by C. Fred Bergsten, Peterson Institute for International Economics
© Institute for International Economics
The author expresses deep appreciation for very helpful comments on an initial draft from Isaiah Frank, Joseph Greenwald, Julius Katz, Ernest Preeg and Alan Winters. The paper was presented to the symposium on the World Trading System—"Fifty Years: Looking Back, Looking Forward", which was cosponsored by the World Trade Organization and The Graduate Institute of International Studies in Geneva on April 30, 1998.
Summary and Conclusions
Five major lessons for successful global trade management emerge from the first fifty years of the GATT/WTO system. They need to be applied to the present situation to set the stage for another half century of successful multilateral trade cooperation. I will summarize the key headings at the outset and then elaborate each, concluding with proposals for the upcoming Fiftieth Anniversary Ministerial and the WTO agenda for early part of the twenty-first century.
Momentum has been a decisive factor in the direction of trade policy throughout the postwar period, both internationally and within the major countries. The political economy is straightforward: new liberalization initiatives force protectionist forces onto the defensive, while the absence thereof creates a vacuum that protectionists fill quite successfully.
The history of the GATT itself reveals an ebb and flow reflecting this principle. When the institution became largely comatose for several years after the completion of the Kennedy and Tokyo Rounds, major new protectionist efforts were undertaken and succeeded for at least a while: most notably the installation of the MFA and the US import surcharge in the early 1970s, and the panoply of new VERs (autos, steel, machine tools, expanded in textiles/apparel) in the early 1980s. By contrast, the ongoing agenda of sector negotiations after the completion of the bulk of the Uruguay Round in 1994 has precluded significant backsliding.
The periodic absence of international momentum has had a particularly profound effect on the trade policy of the United States, the largest and most influential member of the system. Its protectionists took advantage of the post-Kennedy Round malaise to ram the "Mills bill" through the House, with its textile and shoe quotas and other far-reaching protectionist provisions; threaten the even broader Burke-Hartke legislation to control all imports and outward direct investment; and prompt the Nixon Administration to negotiate the MFA and apply an import surcharge. Its protectionists successfully achieved the series of new VERs listed above, forced a wholesale reversal of the Reagan Administration's trade policy in September 1985, and enacted the "Super 301" provision even after the Administration had successfully preempted more negative legislation. And the current antiglobalization forces in the United States have taken advantage of the present lack of forward momentum, short-lived and modest though it is, to win a stunning victory in late 1997 with their defeat of new fast track negotiating authority for the President.
As will be noted below, these temporary (but extremely costly) periods of major American protectionism were driven initially by (largely self-inflicted) imbalances in US monetary and macroeconomic policy. However, the absence of any major GATT initiatives at the time left the door open for such relapses. This explains why American trade negotiators are always anxious to begin a new initiative as soon as the prior one ends, or even sooner, and why the rest of the world errs to demur in the name of "trade fatigue" or some other excuse that ignores the fundamental interplay between external and internal politics in American trade policy.
The lesson for 1998 and beyond is clear: launch a new liberalizing initiative in the WTO to restart the bicycle as soon as possible. As noted, the sectoral followups to the Uruguay Round—in telecommunications services, financial services and information technology products—maintained a degree of momentum after its conclusion. The APEC summit initiative of November 1997, committing its members (who make up half of the world economy) to new liberalization in 9-15 additional sectors, is a promising start in the needed direction if it can be multilateralized (as will be elaborated below). And the Uruguay Round wrapup was extremely wise to incorporate a "built-in agenda" for the future, including such major topics as agriculture and overall services.
Hence the WTO system is teed up to launch the needed new initiative. Sir Leon Brittan, and now the EU more officially, has proposed a Millennium Round for that purpose. But no significant liberalizing progress is underway at present. The United States, the developing countries and the rest of the WTO membership need to embrace the EU initiative promptly to restart the bicycle and regain the momentum for liberalization. It is urgent for them to do so in light of the evident strength of the backlash against globalization, as indicated in the continuing rejection of fast track in the United States and the growing Asian calls to reduce their vulnerabilities to future crises by partial separation from the global system rather than the full-scale outward orientation of the past.
