August 8, 2000

August 8, 2000 | Lecture on Trade, Economic Freedom

Global Trade: 10 Steps to Reclaiming U.S. Leadership

The United States is the world's lone superpower, the world's largest economy, the largest exporter, largest importer, and largest open market. Therefore, it follows that the United States has the greatest impact on the world when it comes to global trade.

THE QUALITIES OF LEADERSHIP

However, leadership implies qualities that exceed size alone. True and effective leadership requires an approach and a style that engenders respect and trust, not antagonism and fear. The United States will probably always be envied, and resented, by some because of our size, wealth, entrepreneurial spirit, and impatience for results. So, our style of leading and dealing with others should be one which does not exacerbate any negative feelings that already exist. We should be able and willing to pursue our objectives while being fair to others and understanding of their needs and desires. The result should be a "win-win" situation: Each party achieves something it wants, and global trade and prosperity gain at the same time.

Sadly, I believe that the leadership status and credibility of the United States have slipped in recent years, particularly since the unfortunate World Trade Organization (WTO) ministerial meeting in Seattle in November 1999.

THE FAILURE IN SEATTLE

It is well worth taking a closer look at the Seattle meeting because it illuminates some of the problems we face.

The announced purpose of the meeting was admirable: to launch a new round of global trade talks. Instead, what happened was a setback for the global trading system and for U.S. leadership. There are some important lessons here.

The first is that U.S. preparation for the meeting was either inadequate, went awry, or did not recognize that perhaps many countries were still digesting the Uruguay Round and were not ready for a new one. The result was that the United States was isolated in pushing its agenda but, nevertheless, decided to bulldoze its way through. Leadership by bulldozing did not work in Seattle and will not work in the future.

The substance of the U. S. agenda was another problem. We wanted the new round to focus on services and agriculture and to create a working group on labor standards. Our usual allies in trade matters--Europe, Japan, and Canada--were not with us, and neither were the developing countries. The reasons: Our European and Japanese colleagues seem to have backtracked on the commitment made in the Uruguay Round to include agricultural products in the next one. And, the developing countries are dead set against including labor standards in trade agreements because they think we are creating a new barrier against them and their products.

The current Administration's insistence that labor and environmental standards be a part of any trade agreement has been roundly resisted for the past eight years by the developing countries. The antagonism and fear have been building and finally burst into the open at the Seattle meeting.

Adding to the impending tragedy, President Clinton stated in an interview just prior to his arrival at the meeting that he could envision sanctions against countries that did not comply with labor standards. This sent shivers down the collective spines of the developing countries. Until their fears can be alleviated, any hopes for a new round are decidedly dim. A further complication: The WTO team in charge of the meeting were mostly new to their roles and probably not as well prepared as they might have otherwise been. The new Secretary General had been chosen only a few months before, after a protracted battle, and his deputies were also new to their positions.

The coup de grace was the protests that engulfed the meeting--protests against globalization and transnational companies, among other things. The protest group included unions, environmental groups, some religious organizations, consumer groups, and anarchists. The skirmishes and noise surrounding the meeting echoed around the globe. The coalition appeared again at the IMF and World Bank meetings in Washington, D.C., in the spring and is expected next month at the Republican and Democratic party conventions. This coalition has gained traction and is here to stay.

10 Steps to Consider

Against this background, we are now approaching an important national election--presidential and congressional--an election that could determine the direction of our country for a generation. After the results are in, what should U.S. policymakers do? Here are 10 key steps for consideration:

  1. Develop a new style of U.S. leadership.

We have been criticized in recent years for a tendency toward hegemony. I do not believe this to be true, but I do think some of our national leaders have been too willing and too quick to tell other countries what to do and how to do it. This approach may have been more workable in the days following World War II, when the United States was supremely dominant. Then, there were fewer than 50 countries in the world. Today, although we are the only superpower, there are now nearly 200 countries in the world, many of which have great national pride, and all of which want a piece of the economic action. It, therefore, follows that U.S. power and influence, while still great, have been diluted. And, it follows further that simply dictating to other countries--the bulldozer style of leadership--does not work. We need a more collegial and inclusive style, with more emphasis on consulting with others, recognizing their needs, searching for common ground, and building consensus. The United States must repair and rebuild many relationships around the world and set a new tone for the future. Consultation and consensus building takes time, which may contradict our American impatience for results. Still, we should do it.

