The expansion of free trade around the world, long a pillar of U.S.
foreign policy, is once again becoming a cornerstone of U.S.
policy. After the end of World War II, the United States employed
trade policy as a tool to promote economic freedom and stimulate
economic growth both at home and abroad. Because of its leadership
on trade, more people in more countries experienced greater
improvements in their living standards than at any previous time in
U.S. history. In fact, world exports in dollars are 18 times higher
and world gross domestic product (GDP) is now six times greater
than they were in 1948 when the major economic countries signed on
to the market-opening General Agreement on Tariffs and Trade
(GATT), which laid the groundwork for today's World Trade
Organization (WTO).
Over
the past seven years, however, the United States neglected its
much-needed leadership role on trade, thereby slowing efforts to
craft comprehensive international trade agreements. President Bill
Clinton, for example, failed to secure fast-track negotiating
authority, thereby discouraging countries from concluding trade
agreements because they could not be sure that Congress would pass
them on a quick up-or-down vote. And the Clinton Administration's
missteps at the Seattle ministerial meeting of the WTO in late 1999
contributed to the inability of member countries to reach agreement
on further reducing trade barriers.
Reclaiming U.S. leadership on free trade
is now a priority. President George W. Bush has already indicated
that he will ask Congress to grant him fast-track authority to
conclude trade agreements, and U.S. Trade Representative Robert
Zoellick has made it clear that the Bush Administration will
promote "free trade globally, regionally, and bilaterally," and
that its policy will be to "reward good performers."
In
this era of globalization, trade issues meld foreign policy and
economic policy as never before. The Bush Administration must shape
a new agenda for promoting free trade that brings the world's open
economies together and demonstrates the immense benefits that
economic freedom brings to their people. It is an optimum time to
initiate a Global Free Trade Association (GFTA) of countries that
are committed to free trade and free movement of capital. Such an
association would enable these countries to accelerate the removal
of any trade barriers and investment restrictions they now have and
would encourage other countries to open their economies
unilaterally to trade in order to join.
The
GFTA must be a voluntary and inclusive association, with membership
based solely on a country's demonstrated commitment to a liberal
trading order. This means that its members share similar beliefs
and market institutions. By agreeing to further reduction or
elimination of their trade barriers, they minimize the need for
lengthy negotiations that often hamper bilateral or multilateral
trade deals. The GFTA, by its very nature, will advance free trade
around the world, promote economic freedom and economic growth
among its members, secure the benefits of free trade for more
people, and provide an incentive for other countries to liberalize
their economies in order to join.
Rather than being seen as a substitute for
other mechanisms that further free trade, such as the WTO or
bilateral trade deals, the GFTA should be seen as the basis of a
larger trade agenda--to promote free trade by any means. It is a
creative alternative to current approaches that is more suitable
for an era in which the advance of global free trade has
stalled.
THE FOUR CRITERIA FOR GFTA
MEMBERSHIP
As part of the effort to create a Global Free Trade Association,
each country's commitment to free trade must be measured by
objective standards. Each prospective member country must have
demonstrated its ability and willingness to meet specific criteria
of openness to trade, such as those employed in The Heritage
Foundation/Wall Street Journal Index
of Economic Freedom, which annually evaluates over 160
countries on 10 specific factors. Four of these Index
factors, taken together, constitute a sound measure of the openness
of a country's markets:
- Trade policy,
- Capital flows and foreign investment,
- Property rights, and
- Regulation.
To
qualify for the GFTA, a country would need to score well on each of
these factors. Doing so would
indicate that the country is open to trade and investment and that
it maintains a secure rule of law with low levels of
regulation.
Trade Policy
According to these Index factors, then, countries must
have an average tariff rate of no more than 9 percent and must
maintain minimum non-tariff barriers. Such barriers include
anything that prohibits trade, including import licenses,
administrative controls, and quotas. Countries with low tariff
rates and low non-tariff barriers to trade enable foreign goods to
enter without requiring them to overcome major obstacles.
Hong Kong, which received the best Index score for
economic freedom in 2001, provides a good example of a country with
low trade barriers. Hong Kong levies virtually no import tariffs
and maintains few, if any, non-tariff barriers. Foreign firms have
competitive access to Hong Kong's vibrant market.
Investment
The second factor to consider in determining a country's
eligibility for GFTA membership is the openness of its investment
regime. The Index defines an open investment regime as one
that maintains a transparent and open foreign investment code,
treats foreign investments impartially, and approves foreign
investments efficiently.
A
good example of a country with an open investment regime is
Ireland. Foreign businesses locate in Ireland to gain access to
the European market, but also because Ireland maintains an
efficient and transparent foreign investment code and welcomes
foreign investment in virtually all sectors of the economy. Today,
over 1,200 foreign companies have chosen to locate in Ireland
because of its openness to foreign investment and its competitive
environment.
Property Rights
The third factor to consider is whether a country maintains a
secure property rights regime. According to the Index, a
secure property rights regime is one in which an established rule
of law protects private property and provides an environment in
which business transactions take place with a high degree of
certainty.
The
United States is a good example of a country with
well-protected property rights. When property rights are secure,
entrepreneurs--both domestic and foreign--are more likely to take
risks with their income. They know that if they do invest in a new
business venture, they will be able to keep the profits.
Entrepreneurs in the United States do not have to worry about third
parties stealing their products or ideas, and are thus more likely
to engage in this economic activity.
Regulation
The fourth factor to consider is regulation. Scoring well on
the Index on this factor would indicate that a country's
government regulations do not deter entrepreneurs from opening a
business and do not overly burden new businesses with regulation.
