Trade Strategies for a New Era

Ensuring U.S. Leadership in a Global Economy

January 01, 1998

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Foreign policy analyses written by CFR fellows and published by the trade presses, academic presses, or the Council on Foreign Relations Press.

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Trade Strategies for a New Era proposes concrete ways to cut the U.S. trade deficit, to deal with commercial problems arising from Asia's economic woes, and to bring back on track the recently derailed U.S. presidential fast-track authority. It offers a strategy to build the necessary bipartisan support inside the United States for trade policy and to help U.S. companies gain access to foreign markets.

A collection of short chapters written by key members of Congress, former top officials of the U.S. Trade Representative's Office, expert analysts, and senior business executives, this book goes beyond traditional trade concerns to address problems of global corruption, regulatory reform, environmental and labor objections to trade, and the public's growing distrust of economic globalization. The book also sheds new light on how the United States has acquired a strong competitive position in the high value-added segments of most industries—from steel to computers to textiles—even as it has yielded its dominant position manufacturing products requiring little input from technology or skilled workers.

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This book weaves together the threads of a new vision for U.S. trade policy and a strategy for pursuing it. That vision must integrate a comprehensive program of multilateral, regional, and bilateral negotiations with a domestic policy agenda that will equip the American people to meet the challenges of global competition.


Since World War II, the United States has played a leading role in global trade negotiations, both for its own domestic economic reasons and for global strategic purposes. The results have been impressive on both fronts. Trade remains the major engine of growth for the economy, with exports expanding more than twice as rapidly as domestic gross national product (GNP) between 1970 and 1994. The economic prosperity of countries that took advantage of global trade liberalization hastened the end of the Cold War. This outcome has validated the bold economic vision set forward after World War II by great American leaders such as George Marshall and Cordell Hull: The expansion of trade based on market principles has created a more prosperous and peaceful world.


Today the United States and the world need a new vision and a new game plan. The globalization of the world economy, the technological revolution that is transforming the workplace, and demographic changes that are straining social welfare systems are creating new challenges and opportunities for trade policy. Unprecedented consensus exists among governments around the globe on the economic advantages of market competition and trade liberalization. At the same time, domestic dislocations are creating new political resistance to competition and trade-enhancing reforms. This situation calls for bold leadership by the president and other world leaders to pursue trade liberalization opportunities and to address the economic and social adjustment problems that most of the world has in common.


In pursuing a proactive trade strategy, the United States should have four strategic objectives:
 

  • A level playing field with respect to all public policies that impede the globalcontestability of national markets, including domestic regulatory policies, investment policies, competition policies, and policies on bribery and corruption.
  • Gradual elimination of tariff barriers to trade by means of regional free tradeagreements, global sectoral free trade agreements, and more comprehensive multilateral negotiations at some future date.
  • Domestic and international consensus on the best means of strengthening international cooperation on labor and environmental issues.
  • Deeper economic, political, and social ties in the three regions bordering the United States--Americas, the Pacific Basin, and the North Atlantic--established through the negotiation of regional and bilateral agreements appropriate to each region.
     

Guided by these strategic objectives, the United States should concentrate its near-term effort on dismantling trade and investment barriers that impede foreign market access for the most promising U.S. industries. In general, those tend to be high-value manufactured and agricultural products and infrastructure equipment and services.


The U.S. government will need the support of the American people to implement trade liberalization measures. Many Americans are being asked to change their jobs and even their occupations as a result of recent historic shifts in the world economy. Americans, like people elsewhere, do not like disruption in their lives, the uncertainty it creates for their families, and the loss of income for those least able to afford it.


In order to persuade the American people to support a forward-looking trade agenda, the U.S. government must make it easier for Americans to change their jobs through improved manpower training and education programs and the greater portability of job-related pension and health insurance benefits. The government also should adopt domestic macroeconomic policies and international monetary policies that reduce the adjustment burdens imposed by misaligned exchange rates.


Above all, the president must persuade the American people that the United States must lead international efforts to tear down barriers to trade and investment, both in its own economic self-interest and in the interest of greater world peace and stability. The nation's adjustment problems must be put in perspective. After all, the United States is in better economic shape than most countries in the world, and its adjustment problems pale in comparison with those in most developing countries and formerly communist countries. In view of the military and economic costs imposed by the Cold War, the United States has a tremendous stake in making sure that these countries are smoothly integrated into the world economy.


This book provides insight into these issues, which are at the heart of the current debate over U.S. trade policy, and suggests how the United States could respond to the challenges ahead. Each of the authors has put forward personal ideas that offer policymakers a number of possible options in the face of future trade challenges.


This chapter seeks to weave together the various issues addressed by the individual authors and to indicate how they could fit into an overarching trade strategy. There is a great deal of consensus among this group of experts on the general directions that U.S. trade policy should take. But the views expressed in this chapter are those of the editor.


The Domestic Economic Case for Trade Liberalization

Trade has benefited the U.S. economy by stimulating growth, by expanding output in the most productive sectors of the economy, and by creating new jobs that pay above-average wages. Labor productivity in plants producing for export has been 40 percent higher than in equivalent plants producing only for the home market, and salaries for workers employed in export-related jobs have been 15 percent higher than average wages in manufacturing. Employment in exporting plants rose by 9 percent between 1992 and 1997, while employment in nonexporting plants declined by 14 percent. Imports have pushed American firms producing competive products to be more productive. Imports also have raised the standard of living by providing a wider range of goods at competitive prices to American consumers.


Exports and imports together are now equivalent to 24 percent of domestic GNP, compared to 11 percent in 1970. There is every reason to believe that in the future trade will be even more important to the American economy than it is currently. To ensure that trade remains an engine that fuels economic growth, the United States will need to pursue policies that expand access in the most promising markets and sectors.


