reinforce the opening-up of telecommunications services. I hope that any eventual agreement will be made on a multilateral basis, to make the most of its benefits both to the global economy and the trading system.
Ministers at Singapore will also have before them the "built-in agenda" of the WTO - the commitments which already exist to begin new negotiations in agriculture, services and other areas before the turn of the century. The "built-in agenda" also touches on some of the other subjects which various members have proposed for the WTO's work programme, such as investment and competition. I would like to say something about each of these.
As far as investment is concerned, globalization has dramatically reduced the utility of distinctions that policy makers used to maintain between different forms of market access.
In this setting, it seems to me that no rationale can be offered for not having multilateral investment rules while we have multilateral trade rules. In the Uruguay Round, the negotiation on trade-related investment measures - or TRIMS - resulted in a mandate to look at investment issues with a view to considering whether the TRIMS Agreement should be complemented with provisions on investment. At the same time, negotiations in the field of trade in services have led to substantive commitments on investment in a wide range of sectors. These commitments apply to the right of foreign investors to establish themselves, as well as to conduct business once they are established. In addition to these sector-specific undertakings, WTO Members are committed to providing m.f.n. treatment with respect to all trade in all services, except in the relatively few cases where narrow exceptions to m.f.n. have been inscribed.
Notwithstanding the significance of what we have already achieved in services, I believe we need a more horizontal and all-encompassing approach to investment in the WTO, particularly as nothing has been done so far in the sphere of goods. Multilateral rules in this area should build on the WTO principles of m.f.n. and national treatment, thereby contributing to a policy environment that encourages and safeguards foreign investment, especially in the great majority of developing and least-developed countries who are at present largely outside the main flows of foreign direct investment. The OECD, as well as some regional trade agreements, have already developed, or are in the process of developing international investment rules. But I believe governments will increasingly recognize the need for work on this issue in a more global setting.
There is a risk, in the absence of a strong multilateral framework, of an accumulation of potentially inconsistent and even discriminatory regimes in regard to foreign investment. The question is how to ensure a truly multilateral dimension to this question that takes account not only of the role of investment within the international trading system, but also of the common interest that both industrial and developing countries have in ensuring a favourable investment climate. It is hard to imagine that an answer can be found outside the WTO. There are currently more than 900 bilateral investment treaties. And if all countries in the world were to participate in such agreements, we would need around 20,000 bilateral treaties. This fact provides a clear answer to those who preach the superiority of a bilateral approach. I cannot imagine that business would welcome such a bewildering variety of requirements. It is clearly preferable to have just one set, covering all countries, developed and developing alike, under the same rules and disciplines and with just one enforcement procedure.
The TRIMs Agreement also contains a mandate to consider the need for rules on competition policy. The GATT and WTO have sought to enhance competition for the last 50 years through promoting trade liberalization. More explicitly, competition questions were taken up in the Havana Charter, and came onto the Uruguay Round agenda through the negotiations on basic telecommunications. I believe it is important for us to examine this question thoroughly in the WTO setting. As government-mandated and supported policies have become less trade-restricting, attention focuses increasingly on market barriers maintained by enterprises - that is, barriers that are intrinsic to the structure of markets and independent of any government policy.
We need to determine, firstly, how pervasive and problematic such barriers may be. Secondly, we must ask whether these should be dealt with nationally, or whether we need international disciplines to ensure the proper functioning of markets. And if we do need an international approach, what should it be? Should we create a right of multilateral action that commits government to implementing their national competition policies, or should we go further and write substantive competition rules? These are interesting and important questions that we must address. We can certainly learn something from the negotiations on basic telecommunications, where governments clearly felt the need to spell out and commit themselves to specific, multilateral pro-competitive principles.
Whether or not we recognize it, competition is making itself part of our agenda. It is just a question of when and how this becomes explicit.
Beyond the built-in agenda, issues which have been proposed by some countries include trade and labour standards (the most potentially controversial of all these subjects). No-one can deny the importance of core labour standards that have been internationally agreed. But the issue is now about the extent of the relationship with trade and the best forum for discussion. This is why this issue remains potentially divisive. There is a shared responsibility to avoid a dramatization of it at the Ministerial Conference. If this were to happen, it is certain that the people whose interests we all want to protect would not be in any better position.
