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Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century

WorkingPapers CompetitiveLiberalizationandGlobalFreeTrade:AVisionfortheEarly21stCentury
byC.FredBergsten,PetersonInstituteforInternationalEconomics InstituteforInternationalEconomics

TheMarchTowardFreeTrade Alargepartoftheworldhaseliminatedallbarrierstotradeorisintheprocessofdoingso.Thefifteenmembersof theEuropeanUnionhavecreateda"singleinternalmarket."AustraliaandNewZealandhavecompletedtheirfree tradearea.Severallargegroupingsareenroutetoasimilaroutcome:theNorthAmericanFreeTradeAgreement (Canada,Mexico,UnitedStates),Mercosur(Argentina,Brazil,Paraguay,Uruguay),andtheASEANFreeTrade Agreement(Brunei,Indonesia,Malaysia,Philippines,Singapore,Thailand,andnowVietnam).Therearenumerous freetradeareasamongsmallercountries. Inaddition,aseriesofnewgroupingshavepledgedtoabolishallimpedimentstotheirinternationaltradeinthe comingyears.TheEuropeanUnionandtheMediterraneancountries(EUROMED)havecommittedthemselvesto freetradeby2010.The34democraciesoftheWesternHemisphereagreedattheirMiamisummitinDecember1994 toworkoutaFreeTradeAreaoftheAmericas(FTAA)by2005.TheeighteenmembersoftheAsiaPacificEconomic Cooperation(APEC)forumwhichaccountforhalfofwouldoutputandincludethethreelargestnationaleconomies (China,Japan,UnitedStates)decidedviatheirBogorDeclarationofNovember1994toestablishfreetradeand investmentintheregionby2010fortheirhigherincomemembers,thatmakeup85percentoftheircommerce,and by2020fortherest.Historysuggeststhatthesetargetswillbemetwellaheadofschedulebecauseprivatesectors begininvestingtotakeadvantageoftheeventualsteadystate,andtherebyacceleratethewholeprocess,assoon asthedealsbecomecredible.1 Therehavebeenmanyproposalsforadditionalfreetraderegimes.Themostsignificantbyfarwouldbea TransAtlanticFreeTradeArea(TAFTA),joiningEuropeandNorthAmerica.Inawhollydifferentsetting,Russiahas proposedrevertingtofreetradeamongsomeoftherepublicsoftheformerSovietUnion.Indiaispromotingan associationofcountriesthatrimtheIndianOcean. Evenwithoutanyadditionalconfigurations,over60percentofinternationalcommercenowtakesplacewithinexisting orplannedfreetraderegimes(table1).Thisshareisrisingrapidly,bothbecauseoftheonsetofnewarrangements andbecausetradeexpandsmorequicklyundersuchconditions.Thequestionthusarises:whynoteliminatealltrade barriersthroughouttheworld?WhynotlaunchamovementtowardglobalfreetradeattheWTOMinisterial ConferenceinSingaporeinDecember1996?Whyshouldn'tAPEC,havingagreedtoachievefreetradeinitsown regionbutnotwantingtocreateanewdiscriminatorybloc,proposethattheworldasawholeemulateitsapproach? Table1:RegionalFreeTradeArrangements(shareofworldtrade,1994) EuropeanUnion EUROMED NAFTA 22.8 2.3 7.9

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Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century

Mercosur 0.3 FreeTradeAreaoftheAmericas(inadditiontoitssubregionals) 2.6 AFTA 1.3 AustraliaNewZealand 0.1 APEC(inadditiontoitssubregionals) 23.7 TOTAL 61.0 CompetitiveLiberalization Inansweringthesequestions,itisfirstessentialtounderstandwhysomanycountries,insomanydifferentpartsof theworld,withsuchdifferenteconomicsystems,atsuchdifferentstagesofdevelopment,haveallheadedinthe samedirection.Thereareofcoursedifferentnationalcircumstanceswhichexplainthedetailedstrategiesandtiming oftheindividualinitiatives.Theoverarchingforce,however,hasbeentheprocessofcompetitiveliberalization. Therapidincreaseofglobalinterdependencehasforcedallcountries,whatevertheirpriorpoliciesorphilosophies,to liberalizetheirtrade(andusuallyinvestment)regimes.Economicsuccessintoday'sworldrequirescountriesto competeaggressivelyforthefootlooseinternationalinvestmentthatgoesfartodeterminethedistributionofglobal productionandthusjobs,profitsandtechnology.Mostcountriesofferdirectincentivestoforeigninvestorsbutan opentradeandinvestmentregimeisessentialforthispurpose.Mexicoovercameitshistoricaversionstotrade liberalizationandembracingitsnorthernneighbor,andproposedNAFTA,whenitbecameconvincedthatdoingso wasessentialtoavoidlosingoutintheglobalcompetitionforcapital. Moreover,successintoday'sglobaleconomyrequirescountriestocompeteeffectivelyininternationalmarkets ratherthansimplyathome.Thisistruenomatterhowlargethedomesticmarket:theworld'smostselfcontained economiesincludingBrazil,China,India,RussiaandperhapsmostnotablytheUnitedStateswhichmaintained extensivequotesonautos,machinetools,steelandnumerousotherproductsonlyadecadeagohavealljoinedthe competitiveliberalizationrace. Competitiveliberalizationispursuedbycountriesthatuntilrecentlyhaddeeplyentrenchedprotectionisttraditions. Franceisadramaticcasesinpoint.SoisvirtuallyallofLatinAmerica,whichembracedimportantsubstitution doctrinesasrecentlyastwodecadesago.Themoststunningreversalofallcomesfromtheformercommand economiesoftheCommunistworld,rangingfromChinathroughCentralEuropeandtheformerSovietUniontonow Vietnam. Anintellectualandideologicalseachangeunderliesthishistoricdevelopment.Importsubstitutionandevenautarkic modelsofdevelopmentandnationaleconomicstrategywerereasonablyrespectableintothe1960sandeventhe 1970s.Buttheirfollieswerethenexposed,includingbythethirdworlddebtcrisisofthe1980s,andreplacedbya newconsensusof"outwardorientation."Thepoliticalonsetofconservativegovernmentsthroughoutthe industrializedworld,andinmanypartsofthedevelopingworldaswell,hastenedtheimplementationofthesereform models. Thischangeinbasicthinkingdoesnot,however,explaintheonsetofregional(orotherinternational)trade arrangements.Whydidn'tthenewattitudesimplyproduceaspateofunilateraltradeliberalization,whichall textbooksrecommendasthemostdirectroutetomaximizingtradebenefitsforanindividualcountry?Theanswer liesinthepoliticsoftradereform. ThePoliticalEconomyofTradeReform Tobesure,agooddealofunilateralliberalizationhastakenplace.ThishasbeenespeciallytrueinEastAsia.Ithas alsooccurredintheUnitedStates,mostofwhosequotaswereabolishedwithoutanyforeignquidproquo.But domesticpoliticaloppositionusuallyblockedcountriesfromsimplyabolishingtheirtraditionalbarriers.Entrenched interestsfoughthard,andfrequentlywithprolongedsuccess,tomaintaintheirprotectedpositions.Thepoliticsof economicreformweredifficultandcontentiousinvirtuallyeverycase.2 Thestandardstrategyforachievingtradereformwastomobilizeenoughprotradeintereststoovercomethosewho resistedfurthermarketopening.Theseincludedbeneficiariesofimportssuchasconsumersandindustrialusersof importedinputs.3However,suchgroupsrarelyorganizedandtheirgainsfromliberalizationwerebothmodestand widelydiffused.Hencetheyproducedlittlepoliticalcounterweightagainstthosewhowouldbeadverselyaffectedby