The United States is currently in an excellent position to take advantage of a proactive trade negotiating strategy. After a period when it had lost its competitive edge in many industries, the country has regained a strong competitive position in world markets. Surveys of the relative competitiveness of various countries have placed U.S. industries on top or close to the top. As Chapter 3 shows, many industries that suffered a deterioration in productivity in the 1970s and 1980s have made major productivity gains in the 1990s. These improvements have enabled U.S. producers to regain foreign markets in key niches of major industries, such as textiles, steel, and glassware--industries previously thought to have been lost to American producers.


The American economy has demonstrated an unparalleled capacity to generate new jobs and new businesses, and has outperformed most other developed countries in the last few years. This makes the American economy appear strong and vigorous to many other countries, even though Americans themselves do not necessarily see their economy in the same light.
 

Geopolitical and Geoeconomic Objectives

For the past 50 years, the United States pursued the global liberalization of trade barriers and the development of global, multilateral trade rules based on market principles for security as well as economic reasons. In fact, during the earlier postwar period, the United States frequently overrode its narrow commercial interests for security reasons. As other countries gained a competitive edge and became more equal trading partners, the United States became less willing to sacrifice its commercial interests for security objectives. Nevertheless, trade agreements still play an important role in achieving broad strategic goals.


Trade agreements now are the principal mechanism for establishing stable relationships among countries. More than at any time since the end of World War II, the overwhelming majority of countries have come to recognize the critical importance of market-oriented policies and trade for achieving economic growth and the concomitant improvement of living standards. An expansion of international trade and investment stimulates growth by exposing industries to international competition and creating new market opportunities. Increased international economic ties have the added benefit of making armed conflict between and among nations less likely.


Trade agreements thus have become perhaps the most important vehicle for pursuing national aspirations in the post-War world. They are effective not only in removing barriers to international trade and investment but also in dealing with a wide range of related topics. Remarkably, countries have proven willing to negotiate on a range of sensitive subjects as part of comprehensive regional economic integration agreements. Both in Europe and in the Americas, many countries have seen regional trade agreements as a convenient vehicle for embedding domestic economic and political reforms, based on market principles and democratic values, in international accords, thus giving the reforms greater permanence. Moreover, regional agreements have proven to be particularly useful for liberalizing trade and investment because often they are easier to negotiate and more flexible, and thus able to address a wider range of issues more quickly.


Regional trade agreements, however, can themselves become a source of international friction to the extent they are preferential and therefore discriminate against nonmembers. Therein lies a dilemma. The challenge for policymakers is to establish some balance between the pragmatic pursuit of regional agreements and efforts to strengthen the multilateral system as a whole. While some degree of discrimination may be necessary both to achieve domestic political support for regional agreements and to create incentives for other countries to engage in negotiations, there should be a conscious effort to use regional agreements to enhance the multilateral system wherever possible. As Bruce Stokes points out in Chapter 9, "the regional aspect of a new strategic vision is already largely in place. . . . [A] new geoeconomic vision requires a renewed American commitment to multilateralism."


Establishing a Level Playing Field in a Globalized World

The overall objective of a U.S. trade negotiating strategy over the coming years should be what it has been over the past 50 years, namely to remove barriers to international trade and investment and to establish rules for a level playing field. The United States has pursued these objectives in the belief that they are consistent with the American commitment to market competition as the most efficient means both for allocating economic resources and for creating the incentives necessary to spur innovation and entrepreneurship. 

The range of issues that need to be addressed by trade negotiations has expanded. Reductions in trade barriers at the border have exposed less visible barriers embedded in domestic regulations. Globalization of production and markets has eroded the boundary between trade and investment and between trade policy and domestic policy. It therefore is necessary to redefine the goal of open trade and a level playing field to encompass not only the absence of trade barriers but also the absence of entry barriers created by domestic regulatory policy or shortcomings in competition policy. This expanded view of the trade liberalization process is embraced by all the authors in this volume and is discussed at greater length in a number of chapters, particularly Chapters 10, 11, 14, 17, and 18.


The United States should firmly embrace this new, broader view of the scope of trade negotiations. It provides a solid conceptual foundation for what the nation has sought in practice through bilateral, regional, and multilateral negotiations and through actions taken under Section 301 of the U.S. trade law. Explicit recognition of this goal will permit more rigorous analysis of the policy requirements for global market competition and provide broader public support for negotiating objectives that otherwise are seen purely as efforts by individual companies to advance their parochial commercial interests.


A foundation for an international consensus on this expanded view of trade liberalization has been built among the relatively developed countries belonging to the Organization for Economic Cooperation and Development (OECD). OECD ministers endorsed this broader view in their 1995 ministerial declaration by stating that future multilateral trade negotiations should seek to assure that national economies are open to global competition or, to use economic jargon, to assure the global contestability of national markets.


Opening National Markets to Global Competition

A negotiating strategy that seeks to open national markets to global competition must deal with a number of issues beyond the traditional trade barriers at the border. To the extent that they hamper or distort international competition, investment policies, regulatory policies, sectoral or industrial policies, competition policies, and policies concerning bribery and corruption must all be addressed.


The authors in this volume support this expanded scope of future trade negotiations, although they may differ with respect to specific tactics or particular negotiating solutions. Chapters 11, 14, and 17 provide the most detailed discussion of the rationale and dimensions of this expanded scope of trade negotiations, and Chapter 10 discusses its particular relevance with respect to the American bilateral trade relationships with Japan and China.


The United States should declare that it intends to address each of these policy areas in all of its negotiations_bilateral, regional, and multilateral_where that is necessary to assure a level playing field. The emphasis and the nature of specific commitments sought in individual negotiations will inevitably vary in accordance with U.S. commercial interests and with what is achievable in light of the diversity or homogeneity of the countries involved in the negotiations.


