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22 September 1998

University of trieste MIB – school of management

Address by Ambassador Renato Ruggiero Director-General of the World Trade Organization, Trieste

I am particularly pleased to be here with you today because I consider that schools of management like yours are a true example of the direction which higher education should be taking in our country if our youth is to compete with the youth of other countries of Europe and the world. What you have achieved in the ten years since the school was founded is more than worthy of my words of praise and encouragement for the future. And this gives me all the more reason to be grateful and proud of the honorary degree that you have kindly awarded me.

A university today is far more than just a temple of knowledge, particularly in an industrial city such as Trieste. The role that knowledge has acquired is crucial to the development of countries as well as of the individual. As the British Prime Minister, Tony Blair, so eloquently recalled, ours is "a generation that claims education, skills and technology as the instruments of economic prosperity and personal fulfilment, not old battles between State and market".

Thus, the universities carry an exceptionally heavy responsibility: in this world in which the globalization of economic processes is gaining ground every day and in which technologies are turning into one of the most important vehicles of global knowledge, you are faced with the task of educating the rising generations, the protagonists of the 21st century. While it is true that technologies as such cannot replace education or culture, they are becoming an increasingly indispensable tool for enhancing and spreading knowledge.

And since this knowledge is becoming, in our changing world, a production factor more important than labour, capital and raw materials, it is also subject to the new rules of global competition. Those who fail to adapt remain outside the process and become marginalized.

Today, by largely removing limitations relating to time and space, the new digital technologies greatly enhance access to information and knowledge. Distance learning, including at university level, is spreading rapidly and creating ever closer ties among different cultures and schools of thought. And since new technologies also affect the way in which teaching is conducted, it has become essential to acquire a thorough understanding of how best to apply such technologies, and to constantly update those applications. * * *

The American philosopher George Santayana once said that "those who cannot remember the past are condemned to repeat it". And it is with this in mind that I will be speaking to you today of an essential chapter in your education: the development of the world trading system since the end of the Second World War. For indeed, I get the impression from today's discussions that we could very well be forgetting the lessons of the past.

This year, we celebrated in Geneva the 50th Anniversary of the world trading system in the presence of many Heads of State and government whose different origins and backgrounds, from Clinton to Mandela, from Castro to Blair, from Prodi to Cardoso, to name but a few, bear witness to the universality of our message. In the words of these leaders, alongside the elements of a vision for our common future was the constant reminder of the way in which difficulties of the past had been overcome and could only be avoided in the future through ever closer international cooperation based on rules and disciplines that were fair and beneficial to all.

Fifty years ago, the world economy was re-emerging from the vast ruins of the Second World War. The challenges facing the world were of unprecedented magnitude and complexity: to recreate a world order, restore a sense of international community and re-establish the foundations for growth and prosperity in the future. Today, 50 years after the Bretton Woods Agreements and the creation of the multilateral trading system whose management was entrusted to a provisional agreement – the GATT (General Agreement on Tariffs and Trade) – we are once again faced with a new world and a new series of challenges. The trade barriers that once divided economies and peoples have been considerably reduced and in many cases eliminated at the multilateral and regional levels. The nature and magnitude of the ideological divisions that have characterized the last 50 years are tending to change. Even the north-south divisions have narrowed owing, in particular, to the inherent potential of the new borderless technologies. A great majority of developing countries have turned towards market economies and increasing trade liberalization in the conviction that this is the best way to achieve growth and modernization. This trend was confirmed a few days ago in Geneva by all of the delegations of the WTO Member countries which, without exception, energetically resisted all temptation to revert to protectionism and confirmed their support for further liberalization of trade on the basis of the rules, procedures and flexibility that form the foundation of our trading system.

The creation of the World Trade Organization (WTO) in 1995 as the first international institution of the Post-Cold War era was in itself a significant symbol of the emergence of this new global system. While the challenge of the past 50 years consisted in managing a divided world, the challenge of the next 50 years will consist in managing an increasingly integrated world.

It would be a grave error, however, to underestimate the forces working towards disintegration rather than integration, towards divisions among nations, economies and peoples rather than peaceful cooperation, towards the erection of barriers rather than their elimination. * * *

The multilateral trading system was launched in the context of the discussions which led to the creation of the International Monetary Fund and the World Bank. It arose in response to the events of the end of the 1920s and beginning of the 1930s which had such an influence on the developments which led to the Second World War. The financial crisis of 1929 was in fact aggravated by the significant new trade barriers that were erected. The United States began with the Smoot-Hawley Act of 1930, which increased the average American tariff to 53 per cent. Many other countries followed suit. By the end of 1931, 26 countries had significantly increased their customs barriers and recreated a vast arsenal of quantitative restrictions on both trade and capital movement. The collapse of the gold standard encouraged competitive devaluation. International credits and investments, together with trade flows, diminished drastically.