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Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century

increasedforeigncompetition. Toovercomesuchopposition,itbecamenecessarytoappealtoexportersandotherswhogaindirectlyfromthe openingofmarketsabroad.Thepoliticaleconomyoftradeliberalizationinindividualcountriesthusrestedheavilyon parallelliberalizationinpartnercountries.Themostassuredtechniqueforachievingsuchparallelactionwastoinsist onreciprocity,throughthenegotiationoftradeagreementswithenoughexistingorpotentialmarketstotiptheinternal balanceinfavorofthedesiredliberalization.TheUnitedStatesfinallyagreedtogetridofitstextilequotasby negotiatingforeignconcessionsfromtherestoftheworld,intheUruguayRoundattheGATT,onintellectualproperty rightsandagriculturalbarriers.Throughthatsamenegotiation,JapanandKoreabegantoopentheirricemarketsby appealingtotheexportinterestsoftheir(especiallyhightech)manufacturers. Negotiatedliberalizationthusturnedouttobefarmorefeasiblethanunilateralliberalization.Thekeybecamea country'sabilitytopersuadeitsforeignpartnerstoproceedintandemwithit.Largetradingentities,suchasthe UnitedStatesandtheEuropeanUnion,obviouslyhavethemostleverageinthiscontextbecauseoftheattractionto othersoftheopeningoftheirmarkets. Anotherkeyvariableisthestageofliberalizationatwhichacountryfindsitself.Initialreductionsofveryhightariffs arefrequentlyeasybecausetheyputfewdentsinthereallevelofprotectionandthuscanoftenbeimplemented unilaterally.Butmostcountrieshavefoundthattheymustapplythetraditionalpoliticaleconomyapproachto engineerthelater(andmostbeneficial)phasesoftheprocess. Chileisarecentcaseinpoint.Itspolicydesiretoachievetotallyfreetradeisclearbutitmustnowmobilizestrong supportfromitsexporterstoovercomeresistancetoeliminatingitslast10percentorsoofprotection.Itsstrategyis totrytonegotiatereciprocaldealswhereveritcaninMercosur,NAFTA,APEC,bilaterallyand/orgloballythroughthe newWorldTradeOrganization(WTO). Regionalvs.GlobalLiberalization Inseekingreciprocalliberalization,countriescouldturneithertotheirrespectivegeographicregionortotheglobal tradingsystemasawhole.Theglobalapproachisfundamentallysuperiorbecauseitmaximizesthenumberof foreignmarketsinvolvedandavoidstheeconomicdistortions(andpoliticalrisks)ofdiscriminationamongtrading partners.Indeed,thesuccessionofGATT"rounds"throughoutthepostwarperiodhasmadeamajorcontributionto thefreeingofglobaltrade. Astheurgencyofcompetitiveliberalizationacceleratedoverthelastdecadeorso,however,theregionalapproach hasincreasinglycometodominatetheprocess.Itsimplyturnsouttobelesstimeconsumingandlesscomplicated toworkoutmutuallyagreeablearrangementswithafewneighborsthanwiththefullmembershipofwellover100 countriesintheWTO.Moreover,regionalgroupingsaredemonstrablywillingtoproceedmuchmoreboldly:manyof themhavedecidedtoadopttotallyfreetrade,asnotedabove,whereasnoneoftheglobalconclavestodatehas evenconsideredsuchanambitiousgoal.TherapidgrowthinthemembershipoftheWTO,whosepredecessorGATT hadfewerthan50membersthoughthefirstseveralpostwarnegotiations,addedtothischangeinthecalculation. Desirestoovercometraditionalpoliticalrivalrieshavealsobeenadrivingforceinthesuccessofseveralofthe regionaleconomicarrangements.ThecardinalgoaloftheEuropeanUnionwastoendthehistorichostilitybetween FranceandGermany.Mercosursoughttoendthearmsrace,includingitsnucleardimension,betweenArgentinaand Brazil.AsuccessfulAPECwouldreducetheriskofintraAsianandtransPacificconflicts,whichhavebeenso prevalentoverthepastcenturyincludingthreewarsfortheUnitedStates.Regionaltradearrangementsarethus oftenmotivatedbyprioritynationalsecurityconcerns.Thisisanotherreasonwhytheyoftenmovemorequicklyand moreboldly. Muchofthepoliticaleconomyofcompetitiveliberalizationinrecentyearshasinfactplayeditselfoutinthedynamic interactionbetweenregionalandglobalinitiativestoreducetradebarriers.Thiscreativetensionhasbeenpresent throughoutmostofthepostwarperiod.TheUnitedStatesinitiatedtheKennedyRoundinthe1960stocounterthe discriminationinherentinthecreationoftheEuropeanCommonMarket(aswellasforbroadforeignpolicyreasons) andtheTokyoRoundinthe1970stocountertheadditionaldiscriminationfromtheCommunity'sexpansiontoinclude theUnitedKingdom.TheEuropeanscooperatedinbothventuresandthusenabledtheregionalandglobaleffortsto "ratchetup"thescopeandpaceofliberalization. Thepositiveinteractionbetweenthetwostrategiesacceleratedsharplyinthe1980sand1990sascompetitive liberalizationbecamethenormandcountriessearchedfortacticstoobtaintheneededdomesticsupport.TheUnited

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Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century

StatesreverseditstraditionalaversiontoregionalismbyembracingfreetradeagreementswithIsraelandCanada aftertheEuropeanCommunityblockedthelaunchofnewnegotiationsintheGATTtowhichtheECrespondedby droppingitsvetoandpermittingtheUruguayRoundtobegin.WhentheRoundfalteredinthelate1980s,thethree NorthAmericancountrieslaunchedNAFTAandtheAsiansinitiatedAPEC.4WhentheRoundalmostfailedtomeet itsfinaldeadlineinDecember1993,APEC'sinitialsummitinSeattleinNovember1993inducedtheCommunityto finallyagreebecause,accordingtoonetopEuropeannegotiator,it"demonstratedthatyouhadanalternativeandwe didnot."Theregionalinitiativesalsoreinforcedeachother:APEC'sBogorDeclarationwasinstrumentalin galvanizingtheMiamisummit,afewweekslater,tocommittofreetradebyadatecertainintheAmericas. Thispositiveinteractionalsoextendstothesubregionallevel.PresidentBush'sofferin1991toextendNAFTA throughouttheWesternHemisphereledtoanexplosionofbilateralandplurilateralagreementsacrossSouthand CentralAmericaascountriessoughttopreparethemselvestoqualifyforfreetradewithNorthAmerica.InAsia, AFTAhasaccelerateditstimetableandsubstantiallybroadeneditscoveragetostayaheadofAPEC.AFTAand AustraliaNewZealandhavediscussedpossiblelinkagesbetweenthegroups. Henceregionalandgloballiberalizationinitiativeshavebeenmutuallyreinforcingthroughoutthepastthreedecades ormore.Thefearsofsomeobserversthatregionalismwouldderailglobalismhavebeendemonstrablyovercome. TheThreatstotheTradingSystem Butdeterminedleadershiphasbeenrequiredtoavoidconflictsbetweenregionalismandglobalism.Doingsohasalso requiredthemaintenanceofeffectiveglobaltraderulestoprovideaframeworkthatwoulddeterconflictbetweenthe regionalarrangements,includingrulesthatapplytothearrangementsthemselves,andaninstitutiontoenforcethem. Evenso,therehavebeensomeclosecallsespeciallywhentheglobalsystemfaltered.Themajornewregional arrangementsspawnedbythemisseddeadlinesoftheUruguayRoundwereintendedtoserveasalternativestothe globalregimeifneeded.AnultimatefailureoftheRound,whichalmostoccurred,wouldhavediscreditedtheentire globalsystemandraisedarealspecterofcompetingblocs. Moreover,theEuropeanUnionfrequentlyseemstofocussoheavilyonitsregionalagendathatitforgetsitsglobal responsibilities.TheUnitedStatesissometimesviewedaspreoccupiedwithNAFTAorAPEC.ByjoiningEastAsia andNorthAmerica,APEChaseliminatedanypossibilityoftheevolutionofthethreeblocworldthatwassowidely andrightlyfearedafewyearsago5butafailuretoworkoutaccommodationswithEuropecouldinsteadcreatea twoblocworldthatwouldconveysubstantialdangersaswell.SouthAmericamightdecidetohaltitsliberalization onceMercosurhadconsolidated,andBrazilmightbehappytoleaveitsnewleadershipofthatregionundisturbedfor atleastawhile.Thereisaconstantneedtokeeptheglobalregionalinteractiononasupportivecourse.Thisisone keyreasonwhyanewinitiativeisnowrequiredtoconsolidatetheregionalliberalizationinitiativesintoanagreement toachieveglobalfreetradeinthe21stcentury. Thereareotherriskstothecontinuedtriumphofcompetitiveliberalizationthatneedtobemetbyanewglobal initiative.Themostthreateningofthesechallengesdonotariseinthecountriesthathaverejectedopennessmost stronglyintherecentpast,thedevelopingandformercommandeconomies,althoughsomeofthemdoharbor lingeringdoubtsthatcouldagainassumeascendance.Paradoxically,thestrongestpressurestoreversetheliberal coursecanbefoundinthecountriesthatcreated,nurtured,andchampionedthepostwarorder:theUnitedStatesand theEuropeanUnion. TwostructuralchangesdominatetheevolutionoftheAmericaneconomyoverthepastgeneration.Oneis globalization:theshareoftradehasmorethandoubledandnowexceedsthesameshareasintheEuropeanUnion asagroupand(especially)inJapan.Theotheristhestagnationofrealincomesandaregressiveshiftinincome distribution:theUnitedStateshascreatedtensofmillionsofnewjobsbutthemedianfamilyincomeislowertoday thanagenerationago,theaveragerealwageisflatordownformorethanhalfthepopulation,andonlythetop20 percentisunambiguouslybetteroff.6 Thecentralquestionforpresentpurposesisthedegreeofcausalitybetweenthetwophenomena.Virtuallyall economistsagreethatglobalizationhasproducedsomeoftheproblemscited.Themajoritybelievestherelationship accountsfor1020percentoftheproblemandthataretreatintoprotectionismwouldmakeitwork.Butatleastafew seriousstudiesattributealargerpartofthecountry'schiefeconomicdifficultiestoglobalizationandcallforashiftin tradepolicyasaresult. Americanpoliticsfrequentlyreflectthistension.OnlytheextremistsofbothrightandleftPatBuchanan,Ralph