Foreign Investment

Foreign investment traditionally was seen as an alternative to trade, and governments pursued agreements on investment independently of trade agreements. It has become increasingly clear, however, that in the case of certain high-value or highly complex and customized products, investment in local distribution, research, customizing, and service facilities is a prerequisite for effective market access. This relationship was considered central in the negotiations that led to the General Agreement on Trade in Services (GATS) during the Uruguay Round. Commitments on investment were made a key component of the GATS because it was quite obvious that the freedom to trade a service would be of limited economic value if firms did not have the right to establish themselves in foreign markets. In the new global economy, production, trade, and investment are generally not substitutes but complementary means for achieving the most efficient production and distribution of goods and services.


In light of these new realities, the United States should seek to incorporate investment issues in all future trade agreements, with the aim of allowing firms to choose the most efficient location of production and distribution facilities. Chapters 11 and 17 probe the content of multilateral agreements on investment, whether in the OECD or in the World Trade Organization (WTO). They argue for rules that give foreign firms fundamental rights: transparency of laws and regulations, due process in the administration of such laws and regulations, national treatment of foreign firms, and market contestability (assurance that national markets are open to competitive entry).


Regulatory Policies

Economic regulations that seek to control production, distribution, pricing, employment, and/or investment decisions can significantly impede access to national markets and preclude a level playing field. Legally established monopolies amount to a total ban on trade and international competition. Overregulation at the sectoral level inevitably limits competition and also is likely to provide fertile ground for private anticompetitive practices. Where regulations give bureaucrats extensive discretionary powers and the political process gives affected enterprises the ability to buy influence, bribery and corruption can further impede nondiscriminatory access to markets and limit international competition.


Past trade negotiations have focused on two very important areas of regulation: the establishment of technical standards and sanitary and phytosanitary standards. The relevant agreements negotiated during the Uruguay Round are the Agreement on Technical Barriers to Trade (which deals with technical and regulatory standards) and the Agreement on the Application of Sanitary and Phytosanitary Measures (which deals with measures designed to protect against harm to plants or animals or to humans consuming products made from such plants or animals). Both seek to minimize the deliberate use of standards as barriers to trade and the creation of barriers in the course of establishing legitimate national standards.


Regulatory issues also have been at the core of sectoral negotiations in services organized under the aegis of the General Agreement on Trade in Services in the WTO. The WTO agreement on international competition in telecommunication services (1997) wonderfully illustrates a recent example of such an agreement. Regulatory issues will be at the heart of all serious future efforts to liberalize trade in services, since most barriers to trade in services are embedded in sectoral regulations covering most infrastructure and professional services.


In light of the growing importance of regulatory issues in international trade, the OECD has embarked on an analysis of the relationship between regulatory reform and trade liberalization, with the objective of crystallizing principles and concepts that might aid future trade negotiations. This effort could prove particularly valuable in the area of international competition in services. Chapter 13 describes in some detail the rationale for international cooperation in the regulatory arena and some of the principles that might provide the basis for such cooperation. The subject also is explored in Chapters 10 and 17.


Competition Policies

Private anticompetitive practices can impede international trade and distort international competition as effectively as government barriers, particularly where the government delegates standards making or regulatory enforcement activities to private entities. Governments even may condone anticompetitive activities as a matter of industrial policy. Investment restrictions can prevent foreign firms from gaining access to restricted distribution systems or other essential facilities.


It is generally recognized that competition policy is a difficult area for achieving international agreement, due to sharp differences in policy among OECD countries and the absence of competition laws in many developing economies. Tackling the practices that most distort trade and international competition, however, does not require across-the-board harmonization of antitrust laws. Since the most egregious anticompetitive practices tend to be concentrated in certain industries and types of practices, a focused approach addressing those practices and industries should prove more feasible. Moreover, since government regulation and policy often are at the source of private restraint of trade, a focused effort to reform the regulations involved or to remove unnecessary restraints on the ability of new entrants to invest in distribution systems or essential facilities could prove adequate in many cases. Chapters 10, 11, and 17 provide a range of possible approaches for tackling trade distorting anticompetitive practices at an international level.


Bribery and Corruption

Bribery and corruption can effectively impede international competition where laws prohibiting such practices are weak and government officials have extensive discretionary authority to make purchasing decisions or to issue licenses for regulated activities. The United States has vital interests in this area because bribery and corruption have a particularly important restrictive effect on foreign purchases of infrastructure and construction equipment, areas where the nation has significant competitive strengths. U.S. trade strategy therefore should give priority to international efforts designed to curb corrupt practices in procurement and licensing decisions affecting international trade and investment. Curbing corruption is bound to have major benefits by reducing waste and economic inefficiencies and by contributing to political legitimacy. Few governments can afford to defend such practices.


The OECD, in response to a U.S. initiative, has developed a number of ministerial recommendations for strengthening national anticorruption laws. WTO ministers in Singapore also agreed to conduct a study on transparency in government procurement, which could lead to a strengthening of provisions in the government procurement code providing for transparency and objective bidding procedures. Work that has been launched in the OECD on regulatory reform and trade liberalization ultimately could lead to the adoption of more objective and transparent regulations. These and other initiatives are explored in detail in Chapter 12.


Institutional Issues

U.S. trade negotiating objectives in many areas are intimately related to the development of open institutional processes and modes of governance at both the national and international levels. A market-based system and the ability of U.S. products and producers to compete effectively abroad depend on the transparency of regulations and the activities of rule-making bodies, the observance of due process in both the development of new rules and their implementation, and access to objective, arm's-length dispute settlement processes. Transparency and due process do not eliminate trade barriers automatically, but they are a prerequisite for addressing them in a forthright manner. Moreover, many patently biased and potentially corrupt regulatory or procurement decisions cannot stand the light of day.