This was a lesson that the creators of the multilateral trading system bore in mind in developing the new rules of the international trading system. And it is a lesson that no-one should forget today, particularly the young, because trade has an enormous political impact. The experience of European construction has also shown that the liberalization of trade barriers is a decisive tool in overcoming even the most acute historical divisions, while the maintenance of barriers or the creation of new barriers favours the emergence of economic and political nationalism, with all of the tragic consequences that they entail.

And it is thanks to that effort to take account of past experience that the outstanding feature of the WTO is the juridical nature of the system. I shall dwell on this aspect for three reasons: first, the juridical nature of the system has had what I would call a revolutionary impact on international economic relations in that it is through the use of semi-automatic and compulsory procedures that all Member countries of the system are made to respect the rules established on a consensual basis. Second, this aspect should be a central element in your education. Third, this system is not very well known in our country.

In the multilateral system, decisions are taken on the basis of a consensus; every State has the right to a vote and every vote is equal to all other votes. This method also applies to the new dispute settlement procedures, which are at the very foundation of the system and which are far more structured than those of the GATT system, involving more clearly-defined time-frames. The new system for the settlement of disputes among States has also made it practically impossible to block the adoption of decisions.

The written text which I have asked to have distributed contains a detailed description of how the system operates. For reasons of time, I shall not go into much detail now.

While under the GATT system, panel decisions could only be adopted by consensus – i.e. a single objection could block the decision – under the new system, decisions are adopted automatically as long as there is no consensus to reject them – i.e. if a country wishes to block a panel decision, it must convince all of the other Members of the WTO, including the country or countries which brought the case, of their views. The WTO dispute settlement system is in some ways the first international economic court or tribunal that the world has known; and yet it is still preferable for the Member countries involved to discuss their problems and to try to resolve them among themselves before actually resorting to a panel. The first phase of the procedure therefore provides for consultations between the governments involved in the case. Should these consultations fail to produce any positive results, the governments may ask me, in my capacity as Director-General, to offer my mediation or to seek other means to settle the dispute. And even when a case has been submitted to the more formal panel procedure, informal consultations and mediation are still possible. The second phase of the procedure consists in the panel itself. Panels, as I have said, resemble tribunals. They are made up of three – in some cases five – experts from different countries that are chosen in consultation with the parties to the dispute. These experts may be chosen from a permanent list of qualified candidates or from other sources. They must serve in their individual capacities, and may not receive instructions from their governments. This panel examines the facts of the case and decides who is right and who is wrong, basing its findings on the different provisions of the WTO Agreements cited in the case. The panel report is transmitted to the Dispute Settlement Body, made up of representatives of the Member countries, which may only reject it by consensus – in other words, it is unlikely that the conclusions of the panel will be rejected.

But how do the panels operate? Before any meetings are held, each party submits its arguments to the panel in writing. A first meeting then takes place, in which the country that brought the case, the responding country and all countries which expressly notified their interest in the case present their arguments. This is followed by a second meeting in which each country is given the possibility to rebut, in writing and orally, the arguments of the other countries. If the case involves questions of a scientific or technical nature, the panel may seek the advice of experts or ask a group of experts to prepare a written opinion for it to use. Once these phases have been completed, the panel prepares a preliminary draft report which includes a brief description of the arguments put forward, but not the legal arguments or the conclusions of the panel, so that the parties involved may see how their arguments have been reproduced in the report.

Six months after the establishment of the panel – three months in case of emergency – the panel must submit its interim report. This interim report includes the arguments and the conclusions of the panel which are transmitted to the parties for a period of reflection not exceeding two weeks, during which the panel may hold further meetings with both parties to the case. Upon expiry of the two-week period, the panel submits its final report. Initially, this report is transmitted only to the parties to the case, and after a period of three weeks, it is distributed to all of the Members of the WTO. If the panel decides that the disputed trade measure violates one of the Agreements or a WTO obligation, it recommends that the measure be brought into conformity with WTO regulations. The panel may also suggest ways of doing so. The panel report becomes a decision or recommendation of the Dispute Settlement Body following a period of 60 days providing there is no consensus to reject its contents. The entire panel process should not exceed one year.