Proposals also include the problem of corruption in international trade, which has been linked with the need for further work on government procurement; the question of regionalism; and the adaptation of the trade rules to the global economy. The issue of the effects of commodity prices, exchange rates and debt on developing-country trade earnings has been raised orally.
These suggestions will need to be approached with objectivity and care, in line with the principle of consensus which has always guided the multilateral system. Developing a consensus in these areas will be a serious challenge - but the multilateral trading system has successfully met such challenges in the past (for example when services and environment were brought into the picture).
One of the most notable changes on the world trading scene in the last decade or so has been the death of the North-South divide - an event as significant as the demolition of the Berlin Wall. This change is attributable in large measure to the embrace of market-opening and liberalization policies in countries at all levels of development. A priority for Singapore is to sustain this new unity.
If we are to move forward to develop a trade agenda for the 21st century, it is essential to have a solid base of confidence among all the members of the trading system that it is working in their interests.
The Challenges Ahead
Shaping the trading system of the new century means above all responding to four fundamental challenges.
The first is to do a better job than we are doing at present in conveying to people everywhere the message that open trade and the multilateral system work in their interest. We have to recognize that the rapid advance of global integration has contributed to a climate of uncertainty in many societies, a situation which is ripe for exploitation by those who peddle the quack remedies of protectionism and xenophobia. What is urgently needed is for governments, the private sector and academics to work together to restate clearly and persuasively the truth that the past 50 years of our history makes so evident - that open trade within the rules of the multilateral system is the key to growth, and hence to all our hopes of a more prosperous and stable existence.
The second challenge is to respect and strengthen the fundamental contract that now unites countries at all levels of economic development. The industrialized world has to keep open its markets and improve their openness in the years ahead. On their side, the developing countries have to continue with their liberalizing reforms and increase their integration into the global system. And together, both industrialized and developing countries have to work to improve the situation of the least-developed.
I believe that raising living standards in these countries is one of the most urgent tasks before us. It has been estimated that while incomes per head are expected to rise by 80 per cent on average in East Asia between now and the year 2005, the comparable figure for Sub-Saharan Africa is only 8 per cent. How can we help to narrow this widening gap and to promote development in the poorest countries?
At the very least, we must ensure that all markets are completely and securely open to the goods and services produced by these countries. A commitment to bind all tariffs that they face at zero and eliminate all remaining quantitative restrictions on their exports by a firm date would be one useful initiative. There are many other ways in which we could assist, such as improving their access to investment (another reason for taking this issue up in the WTO), encouraging regional initiatives among least-developed countries, and applying more flexible rules of origin to their products.
Equally important is building up their institutional and human capacity so that they are fully able to take advantage of improved opportunities. This calls for some fresh approaches, both in the cooperation among agencies providing technical assistance and in the means by which they do so.
The WTO has made a start in this direction, by developing an integrated technical cooperation plan with UNCTAD and the International Trade Centre, which we jointly sponsor. There is clearly more to be done in promoting such cooperation. We must also work closely together with all other relevant agencies to exploit to the full the opportunities new communications technology offers to extend the scope and the lasting impact of our capacity-building efforts.
Lastly, there is a need to pay serious attention to the situation of net food-importing developing countries who - for a variety of reasons - are facing rising prices for a number of agricultural commodities.
The third challenge is universality - the need to bring China, Russia and all the other countries still outside into the WTO system. We can only reap the full benefit of a rule-based global trading system when this is achieved. No-one is under any illusion that the process is an easy one. The accession of large transition economies, in particular, raises significant questions of substance whose answers need to strike an acceptable balance among the aspirations of the candidate countries, the interests of existing members and the need to safeguard the integrity of the system and its rules. There is no quick political fix to these issues. Aspiring and existing members alike share in the responsibility of ensuring that the accession negotiations proceed as rapidly as possible but in a way which strengthens the system as a whole.