Big is Beautiful
The history of the GATT/WTO, and especially trade policy in the United States, clearly reveals that large-scale initiatives fare better than modest ones. The political economy is again straightforward: big-picture proposals capture the imagination of top political leaders and thus induce them to provide the leadership needed to win domestic support, provide a foreign policy/national security rationale to amplify the purely economic case for proceeding, and generate such huge stakes that no political leader is willing to accept blame for failure of the enterprise once it has been launched. "Big is beautiful," therefore, at both the startup and completion of the process.
The key example of the United States is again instructive. Extension of NAFTA to tiny Chile would have been so small that it failed to command any Presidential leadership and business support. The defeat of fast track was due importantly to the Administration's failure to indicate how it would use the authority and thus the absence of any apparent stakes worth fighting for.
Each succeeding GATT round has had the important advantage of being more ambitious than its predecessors. The Kennedy Round sharply increased the extent of multilateral cuts in tariffs, which remained an important impediment to trade at that time. The Tokyo Round began the process of extending the GATT system to nontariff measures. The Uruguay Round brought agriculture and textiles into the system, seriously addressed services and intellectual property rights, and dramatically improved the dispute settlement mechanism. "Bigger was better" in attracting sufficient political support to bring each succeeding negotiation to a successful conclusion, despite the bigger battles that had to be taken on to do so.
There is a natural extension, to the next phase of multilateral liberalization and rulemaking, from this past progression of escalating increasing negotiating goals: setting a goal of global free trade by a date certain, perhaps 2010 or 2020.1 Over 60 percent of world trade is already free, or en route to being free (see table 1), as a result of the initiatives already completed or undertaken by the several large regional arrangements (EU, NAFTA, Mercosur, AFTA, Australia-New Zealand, FTAA, and APEC). It is thus a relatively short step to global free trade, and rolling the regionals into such a multilateral context is in any event the only way to assure the avoidance of conflict among them. Hence a global free trade goal appears feasible, as well as being a highly desirable big-picture proposal to capture political imagination and support around the world.
The route to that goal will clearly encompass one or two major "rounds" of WTO negotiation. A corollary of "big is beautiful" is that multi-issue rounds have been crucial to the outcome of the successive GATT negotiations. Tradeoffs across issue-areas are required to meet the needs of the ever-growing number of country participants, and to induce a critical mass to sign on. The three recent sectoral agreements have probably completed the roster of potential stand-alone deals, and their negotiation may have even jeopardized later agreements on agriculture and other difficult topics by "using up" some of the tradeoffs that could otherwise have been employed for that purpose. It must also be remembered that several sectoral efforts, including maritime services in the WTO and a Multilateral Agreement on Investment in the OECD, have failed largely because of the absence of potential tradeoffs with other issue-areas.
The current APEC sector initiatives, which represent the major liberalization effort now underway and may provide one of the foundations for the Millennium Round, are instructive in this regard. After their success in galvanizing global agreement on the Information Technology Agreement (ITA) in late 1996, the APEC leaders decided to try to replicate that event in additional sectors in 1997. They originally envisaged agreeing on two or three sectors, at their Vancouver summit in late 1997, but found that "balance among the parties" required a much larger number-so they decided to proceed on 15, including 9 in 1998. APEC of course hopes to multilateralize these negotiations, as it did with the ITA, and the EU (and presumably others) have already indicated that they will propose additional sectors. This broad group of sectors will then undoubtedly be meshed with the built-in agenda already endorsed by the WTO, setting the stage for the Millennium Round (with or without the "global free trade by 2010/2020" goal recommended here).
The basic lesson of GATT/WTO history, as well as of trade policy in the United States, is that larger initiatives fare better than small ones. Application of that lesson to the period ahead is of crucial importance because of the severe threat to the open trading system from opponents of globalization in the United States, Europe and some key developing countries. The complaint that rounds take too long to complete is actually a virtue because, as long as their eventual success remains a realistic prospect, it is the very existence of the negotiations that propels the bicycle forward and provides a bulwark against backsliding. If one worries about excessive duration, however, the answer is to divide the total negotiations into a series of self-balancing, but smaller, "roundups" every two or three years to assure the credibility of the process.2 The prescribed course of action is, in any event, the earliest possible launch of a Millennium Round within the context of setting a policy objective of achieving global free trade by 2010 or 2020.