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Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century

Nader,RossPerotandorganizedlaborhavelaunchedfrontalattacksonthebipartisantradepoliciesofthepast60 years,andalltheircampaignshavebeendecisivelyrejected.ButPresidentClinton,whofaithfullyimplementedthe ReaganBushcommitmentstoNAFTAandtheUruguayRoundandexpandedonthemsubstantiallywithAPECand theFTAA,madeexplicitdecisiontokeeptradepolicyoutofthepoliticaldiscussionin1996.SodidSenatorRobert Dole,whosupportedallthepriorinitiativesbutannouncedstrongoppositioninlate1995to"anymoretrade agreements"fortheforeseeablefuture. ThesituationinEuropeisfundamentallysimilarifquitedifferentinitsdetails.Europe'schiefeconomicproblemis highunemployment,whichhasrisenfrom23percentagenerationagotoabout10percentnowfromwellbelowthe Americannormtoalmosttwiceashigh.ButaveragewagesandincomesinEuropehaverisensubstantiallyoverthis period,insharpcontrasttotheirstagnationintheUnitedStates. Thesetwogreatindustrialareashavethusmadeverydifferentsocialchoices.Bylimitingitssocialsafetynetand permittingfirmstodownsizevirtuallyatwill,theUnitedStatesforcesitsdisplacedworkerstofindnewjobsat whateverwageisavailablepricingitslaborcompetitivelyandthusmaintainingfullemployment.Europehasby contrastbecomeagenerouswelfarestatewithextremelyrigidlaborlaws,discouragingnewhiresfromboththe supplyanddemandsideswhilemaintainingsocialpeacethroughgovernmenttransfersofashareofitshigher incomestothepoor.SirJamesGoldsmithandothersblametheresultingunemploymentoncompetitionfromlow wagecountries. TheTAFTAideaforfreetradebetweenNorthAmericaandEuropethusposesasubtlebutpotentiallydeadlythreatto theglobaltradingsystem.SkilledprotectionistsinbothAmericaandEuropehavealreadylearnedthatfrontalattacks onliberalizationareboundtofail.Hencetheyhaveoptedforprocessprotectionthatemploysdevicestocounter unfairpractices,suchasdumpingandgovernmentsubsidies,inwaysthatgofarbeyondthelegitimateuseofsuch policies.Theyinsistonnewinternationalagreementsonenvironmentalandlaborstandards(andnativepopulations!) thatcouldalsoprovidecoverfornewtradebarriers. ThecaseforTAFTAissimilar:itpositsthatfreetradeisacceptableaslongasittakesplaceamongcountriesat roughlyequal(i.e.high)incomelevels.Therich(andwhite)countrieswouldcombinetoerectnewdiscrimination againstthepoor(andafewrichAsians).Preferenceswouldperverselybeprovidedtoricherratherthanpoorertrading partners.China,Malaysiaandotherswouldbeofferedararebutpowerfuljustificationfortheirparanoidfearsofbeing containedratherthanengaged.Nowonderthisparticularfreetradeproposalhasbeenembracedsoenthusiastically bythelikesofRichardGephartandformerAFLCIOPresidentLaneKirkland,seizingonthegoodintentionsbut economicnaiveteoftheforeignpolicygurus(includingHenryKissingeraswellastheforeignministersofGermany andtheUnitedKingdom)wholaunchedtheideainadesperateattempttofindnewcementforacrumblingAtlantic alliance.7 Suchacirclingofwagonsbytheoldrichwouldreverseoneofthemostbeneficialtrendsoftheregionalinitiativesof thepastdecadeorso:theirinclusionofbothricherandpoorernations,whichhasendedtheNorthSouthconflictfor allpracticalpurposes.TheEuropeanCommunityledthatprocessbyincludingsouthernEuropeancountrieswithper capitaincomesthatwereaboutonefifththatofnorthernEurope.NAFTAexpandedtheprocess,addingMexicowith oneeighththeincomeoftheoriginalmembersoftheCanadaUnitedStatesFreeTradeArea.Theratiosareeven higherinEUROMED,theFTAAandespeciallyAPECwherethegapbetweenJapanandIndonesiaisaboutthirtyto one.AdiscriminatoryTAFTAwouldreverseallthisprogressandreignitehostilityacrossthepotentiallyexplosive incomedivide,especiallywithover80percentoftheworld'spopulationandvirtuallyallofitsgrowthinthepoorer countries. ThebottomlineisthatneitherEuropenortheUnitedStateshasbeenabletogenerateasteadyincreaseinthe numberofwellpayingjobs.Europehasrisingincomesbuthighunemployment.Americahaslowunemploymentbut flatincomes.Perceptionsandpoliticiansinbothcouldcometotreattradeasamajorsourceoftheproblem,oreven themajorsourceoftheproblem,andthuspavethewayforamassivereversalofgloballiberalization. TheAsiangiants,JapanandChina,alsoposemajorthreatstothecontinuedopennessofthetradingsystem.The politicaleconomyofliberalizationsucceedsinwinningdomesticsupport,eveninacountryaslargeastheUnited States,onlywhenitsmajorforeignmarkets(especiallyiftheyarealsoitstoughestcompetitors)areseenasjoining theprocessandcontributingtheirfairsharestotheprocess.JapanhasgrudginglyparticipatedinalltheGATT roundsbutaccesstoitsmarketsremainsextremelytruncated.8Chinahasnotyetcommittedtotheminimum reformsnecessarytojointheWorldTradeOrganization.Protectionistsinothercountries,withsomejustification,will usethereluctanceofJapanandChinatoliberalizetoopposefurtherreductionoftheirownnations'barriers.