This phase does not necessarily conclude the dispute settlement process. Each party to the case may in fact appeal the panel's ruling, and in some cases both parties do so. Appeals must be strictly limited to questions of legal interpretation, and may not re-examine the facts already presented or examined. Each appeal is heard by three members chosen from among the seven members of the standing Appellate Body established by the Dispute Settlement Body and representing the various tendencies of the WTO Member countries. The members of the Appellate Body must be persons with recognized expertise in the trade system and international law, and must be unaffiliated with any government. The Appellate Body may uphold, modify or reverse the legal findings and conclusions of the panel. Normally, Appellate procedures must not exceed 60 days, extendable, in exceptional cases only, to 90 days. The Dispute Settlement Body may accept or reject the decisions of the Appellate Body within a maximum of 30 days. These decisions, as well, may only be rejected on the basis of a consensus. They must be implemented within a period usually not exceeding 15 months. If the losing party cannot or does not wish to amend the measure or measures in question, it must enter into negotiations with the winning party with a view to developing mutually acceptable compensation, for example tariff reductions in sectors of particular interest to the countries that brought the dispute. If no satisfactory compensation has been agreed within 20 days, the party that brought the dispute may request authorization from the Dispute Settlement Body to impose trade sanctions commensurate with the injury suffered against the country that has failed to comply. As you can see, however, the final decision must be implemented, whatever the procedures used.

During the first three years of the WTO's existence, some 119 cases were submitted to the new procedure, while there were only about 300 during the 47 years of existence of the GATT. Moreover, an increasing number of cases are being brought by developing countries, reflecting the increasing credibility of the system for those countries. An even more important indication of the effectiveness of the new system is the tendency to settle "out of court", i.e. before the panel issues a final decision. In other words, the system functions as a tool for facilitating conciliation, first of all, and encouraging the satisfactory settlement of disputes among States, rather than simply issuing judgements in each case.

I would simply like to stress then, that the great challenge facing the World Trade Organization is to maintain and extend a world trading system based on law, and not on force and unilateral action.

And it is this aspect of the world trading system that is of most interest to the Member countries of the Organization as well as the candidate countries. When the World Trade Organization was created, in January 1995, it had 80 Members. It now has 132 Members, of which 80 per cent are developing countries or countries in transition from communism to a market economy. Added to that number are 32 candidate countries, including China and Russia, all developing countries or transition economies. These figures provide irrefutable proof of the soundness of the system. * * *

Now, let us look ahead at the enormous challenges facing us at the global level, as well as the great opportunities. If we are to be objective, we must begin by observing that we are still far from having achieved a satisfactory balance in the development of the world economy. Poverty, the threshold of which is normally placed at less than one dollar a day, still affects vast regions of the world. It has a crippling effect on all aspects of the existence of hundreds of millions of people. Their nutritional level, their health, their infant mortality, their life expectancy and their access to education are in every respect intolerable. And we must be sure always to remember these realities at every opportunity and at every level, national and international.

But while the problem is immense, over the past 50 years, and in particular over the past ten or 15 years, we have been able to observe signs of positive change, even if the serious problems currently affecting the world economy are a source of great uncertainty and highlight the need to improve the overall management of the world system.

The differences among countries remain unacceptable, even if there has been a surge in world economic growth thanks above all to the gradual liberalization of trade. The truly serious problem lies in the distribution of resources, both at the national and international levels, and this does not depend on the multilateral trading system which has in fact been the essential factor in economic growth. From 1948 to 1997, trade in goods has increased 17-fold while world output increased six-fold. A comparison of growth in the developing countries and growth in the advanced economies between 1985 and 1997 shows that in the developing countries, on average, there has constantly been a more marked acceleration. During the period 1990 to 1997, their average growth rate was 5.4 per cent, i.e. three times that of the industrialized countries. As regards trade, however, it was the advanced economies that benefited the most, putting paid to the argument that imports from the developing countries led to loss of jobs.

But even more impressive has been the extent and the rapidity of economic growth in many of the developing countries. While the industrial revolution of the 19th century concerned some 200 million people, the current economic globalization process concerns billions of people at entirely different rates of development. The United Kingdom, the first industrialized country, took 58 years to double its per capita income for the first time; the United States took 47 years; Germany 43 years. Meanwhile, it took Korea only 11 years and Chile 10 years, while China has been doubling its per capita income every nine years, only after opting for a market economy and growing trade liberalization.

Ten developing countries representing approximately one third of the world's population, i.e. about 1.5 billion, more than doubled their per capita income between 1980 and 1995. Even in Africa, 19 countries, including economies in the Sub-Saharan region, have attained growth levels of more than 4 per cent over the past three years after adopting structural reform plans.

It would be a serious mistake to underestimate the absolute priority of the struggle against inequality and poverty; but it would also be a serious mistake not to stress the great progress made in the choice of the market and increasing trade liberalization.