As Stokes points out in Chapter 9, "In the future, the pursuit of U.S. economic self-interest necessitates a reaffirmation of American commitment to true democratization. This course is required, not out of any philosophical commitment to one particular form of governance or as part of some new global ideological conflict but because American business functions best in a democratic environment characterized by due process, the rule of law, and transparency in decision making."


In light of the growing economic interdependence among nations and the expanding number of domestic policies affected by international rule making, there is a growing need to establish public access and accountability with respect to the activities of international economic organizations, including the World Trade Organization. Public acceptance of the new compulsory dispute settlement system in the WTO, for example, will hinge on wide agreement by affected interest groups that the process is fair, objective, and gives full consideration to all views and interests. Some progress has been made in shedding greater light on the internal proceedings of the WTO, but more will need to be done to establish the necessary conditions of democratic process.


Dealing with the Social Dimension of International Trade

Trade-related issues affecting the environment and core labor standards often are lumped together as social issues on the trade agenda. These concerns have proven to be highly controversial, both domestically in the United States and internationally. The debate in the United States has tended to divide the broad political coalition that historically has supported trade liberalization. The absence of a compromise on this issue could block political support for future trade negotiations.


The most ardent advocates propose using trade measures to induce foreign governments to adopt higher standards in environmental policies and labor standards. They hope to achieve higher international standards in these areas and to prevent downward pressures on domestic standards that result from international competition. Opponents argue that the inclusion of these topics in trade agreements is an inappropriate intrusion of nongermane and controversial issues into an overloaded trade agenda. They argue that countries should have a right to choose their own levels of performance in these areas, in accordance with a nation's income level and social preferences. Both advocates and opponents make valid points, and there is a need for a pragmatic compromise on these issues.


Environmental Policies

Developing an international consensus on the appropriate ground rules for the use of trade measures for environmental purposes will be very difficult. At the same time, the subject cannot be avoided, because national legislatures, including the U.S. Congress, have passed laws imposing trade sanctions for environmental practices. Moreover, many international environmental agreements contain trade provisions inconsistent with international trade rules under the WTO. And the economic activity spurred by greater international trade can have a negative impact on the environment. A compromise approach would be to allow trade measures where cross-border pollution directly harms the importing country or where a large number of countries agree that certain practices harm the global environment. 

In Chapter 15 Robert Morris analyzes the issues under discussion in trade forums that link trade and environment questions and puts forward a number of creative solutions for advancing international consensus.


Labor Standards

Workers in the United States and other developed countries are concerned that open international competition will undermine what they have achieved domestically in labor standards. However, studies carried out in the OECD and elsewhere have failed to find any consistent impact of trade on labor standards, although anecdotal evidence would suggest degradation of work life attributable to trade in particular cases.


This issue sparked a great deal of debate among the authors of this volume. Some, including Michael Hart, believe that dispassionate dialogue within a trade context ultimately could lead to a consensus view on how the WTO and other trade organizations could play a nonprotectionist role in the promotion of labor standards, bolstering political support for open trade policies. Other authors believe that this subject should be kept out of trade negotiations, although they are prepared to suggest alternative means for addressing the issue, such as development of international standards for labeling by the International Standards Organization (ISO 25000) and a new, more vigorous effort in the International Labor Organization (ILO). In principle, a majority of countries have agreed to abide by core labor standards in the framework of the ILO, but there is widespread dissatisfaction with that organization's effectiveness. One possible solution would be to give the WTO a supporting role in enhancing the work of the ILO, by including labor issues in the Trade Policy Review Mechanism or by creating new trade benefits tied to a good record on labor standards. Moreover, discussion of the labor issue in the WTO and other trade fora could spark the political will necessary to reform the ILO to make it a more effective body.


The Multitrack Strategy

Since the mid-1980s, the United States has followed a strategy employing bilateral, regional, and multilateral trade negotiations. The nation rightly believed that a range of negotiating options would make it possible to get around countries that do not want to negotiate on particular issues and address more effectively the challenges and opportunities facing the country in particular bilateral, regional, or multilateral contexts. Under the multitrack strategy, the United States negotiated bilateral agreements with Japan and other individual nations, negotiated a regional free trade agreement with Mexico and Canada (North American Free Trade Agreement [NAFTA]), and set long-term targets for free trade around the Pacific rim (Asia Pacific Economic Cooperation forum [APEC]) and in the Americas (Free Trade Area of the Americas [FTAA]). Multilateral negotiations were used to enhance global trade rules and create the World Trade Organization.


All chapters by authors who address negotiating strategy issues in this book--Chapters 7, 8, 10, 17, and 18--supports the multitrack approach of bilateral, regional, and multilateral trade negotiations. The authors differ in their degree of enthusiasm for specific bilateral or regional arrangements, but all agree that the United States should continue to place emphasis on strengthening the World Trade Organization as the foundation of the global, multilateral trading system.


The various authors also differ on tactical issues, in particular with respect to the optimal means of advancing specific regional initiatives and future multilateral negotiations in the WTO. These tactical differences provide a varied set of options for implementing a multitrack strategy.


The United States should establish long-term strategic goals that it intends to pursue in all of its trade negotiations. Experience shows that the nation is most successful in obtaining its objectives when it uses all the available negotiating tools--bilateral, regional, multilateral, and unilateral--to pursue clear, overarching objectives. This was a key to the Uruguay Round successes in the areas of trade in services and intellectual property protection. It also might be key to achieving progress on the new generation of issues, such as the elimination of discriminatory investment restrictions, regulatory reform, and the reduction of business practices that restrict trade.