The fourth challenge is to make sense of the relationship between regionalism and the multilateral trading system. It is less than fifteen years since the dramatic explosion in regional agreements occurred, making such arrangements the prominent feature of international economic relations that they are today. In 1980, relatively few customs unions and free trade areas existed, but now nearly all WTO Members belong to one or more regional trading arrangement. Apart from the European Community, what arrangements there were fifteen years ago tended to be limited in scope and to focus primarily, if not exclusively, on preferential tariffs. The new wave of regional trading arrangements can be said, like so many things, to have started in North America.
Indeed, Canada played a pivotal and initiating role in the establishment of a free trade agreement in North America, which was soon to be extended as NAFTA. And now, there are plans for a hemispheric free trade agreement, which would also build on existing arrangements in South America, such as MERCOSUR, the ANDEAN Pact and the Central American Common Market. In Asia, we see ASEAN recently expanding its geographical coverage and deepening the integration process. The South Asian countries are also developing a regional arrangement. And, of course, we have APEC, which, while not as yet involving trade preferences among its members, embodies an ambitious vision of free trade among countries in Asia and also across the Pacific Basin to North and South America. In Africa, several regional arrangements are being developed. In Europe, the European Union has built up a complex hierarchy of preferential arrangements involving all its immediate neighbours, and has wider schemes in prospect. The idea of a Trans-Atlantic free trade agreement has also attracted considerable attention recently.
The regional liberalizing impulse is not in itself cause for alarm among the upholders of the multilateral system. Regional initiatives can contribute significantly to the development of multilateral rules and commitments, and in regions such as Sub-Saharan Africa they may be an essential starting-point for integration of least-developed countries into the wider global economy. At the most basic level the real split is between liberalization, at whatever level, and protectionism. Viewed from this perspective regional and multilateral initiatives should be on the same side, mutually supportive and reinforcing.
However the sheer size and ambition of recent regional initiatives means we can no longer take this complementarity for granted, if indeed we ever could. We need a clear statement of principles, backed up by firm commitments, to ensure that regional schemes do not act as a centrifugal force, pulling the multilateral system apart.
The answer is to be found, I suggest, in the principle which some of the newer regional groupings have enunciated - Open Regionalism.
Of course, we need to be clear about what open regionalism means. Among the different possibilities, I see two basic alternatives.
The first is to ensure that any preferential area under consideration will be consistent with the legal requirements of the multilateral system. The existing provisions mean that such areas could at the same time be legally compatible with the WTO's rules and preferential in their nature, which means they can be an exception to the m.f.n. clause which is the basic principle of the multilateral system. The possibility of making such a legal exception to the m.f.n. principle within the rules was conceived in a completely different time and situation. Today, with the proliferation of regional groupings, the exception could become the rule, and this would risk changing completely the nature of the system.
The second interpretation of open regionalism is the one I hear from a number of governments including some members of APEC or MERCOSUR. In this scenario, the gradual elimination of internal barriers to trade within a regional grouping will be implemented at more or less the same rate and on the same timetable as the lowering of barriers towards non-members. This would mean that regional liberalization would in practice as well as in law be generally consistent with the m.f.n. principle.
The choice between these alternatives is a critical one; they point to very different outcomes. In the first case, the point at which we would arrive in no more than 20 to 25 years would be a division of the trading world into two or three intercontinental preferential areas, each with its own rules and with free trade inside the area, but with external barriers still existing among the blocs.
Is this the sort of world any of us would want?
I leave you to imagine the consequences of this vision in terms of world stability and security; where, for example, would China and Russia be in such a world?
The second alternative, on the other hand, points towards the gradual convergence of regionalisms and multilateralism on the basis of shared aims and principles, first and foremost respect of the m.f.n. principle. At the end, we would have one free global market with rules and disciplines internationally agreed and applied to all, with the capacity to invoke the respect of the rights and obligations to which all had freely subscribed. In such a world there could and must be a place for China, Russia and all the other candidates to the WTO.
Given the reality of regionalism, and the necessity to maintain the central importance of the multilateral system, the question comes down to how best to ensure this gradual convergence takes place.
Should it, for example, be left to concerted unilateral effort or be the subject of a multilateral negotiation, in the same way as past enlargements of the European Community helped spark previous GATT Rounds?
Should we attempt to set a time-limit within which regional liberalization of market access would be followed either by its extension on an m.f.n. basis or the start of multilateral negotiations?