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Competitive Liberalization and Global Free Trade: A Vision for the Early 21st Century

Japancouldalsocauseproblemsbecauseofitsinternaldevelopments,whicharebeginningtoresemblethoseinthe otherhigherincomeareas.Unemploymentisatapostwarhigh.Traditionalsocioeconomicnorms,suchaslifetime employmentandkeiretsusupplierrelationships,areerodinginlargepartduetoglobalization(anditsalleged hollowingoutofthedomesticproductionbase).Deregulationcouldbeslowedevenfurtheranditwouldbe unsurprisingifprotectionistvoicesbegantobeheardinJapaninthenearfuture. RestartingtheBicycle Whydoesitmatter?Neworexpandingblocswoulddiverttradefromoutsiders,tobesure,butalmosteverybody wouldbeinablocandthediversionwouldalmostcertainlybeswampedbyfastergrowthandhencetradecreationfor everybodyasinthecaseoftheEuropeanUnionoverthepastfortyyears.Internationaltradeandinvestmentare flourishing.Businessneedssimplytobeassuredthatnonewimpedimentswillbeplacedinitspath. Theproblemwiththis"standpat"scenarioisitsinstability.Thehistoryoftradepolicyteachesforcefullythatfailure tomovesteadilyforwardtowardliberalizationcondemnsthetradingsystemtotipsidewaysorfallbackwardinthe faceofprotectionistpressuresthe"bicycletheory."Forexample,protectionismscoredmajorsuccessesduringthe prolongedperiodswhentheGATTbecamemoribundimmediatelyafterthesuccessfulconclusionoftheKennedy Roundinthelate1960sandtheTokyoRoundintheearly1980s.Asnotedabove,therearestrongpressures throughouttheworldincludingintheUnitedStatesandEuropethatwouldseizeonanystallingoftheforward momentumandtrytoreversethetrendtowardliberalization.RenewedfinancialcrisesalaMexicocould,asinthe past,produceawholesaleadoptionofnewimportcontrols. Oneofthegreatadvantagesofthecontemporaryregionalinitiativesisthattheyhavekeptthebicyclemoving forwardaftertheconclusionoftheUruguayRound.TheRounditselfalsohelpedbyschedulingfuturenegotiationsin anumberofsectors,someofwhichareunderway.Itnowbecomesnecessary,however,torolltheregionalefforts intoaconsolidatedglobalstrategythatwillsimultaneouslykeepthebicyclemovingforwardandavoidthecentrifugal risksofdriftingintoconflictingblocs. Thesubstanceofanewglobalinitiativewouldincludeeliminationofallremainingtariffandnontariffborderbarriers. TheUruguayRoundteeduptheseremnantsoftraditionalprotectionfordecisiveactionbyconvertingagricultural quotasintotariffs,removingquotaprotectionfromtextilesandapparel,andobtainingbindingsofmosttariffsin developingcountries.Onemoremajoreffortshouldcondemnthesepracticestothedustbinofhistory.9 Inaddition,newnegotiationsareneededtoenabletheglobalsystemtocatchupwithsomeofthe"newproblems" thatareplaguinginternationaltraderelations.Protectionistsinallcountriesareingeniousinstaying"onestepahead ofthejudge"andthesystemneedscontinuousupdatingtostaywithinreach. Forexample,mostAmerican(andothers')complaintsaboutJapannolongerrelatetothatcountry'sborderbarriers. Theyfocusinsteadontheanticompetitivebehaviorofitsfirmswiththeirexclusivesupplierordistributor arrangements(verticalkeiretsu,asinautopartsandfilm,respectively)anddominationofparticularmarkets (horizontalkeiretsu,asinglassorsodaash).TheUnitedStateshasbeenusingtrademeasures,suchasSection 301,toaddressnontradeproblems.Thereisanurgentneedtoworkoutnewinternationalagreementsoncompetition policyandcorporatebehavior.10 Investmentisasecondareainwhichtheinternationalruleshavelaggedfarbehindcommercialpractice.Investment isnowanessentialelementofinternationaltrade,especiallyinservicesbutintraditionalmanufacturingaswell. AsidefromafewverymodestcovenantsontraderelatedinvestmentmeasuresagreedintheUruguayRoundand APEC'sinadequate"nonbindinginvestmentprinciples,"however,therearevirtuallynomultilateralagreementsonthe issue.11 Anotherpendingissueisregionalismitself.TheGATTarticlethatgovernssucharrangementsisextremelyweakand itsimplementationhasbeenevenweaker:ofthe100orso"freetradeagreements"thathavebeennotifiedtothe GATT,nonehavebeenrejectedandonlytwohavebeenapproved.Nowthatregionalismissoprevalent,theWTO needstoadoptmuchstrongerprovisionsandprocedurestomakesurethattheyevolveinanopenmanner. Anumberofothertopicsmustbeaddressedaswell.Thenumerouslinkagesbetweenenvironmentalmeasuresand trademustbesortedoutinwaysthatbothprotecttheenvironmentandavoidingprovidingnewexcusesforprotecting againsttrade.Therelationshipbetweentradeandlaborstandardsneedstoberesolvedaswell.

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Abroaderyetclearlyrelatedissueisinternationalmonetaryarrangements.Thecurrentregimeofflexibleexchange ratesperiodicallypermitssizableandprolongedmisalignmentsofmajorcurrencies,suchasthehugeovervaluation ofthedollarinthefirsthalfofthe1980sandthelargeundervaluationoftheyeninthelate1980s.These misalignmentsinturnleadtolargetradeimbalancesthatintensifyprotectionistpressuresinthedeficitcountriesby tiltingthedomesticpoliticalbalanceagainstexportersandinfavorofimportcompetingindustries.TheWTOwillnot solvethisproblembutshouldpushtheInternationalMonetaryFund,andtheG7asitsinformalsteeringcommittee, toimprovethefunctioningofthemonetarysystemtoreducesomeofthepressuresonthetraderegime.12Such trademonetarylinkagefeaturedprominentlyintheoriginalplanningfortheTokyoRoundintheearly1970sandtoa lesserextentintheplanningfortheUruguayRoundinthemiddle1980s. TheneedfortheWTOtoaddressaseriesofnewtradeissuesalsoreplicatestheearlierpostwarhistory.The KennedyRoundproducedamajorreductioninthehightariffsthatwerethemajortoolofprotectionintheearly postwarperiod.TheTokyoRoundthenattackedgovernmentprocurement,subsidiesandothernontariffborder barriers.TheUruguayRoundturnedtomajorbehindtheborderproblemssuchasintellectualpropertyrightsand servicesrules.Eachoftheseliberalizationsexposedanewsetofconstraintsonmarketaccessthatrequiredanew initiativetobringtheinternationalrulesuptodate,andthepresentperiodisnoexception. Itwouldbepossibletoaddressalltheseissuesinaseriesofseparateregionalnegotiations.Indeed,someofthe regionalagreementshaveinnovatedsuccessfullyinaddressingnewtopicsinthepast:theCanadaUnitedStates FreeTradeAgreementprovidedamodelforsomeoftheservicestalksintheUruguayRound,AustraliaNewZealand successfullymeshedtheircompetitionpoliciesinamannerthatalsoenabledthentoeliminateantidumpingduties, andNAFTAhaspioneeredinforgingeffectiverulesoninvestment.Therewouldbeaseriousriskofinconsistencyif suchissueswereaddresseddifferentlyinthedifferentregionalfora,however,anditwouldbemuchmoreefficientto deriveworldwideapproachesthatcouldbeappliedbyall.Thecaseforglobalismisagaincompelling.The"Grand Bargain"ThemembersoftheWTOshouldthereforeagreetoconsolidatethefreetradearrangementsthathave alreadybeensetattheregionallevel,coveringmorethan60percentofworldtradeasdescribedattheoutset,intoa globalcommitmenttoachieveworldwidefreetradebyadatecertain.Thedatecouldbe2010,ontheAPECand EUROMEDmodels,withapossibleextensionto2015or2020forthepoorercountries.Implementationofthe agreementwouldkeepthebicyclemovingforwardforsometime. Suchacommitmentwouldrestona"grandbargain"betweentwogroupsofcountries:thehighincomemature economiesofNorthAmericaandWesternEuropeandtherapidlygrowing,lowerincomecountriesthatmakeupmost oftherestoftheworldplusJapan.Thelowerincomefastgrowers(andJapan)owemuchoftheirspectacular successtotheopennessoftheworldeconomythatenabledthemtopursue"exportled"or,moreaccurately, "outwardoriented"developmentstrategies.Hencetheyneedinsuranceagainstanyreversiontoprotectionbythe "oldrich,"includingproceduralsafeguardsagainst"processprotection"andothersubtlemethodsofundoingprior marketopening.Intheregionalagreementsalreadyadopted,theyhavedemonstratedawillingnesstopaythe premiumnecessarytobuysuchinsurance. Thereisasecondcomponentofthe"insurancemotive"inanumberofdevelopingcountries:insurancethattheir domesticsuccessorswillnotreversetherecentliberalizationoftheirowneconomies.Suchreformscanbe"locked in"bybindingthecountry'sliberalizationininternationalagreements,regionaland/orglobal.Suchbindingsapplyonly totradeandinvestmentpoliciesanddirectlyrelateddomesticmeasuresbutitwouldbedifficulttoreversemost domesticreformsifitwereimpossibletoraisenewexternalbarrierstosupportareversiontodirigism. MexicowasmotivatedbysuchapackageofexternalandinternalconsiderationstoproposeNAFTA,joinAPECand concludetradedealswithanumberofothercountries.SimilarfactorshaveplayedamajorroleintheotherLatin AmericancountriesastheypursuetheirsubregionalliberalizationsenroutetoaFTAA.Theexternalelementofthis "insurancestrategy"hasbeenimportantformanyAsianmembersofAPEC. TheAsianandLatinAmericancountrieshavebeenpredominantlyconcernedaboutapossiblereversiontoprotection intheUnitedStates,byfartheirlargestmarket,andhencehaveemphasizedtradedealswiththatcountry.Theyare alsoconcernedaboutEurope,however,soarepursuingthatdimensionaswell:Mercosurthroughapendingtrade agreementwiththeEuropeanUnion,EastAsiathroughitsnewsummitswiththeEuropeans.Neitherofthese arrangementsarelikelytoproducemuchsubstance,however,soEastAsiaandLatinAmericawhicharelikelytobe thetwofastestgrowingpartsoftheworldeconomyoverthecomingdecadeswouldbenefitgreatlyfromengaging EuropeinthesamekindoffreetradecommitmentstheyhavealreadyelicitedfromtheUnitedStates.Thiscan probablybedoneonlythroughaglobaleffortintheWTO.13