Multilateral Trade Negotiations

The United States should champion comprehensive multilateral negotiations in the future. As Chapter 7 observes, "multilateral negotiations give the biggest bang for the buck. . . . Regional pacts may produce deeper liberalization in specific areas, but none matches the comprehensive coverage of national trade practices contained in multilateral accords that have been negotiated in the GATT [General Agreement on Tariffs and Trade]." Also, as Alan Wolff observes in Chapter 18, "given the openness of the U.S. economy, and a trading system based on the most-favored-nation (MFN) principle, there is no other practical way to spread as far as possible the area of reciprocal openness."


While other countries are now as prosperous as the United States and have a large stake in international trade, the United States remains the country in the best position to provide international leadership for trade liberalization.


Launching comprehensive negotiations across a broad range of issues is likely to be difficult in view of the increasing complexity of the issues and the increasing number and heterogeneity of the WTO membership. Nevertheless, the rest of the world is likely to gauge the U.S. commitment to the multilateral system by its effort to push for comprehensive multilateral negotiations. This is particularly the case if, in the near future, the United States intends to devote considerable energy to regional free trade negotiations. America's trading partners likely would interpret the absence of a forward-looking agenda for the WTO as a decline in U.S. support for the multilateral trading system and a signal that America is unprepared to exercise bold leadership.


The creation of the World Trade Organization and the introduction of biennial meetings of trade ministers has changed the dynamic of negotiations and opened up the possibility of tackling priority issues as they arise. The successful negotiation of agreements at the 1996 trade ministerial meeting in Singapore to eliminate trade barriers in information technology products and to provide competition in basic telecommunication services (the Information Technology Agreement and the Agreement on Basic Telecommunications) set a welcome new precedent for the negotiation of major agreements outside of massive rounds.


Nevertheless, major progress in liberalizing trade across a broad front is still likely to require the periodic initiation of comprehensive negotiations designed to address a range of issues simultaneously. This is necessary, in part, to give enough countries a stake in agreements being negotiated and to raise the political stakes in what is being negotiated high enough to warrant the involvement and support of the top levels in government and business. As former U.S. Trade Representative Robert Strauss used to say, you need a large enough pile of chips on the table to make either a game of poker or a trade negotiation interesting.


The negotiating results of the Uruguay Round included a number of commitments with respect to follow-up negotiations in areas such as services and agriculture and analytical work that could prepare the ground for possible future negotiations in areas such as investment, environment, and restrictive business practices. This unfinished business has come to be dubbed the built-in agenda of the World Trade Organization. At the first regular, biennial ministerial meeting of the WTO in the autumn of 1996 in Singapore, ministers confirmed and expanded this work program, which covers most of the key issues discussed in this book. The work program is likely to constitute the core of comprehensive negotiations that might be launched around the year 2000. It includes issues such as investment, competition policy, sectoral regulations in services, and bribery associated with government procurement. Ministers in Singapore debated but were not able to decide whether and how the WTO should address environment and labor issues; nevertheless, the trade dimensions of these issues will not disappear and a consensus will have to be developed on how best to address them.


A key issue, one not resolved at the Singapore Ministerial, is the future approach to tariff negotiations. This issue is crucial because much of the debate over regional free trade agreements is over the question of nondiscriminatory global cuts in tariffs as opposed to preferential regional tariff reductions. Tariff cuts negotiated within the WTO have to be applied on a so-called MFN basis, which means that they have to be applied to imports from all member countries equally. Tariff reductions negotiated on a preferential basis within a regional free trade agreement are applied only to imports from other countries in the region.


Leaders in the Americas have committed themselves to complete negotiations on the elimination of tariffs by 2005, and leaders from the Pacific region have committed themselves to eliminate tariffs by 2010 with respect to the developed countries and 2020 with respect to the developing countries. A number of opinion leaders, including Fred Bergsten, director of the Institute for International Economics, and Martin Wolf, an editorial writer for the Financial Times, have proposed that WTO ministers follow the lead of regional leaders in the Americas and APEC and commit themselves to the complete elimination of tariffs by a certain date.


As an alternative to a commitment to abolish all tariffs by a certain date, the WTO might consider focusing future tariff negotiations on the time period over which individual tariffs are to be phased out completely rather than on the percentages by which tariffs are to be reduced over a fixed period of time (as has been the case in past negotiations). The periods might vary from immediately upon completion of the negotiations to 30 years into the future. Such an approach could be combined with an expanded application of the so-called zero-for-zero or sectoral free trade approach employed in the Uruguay Round and in the more recent Information Technology Agreement. Under the zero-for-zero approach, all major exporting countries agree to phase out their tariffs in particular industry sectors. A third approach would be to convert regional commitments to cut tariffs into global commitments, where trade covered by regional free trade commitments in FTAA, APEC, and a possible Transatlantic Free Trade Area (TAFTA) constituted say 80 percent of global trade.


Any approach to tariff negotiations also will have to address the issue of agricultural products. The liberalization of trade in agricultural products is likely to remain the most difficult area in any effort to dismantle trade barriers. The agricultural agreements reached in the Uruguay Round, which provided for the coordinated reduction of tariffs and of trade-distorting domestic support programs in agriculture, provide a ready-made blueprint for future negotiations in this area. The most promising approach would be to continue, on an accelerated basis, the percentage reductions built into the Uruguay Round agreement.


Sectoral Priorities

In choosing sectors for particular emphasis in market-opening negotiations, the United States should be guided by the international competitive strength of its industries and the likelihood that producers will be able to take advantage of reduced trade barriers abroad. To a large extent, the identification of such sectors has to result from consultations with the firms involved, as indeed was the case in the Uruguay Round in the selection of sectors for the elimination of tariffs under the zero-for-zero approach.


