The Heritage Foundation

Lecture #418 on Asia

October 21, 1992

October 21, 1992 | Lecture on Asia

After NAFTA: Free Trade and Asia

(Archived document, may contain errors)

After NAFTA: Free Trade and; Asia

By Franklin L. Lavin

Ile expansion in international trade over the past few decades has led to enormous benefits for both the United States and our trading partners. Our success Mth the North American Free Trade Agreement ( NAF17A) and our ability to build on that success in 1993 through free trade agreements across the Pacific will provide an unparalleled opportunity to lock in that prosperity for the next gen- eration. But before I dive directly into that thesis, let me ba c k up a bit and explain how we have ar- rived at this present-auspicious position. The last few years have witnessed the fading of the Cold War and the emergence of global eco- nomic issues as a primary'dimension of U.S. foreign policy. As our nation tries to come to grips with the challenge of international financial and commercial issues, we might do well to recall some of the aspects of Cold War foreign policy management which contributed to our success during that "long twilight struggle." The cornersto n e of our security policy during the last five decades has been the concept of collec- tive security-mutual defense treaties establishedwith the other leading industrial democracies to protect the common safety. The North Atlantic Treaty Organization (NATO ) and Australia-New Zealand-United States (ANZUS) Alliance standout as two institutions which helped preserve the peace during those turbulent times. Whereas our leadership in the 1940s grappled with the issue of security architecture, today we must grappl e with the issue of economic architecture. The two paramount international economic in- stitutions, the General Agreement on Tariffs and Trade (GATIF) and the Group of Seven (G-7), which deal with trade matters and financial matters, respectively, have sho w n recently that they are both in need of being strengthened. Generosity and Self-Interest. It is against this backdrop of a sea-change in foreign policy orien- tation and a boom in international economic activity that President Bush's "Agenda for American Renewal" speech must be seen. On September 10, in an address to the Economic Club of Detroit, President Bush said it was his goal to "develop a strategic network of free trade agreements with Latin America, with Poland, Hungary, and Czechoslovakia, and wi t h countries across the Pacific." Margaret Thatcher commented on the President's speech some two weeks later, stating that the pro- posal constituted "a typicel combination of Americangenerosity and far-sighted understanding of its own self-interest." Inde e d, the U. S. experience with trade liberalization has always evoked these two concepts- generosity and self-interest-which one could say trade in general evokes. The U.S. has qaite a bit of experience with trade liberalization, having set up five trade ag r eements (FrAs) with both Can- ada and Israel, and having established a prefere. ntial trading arrangement with the Caribbean natiDns through our Caribbean Basin Initiative. Each of these openings in trade has led to increased exports from the United State s , increased jobs in the U.S., and increased opportunity for U.S. consumers. And there is every reason to believe that our pending FTA with Mexico will result in similar economic benefits for both participating countries. As a follow-on to NAFTA, the Presi dent previously had proposed the idea of hemi-

FhmkUn L. Lavin is Deputy Assistant Secretary for East Asia and the Pacific at the U.S. Department of Commme. Th,- thoughts expressed in this lecture am not necessarily U.S. Government policy. Mr. Lavin qxke at The Heritage Foundation on Tuesday, October 6,1992. ISSN 0272-1155. 0 IM bylte Heritage Foundation.

.spheric free trade, from the Yukon to Tierra del Fuego, through his Enterprise for the Americas Ini- tiadve MAI). So the idea of expanding free a-ado scross the Pacific is very much an evolutionary idea, building on previously adopted and proposed liberalizations. EmphadAng GATT. The Detroit speech spells out a further refinement of this two-level pro- cess. On one level, we work through GATT to stren g then the multilateral system. On another level, -we work toward the development of sub-groupings which allow us to proceed at a faster pace. Our move toward selective FTAs over the past decade notwithstanding, the United States consistently has taken a mu l tilateral approach to liberalization. That is to say, the U.S. always emphasized the GATT as the appropriate vehicle for promoting world trade. GATT has been and continues to be the most useffil v6hicle, and we 'c6rd-iiiiie to'believe that ft UruguayRound Will yield benefits sim- ilar to the previous successful rounds. In addition, one could argue that the liberalizations taken to date were for specialized reasons: security concerns in the case of Israel and the Caribbean and bor- der issues in the case of Canada and Mexico. So historically we have attached a great deal of importance to the GATT process, but there are -limits to using GATT as the sole vehicle for trade liberalization; perhaps this is somewhat akin to pursuing foreign policy only through int e rnational fora. GATT operates on the basis of consensus. Thus steps to which 105 GATT members must agree will necessarily be a long time in coming. The good news is that GATT encompasses some 90 percent of the merchandise trade which takes place in the wo r ld. Ile bad news is that because it is so broadly gauged, it sometimes moves very slowly. If two or more countries have a desire to liberalize among themselves, shouldn't they be able to design a mechanism which would so provide? Why should countries whic h desire the benefits of in- creased trade have to proceed at a pace set by the least competitive or most protectionist member of the GAM GATT is valuable as a mechanism for moving die world trading community toward liberaliza- tion. But if we view it as t h e only mechanism for liberalization, we miss opportunities. Hence the Agenda for American Renewal calls for the successful completion of the current round, but it also states we will take trade liberalization where we can find it. We will move as rapidly a s we can. With NAFTA negotiated and awaiting ratification, our attention will tum first to liberalization in this hemisphere. Given the strong consensus for free trade which is developing across Latin Amer- ica as well as the number of FrAs which already e xist in the region, this process should take about two years to move to resolution. Mexico, for example, has already established FrAs with the Cen- tral American countries and Chile. The Southern Cone countries of Argentina, Brazil, Paraguay, and Uruguay h ave already established their own FTA, known by its Spanish abbreviation MERCOSUR. We should make 1993 the year in which the question of how to expand, free trade into the Pacific changes from an idea in a speech to a practical question for leadership on both sides of the Pacific. Indeed, President Bush has stated that he intends to seek formal negotiating authority for these new FrAs in the first half of 1993.