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Thesecondpartofthe"grandbargain"wouldprovidethehigherincomecountrieswithincreased,andeventuallyfull, accesstothemarketsofthelowerincomebutrapidlygrowingcountriesaroundtheworld(andJapan).Mostofthis lattergroup,despitetheirimpressiveliberalizationsoverthepastdecadeorso,retainsubstantialtradebarriers. Thispartofthebargainwouldbeattractivetotherichcountriesbecausetheytooareheavilydependentonexport expansion.SuchdependenceisnothingnewforEuropebut,asnotedabove,hasonlyevolvedinamajorwayforthe UnitedStatesoverthepasttwodecades.Asexemplifiedbythe"BigEmergingMarkets"strategyoftheClinton Administration,thisrichcountryinterestfocusesprimarilyoncountrieswithlargeandrapidlygrowingmarketsthat stillmaintainsubstantialaccessbarriers.HencetheUnitedStatesandEuropewouldbenefitgreatlyfromthe proposed"grandbargain." Thereisnothingnewconceptuallyinthisproposalforthe"oldrich"topledgetoavoidnewbarrierswhilethe"rapid growers"committoeliminatetheirs.Suchasymmetricliberalizationhaslainattheheartoftheagreementson NAFTA,theFTAAandAPECandeventheEuropeanUnion.Intheseregionalversionsofthe"grandbargain,"the poorercountrieshaveboughtassuredcontinuedaccesstothemarketsoftherichcountriesbyagreeingtocatchup overtimewiththosecountries'priorliberalizations.Thereisaroughjusticeintheproposedasymmetrybecausethe willingnessoftherichcountriestofacilitatethe"outwardoriented"growthstrategiesofthepoor,byreducingtheir barriersmuchfurtherandmuchfaster,enabledsomeofthelattertostartcatchingupwiththeincomelevelsand standardsoflivingoftheformer. ThenovelelementhereistoshiftthecontexttotheglobalplaneviatheWTO.Thiswouldconsolidateandlinkthe existingregionalagreements.ItwouldalsobringtheformerSovietUnion,SouthAsia,Africaandthefewother uncoveredpartsoftheworldintothedeal.Itwouldkeepthebicyclemovingforwardforsometime. ThePathtothe"GrandBargain" Whowouldtaketheleadinproposingandpushingforthe"grandbargain"?OnepossibilitywouldbetheUnitedStates andtheEuropeanUnion,theultimateclosersofeachofthemajormultilateraltradenegotiationsinthepostwarperiod todate.ConversionoftheTAFTAideaintotheirassumingjointleadershipofanewglobalinitiativewouldbean extremelyhealthydevelopment. Therearereasonstodoubtthesuccessofsuchaneffort,however.TheUnitedStatesattemptedtomoveinthat directionwithits"OpenMarkets2000"proposalattheG7summitinNaplesinJuly1994butwasturneddownbythe EuropeanUnionreplicatingEurope'srejectionoftheAmericanefforttorestartglobaltradetalksin1982soonafter thecompletionoftheTokyoRound.SeveralEUmembersblockedaproposalbytheEuropeanCommissiontojoin theUnitedStatesattheMadridsummitinlate1995inagreeingtostudytheTAFTAideaaconclusionthatwas substantivelycorrectbutwasadoptedforprotectionistreasonsratherthanthesystemicconsiderationsadvanced here.SeeninthecontextoftheEU'soverarchingfocusonitsownregionalconcerns,centeringontheexpansionof itsmembershiptotheeastandthedeepeningofitsintegrationincludingmonetaryunion,itisdoubtfulthatEurope willbepreparedforsuchaleadershiproleintheglobalsystematanyearlydate. ThealternativeisAPEC.Fromitsinceptionin1989,APEChasproceededunderthemantraof"openregionalism"a termdeliberatelychosentocontrastitwiththeinwardlookingregionalismthatmanyAsiansfearedmightprevailin bothEuropeandNorthAmerica.EverypronouncementofAPECleaders,includingtheBogorDeclarationthat committeditsmembershipto"freeandopentradeandinvestmentintheregion,"hasemphasizedthegroup's commitmenttofurthergloballiberalizationanditsantipathytowardbecominganexclusionarybloc. APEChasnotdefined"openregionalism."Itsmembershavehowever,committedthemselvestocontinuereducing theirbarrierstononmembercountriesastheymovetowardfreetradeintheregion.Someofthemmightextendtheir APECliberalizationtononmembersunconditionally,whichtheyareperfectlyfreetodoasAPEChasnointentionto becomeacustomsunionwithacommonexternaltradepolicy. Mostlikely,however,APECwilloffertogeneralizeitsregionalliberalizationtotherestoftheworldonareciprocal basis.Asnotedabove,thisisthepropercourseforanytradingareathatislargeenoughtoinduceoutsidersto respondpositivelytoitsproposals.APECclearlymeetsthatcriterion,accountingforabouthalftheworldeconomy andalmosthalfofworldtrade. TherearetworeasonswhyAPECshouldconditionaccesstoitsliberalizingmarketsonreciprocaloffersby nonmembers.Thefirstisexternal:globalliberalizationandhenceworldeconomicbenefitswillbedoubledbecause outsiderscouldnotaffordtorejecttheoffer.Thesecondreasonisinternal:asnotedearlier,thepoliticaleconomyof