Chapter 3 provides a detailed analysis of relative U.S. competitive strength through the computation of "revealed comparative advantage" (RCA) indices. The computation of such an index vis-...-vis major trading regions indicates that the United States remains highly competitive in agricultural and other primary products and in chemicals. Analysis of more detailed RCA indices based on more detailed product groupings shows that the United States remains competitive in high-value, technology-intensive products such as pharmaceuticals; manufacturing, construction, and agricultural machinery; professional, scientific, controlling, and medical instruments; power-generating and telecommunications equipment; and aircraft.


The United States needs to give particular attention to its competitive strength in infrastructure equipment and services, covering in areas such as telecommunications and data processing, broadcasting, air transportation, and power generation. Forecasts show that many countries will make major investments in these areas in the years ahead. Estimates put the demand for such equipment at $1 trillion over ten years for the Pacific area alone. Since such equipment typically is purchased by government-owned or regulated monopolies, issues concerning government procurement, measures designed to curb bribery and corruption, and regulatory reform take on increased importance.


Regional Priorities

Chapter 3 analyzes recent regional trade patterns. It confirms the growing importance of U.S. trade with its two neighbors and with the Pacific region and the slower expansion of trade with Europe. Trade with South America is gaining rapidly, albeit from a relatively small base. This regional pattern highlights the importance of NAFTA for the United States and the potential benefits of pursuing regional free trade negotiations in the context of the FTAA and APEC.
 

The highest priority should go to the negotiation of the proposed Free Trade Area of the Americas, for a variety of reasons: geographic proximity; the apparent willingness of the countries involved to tackle the tough issues; and the economic, foreign policy, and security benefits of embedding recent economic and political reforms in an international agreement. Chapter 8 provides a detailed assessment and set of recommendations for negotiating an FTAA.


APEC also presents many potential benefits to the United States, but progress toward the goal of free trade is likely to be slower in light of the greater economic, political, and cultural heterogeneity of the countries involved. In Chapter 8, Ernest Preeg expresses skepticism about the viability of the free trade targets set by APEC leaders, although he and other authors agree that APEC can play a useful role in facilitating the removal of barriers. Trade and economic output within the Pacific region is likely to increase faster than in other regions of the world, and APEC can help assure nondiscriminatory access to these markets for U.S. firms. Moreover, since the greatest bottleneck to continued growth in the region is inadequate investment in infrastructure services. Appropriate economic reforms, spurred by APEC, could give the United States improved market access for both infrastructure equipment and services.


Despite the slower growth in transatlantic trade, the U.S. economic relationship with Europe remains crucial for both economic and political reasons. While U.S. firms face few significant barriers to trade and investment in Europe (with the exception of agriculture and some highly regulated services sectors), they do face an increasing number of issues in the area of standards and regulation. In recognition of this fact, the United States and Europe will pursue bilateral agreements in these areas both through a bilateral business dialogue and through negotiations in the context of the so-called Transatlantic Partnership. As Claude Barfield points out in Chapter 13, the United States and Europe face roughly similar regulatory challenges, and their ability to negotiate agreements providing for wider competition in regulated industries, and for mutual recognition of standards and professional licensing, could provide a foundation for broader international cooperation in such areas. 

American and European officials have informally explored the possibility of negotiating a Transatlantic Free Trade Area but decided to set that idea aside. One reason for the reluctance (TAFTA) to pursue the idea is the obvious difficulty of removing barriers to trade in agriculture. Another reason was a concern that the negotiation of a preferential free trade agreement between the two principal members of the WTO would have a negative impact on the multilateral system.


Preeg nevertheless believes that the negotiation of a TAFTA would be the key to integrating the regional and global trade negotiating strategies. He also observes that U.S. tariffs are already very low and argues that "the trade and investment effects of a TAFTA should be relatively small, on balance, for all members, and should not provoke the kind of protectionist reaction that occurred, for example, in the United States over NAFTA, based on the fear of job losses to cheap Mexican labor."


This author, along with Preeg and Stokes, takes the view that the establishment of a free trade vision by countries on both sides of the Atlantic ultimately would have a positive impact on the global liberalization of trade by establishing a new dynamic. If a commitment to free trade by the North Atlantic countries was added to the free trade commitments in the Americas and within the APEC region, the advantages of global tariff cuts would become all the more apparent. To reduce concerns that a commitment by North Atlantic countries to eliminate tariffs would undermine the multilateral trading system, the United States could reserve judgment on whether such cuts would be made on an MFN or preferential basis, pending the outcome of free trade negotiations in the FTAA and APEC, and the willingness of enough countries to eliminate tariffs globally.


Other policy analysts have proposed alternative approaches to building regional cooperation across the Atlantic, which would exclude the preferential elimination of duties within the North Atlantic area a priori. Elsewhere, Ellen Frost has argued for the creation of a North Atlantic Economic Space.
 

Bilateral Priorities

The United States' bilateral trade relationships with Japan and China deserve special attention. The trade flows involved are large, and the factors influencing them are unique with respect to each country. In the case of Japan, most formal barriers that count have been dismantled, but the domestic regulatory system and the lack of a vigorous competition policy create many internal barriers to trade. In the case of China, its economy is in a transition from a state-run economy to a more market-oriented economy, and at the moment is not quite either. This situation creates a triple challenge_the need to devise a negotiating approach that will address on a pragmatic basis whatever practices or measures most restrict trade at any given point in time, while pushing China toward long-term, market-oriented, domestic economic reforms and market-based trade policy commitments.