Businesses are less likely to invest in branching out to countries
with excessive bureaucratic hurdles to opening a business or where
regulations significantly raise the cost of doing business.
Singapore, which has continually ranked among the top
Index countries in overall economic freedom, is an example
of a country that maintains very few obstacles to opening
businesses. Entrepreneurs wishing to open a new business in
Singapore encounter a very simple licensing system and often get
their businesses up and running in a matter of days. Moreover, once
a business is established in Singapore, the government imposes very
few regulations.
Taken together, these four characteristics
of countries with open markets create an attractive environment in
which to do business.
Aside from securing the benefits of free
trade for its member countries, the GFTA also gives countries
committed to open markets an opportunity to form an alliance with
like-minded countries. For instance, in Europe, a number of smaller
"periphery" countries such as
Denmark,
Estonia, and Ireland have exhibited a commitment to free and
open markets and are often at odds with European Union (EU)
regulations.
Current and future EU member countries
such as these will be forced to accept EU regulations, which would
undo much of the good that they have accomplished by liberalizing
their economies. For example, EU member countries are greatly
restricted by a regulation requiring that they negotiate trade
treaties through the EU instead of making individual sovereign
choices regarding their trading arrangements. For nations that want
to form alliances with open countries and avoid being linked with
organizations that adhere to market-unfriendly policies, the
logical alternative is to join the GFTA.
Countries that Would Qualify
The advantage of the GFTA over current mechanisms for promoting
free trade is that qualifying countries would secure the benefits
of increased trade and investment among the members without having
to undergo any new major policy reforms. In other words, membership
is based on current policies, not future promises.
Because the nature of the GFTA is
voluntary and inclusive, it embraces state sovereignty. Membership
is based solely on a country's commitment to a liberal trading
order as demonstrated by its economic policies. Numerical targets
that determine membership allow for self-selection, based on a
country's economic policy decisions; membership is solely under the
control of each country.
Using the Index factors listed
above, 11 countries would qualify for the GFTA immediately because
they already have very open markets. These countries are
Chile, the
Czech Republic, Denmark, Estonia, Hong Kong, Ireland,
Luxembourg,
New Zealand, Singapore, the
United Kingdom, and the United States. (See Chart 1.) Next in
line are the 26 countries that miss qualifying by falling short on
just one of the four factors.
As
Chart 1 shows, the 11
countries represent major regions of the world. The periphery
countries in Europe and the Asia-Pacific region are also
represented. Chile secures a foothold for Latin America, and the
United States anchors North America. Policies, not geography, are
what define the GFTA.
The
success of the GFTA for the first 11 members would attract other
countries to reform in order to join. Without any American
finger-pointing about the merits of liberalization, they would have
an incentive to open their markets further to qualify for the GFTA.
Reform would be in their best interest. A system based on rewarding
markets that have already opened will change the way countries
think about trade. No longer will open economies need to wrangle
over winning concessions from closed countries to further free
trade. Instead, free trade will be seen for what it is--a policy
that gives countries that embrace it a massive economic
advantage.
Table 1 lists the 26
countries that just miss eligibility for GFTA membership by one
factor. If these countries were to remove the obstacle to
eligibility listed in the table, they too would qualify for the
GFTA to gain greater access to the markets of the United States and
the other 10 countries. Such a "carrot" would do far more than
diplomatic "sticks" to advance free trade.
PROMOTING ECONOMIC GROWTH AND ECONOMIC
FREEDOM
To demonstrate the economic benefits that come from maintaining
market-friendly institutions, consider the following comparison:
how Index countries score on the four GFTA criteria and their per
capita GDP. Once a country's
scores in trade policy, capital flows and foreign investment,
property rights, and regulation are averaged, its openness to trade
can be numerically graded and a new "trade openness index" can be
created. Based on their grade, countries can be ranked as "open,"
"mostly open," mostly closed," and "closed."
As
Chart 2 illustrates,
open countries accumulate more wealth than less open countries do:
The "open" countries realize over twice the GDP as do "mostly open"
countries, while "mostly open" countries have well over twice (2.5)
the GDP of "mostly closed" countries.
Because the GFTA is likely to encourage
member countries to develop internal incentives to stimulate faster
economic growth, their GDPs will expand. Such incentives could well
include freer movement of capital within the association, setting
numerically the lowest rates of subsidies between members, and
diminishing hidden tariffs. As GFTA countries' GDPs improve, other
countries will find themselves subject to increasing internal
pressure to increase their own economic freedom in order to
compete. This is a win-win scenario for global prosperity.
CONCLUSION
Trade promotes economic growth in countries with vastly different
government structures, primarily because it fosters market
competition and innovation. These in turn bring consumers more
choices and better opportunities to improve their standard of
living. This spurs companies to develop even better products and to
bring more of those goods and services to market, which in turn
helps to keep prices low and quality high. The winners are the
people themselves.
The
time is right to initiate the Global Free Trade Association and
enable more people to prosper. The GFTA promises to promote
economic growth and economic freedom around the world by securing
the benefits of free trade for member countries while giving
non-member countries an incentive to make market-friendly reforms
in order to qualify for membership.
John C. Hulsman,
Ph.D., is Research Fellow for European Affairs in the
Kathryn and Shelby Cullom Davis Institute for International
Studies, and Aaron Schavey
is a Policy Analyst in the Center for International Trade and
Economics (CITE), at The Heritage Foundation.
Lenore
Sek, Vladimir Pregelj, and Arlene Wilson, "The World Trade
Organization: The Debate in the United States," Congressional
Research Service CRS Report No. RL30521, April 12, 2000, at
http://www.cnie.org/nle/inter-42.html.