This is why I wanted to be clear in highlighting these aspects which are often disregarded or falsely presented in discussions on the world economy. * * *

Today, the rapid development of new technologies is adding a new and revolutionary dimension to economic relations.

The crucial innovations in the development of information technology and telecommunications are leading to the development of a borderless economy – a single world economic area. For the first time in our history, millions of persons in the developing countries will have immediate and equal access to information and educational technology, the two most important raw materials of our times. With the development of electronic trade, any country or any individual will potentially be in a position to sell or buy goods or services in any part of the world. The impact of this development could be revolutionary.

This rapid technological progress is transforming the world even more radically than the growing liberalization of trade and investment. And the impact of this revolution is not limited to growth in productivity and economic growth, but will tend increasingly to forge a new relationship between the advanced economies and the developing economies, a new contract between governments and citizens and new links among peoples, links which transcend culture, social class and nationality. * * *

It would be a mistake, however, to underestimate the current problems of the world economy resulting from malfunctions in the financial system and particularly the excessive volatility of short-terms capital movements. It has been calculated that overall daily capital movements are more than 100 times greater than the daily volume of world trade.

The latest IMF forecasts show a 2 per cent downward revision in world economic growth figures as a result of the financial crisis.

Meanwhile, the growth in the volume of trade in 1998 is expected to drop to about half of the 1997 rate, that is it should not exceed 4 to 5 per cent.

In terms of value, trade in goods is expected to decline somewhat during the second half of this year, assuming the dollar and oil prices remain close to their July 1998 level.

Therapy against the current crisis unquestionably calls for a strategy to restore sustainable economic growth as quickly as possible and put an end to the enormous social and human cost of the disorder in the financial markets. In other words, reform efforts must begin with policies and measures aimed at re-establishing order in financial flows. This is the task that now faces the national financial authorities and international financial institutions.

As regards the multilateral trading system, which is under the responsibility of the World Trade Organization, we should recall that 25 per cent of world production is currently exported. Fifty years ago, only 7 per cent of world production was exported. For the developing countries, the current ratio of foreign trade to GDP is 38 per cent, which explains why they are in an even greater need of trade liberalization than the advanced economies. However, these figures also reflect how interdependent individual economies have become. This interdependence is what we call "globalization", and many are those who consider this process to be largely responsible for our problems today.

They are mistaken. Globalization is not a policy to be praised or condemned, but the consequence of policies and above all of technical progress. More and more, it has become an essential dimension in examining a number of problems both at the national and international levels. While this new dimension is indeed assisted by trade liberalization, its main driving force is the technical progress which has tended to do away with the obstacles of space and time.

In Geneva, I have tried over the past few days to organize discussions with the representatives of all of the Member countries on the role that the multilateral trading system could play in helping to overcome the crisis. I put forward three objectives on which our views coincided. Firstly, the rejection of protectionism, which would inevitably lead to a decline in growth and employment, and would serve the cause of that formidable enemy, economic and political nationalism. Secondly, the reaffirmation of our determination to conclude as quickly as possible the negotiations with the candidate countries, of which there are now 32 including, as I mentioned, China and Russia. Finally, continuation of preparations for future negotiations, beginning at the end of 1999, for further liberalization of agriculture, services and parts of intellectual property, as well, perhaps, as investments, the rules of competition, and almost certainly industrial tariffs, including textiles. An ambitious and far-reaching programme, whose general outlines were already accepted at the Ministerial Conference last May.

Precisely because the world trading system is based on the gradual reduction of trade barriers in the framework of rules and procedures established on a consensual basis, it provides an element of stability and progress today. For the world economy to progress, the other sectors must also take greater account of the factors that contributed to the success of the multilateral trading system: consensus, non-discrimination, rules and flexibility respected by all. * * *

The time has come for me to conclude my address. The new and the old will continue to coexist in our daily lives for a long time to come. The new borderless economy is not a substitute for all economic activities. Factories and farms will not disappear from one day to the next, and software cannot replace the food we eat or the cars we drive.

We have only just reached the threshold; but the transition is likely to accelerate rapidly, spurred on in particular by the new technologies. Thus, the major task facing us is not to delay or halt progress towards the future, but above all to improve the manageability, at the world level, of such complex and vast changes. The advent of a new world and of a new economy, with the inevitable risks involved as well as the great opportunities to be derived from a development process involving billions of human beings, places us in the position of having to invent the future.

This will be chiefly up to you, the young generation. And while it represents a great challenge, it will also provide you with the motivation and hope which society itself and the media are doing all they can to stifle in today's world.

Thank you.