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tradepolicyrequiresthemobilizationofdomesticexportinterestsbyofferingthemsufficientlyenhancedaccessto foreignmarketstoinducethemtoundertaketheeffortnecessarytowinnationalsupportforliberalization. APECthushasthecapability,theinclinationandthepositioningtoinitiatethenextmajorepisodeofglobaltrade liberalization.Ithasalreadycommittedtoachievefreetradeinitsregionandishardatworkconvertingitsvisioninto practicalreality.Itisthusinanidealpositiontoassumeleadershipoftheglobaltradingsystem.14 TheWorldTradeOrganizationwillbeholdingitsfirstministerialmeetinginSingaporeinDecember1996.Thiswould bethenaturaloccasiontobegintheprocessofachievingglobalfreetradeintheearlypartofthe21stcentury.APEC couldgalvanizetheprocessbyseekingagreementofthefullWTOmembershiptoemulateitsgoalofachievingfree tradeandinvestmentby2010/2020. Itwouldprobablybepremature,however,toseekaglobalfreetradepledgeatthattime.TheUnitedStateswillhave justconcludedapresidentialcampaigninwhichtheincumbent,whotookacourageousleadinsigningfreetrade pactsduringhisfirsttwoyearsinoffice,declinedtodiscusstheissueandhisopponentswereequallyhesitant.In addition,theEuropeanUnionwillbepreoccupiedwellinto1997bytheInterGovernmentalConferenceonthefutureof itsintegrationprocess,includingitstradeandotherexternaldimensions.Thetwolargesttradingentities,thathave traditionallydeterminedthecourseoftheworldtradingsystem,maynotbereadyformajorinitiativesthisyear. Moreover,APECtheproposednewleaderforgloballiberalizationmaynotyetbefarenoughalonginimplementing itsownplanstoprovideacredibleinducementforotherstojoinit.ItwouldhavetotakeconvincingstepsatSubicto demonstratethatitwasseriousaboutfulfillingitsownregionalgoals.OnewaytodosowouldbeforAPECtomake suchcommitmentsinasinglekeysector,forexample,theInformationTechnologyAgreementthatisnowbeing activelydiscussed,andthenchallengetherestoftheWTOtojoinin. IndeterminingarolefortheSingaporeMinisterial,however,itisimportanttofirstsetlongtermsystemicgoalsand thenworkbackward.Anagreementtoachieve"globalfreetradeby2010"couldplausiblybereached,ifnotat Singapore,atthesucceedingWTOmeetingin1998.Todoso,planningneedstoproceedonanumberoffronts. First,thebiannualWTOmeetingin1998shouldbeconvertedintothefirstGlobalTradeSummit.TheGATTnever heldasummitmeeting.YetsummitshavebeenaregularfeatureoftheEuropeanintegrationprocess,therapid evolutionofAPECsince1993,thelaunchoftheFTAA,andkeysubregionaltradearrangementsincludingAFTAand Mercosur. AnnualsummitshaveprovenparticularlyeffectiveinAPEC,elevatingtheinstitutionfromapurelyconsultativeforum toanengineofregionalandpotentiallyglobaltradeliberalizationinonlytwoyearsandmaintainingstrongpressure onministersandofficialstokeeptheprocessmoving.AsianandEuropeanleadershaveinitiatedaseriesofbiannual consultativemeetings.TheWTOshouldbringtogetheritsheadsofgovernmentatthelasthighlevelmeetingofthe worldtradebodyinthe20thcenturytosetavisionfortheglobaltradingsysteminthe21stcentury. Second,theSingaporeministerialshouldappointaWisePersonsGrouptomakerecommendationsforthefutureof thetradingsystem.Asimilargroup,chairedbyFritzLeutweilerofSwitzerlandandincludingSenatorBillBradleyfrom theUnitedStates,wasappointedbytheGATTinlate1983.Itsreportinearly1985madeanimportantcontributionto thedecisiontobegintheUruguayRoundin1986.TheAPECvisionasendorsedintheBogorDeclarationwasinitially proposedbythatorganization'sEminentPersonsGroup.15 Third,Singaporeshouldinitiateaworkprogramtopreparetheissuesthatwouldformthesubstantivecoreofthe "globalfreetrade"negotiations.Fortunately,thereisalreadywidespreadagreementonthatagenda.TheUruguay Rounditselflaidoutanambitiousscheduleoffurthernegotiationsincludingtelecommunicationsandmaritime servicesin1996,financialservices(again)in1997,governmentprocurementin1999,andagricultureandservicesin 2000.16ConsultationsamongtheWTOmembershaveidentifiedanadditionalsetofprioritytopicsalongthelinesof thoseoutlinedabove:competitionpolicyincludingitsrelationshiptoantidumping,investment,tradeenvironment linkages,perhapslaborstandardsandtheirrelationshiptotrade,andseveralothers. AnotherimportantpreparatorystepistocompletethemembershipoftheWorldTradeOrganization.Singaporeshould acceleratetheefforttobringChina,Russiaandtheotherlargenonmembersintotheinstitutionintimetoparticipate fullyintheproposednegotiations.Nomoveto"globalfreetrade"canbeeffectivewithoutthesecountriesthough theymustofcoursecomplywiththeorganization'srequirementstogetin.

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Finally,theWTOneedstofirmlyestablishitsowncredibilitythroughouttheworld.Thiswillmeaneffective implementationofitsdisputesettlementmechanism,moretransparencyofitsoperationssothatallinterested partiesaroundtheworldcanseehowitworksinpractice,andefficientmanagementoftheoverallorganization.Trust intheinstitutionitselfifanecessaryprerequisiteforgivingittheadditionalresponsibilitiessuggestedhere,including toallayfearsthatitcan"violatethesovereignty"ofitsmembercountries. Beyondthesepreparatorysteps,anumberofkeyquestionsremaintobeansweredbeforea"globalfreetrade" pledgecouldbeadopted.Forexample,howshould"freetrade"bedefined?Shoulditapplyonlytotariffs,quotasand otherborderbarrierswhichwouldrequiresubstantialliberalizationinmanydevelopingcountriesbutnotmuchinmost oftheindustrialworld?Orshoulditextendtomeasuresbehindtheborder,atleastforcountrieswhereasinJapan theyplayacentralroleincurrentandforeseeabletradeconflicts? Anotherkeyissueisthedefinitionof"reciprocity"or"comparability."Allagreeinprinciplethatanysuchnegotiation mustelicitfaircontributionsfromallparties.Butitisextremelydifficult,inpurelyintellectualtermsevenbefore turningtothepoliticsoftheproblem,toequate"concessions"acrossissuesasdisparateastariffsandnational competitionpolicies."Reciprocity"alreadylostmostofitsquantitativesignificancewhentheGATTturnedto negotiatingnontariffbarriers,intheTokyoRoundandevenmoresointheUruguayRound,anditmaybeimpossible torestoreanyprecisiontotheconcept.Nevertheless,thepoliticaleconomyoftraderequireseachcountryto demonstratethatitsown"concessions"werematchedbythoseofitspartnersanditishighlydesirabletobuttress thecasewithordersofmagnitudeifnotpreciseestimates. Anotherquestioniswhetherthegoalof"globalfreetrade"shouldbeachievedviaoneormorecomprehensivetrading "rounds"withasingledeadlineorvia"continuousnegotiations"overtimeonindividualissues.Attheendofeach previousround,includingtheUruguayRound,virtuallyallparticipantshavedismissedtheideaoflaunchingsuchan allencompassingefforteveragain.Such"tradefatigue"isfullyunderstandablefromthosewhohavehadtolaborto bringsuchanefforttoconclusion,especiallywhenittooksevenyearsasinthelatestexample. Ontheotherhand,thelogicofroundshasalwaysprevailedinthepast.Comprehensivecoveragehasproven necessarytoofferthemaximumscopefortradeoffsacrosssectorsandissues,therebyinducingthegreatest numberofcountriestoagreetothelargestpossibleliberalization.Sectoralorissuespecificefforts,bycontrast, requireintraissuetradeoffsthattendtominimizetheheadwaythatcanbemade.Therecordtodateofissuespecific negotiationssincetheendoftheUruguayRoundisdiscouraging:theUnitedStatesrejectedthefinancialservices packagein1995,andthetelecommunicationsandmaritimeserviceseffortsfalteredearlierthisyear.Themessage, onceagain,isthatbroaderinducementsandpackageswillprobablybeneeded.Thetriedandtruealternativeofa roundshouldbekeptforemostinmindespeciallytoachieve"globalfreetradeby2010,"perhapsthemostambitious ofallthemultilateraltradeinitiativeseverattempted. TheSingaporeMinisterialinDecember1996neednotdecidetoembarkonapathto"globalfreetradeby2010"nor whethertoconvertitssuccessormeetingin1998intoaGlobalTradeSummit.Itshouldlaunchaworkprogramonall theseissuesanywayaspartoftheroutineevolutionofthetradingsystem,includingitspreparationforwhatever mightcomenext.Asnoted,manyoftheissuesarealreadyontheagendaandshouldbepursuedwithoutdifficulty. Thetacticalconsiderationscanbeaddressedlateraslongasthebroadstrategicvisionbeginstoevolvelaterthis yearandaprocessissetinplacethatwouldpermitittoeventuate. WillItFly? Thefinalquestionisthemostcrucial:issuchaproposalpoliticallyfeasible?Willitflyinthekeycountries?The doubtsandfearsoutlinedabovesuggestthataherculeaneffortwouldbeneededtopullitoff. Themainproblem,aswellasthepivotalactor,willprobablybetheUnitedStates.Mostothercountrieshave traditionallybeenmoredependentontradeandhavethusaccepted,ifsometimesgrudgingly,thecasefor liberalization.TheEuropeans,foralltheirapparentinsularity,haveremovedallbarrierstoeachotherandpointout quitelogicallythatitwouldbetotallyinconsistentforthemtoimposenewrestraintsonnonmembers.Japanand Koreacannotaffordtoblockprogresssoughtbyothers,asindicatedwhentheyagreedtoliberalizericeimportstheir politicallymostsensitivesectorbyfarattheendoftheUruguayRound.Mostdevelopingcountriesareevenmore dependentontradeand,asnotedattheoutset,havebeenactivelyengagedforsometimeinaprocessof competitiveliberalization. Perhapssurprisingly,therearetworeasonswhythecasefor"globalfreetradeby2010"shouldberelativelyeasyto sellintheUnitedStates.First,increasedtradecanbeabighelpinenablingAmericatosolveitsmostpressing