Building Blocks, Not Stumbling Blocs
Debate continues to rage in some quarters over the compatibility of regional trade agreements with the multilateral system. Some observers fear that regional participants, once having liberalized regionally, will not want to give up their preferential arrangements and/or will have "used up" their liberalization potential and/or trade attention. There are, indeed, a few disquieting signs. NAFTA employs rules of origin in the textile/apparel sector that discriminate sharply against nonmembers. Mercosur raised its common external tariff in late 1997 and sometimes expresses doubts about extending its liberalization to broader groupings. History also suggests the real possibility of clashes among regional blocs if their relationships are not managed in the context of a successful global system.
Fortunately, however, the postwar record is an unbroken chain of positive interaction between the global system and its main regional subsystems. There are clear theoretical grounds for this outcome: modest liberalization begets broader liberalization by demonstrating its payoff and familiarizing domestic politics with the issue, regional deals can provide useful models for broader global agreements, and the adverse impact of new preferential arrangements on outsiders induces the latter to seek new multilateral compacts.
The regionals have in fact kept the bicycle moving forward both through their own liberalization and through the impetus they have provided to the successive multilateral initiatives. They have been a major driving force behind each of the rounds that have been the primary channels for global progress. Hence the regionals have been key elements in the successful evolution of the two principles already enumerated, the forward momentum of the bicycle and "big is beautiful."
The key regional arrangement is by far the European Union, and its evolution has been central to the entire postwar history of the multilateral trading system. The initial creation of the Common Market, in the late 1950s, was the most important driver of the American initiative to launch the Kennedy Round in the early 1960s—both for defensive reasons, to start reducing the newly created discrimination against American exports, and to build the "new Atlantic partnership" enunciated by President Kennedy. The expansion of the European Community to include the United Kingdom and others, with the extension of its discrimination to important new markets, was an important factor in the American decision to insist on the Tokyo Round in the 1970s. The EU decision to launch the "single market" strategy in 1985, with the implied broadening of discrimination to many new functional areas, likewise added to the US determination to begin the Uruguay Round a year later. To its great credit, the EU has agreed to reduce its barriers on a multilateral basis in each of these rounds—though with great reluctance in agriculture—and thus to sustain the bicycle of global liberalization.
The positive thrust of regionalism for global liberalization has broadened considerably over the last decade or so. When the EU and others refused to proceed with the new round that the United States was seeking in the early 1980s, the United States reversed its traditional policy of sole reliance on multilateral liberalization and agreed to negotiate bilateral free trade agreements with Israel and then Canada; the EU and others took notice and subsequently agreed to restart the multilateral bicycle. When the Uruguay Round faltered in the late 1980s, Mexico successfully sought US and Canadian agreement to negotiate NAFTA and several Asian countries (notably Japan and Australia) took the lead in creating APEC; the EU and others took notice and the Round regained momentum. When the Round faltered once more in the early 1990s, APEC's decision to hold annual summits and create "a community of Asian Pacific economies" oriented toward "free and open trade and investment in the region by 2010/2020," as formally agreed a year later, quickly persuaded the Europeans to overcome their problems and participate in a successful wrap-up.
For their part, all of the new regionals have so far emulated the willingness of the EU to multilateralize at least part of their liberalization (on a fully reciprocal basis). APEC, potentially the second most important regional grouping because its external trade level closely approximates that of the EU, has to date remained wholly faithful to its precept of "open regionalism"3 and has in fact played a key role in galvanizing the conclusion of both the Uruguay Round and the ITA.