We must also be clear: A different leadership style does not mean that we would back away from our principles or from our objectives. It does not mean that we would cave under pressure from others. What it does suggest is that our style of dealing with others would shift from overbearing to collegial.

The same rationale applies to our trade negotiating posture, which has become overly confrontational. Why do we behave this way? One reason is that some constituencies want our negotiators to talk and act tough. Perhaps another reason is we have placed lawyers trained as litigators in trade-negotiating roles. They have been very talented people who have performed well. But the litigation mindset is "win-lose," where somebody wins and somebody loses. This creates resentment. A better result is where each side feels that it has won. That's "win-win." People leave happier and more willing to come back to the table the next time.

As a key part of our changing leadership posture, the Administration and the Congress would be well advised to resist the temptation to act unilaterally, in particular when sanctions are involved. We have learned over the year--and there is research to document this--that using economic sanctions to achieve a non-economic objective generally doesn't produce the desired result, and we damage ourselves in the process.

  1. Restore fast-track negotiating authority.

Our current lack of fast-track authority is a disincentive for others to negotiate with us, especially in a multilateral context. The next President should seek congressional approval at the beginning of the new Administration.

  1. Take labor and environmental standards as part of trade agreements off the table.

It is the only way to get anything moving again multilaterally. Having said this, I hasten to add that these issues are important and must be taken seriously. But, they should be dealt with in venues other than trade agreements.

Here is the predicament. On the one hand there are the free traders who want to lower barriers and expand trade in the interests of more economic growth and prosperity. On the other hand, other constituencies--notably unions and environmental activists--insist upon the need for labor and environmental standards in trade agreements. The unions believe U.S. jobs need protection from the advantage that low-wage countries may have. The environmentalists believe that economic activity should not outrun environmental protection around the globe. These constituencies have political clout, especially with the current U.S. administration. Trouble is, their objectives clash with the needs of developing countries working to raise living standards, eradicate poverty, and fight disease. Those countries think we are trying to erect barriers to their exports and impede their development. As long as they fear us, it will be difficult to get anything going multilaterally.

There is no easy answer to this global political dilemma. But one thing is clear: We must be more creative in finding common ground instead of just locking horns. At the very least, the different constituencies--labor, business, environment, governments--need to start to reason together.

For our part in the United States, we must admit that we no longer have a strong consensus for free trade. That consensus needs rebuilding. Education and explanation have not been a consistent part of the debate. Business people and others who believe in more and freer trade have not been effective enough at documenting why our society and others around the world are helped by it. Another missing element is a U.S. President who articulates the rationale and stands firmly behind it. The leadership of the new President can make a difference.

  1. Recognize the potency of the anti-globalization coalition and search for new approaches to answering its concerns.

There are worries about the borderless world--that "transnational companies" will become too powerful and that globalization is creating an imbalance between economic growth and social objectives, such as human rights, labor standards, the environment, and poverty reduction.

New ideas and approaches are at a premium here and the search has barely begun. It is suggested that the International Labor Organization (ILO) is the appropriate venue to work toward global labor standards. On the environmental front, there is no obvious organization to which to turn. One idea: A neutral organization, such as the OECD, could assemble a group concerned with global environmental protection. However it is accomplished at some point, those on all sides must begin to talk with each other.

  1. Push for the free trade area of the Americas and support the expansion of other regional free trade areas and liaisons.