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economicandsocialproblemsasdescribedabovewagestagnationandaregressiveshiftinincomedistribution. Exportjobspay1520percentmorethantheaveragewage.Workerproductivityatexportingfirmsis2040percent higher.Thesefirmsexpandemployment20percentfasterthannonexportingfirmsandare10percentlesslikelyto fail.Smallandmediumsizedexportersdoevenbetterthanlargeonesandaccountfor70percentofallsales abroad.17Henceevenashifttoexportjobsfromimportcompetingjobs,whichalsopaymorethanthenational average,wouldhelpconsiderablyevenifithadnoimpactontheAmericantradebalance. Betteryetwouldbeashifttoexportjobsfromthenontradeable(mainlyservices)sector,whichpaysconsiderably lessthanalltradeables(mainlymanufacturing).ThisiseminentlyfeasiblefortheUnitedStateswithoutraisingmajor internationalproblemsbecauseitcontinuestorunannualtradedeficitsof$150200billion.Animprovementofeven $100billioninAmerica'snetexternalposition,loweringthedeficittoabout1percentofGDP,wouldcreateabout2 millionmoreofthesehighpayingexportjobsthanwouldbelosttogrowingimports.Totaleliminationoftheexternal deficitwouldhavetwiceaspositiveanimpact. Tobesure,substantialadjustmentsinAmerica'sinternaleconomywillberequiredtoachievesuchshifts.National savingsmustriseby12percentofGDPtoobviateourneedforthenetcapitalinflowsthatarethecounterpartofthe currentaccountdeficits,18butarelikelytodosoifthebudgetdeficitiseliminatedoverthenextseveralyearsevenif privatesavingsfailtoreboundfromtheircurrenthistoriclows.Individualswillneedbettereducation,trainingand retrainingtoenablethemtocompeteeffectivelyintheworldeconomybutwillneedtheseimprovementstoraise theirincomeswithorwithoutfurtherglobalizationoftheAmericaneconomy. Theseinternaleffortswillfail,however,ifAmericanexportsfailtowinfullaccesstoforeignmarkets.Exportshave donewellinrecentyears,almostdoublingtheirshareoftotalUSoutputjustsince1985.Theywouldmakean enormouscontributiontosolvingourmostbasiceconomicandsocialproblemsiftheycoulddoubleagainby2010. "Globalfreetradeby2010"couldmakeasignificantcontributiontoenablingtheUnitedStatestoreachthatgoal. Barrierstomarketaccessremainquitehighinmuchoftherestoftheworld,especiallythemostrapidlygrowing marketsofAsia.AneliminationofJapan'sbarriersalonecouldexpandAmericanexportsby$20billionannually creating400,000verygoodjobsorevenmore.19LatinAmerica'sbarriersaveragethreetimesasmuchasourown. "Globalfreetrade"inpracticewouldmeanasharpreductioninbarriersinmostothercountriescomparedwithvery littleliberalizationintheUnitedStates,wheremarketsarealreadylargelyfree.20Thisasymmetricnatureofthe liberalizationprocess,asdescribedaboveindepictingthe"grandbargain,"isthesecondcompellingreasonwhyit shouldbereadilyacceptableintheUnitedStates. TheUnitedStateswouldnotreceiveatotallyfreerideinsuchanegotiation.Othercountries,inboththeindustrial anddevelopingworld,wouldinsistthattheUnitedStatessubjectitsimportsafeguardmeasures(suchas antidumpingduties)anditsexportpromotiontools(suchasSection301)toexpandedmultilateraldisciplines.Thisis amodestpricefortheUnitedStatestopay,however,andthereductionofactualbarriersremainsalmostwholly asymmetric. FromtheAmericanstandpoint,suchaninitiativeistheonlywaytoachieveatruly"levelplayingfield"acrossthe worldeconomy.Itwouldbringforeignbarriersdowntoourown.Atastroke,itwouldgreatlyincreaseandrollintoa singlepackagethebenefitsthatwouldotherwisebeprovidedfortheAmericaneconomybyNAFTA,APEC,andthe FTAA. UnlessonecontemplatesareimpositionofhightariffsandquotasbytheUnitedStates,itisfruitlesstodebatethe impactofpasttradeliberalizationnegotiations.Theiroutcomeisclear:arelativelyopenmarketintheUnitedStates contrastedwithseverelyimpededmarketsinmanyoftheworld'slargestandmostrapidlygrowingeconomies.The cardinalgoalofAmericantradepolicymustbetobringtheotherstoitsownlevelasquicklyaspossible.The regionalinitiativesofthe1990shaverepresentedinitialstepsinthatdirection."Globalfreetrade"byadatecertainis theonlywaytocompletetheprocess. ThereisanotherstrongreasonfortheUnitedStatestosupport,indeedtohelplead,suchaninitiative:overallforeign policy.Tradeandeconomicsarenowatthecenteroftheglobalagendaformostcountries.TheonlywayforAmerica toretaingloballeadershipinthepostColdWarperiodistoremaintheleaderontradeasitwasasrecentlyas1993, withthecompletionofNAFTAandtheUruguayRound,and1994withthelaunchofAPECandtheFTAA.Foreign policy,aswellaseconomic,considerationscallforrenewedAmericanactivisminthisarea.