It will of course be essential for the major countries, who are at the same time central to both the global system and the main regionals, to manage the interaction between them in a manner that will continue to be mutually supportive—as the United States did while simultaneously negotiating NAFTA and the Uruguay Round. Assuming that the United States (with NAFTA, APEC and the FTAA) and the European Union (with its expanding network, including Euromed and perhaps EU-Mercosur), do so, the lesson for 1998 and beyond is clear: implement the liberalization commitments of the regional arrangements as rapidly and successfully as possible, and roll them into global agreements especially via the Millennium Round as promptly as possible.
For example, APEC should proceed speedily with its new sectoral approach but offer to include other countries and indeed the entire WTO, as it did with the ITA, as part of the new Round. APEC should indeed go even further and challenge the rest of the world to emulate, on the world level, APEC's own commitment to achieve "free and open trade and investment" by 2010 (for the industrial countries that account for 90 percent of its trade) and 2020 (for the rest). Even short of such a new global compact, the other regional arrangements should publicly indicate their willingness, a la APEC, to globalize their regional liberalization (on a reciprocal basis).
Money is Central
International monetary conditions and the related macroeconomic environment, though outside the purview of the GATT/WTO itself, have been central factors in the postwar evolution of the multilateral trading system. They have been particularly critical to the launch of the successive major negotiations, and to the determination of the United States to push for such agreements.
This was particularly true for the Tokyo and Uruguay Rounds. The Tokyo Round was in fact launched as part of the agreement, insisted upon by the United States, to restore fixed exchange rates among the major countries and terminate the import surcharge that it had instituted in August 1971—the most frontal assault on the principles of the GATT in the history of that institution. The American strategy was twofold: to accomplish a substantial devaluation of the dollar, to restore American competitiveness and reverse the sharp deterioration (for those days) of its trade balance, and to launch a new international trade negotiation to help resist the intense protectionist pressure which had developed by 1971 as described above. (Dollar devaluation was also essential to enable the Administration to win Congressional support for the new trade round, which it did in 1974.)
The launch of the Uruguay Round was similarly linked to a monetary crisis. The huge dollar overvaluation of the early 1980s, stemming from the massive budget deficits and benign neglect of the first Reagan Administration, generated a huge current account deficit and converted the United States from world's largest creditor country to world's largest debtor. As a result, protectionist pressure escalated rapidly and Reagan himself, despite his devotion to open markets in general and free trade in particular, "granted more import relief to US industry than any of his predecessors in more than half a century."4 In addition, leading Congressmen commented that "the Smoot Hawley tariff itself would have passed had it come to the House floor in the fall of 1985." The Administration therefore adopted a two-part strategy similar to 1971: depreciate the dollar sharply, primarily through the Plaza Agreement of 1985, and launch a new multilateral negotiation to counter the protectionist pressure. Dollar devaluation was again essential to achieve the stronger trade position that would garner Congressional approval for the new trade talks, as ultimately achieved in 1988.
The Kennedy Round also originated partially in a monetary crisis. The first run on gold in the postwar period occurred during the Presidential campaign in 1960, and President Kennedy reportedly viewed the balance-of-payments problem along with the risk of nuclear war as his top policy priorities. The Administration's strategy for correcting the deficit (as defined at the time), as developed during its first year in office, included a major effort to open foreign markets to American exports. This in turn led to the proposal to launch the Kennedy Round.
Today's circumstances replicate these previous episodes to an important extent. The US merchandise trade deficit has already reached an annual rate of $225 billion and, with the adverse affect of the Asian crisis, will probably rise to $250-300 billion later this year and into 1999. The IMF has predicted that our current account deficit will reach $230 billion this year, almost 3 percent of GDP, and the actual outcome could be even higher. The imbalance is of course primarily a macroeconomic phenomenon, as in the past, and will require substantial correction in the exchange rate of the dollar—which is currently overvalued by 15-20 percent in trade terms.5
In the meanwhile, however, substantial protectionist pressures will undoubtedly arise once the US economy slows and unemployment begins to increase-and be blamed on the record trade deficit. As noted above, the opponents of globalization have successfully resisted new Presidential negotiating authority even while the economy has been proceeding successfully. The monetary imbalance will thus again require the United States to press for a new multilateral negotiation, to restart the bicycle and help resist the backlash against liberalization.