The importance and unique aspects of the Japanese and Chinese trade regimes create the need for bilateral negotiating approaches tailored specifically for each country. It would be a mistake, however, for the United States to divorce its bilateral negotiations from regional and multilateral objectives, as it has done so often in the past. By separating its bilateral problem-solving discussions from regional and multilateral discussions and disciplines, the United States at best risks isolating itself from its other trading partners in solving the problems it faces; at worst it risks having other countries undercut the moral authority of its market-oriented negotiating objectives. As Wolff points out in Chapter 18, the United States has to find a way to exploit every source of leverage available to it beyond the leverage inherent in access to its large market, including the use of international dispute settlement procedures and the mobilization of allied commercial interests and public opinion abroad.


Chapter 10 provides a detailed review of the history of U.S. bilateral trade negotiations with both Japan and China. It recommends a coordinated use of bilateral, regional, and multilateral negotiations to tackle the full panoply of government measures and private business practices that impedes access by U.S. firms to these markets. Chapter 18 provides other insights into both the nature of the problem underlying the U.S. bilateral relationship with Japan and China and the nature of the solutions that should be pursued.


The most promising approach to opening up the Japanese economy over the medium term is likely to be a consistent push, in bilateral, regional, and multilateral negotiations, for the establishment of a more vigorous competition policy and the reform of domestic regulations, making them less pervasive, less discretionary, more closely tied to objective performance criteria directly linked to transparent regulatory objectives, and more insulated from the domestic political process, which is tied to personal relationships and mutual favors. The Japanese government and many opinion leaders agree that such reforms are desirable, and the United States should help them overcome the domestic forces of inertia that now hinder the adoption of the needed reforms. This will not solve all ongoing trade problems but will establish a common reference point for more targeted bilateral negotiations aimed at removing specific regulatory obstacles to trade on a case-by-case basis. As Wolff points out in Chapter 18, the United States has no alternative but to seek full market access, however difficult, remote, and friction-laden the pursuit of that objective might be.


The best the United States can do now with respect to China is what it is seeking to do, namely to negotiate a workable set of commitments as part of Chinese accession to the WTO. Such commitments should recognize that China is going through a transition process and establish target dates by which the country will implement commitments consistent with planned domestic reforms. A modestly ambitious schedule of reform commitments could include provisions for the periodic review and renegotiation of Chinese commitments, as China faces bumps in the road to reform and its trading partners discover unanticipated new trade barriers in the evolving Chinese economic system. The key is to establish an ongoing process for balancing rights and obligations between China and the rest of the world as the country proceeds on its road to economic reform.


Remedies for Dealing with Private Trade Barriers

As Tom Howell contends in Chapter 16, the United States does not have an effective means for dealing with trade barriers resulting from foreign anticompetitive activities. The use of U.S. antitrust statutes under the foreign effects doctrine is one possible tool,1 but without cooperation by foreign authorities, the Justice Department lacks the means to discover the facts with sufficient rigor to meet the high standards of evidence built into the U.S. legal system. Section 301 of the Trade Act of 1974 provides an instrument that is more adaptable to a foreign trade environment, but the United States lacks an effective and internationally legal remedy. Howell offers suggestions for how such a remedy might be fashioned. The United States needs to explore alternative approaches, including bilateral ones.


The antidumping statutes are a substitute, albeit an imperfect one, for the removal of trade distortions created by private anticompetitive activities. Supporters of current antidumping rules argue that these rules constitute the most effective defense against anticompetitive business practices that are tolerated, and in some cases encouraged, by protectionist foreign governments. Opponents, however, focus on how antidumping laws are used as a competitive weapon against foreign competitors engaged in normal business practices (such as the use of temporary below-cost sales to build markets or to purge excess inventories). An objective analysis of these mutual concerns could provide a way forward.


Antidumping is an extremely controversial area. No other issue was the focus of as much debate and disagreement among the authors of this volume. This disagreement reflects the wide divergence of views among trade policy analysts more generally. A key problem, as Howell points out in Chapter 16, is the absence of credible research by either governments or private research institutions on global market structures and on the impact of private anticompetitive practices and various forms of government intervention on the operation of global markets. The U.S. government should undertake such analyses as a first step toward developing a domestic consensus on how the country could deal effectively with foreign anticompetitive activities and industrial policies.


Domestic Economic Policy Conditions

In order to reap the advantages of open international trade and investment and to maintain domestic political support for an open trade policy, the United States has to get its domestic policies right. Decisions regarding crucial domestic economic policies should be closely coordinated with trade policy decisions and made explicit components of the country's trade strategy. This should be the principal role of the National Economic Council in the White House.


Further, the administration should avoid macroeconomic policies that lead to wide swings of the exchange rate, creating uncertainty for international transactions and eroding the credibility of trade liberalization efforts. As Wolff points out in Chapter 18, trade policy is discredited by a 45 percent swing in the yen/dollar relationship over a relatively short time, or a 50 percent devaluation of the Mexican peso overnight.


In Chapter 6, Marina Whitman explains how the increased share of exports and imports in the economy coupled with the internationalization of financial markets has reduced the ability of the United States to conduct its macroeconomic policies without regard to their cross-border consequences. Lapses of fiscal discipline combined with tight monetary policy, for example, are prone to create large swings in the exchange rate, as higher interest rates in the United States attract foreign funds. While this can successfully reduce inflationary pressures in the United States by increasing imports and reducing exports, it does so at a high price for sectors producing goods and services that are exported or that compete with imports. It does not necessarily prevent inflationary price rises in sectors producing goods or services that cannot be traded. The worst part, from a trade policy point of view, is that this leaves both export interests and import-competing interests disgruntled, creating political pressures for protection that are difficult to resist. Whitman points out that "the major guideline for domestic macroeconomic policy that emerges from these lessons of history is to avoid combinations of monetary and fiscal policy leading to sustained currency misalignments, which have in the past exacerbated pressures for trade protection."