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Tobesure,amajorpoliticaldebatewillbeneededintheUnitedStatestoendorsesuchaninitiative.Thatdebatewill havetocomeanyway,probablyin1997or1998,astheadministrationofthedayseeksCongressionalapprovalto proceedwiththeliberalizationsalreadyagreedinAPECandtheFTAA."Globalfreetrade"wouldinfactaddonly modestlytotheneededauthority,addingEurope(withwhichtradeisalreadylargelyfree)andafewotherdeveloping countriestothepackagealwaysonareciprocalbasis,ofcourse. Buttheideaof"freetrade"withChinaandJapan,orevenBrazilandArgentina,willsurelytriggeranationaldebate besidewhichtheNAFTAlegislationof1993willpalebycomparison.Historyshows,however,thattheUnitedStates isfarmoresuccessfulwithlargeinitiativesthansmallones,certainlyintrade.Sweepingvisions,suchasthe KennedyRoundanditssuccessors,engagethePresidentandtheCongressinamajornationalventure.The businesscommunityandothersupportiveconstituenciesmaketheinvestmentsneededtocarrytheday.Once launched,theinitiativesthenhavesufficientmomentumtoovercomerearguardeffortstoderailorevenerodethem. Thesepoliticalrealitiescanbeseenatpresent.TheinitiativetoextendNAFTAtoChilehasfalteredinpartbecause thepotentialgainsaretoosmalltomobilizeenoughdomesticsupporttoovercometheopposition,howevermodest, ofthosesectors(suchaswine)andinterests(suchaslabor)thatopposetheidea.ThepoliticalproblemwithNAFTA mayhavebeenthatitwastoosmall:itappliedtoonlyonecountrythatwasabout4percentthesizeoftheUnited States,waspursuedwithoutapriorCongressionaldebate,andlulledPresidentClintonandthebusinesscommunity intowaitinguntilthelastminutebeforecommencingtheireventuallysuccessfullobbyingefforts. TheprotradeconstituenciesintheUnitedStatesrealizethatthebicyclemustbekeptmovingforward,thatthe globalsystemmustbereemphasizedtoavoidtheriskthattheregionalinitiativesdesirableastheyarecould evolveinanunhealthydirection,andthattheywillhavetocomeforwardin1997or1998tomakethecaseagain. Presidentialleadershipwillbeessential,asalways,andcanbestbeguaranteedifthePresidenthimselfweretoplay aleadingroleoreventheleadingroleincatalyzingtheentireprocess. GlobalFreeTradeby2010 Bothinternationalanddomesticconsiderations,aroundtheworldandwithintheUnitedStates,thuspointinasingle direction:theinitiationofanagreementintheWorldTradeOrganization,atSingaporeorwithinthenextfewyears,to achieveglobalfreetradebyadatecertainintheearlypartofthe21stcentury.Suchaninitiativeisneededtokeep thebicycleofcompetitiveliberalizationmovingforward.Itisessentialtoprovideeffectivemultilateralmeanstodeal withthetradeandotherinternationaleconomicdisputesthatwillinevitablyincreaseaseconomicinterdependence growsfurther.Itisnecessarytoavoidtheriskthattherapidlyliberalizingregionalarrangements,ornewonessuch asTAFTA,couldturnintohostileblocswithadverseeffectsoninternationalsecurityaswellasglobalprosperity. FromanAmericanstandpoint,"globalfreetrade"wouldprovideanopeningofmarketsinthelargestandfastest growingeconomiesintheworldandthusstimulaterapidgrowthinexportsandthegoodjobsthattheyproduce. FromaEuropeanstandpoint,suchexportgrowthcouldbringdownunemployment.FromthestandpointofAsiaand therestofthedevelopingworld,outwardorientedgrowthstrategiescouldbesustainedwithanassurancethatthe richindustrialmarketswouldnotturninward. Theproposed"grandbargain"wouldglobalizetheenormouslyencouragingprogressinbridgingtheNorthSouthgap thathasbeenpioneeredinrecentyearsbythekeyregionalagreementstheEuropeanUnion,NAFTA,APEC,and theFTAA.Thecountriesthataccountforthebulkoftheworld'spopulation,andvirtuallyallofitsgrowth,would becomeincreasinglyenmeshedwiththe"oldrich"inawebofcooperativeandmutuallybeneficialeconomic arrangements.Therecouldbenobetterinvestmentinsecuringfuturepeaceaswellasprosperity. Whenthevictoriousalliesconstructedtheeconomicsystemforthepostwarworld,theyincludedanInternational TradeOrganization(whichbecametheGATT)toreducebarriersandresolvecommercialdisputesamongnations. WhenEuropeunitedinthelate1950s,theUnitedStatesinitiatedaseriesofmultilateralliberalizationstobothforgea transAtlanticpoliticalpartnershipandreducethediscriminatoryimpactofthenewCommonMarket.Whenthose globaleffortsfalteredinthe1980sandearly1990s,partlyduetotheendoftheColdWar,regionalliberalization agreementsblossomedaroundtheglobetokeepthebicyclemovingforwardandprovideinsuranceagainstthe securityaswellaseconomiccostsoffailureatthecenter. "Globalfreetradeby2010"wouldcontinue,andinasensecomplete,theseearlieractsofstatesmanship.Itwould enhancetheprosperityofallcountriesbyunderwritingtheultimatesuccessforcompetitiveliberalization.Itwould precludetheriskthatregionalarrangementscoulddevelopintohostileblocsoutsideanycomprehensiveglobal framework.ItwouldterminateanyriskofNorthSouthconflictbyengagingbothsetsofcountriesinacooperative

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multilateralenterprisethatmettheneedsofboth. Itcouldturnouttobeprematuretoattempttolauncha"globalfreetrade"initiativein1996.Butplanningshouldbegin andinitialstepstakentopavetheway.Decisionsshouldbemadeinthenextcoupleofyearstoheadofftherisk thatkeyindividualcountries,includingtheUnitedStatesortheEuropeans,orexistingorpotentialregionalgroupings, wouldveerinotherdirections.Thevisionof"globalfreetradeby2010"shouldguidethispartofinternationalaffairs astheworldentersthe21stcentury. Notes 1.Forexample,theoriginalEuropeanEconomicCommunityandtheAustraliaNewZealandCloserEconomic Relationshipnegotiated12yearperiodstophaseouttheirbarriersbutcompletedtheminseven. 2.AnexcellentanalysisofthepoliticalrequirementsforsuccessfulreformcanbefoundinJohnWilliamson,The PoliticalEconomyofPolicyReform,Washington:InstituteforInternationalEconomics,January1994. 3.SeeI.M.DestlerandJohnS.Odell,AntiProtection:ChangingForcesinUnitedStatesTradePolitics , Washington:InstituteforInternationalEconomics,September1987. 4.SeeYoichiFunabashi,AsiaPacificFusion:Japan'sRoleInAPEC,Washington:InstituteforInternational Economics,October1995. 5.PaulKrugman,TheMoveTowardFreeTradeZones,PolicyImplicationsofTradeandCurrencyZones ,The FederalReserveBankofKansasCity,August1991. 6.SeeRunninginPlace,RecentTrendsinUSLivingStandards,Washington:CompetitivenessPolicy 7.Council,September1996. 8.SeeEllenL.Frost,TheNewTransatlanticMarketplace,Washington:InstituteforInternationalEconomics, forthcoming. 9.YokoSazanami,ShujiroUrata,andHirokiKawai,MeasuringtheCostsofProtectioninJapan,Washington: InstituteforInternationalEconomics,January1995,concludethattheconsumercostsofthesebarrierstotalatleast 34percentofJapaneseGDPandthattheyblockatleast$50billionofimportsannually. 10.ThiscaseismadepersuasivelyinJohnWhalleyandColleenHamilton,TheTradingSystemaftertheUruguay Round,Washington:InstituteforInternationalEconomics,June1996. 11.SeeC.FredBergsten,TheUnitedStates,Japan,andAPEC,lectureatSAISJapanForum,Washington:October 26,1995. 12.SeeEdwardM.Graham,GlobalCorporationsandNationalGovernments ,Washington:InstituteforInternational Economics,May1996. 13.SpecificproposalscanbefoundinC.FredBergstenandC.RandallHenning,GlobalEconomicLeadershipand theGroupofSeven,Washington:InstituteforInternationalEconomics,June1996. 14.SeeNoboruHatakeyama,CommentinJeffreyJ.Schott,editor,TheWorldTradingSystem:ChallengesAhead, Washington:InstituteforInternationalEconomics,forthcoming,1996. 15.APECofcoursehasundertakennumerousinitiativesinadditiontotradeliberalizationandwillremainan extremelyimportantinstitutionevenifitsregionaltradeplansareglobalized.Oneofitscardinalgoalsistosolidify relationsbetweenEastAsiaandNorthAmerica,forsecurityaswellaseconomicreasonswhichitcanpursue throughtradefacilitationandbroadereconomiccooperationaswellliberalizationinitiatives. 16.SeeespeciallythefirsttworeportsoftheEminentPersonsGroup:AVisionforAPEC:TowardsanAsiaPacific

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EconomicCommunity,Singapore:AsiaPacificEconomicCooperation,October1993,andAchievingtheAPEC Vision:FreeandOpenTradeintheAsiaPacific,Singapore:AsiaPacificEconomicCooperation,August1994. 17.AfulllistingisinJeffreyJ.Schott,WTO2000:SettingtheCourseforWorldTrade,Washington:Institutefor InternationalEconomics,September1996. 18.TheseandotherdataarederivedinJ.DavidRichardsonandKarinRindal,WhyExportsReallyMatter:More!, Washington:InstituteforInternationalEconomicsandManufacturingInstitute,February1996. 19.Thesenetcapitalinflows,thoughessentialtofunddomesticinvestment,areadirectcauseofthetradedeficit becausetheypushuptheexchangerateofthedollarandtherebyreduceAmericancompetitivenessinworldmarkets (includingourown). 20.SeeC.FredBergstenandMarcusNoland,ReconcilableDifferences?UnitedStatesJapanEconomicConflict, Washington:InstituteforInternationalEconomics,June1993. 21.America'sremainingbarrierscarryaneconomiccostoflessthan$10billioninaneconomyof$7trillion.See GaryC.HufbauerandKimberlyAnnElliott,MeasuringtheCostsofProtectionintheUnitedStates ,Washington: InstituteforInternationalEconomics,January1994.

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