In this particular circumstance, monetary and macroeconomic events elsewhere reinforce the need for an early start on a new Millennium Round. The new euro will start at a level that is undervalued, in trade terms, by 15-20 percent-the natural mirror image of the dollar's overvaluation.6 Once the new European Central Bank establishes the credibility of the new currency, it is likely to start assuming an important role in world finance and a major portfolio diversification from dollars into euro will ensue.7 This will produce an appreciation of the euro and a sharp fall in Europe's trade balance, in the face of unemployment levels already running above 10 percent in all the major countries, and trigger protectionist pressures there. It will be extremely prudent to launch a new WTO negotiation in time to generate forward momentum with which to resist these tendencies as well.
The Asian macro situation adds to these requirements. As the real effects of the region's crisis unfold over the next year or two, with millions of unemployed and thousands of bankruptcies, calls for withdrawal from the liberalization pattern of the past are bound to increase. Here too it will be highly desirable to commit governments to renewed progress, as APEC has already done to an important extent, before the pressures in the opposite direction become too great.
There is thus an intimate relationship between the global trading system and monetary/macroeconomic imbalances. The latter trigger changes in trade balances that generate protectionist processes. The imbalances cannot be corrected by trade policy but rather must be resolved by changes in macroeconomic and currency policies. These changes take time (usually two to three years) to play through, however, and the trade policy pressures must meanwhile be countered by restarting the bicycle of liberalization. This pattern has played a significant role in the launch of all three major GATT negotiations and is likely to do so again for the first major WTO effort.
The final key variable in the successful management of the GATT regime was leadership, usually exercised most visibly by the United States. As noted throughout this essay, American events and initiatives played a central role in the launch of all three GATT rounds (and most of the smaller negotiations as well, including the recent sectoral talks).
It must be remembered, however, that the European Union has been an essential partner in each of these ventures. The reason is simple: the EU, since it expanded beyond the original six members in the early 1970s, has had an economy as large as that of the United States, has been an even larger trading entity, and has spoken with a single voice on most trade policy issues. Hence Europe has been a fully equal partner to the United States on trade issues, has been able to veto any global trade accord, and hence has been a necessary co-leader of all multilateral enterprises.
With the creation of the euro, the EU will shortly achieve a similar degree of equality on monetary and macroeconomic issues. Particularly in light of the critical importance for trade policy of prospective monetary developments, in both the United States and the European Union, it is thus even more important than before for this de facto G-2 to provide leadership for the WTO system. In recent years, the United States has sought to magnify its leadership by mobilizing Asian cooperation through APEC. As noted above, APEC has already played a crucial leadership role in the global system on at least two occasions-the conclusion of the Uruguay Round and the negotiation of the ITA. The United States generally takes the lead on trade issues within APEC but the group as a whole must now be viewed as an important player in the global trading system. But the new bipolar power structure will still require joint US-EU leadership to launch the Millennium Round and all other global trade initiatives for the foreseeable future.
My assessment of the last fifty years thus identifies five key principles as explaining the essential success of the global trade regime. The five have generally worked together in mutually reinforcing ways:
This five-part pattern largely explains the inauguration, course and completion of the three large rounds which have represented the dominant developments of the postwar trading system. The pattern is re-emerging today and is likely to do so clearly over the next year or so. I hope that the system will respond with the Millennium Round on this occasion as it did with the Kennedy, Tokyo, and Uruguay Rounds in the past.
It must be recognized, however, that today's circumstances differ in important ways from those of the past. For example, the threat to the open trading system-at least so far-is not the crude protectionism of the past that, in the case of the United States, produced a "Mills bill" and import surcharge in the early 1970s and a series of VERs in the middle 1980s. The ostensible threat is a more nuanced reaction to globalization, accepting the inevitability of that phenomenon but seeking to manage it in potentially destructive ways.