Free trade areas and bilateral agreements have sprung up all around the world during the past decade. The North American Free Trade Agreement (NAFTA) has had stunning success, so has the European Union, and Mercosur is promising. The Asia-Pacific Economic Cooperation Forum's (APEC) move toward trade liberalization could have useful results. Free trade liaisons have crisscrossed continents and oceans--Europe with Mexico, Chile with a variety of countries, Japan in talks with Canada.

The United States should support these efforts because of this simple philosophy: The more ways there are to free up markets and expand trade, the better off we all will be. The regional groupings do not countermand the global multilateral process; they reinforce our vision of linking the globe in free trade. And, it is worth noting that the regional efforts seem not to draw the ire of the anti-globalization coalition the way the WTO process has.

Of special importance to us is our hemisphere. It was the vision of Presidents Reagan and Bush to link the hemisphere in free trade. The NAFTA, negotiated in 1992, under President Bush, was a major first step. Now in its sixth year, it boasts success for all three countries: Canada and Mexico are now the number one and two trading partners of the United States. In 1992, Chile was promised the next place in NAFTA by President Bush. President Clinton agreed, but now seven years later, nothing has happened.

In 1994, President Clinton hosted the Miami summit, at which the 34 heads of state of the hemisphere's democracies agreed to implement a free trade area (FTAA) by 2005. After that, the idea of a free trade area in the hemisphere dropped off our radar screen, and the United States pulled back from its leadership role. Nonetheless, the FTAA process has inched forward, but the tough issues have not been addressed, in large measure because the U.S. government lacked fast-track negotiating authority and because of the inclusion of labor and environmental issues.

When fast-track negotiating authority is restored, the United States will have the opportunity to push for free trade in the hemisphere again and make the FTAA a reality. In addition, our promise to Chile should be honored. U.S. credibility and leadership are diminished when our government doesn't keep its word.

  1. Endeavor to make the WTO work more effectively.

The WTO is a consensus organization with 137 members and 23 more in the accession process. It is not easy to run a large organization by consensus. However, I have looked at other multilateral organizations, such as the U.N. and the IMF, and can find no other model that constitutes a better way. So, our objective should be to make the current system work as effectively as possible. A new style of U.S. leadership could certainly make a difference.

The WTO must rebuild its credibility in the aftermath of Seattle. There are a variety of ways to do this--an educational process, for one, aimed at better global understanding of what The WTO's mission and activities are, and for another, more transparency in WTO deliberations. In addition, beefing up technical assistance to developing countries could be fruitful. The WTO now has a small technical assistance fund to help those countries implement their trade obligations. Perhaps a private-sector technical assistance fund, with contributions from global companies, could be initiated to further this effort and help to blunt the fears of developing countries.

Another approach to consider other than re-introducing the idea of a new round: advance trade multilaterally, sector by sector.

In the Uruguay Round, the United States pushed hard for the strengthened dispute settlement mechanism, which went into effect when GATT was transformed into the WTO. The new process has generally worked. The United States is its biggest user, bringing 53 cases and winning most of them. However, there is a major concern: What happens when a large trading country does not abide by the outcome of a dispute settlement decision? In the cases about bananas and hormone-treated beef, which the United States and others brought against Europe's practices, the outcomes have been against Europe. In both cases, Europe has not complied. More recently, the United States has lost a case brought by Europe regarding the Foreign Sales Corporation (FSC). We have modified FSC and are working to pass the modification into law before October 1, 2000, the end of the reasonable period for implementation. If the modification is not in place, the United States may find itself in a non-compliance mode. And not incidentally, Europe does not buy our solution for compliance. The plot thickens and the dilemma remains.