Where regional groupings establish new trade rules, should we seek to agree on a mechanism and a time-frame under which they would be brought into full conformity with the multilateral rules where they exist? In cases where there are as yet no equivalent WTO rules we will need to consider a timetable for negotiating their multilateral application.
Maintaining the primacy of the WTO's rules and dispute settlement system is vital, not as an end in itself, but in order to avoid a bedlam of competing and contradictory jurisdictions. As I mentioned earlier, the current evolution of rules on investment gives some early warning of what this could be like.
If we do not uphold the primacy of the multilateral rules, we risk seeing a form of Gresham's Law operating in dispute settlement, with weaker rules driving out stronger as governments choose the jurisdiction which most favours their case.
Obviously the mechanisms by which we assure the convergence of regional and multilateral systems needs a great deal of further thought. I am hopeful that the new WTO Committee on Regional Trading Agreements, under the very able Chairmanship of Canada's Ambassador to the WTO, John Weekes, will make an important contribution to this process. For now, the important point is to be clear about the necessity of this convergence.
It comes down to a question of the sort of world we want to live in. Do we want a world where the advance of global economic integration is matched by a global framework of agreed trade rules which ensure openness and foster growth with stability? Or do we want a power-based system where competing blocs attempt to regionalize the global economy with all the economic and political stresses that would entail?
I make no apology for putting the choice so starkly in terms of alternative visions. If the multilateral system is not animated by a positive and challenging vision of its future how can it hope to maintain dynamism and direction? Regional schemes have more often than not a political vision guiding the trade initiatives and in many cases a clear timetable as well. Why should the multilateral system be any less ambitious?
The challenges I have outlined are contributing to a growing awareness that trade is not just a technical question, but a matter of high political importance. In the WTO, the world now has a permanent trade policy forum as well as a more effective means of negotiating commitments and making and enforcing trade rules. Trade and trade policy have been put back in the front row of international concerns, where they were intended to be by the architects of the post-war international institutions. With the establishment of the WTO, and the conclusion - which is expected very soon - of comprehensive agreements for cooperation at every level with the World Bank and the IMF, the matrix of trade and finance and development is not only completed but updated to contribute to global prosperity and stability in the new century. This improved institutional cooperation is a major step towards fulfilling the mandate given to the WTO by governments to work for improved coherence in international economic policy-making.
The WTO has been invited for the first time to participate, with the Bank, the Fund and the United Nations, in the G7 Summit of leaders of the major industrialized economies, which will be held this year in Lyon at the end of next month. This recognition of the importance of the multilateral system is very welcome not only for itself but also because of the opportunity it gives to reinforce the trade dimension in growth and development for countries at all economic levels. Many of the themes that will be before the G7 leaders will follow on from the Summit which Canada hosted in Halifax last year. The fact of globalization will be the backdrop to the Summit's deliberations, as it is to every serious economic discussion. It is my hope that the WTO, whose business is with the lifeblood of global integration - trade - can help bring concrete and practical answers to the questions that surround this process, especially the extension of its benefits to those who are currently on the economic margins.
At the end of next year, the multilateral trading system will be 50 years old. I would like to see this anniversary properly observed; not just as a recognition of what the system has meant for growth and stability in the world since 1947, but as a reaffirmation of its value for the present and the future. Precisely how and where such a commemoration should take place is a question for further discussion, possibly by Ministers at the Singapore meeting this December. But I believe we should not waste such an opportunity to renew at a high political level our commitment to the system which is the foundation of our present prosperity and our future prospects.
Someone observed to me recently that Canadians have multilateralism in their DNA, and it is certainly true that Canada's contribution to the multilateral principle, whether in economic or political affairs, has been an outstanding one. The most recent expression of this was of course Canada's lead in advocating the establishment of the WTO at the end of the Uruguay Round. I know that NAFTA and other regional initiatives have assumed an increased importance in the Canadian policy landscape as in your economic life; but I am confident that Canada will take the lead in demonstrating that there is no contradiction between the active development of regional opportunities and a continuing firm commitment to the multilateral principle. In this, as in so many other ways, Sylvia Ostry's influence will continue to be felt.