One set of these efforts focuses on neomercantilistic devices, like the "super 301" provision of 1988 US trade legislation. Another promotes linkages between trade policy and nontrade objectives, notably regarding international labor standards and environmental issues. Most important is the explicit effort to stop the bicycle by calling a "strategic pause" in further liberalization,8 perhaps as a prelude to reintroducing traditional protectionist efforts if the system's forward momentum can be decisively broken. The advocates of that strategy in the United States can claim at least two recent successes with their defeat of fast track negotiating authority and the MAI.9
This "new face of protectionism" offers both opportunities and risks. It poses opportunities to address a series of real problems which its advocates identify, including barriers to trade not yet covered by the WTO (e.g., centered on competition policy in Japan) and interrelationships between trade, on the one hand, and labor and environmental issues, on the other. The risk is of course the derailing of the bicycle of liberalization and thus a potential reversal of the progress of the past fifty years.
It is also important, at this point in time, to note the backlash against globalization in other parts of the world. There is a minority, but nevertheless strong and perhaps growing, sentiment of this type in Europe-with the creation of the euro as something of a symbolic equivalent to NAFTA in the United States. The Asian crisis, as its real economic costs unfold over the next year or two, will undoubtedly trigger a similar backlash in Asia (though one that may focus more on separation from the international capital markets than from trade). The issue for the global trading system is thus far more than "simply" countering the risk of backsliding in the United States, important as that consideration alone continues to be.
The monetary impetus for a new trade initiative also now takes on a broader geographical dimension. As noted above, the prospect of record trade deficits in the United States—largely as a result of renewed dollar overvaluation—is again the chief consideration. But the prospective sharp decline in high-unemployment Europe's trade balance, as the creation of the euro and the inevitable depreciation of the dollar lead to a sharp fall in the region's competitive position, adds substantially to the case. So does Asia's need for continued success to the American and European markets to enable it to recover from its current financial crisis.
The third key reason to launch a new negotiation, the need to channel the regional arrangements in a cohesive global direction, is also more extensive than in the past. This dimension of the prior rounds aimed primarily to reduce the discriminatory impact of the European Union. Now, however, it is also important to generate similar opening by NAFTA, Mercosur, and several other regional groupings that have become economically significant in the 1990s. The need for a new global trade negotiation, again, has varied geographical as well as substantive dimensions.
In pursuing that negotiation, I have argued for the most far-reaching application in GATT/WTO history of the principle that "big is beautiful." All of the past rounds were quite ambitious, by contemporary standards, but they sought merely to reduce barriers (and write new rules) in the search for freer trade. Now that so many regional arrangements have already blazed the trail to free trade, I believe the time has come for the global system to adopt a goal of eliminating all barriers by a date certain (perhaps 2010 and 2020, a la APEC and Euromed). In addition to all its substantive benefits, this would keep the bicycle of liberalization moving forward—in the Millennium Round and perhaps even a successor—for at least the next decade or two.
When our successors meet in 2048 or so, I hope they will be able to look back and see that we, at the turn of the century, met the challenges of the global trading system as successfully as did our forebearers in creating the GATT system a half century ago. We can only do so if we learn the lessons of this enormously fruitful period of global cooperation, draw the appropriate lessons for the future, and proceed courageously to implement those conclusions. I hope this paper will contribute to that purpose.
3. As described by C. Fred Bergsten in "Open Regionalism," in Global Trade Policy 1997, Edited by Sven Arndt and Chris Milner, London: Blackwell Publishers,1998, and in Working Paper 97-3, Washington: Institute for International Economics, 1997.
6. Wren-Lewis, cited. The recent "convergence report" of the Commission of the European Community notes " the unusual European trade surplus of 1-1.5 percent of its GDP for the first time since 1986," when the European currencies were clearly undervalued and subsequently rose sharply as counterpart to the huge dollar depreciation.
9. The difficulties experienced by the pending IMF legislation in the Congress are often cited as a third case in point, and there is some overlap between the opponents of trade liberalization and the IMF. However, many of the strongest opponents of the IMF (on moral hazard grounds) are conservatives who strongly support free trade, and the chief opponents of globalization (e.g., the AFL-CIO and Minority Leader Gephardt) have either supported the IMF or adopted a neutral stance on it. Hence it would be a mistake to lump these developments together in any facile manner.
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