Free Trade with the Pacific If the issue facing the United States next year is how to expand fi re trade across the Pacific, I have a few unofficial thoughts to offer. The United States should pursue this goal as it has with the EAI in Latin America: Establish a set of independent free trade criteria and offer to begin discus- sions with any country that meets those criteria. If a country is committed to open markets for goods and services, if a country is committed to removing barriers to investment, if a country is committed to safeguarding intellectual property, then we can begin discussions. Whic h countries would be most likely to embrace these criteria? Looking solely at the commercial dimension, sev- era! economies come to mind. In the first tier of potential trading partners, one should put Australia,


Hong Kong, N ow Zealand, Singapore, and Taiwan. All of these economies have relatively open trading systems, are relatively affluent, and have highly internationalized markets. Of these five, only New Zealand and Taiwan publicly have called for free trade agreements w i th the United States. Of course, the President's proposal is not even one month old. In addition, we should recognize that there are political considerations that potentially complicate decision-making. For example, Australia's leadership appears to have c ome out against an FrA at present. New Zea- land relations are complicated by the ship visits issue. Hong Kong trade relations could be compli- cated by its eventual reversion to PRC rule. And trade relations with Taiwan are complicated by our lack of for m al political'ties. Ile United States should also keep in mind the importance of three economic organizations in Asia: APEC, the CER, and AFIrA. APEC, Asia Pacific Economic Cooperation, is a fifteen-member organization which has done a lot of work on the t e chnical issues of trade such as customs standard- ization. The CER, or Closer Economic Relationship, is the Australia-New Zealand free trade agree- ment. AFTA is the ASEAN Free Trade Area, which begins to take effect next year among the six members of the Association of Southeast Asian Nations. These local economic groupings are wel- come developments as they start the participating nations on the course of liberalization. Neither CER nor AFTA is a trade bloc, any more than NAFTA is, as they do not erect a common external tariff.

Counter-Arguments Although the Wea of U.S.-Pacific fire trade has not been the subject of discussion for a great amount of time, it might be worthwhile to note the concerns which have been cited in opposition to the idea. To date, I have noted three kinds of concerns: those dealing with GATT, those dealing with cultural issues, and those dealing with trade diversion. The GAIT issues themselves are twofold. We sometimes hear objections to bilateral liberaliza- tions because they ar e supposedly a diversion from GATT. A recent issue of Asiaweek stated in an editorial, "Every hour of effort poured down the APEC drain is effort lost to GAIT." This ignores the fact that bilateral FrAs involve a separate set of issues discrete from those a t the GAIT. Addi- tionally, most observers would take issue with the premise that the current round has suffered fi-om, an insufficient effort by the trade experts. The consensus of most observers is that the failure to move ahead with the round to date i s because of political differences. If wrapping up the Uruguay Round was simply a matter of man-hours, I would be the first to endorse the idea that we temporar- ily suspend every trade negotiation we have going on around the world, fly everyone to Geneva, and finish the round. Another GATT concern is that bilateral liberalization in itself undercuts GAIT by establishing -an alternative mechanism to liberalization. On the other hand, if a broad free trade area can be estab- lished, a smaller modefcould be h e ld out as 'an example to propel GATT to freer trade. As a re- gional free trade arrangement moves ahead, it will pur the- onus on the recalcitrant members of the GAIT to resolve their problems. The second concern, U.S. political or cultural dominance, is o ne we have heard before. As you might imagine, we heard these complaints from certain quarters when we worked on both the Cana- dian and the Mexican free trade agreements. From my work in Asia, I have not seen much that would give credence to those compla i nts. Although Americans are keenly interested in marketing their products, there does not seem to be much interest in doing anything in Asia except leaving as soon as the sale is made. Nonetheless, we need to be sensitive to the cultures of the region, al though we cannot let these cultural sensitivities serve as barriers for trade.