  1. Understand the new Europe and manage the relationship accordingly.

The United States has long had a special relationship with Europe. European companies are the largest investors in the United States. But we must understand that Europe has changed, and the old paradigms in the relationship may no longer apply. The European Community now has fifteen members and intends to expand further. It has its own concerns--the new monetary union and its own governance, high unemployment in some countries, and the need for restructuring. Today's Europe wants global recognition of its own and does not want to be viewed as dependent upon or co-opted by the United States. One manifestation is our increasingly acrimonious trade relationship. Besides bananas and hormone-treated beef and our long-standing disagreement over agricultural subsidies, we have differences over aircraft noise, Genetically Modified Organisms (GMOs), and Airbus subsidies, to name a few. The search for common ground has become more complex, and we should recognize this and view the relationship through different eyes.

One approach: Work on eliminating barriers, sector by sector, starting with something on which we can agree.

  1. Continue to support China's entry into the WTO and monitor implementation of the agreement.

The United States has supported China's entry into the WTO. This is the world's fastest-growing large economy. Enormous change and development are going on in that country, and it is crucial that China belong to the WTO and become more integrated into the international community.

We also support granting permanent normal trading relations (PNTR) for China, something we must do, according to WTO rules, if we are to obtain the full benefits that come with China's accession. The bill granting PNTR passed the House, 237-197, in May 2000, with Republican votes providing the healthy margin. The companion bill is awaiting action in the Senate, and passage is hoped for after the August recess. Worst case, the bill would be burdened by amendments, go to conference, and then return to both houses for another vote. The closer we come to the election, the more difficult passage will become.

In any case, China is expected to join the WTO shortly. After accession, we should recognize that China's efforts to comply will probably be uneven. The central government seems committed to keeping to the agreement and has undertaken an extensive education process under the aegis of the State Council. The difficulty will be in the provinces and locales where change may be poorly understood or resisted. There may be some resistance from the state-owned enterprises and from some state ministries, as well. We should monitor the situation closely and assist the process of implementation where we can.

It must be noted that the United States has a plethora of issues and concerns regarding China. We must deal with these issues wisely but we must not allow them to hold back progress on trade and commerce.

  1. Urge Japan to continue restructuring to achieve more economic growth, keep its market-opening commitments, and advance its deregulation initiatives.

Japan has been in a recession for most of the past decade. Their economy is still the world's second largest, but the recession creates a disincentive for increased market liberalization and prevents Japan from playing a more active role in the global trading arena. Another result is that Japan is paying less attention to keeping the market-opening commitments it has already made in sectors such as flat glass and automobiles. A healthier Japanese economy would boost world trade and would help to bring down the trade imbalance--the U.S. deficit with Japan will approach $80 billion this year.

  1. Allow the "new economy"--specifically, the Internet, telecommunications, and e-commerce--to grow free of new tariffs, duties, and regulatory encumbrances.

E-commerce is growing rapidly around the globe, and more increases will come. These new technologies, and the changes they are causing in many aspects of trade and commerce, are moving too rapidly for governments, regulators, and multilateral institutions to catch up. For now, we should let the marketplace be the arbiter of these activities.

TRADE AND ECONOMIC GROWTH GO HAND IN HAND

Over the past few centuries, trade and economic growth have gone hand in hand with trade expansion leading the way. There was one exception, during the first half of the last century when tariff protections were in force by the United States and others. The result was that exports and imports were dampened, and economic growth suffered.

We must expand global trade. It is a major way to ensure global economic growth, well being, and prosperity. But, we must understand and address the concerns of those who fear being left behind. We are all inextricably linked today. World economies are more integrated than ever before, thanks to the advances in electronic and communications technologies.

Our challenge is to convince the world that the power and stamina of the U.S. economy is primarily the result of the disciplines, the incentives, and the opportunities, which free markets protected by democracy create. Our success can be replicated around the globe if other countries will give free markets the credit they deserve and the political credibility they require.

Benjamin Franklin is a hero of mine. One of the many reasons is his philosophy about trade. "Trade," he said, "never ruined any nation."

The Honorable Barbara Hackman Franklin, a former U.S. Secretary of Commerce, is a Distinguished Visiting Fellow at The Heritage Foundation.

Related Issues: Trade, Economic Freedom