A viable trade strategy also has to include supportive labor market and manpower training policies. Trade liberalization, like technological innovation, creates job losses among those who can least afford it, namely low skilled-workers with relatively low incomes. Social acceptance of trade liberalization is affected by the ability of such workers to acquire training in new skills and to move their pensions and health care benefits to new jobs. Chapters 5 and 6 provide many detailed suggestions on how the government could help workers move to new jobs by giving them the training and counseling they need to upgrade their skills and by making their pensions and health care benefits more portable.


During the first term of the Clinton administration, an interagency task force on workforce retraining considered many creative ideas but never pushed them to adoption. One of the most interesting ideas was to use part of the Unemployment Insurance Fund to finance training vouchers for permanently displaced workers. The government also should help local communities to modernize their adult education programs and link them to business-supported counseling services for the long-term unemployed. The country needs to make the adoption of improved manpower training programs a high priority.


Getting Negotiating Authority from Congress

In order for the United States to pursue its trade objectives around the world, it will need fast-track trade negotiating authority or, as it is currently referred to, Trade Agreements Implementing Authority. Other countries are extremely reluctant to negotiate in earnest with the United States if the president does not have sufficient authority to negotiate international trade agreements without Congress revisiting the details during the ratification process. In granting fast-track negotiating authority, Congress gives up the right to amend the implementing legislation and agrees to limit the use of procedural delays before taking a simple up-or-down vote on the agreement. This leaves Congress with the constitutional role of approving commitments undertaken by the United States in trade agreements, but it also ensures that congressional views are inserted in the negotiations before, not after, agreements are concluded.


Congressional passage of Trade Agreements Implementing Authority will require considerable political skill and a willingness to find common ground on politically charged issues, such as the role of environment and labor issues in trade negotiations. Partisan divisions and lingering distrust over the environment and labor issues have frayed the bipartisan coalition of moderate Democrats and Republicans who traditionally have passed trade legislation and have given U.S. trade policy a great deal of stability since World War II. As Representatives Jim Kolbe and Robert Matsui point out in Chapter 2, "trade initiatives will require strong support on both sides of the aisle in order to become law. Without a strong coalition of protrade moderates in both parties, no trade legislation can pass the Congress."


Obtaining passage of new trade legislation also will require a major effort to reach out beyond the bureaucrats, politicians, and lobbyists in Washington. More than before, trade and trade negotiations are affecting the everyday lives of Americans, a fact that has made trade negotiations a subject of public debate across the country, from radio talk shows to living rooms. The somewhat emotional debate over NAFTA has left the public ambivalent on trade issues in general and somewhat hostile with respect to NAFTA itself. Overcoming these negative views will require a public outreach strategy.


U.S. Trade Policy and the American People

The American public deserves a full explanation of the challenges and opportunities posed by an outward-looking, competition-oriented trade strategy. As Ellen Frost points out in Chapter 4, the number of Americans who have a substantive understanding of trade issues is rather small, and many are misinformed about vital facts. This leads to a paradox. At a time when the American economy is performing extremely well and U.S. industries have regained international competitiveness, many people continue to have deep anxieties about global competition, and public opinion on trade is subject to large swings in sentiment. Frost attributes this incongruity to the restructuring of the American job market in the late 1980s and early 1990s, the downsizing of large corporations, the stagnation of real wages, and the increasing wage gap between skilled and unskilled workers. As a result, a large number of working people, along with labor and environmental activists, see corporations as abdicating their responsibility to the community.


All this points to the need to better educate the public regarding the relatively small number of jobs directly affected by imports from low-wage developing countries; the higher wages derived from exports; the domestic nature of many of the problems that cause the public anxiety; and what the government is doing domestically to address those problems. Frost reports that there is strong evidence that people change their views on trade if they have access to a full range of information about the long- and short-term benefits and costs of integrating the American economy with the global marketplace. At the same time, she warns against putting too much emphasis on job gains from trade liberalization, which may well be spurious, and in any event are easily upset by changes in macroeconomic circumstances.


In order to build deeper understanding and support in the American public for U.S. trade policy, the government needs to reach out and communicate with stakeholders who have not, traditionally, been included in the trade policy process. The message needs to be targeted, in particular, at small export-oriented businesses, state and local officials, schoolchildren, and the public at large through the use of mass-circulation magazines and radio talk shows.


Conclusion

The success of U.S. domestic economic policies and foreign policy may well depend on the vision and political skill the government brings to bear in managing U.S. trade relations with the rest of the world. In light of the historic shifts in policies in most of the developing countries and formerly communist states toward market-oriented economic policies, the world stands on the threshold of a prolonged economic boom. As countries such as China have already demonstrated, once artificial constraints on individual initiative are removed and enterprises are given the ability to compete on a global basis, countries can experience tremendous bursts of economic growth.


The U.S. economy is well positioned to supply these economies with the capital equipment, infrastructure equipment, and services they need to sustain their growth. As they grow richer, they will want to import more American high-value-added agricultural products, consumer goods, and entertainment products. To capture these markets for its exports, the United States must negotiate the further reduction of trade barriers and restrictive regulations that now block access to many foreign markets.


The negotiation of trade agreements in the post_Cold War world provides not only for new trade and investment opportunities but also can serve as a basis for strengthening political ties with countries and reducing the risk of armed conflicts. Geoeconomics thus will provide the foundation for peace and stability in the future.


Domestically, the U.S. economy has benefited enormously by leaving its economy exposed to the forces of international competition. By doing so the United States is in a stronger competitive position today than any other country. But the ability of the United States to exercise its leadership role effectively will depend on the wisdom with which it designs and implements its trade strategy.


NOTE

Under the foreign effects doctrine, U.S. antitrust authorities have asserted the right to take antitrust actions against anticompetitive practices abroad where such practices affect adversely competition in the United States.