The third complaint is an ec o@nomic one: the standard economic textbook argument of trade diver- .sion. In other words, if Country A and Country B liberalize their mutual t rade, Country C could be worse off if it had traditionally been an exporter to either A or B, and were subsequently displaced. In certain rare cases, this trade diversion (so-called because with liberalization, trade is diverted from the most efficient ex p orter to one who enjoys a preferential trading arrangement) could be so great as to exceed the benefits of increased trade between A and B. Country A might be better off. Country B might be better off. But the degree to which country C is worse off could c onceivably even offset the improvements of both A and B. There is a policy response and an economic response to this argument. The policy response to'diis complaint is simple:,Iiberalization, shouldbe offered to A, B; and, C. If:any country fears being di s - placed by other countries' liberalizations, it need only liberalize itself. The economic response is that the prospect of increased trade in the case of NAF17A, for example, vastly outweighs the minor cases which might exist. Economist Lawrence Krause s tates that the greatest threat to economic ex- pansion in Asia in 1993 is the possibility that NAFrA would not be ratified.

Principles for 1993 Let me sum up by offering four principles we should keep in mind as this issue moves forward next yea:

1. We n eed to find the right way to turn the President's visioninto a workable pro- posal. President Bush has stated he will seek congressional authority for negotiating these follow-on trade agreements. As GATT and NAFrA am on their way to being re- solved, say in March 1993, the United States government should formally put forward a ftamework of criteria which would allow us to begin discussions. These discussions could be bilateral initiatives or multilateral arrangements as was first proposed by then- Underse c retary of State Robert Zoellick as "After-NAFrA links." We also need to explore how APEC can contribute to greater trade liberalization-, as was most recently suggested by Australian Prime Minister Paul Keating. 2. The free trade proposal must be all-enco m passing and GATT-consistent. All coun- tries have sectors of their economies which am less competitive and therefore would experience the greatest dislocation should that country move toward five trade. Coun- tries firquently seek to exempt those sectors f rom five trade agreements. The proposal a country offers, rather than being genuine free trade, becomes free trade in all sectors except those in which other countries compete well against them. Hardly an inviting proposal. We need to seek free trade agre e ments for all goods and services. We need to eliminate barriers to investment, and we need solid protection for intellectual property rights. Like NAFrA, these new FrAs need to be built around reductions in trade bar- riers, not common external tariffs. 3 . We need to recognize that most barriers to trade are non-tariff barriers (NTBs). It will do us no good to simply negotiate tariff reductions leaving NT`Bs intact. Regula- tions currently in place prohibit or mitigate against U.S. television commercials i n various Asian countries, for example. Similarly, some countries prohibit U.S. banks from having branches or even off-site ATM machines. All of these NT`Bs will have to be resolved for the agreements to be genuine FrAs. 4. We need to recognize the differe n ce between a "hub and spoke' system and a plurilateral systerrL The "hub and spoke" model of FrAs envisions a series of bilat- eral FrAs in which the United States might sip an agreement with Country A and another one vAth Country B and would thereby enjo y free trade privileges with both A


arA B, but Countries A and B would not enjoy ftee trade privileges with each other. A plurilateral model envisions a system in which participating countries would autornati- cally enjoy free aiding privileges with all other members.

It's easy to see the advantages of the latter system, particularly as free trade expands. One could hardly be thought of as generous or far-sighted if, for example, one were to require a mid-sized country such as Thailand, which might b e the 28th country to sip an FrA with the United States, to go ahead and negotiate 27 other FrAs around the world.

Conclusion NAFTA represents about 30 percent of world GNP. Every country in the Western Hemisphere ex- cept for d= has expressed a desire t o participate in the EAl, which should lead to free trade across North and South America. If we think it is reasonable that free trade will be expanded across the Pa- cific over the next few years, over 40 percent of the world's economic activity could ta k e place through a U.S.-led free trade area. Seeking greater free trade with our Asian partners will not be easy. Every country will react dif- ferently to this proposal; some with enthusiasm, many with noncommittal but positive words, some, with disdain. I n the United States we will also face criticism from people who would rather protect 19th century business practices than build them into 21st century businesses. This should neither trouble nor surprise us. We seek nothing but the right to buy and sell o u r goods and services as a fire people. If sane countries are prepared to move with us on equal terms in the spirit of friend- ship, we welcome them and we are flexible enough to take advantage of an opportunity. If other countries feel they need to wait, w e are patient enough to understand. President Bush elaborated on some of the themes of his Detroit speech, saying, "During the Cold War, we built a global security structure to contain and counter the Soviet Union and communist ag- gression. We forged mil i tary alliances across the Atlantic and Pacific that underpinned that struc- ture. In the post-Cold War era, we need a strategic global economic and trade policy that will ensure our position as an economic and export superpower as well." U.S. leadership s ecured world peace through the post-war era. U.S. leadership can secure world economic prosperity for generations to come.



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