Foreign Affairs, November/December 1996, pp. 113-26

# Is the World Ready for Free Trade?

Charles R. Carlisle

Charles R. Carlisle is a Partner in the consulting firm of Carlisle and Handal International. He was Deputy Director General of the GATT from 1987 through 1993.

## CHARTING A COURSE

How to move forward on liberalizing global trade? By incremental steps of an already agreed-upon agenda or by one great leap to free trade in a grand new negotiation? This question arises as trade ministers from the World Trade Organization's 120 member countries prepare to meet in Singapore in December to chart the course of further trade liberalization. This will be their first gathering since they met in Marrakesh in April 1994 to bring GATT'S Uruguay Round of negotiations to a successful conclusion.

A long series of preparatory meetings at the WTO's headquarters in Geneva, which began in the spring and may continue until the eve of the Singapore conference, has foreshadowed what will probably happen in December. They suggest that the world is not ready for a leap to global free trade by a set date early in the next century.

Unless an important issue disappears during the preparatory work, the ministers will be asked to decide four major questions. Three of these, although potentially important to the long-term development of the trading system, raise collateral issues not directly related to trade liberalization. There is perhaps a 50-50 chance that the WTO will decide to address, although not through negotiations, the question of international rules for investment and the new question of "competition policy," covering government and industry practices that restrict competition. The third and most hotly contested question will be whether the WTO should take up internationally recognized labor rights. The United States, France, and other European countries have pushed the issue, but it has met with considerable resistance from the Association of Southeast Asian Nations (ASEAN), Japan, Australia, and others. Its opponents' expressed concern is that the proposal could lead to veiled protectionism, but some governments may hold other, unspoken objections. Either way, the odds that the ministers in Singapore will decide to address the matter in any significant way are slender to nonexistent.

The fourth and most important issue is the pace, depth, and breadth of the liberalization of global trade. The WTO already has an extensive "built-in agenda," decided in the Uruguay Round, that calls for major trade liberalization negotiations over the next decade. lt is highly probable that the ministers will stay with that agenda, but should they? Some economists advocate a more ambitious course that would lead to completely free trade in the early decades of the next century. Prominent among them is C. Fred Bergsten, director of the Institute for International Economics. He argues that an agreement to achieve global free trade by 2010, or possibly 2020 for the poorest countries, could be achieved by a "grand bargain" that would insure lower-income countries against reversion to protectionism by the "old rich" in return for full access to their markets and those of Japan. He believes the grand bargain would create well-paid export-related jobs and check regional trading arrangements, bringing gains to the United States and the world economy.l

Earlier this year, Renato Ruggiero, the WTO'S director-general, and Donald Johnston, secretary-general of the Organization for Economic Cooperation and Development, separately voiced conditional support for some aspects of Bergsten's idea. Both men have also expressed serious concerns about regional trading blocs. But the Financial Times of April 25 reported that Ruggiero and Sir Leon Brittan, the EU'S trade commissioner, "responded coolly" to Bergsten's proposal that the WTO commit itself to global free trade by 2010. WTO representatives this past spring quietly discussed the possibility of pursuing a more ambitious trade liberalization program and calling a trade summit in Washington around the end of 1997, but neither idea found much support. Neither the European Union nor the United States seems to support trade liberalization beyond the built-in agenda, although the EU might support preparatory work for a new round of trade negotiations. And if the Uruguay Round taught the world anything, it was that no major initiative in the WTO stands a chance of success unless the United States and the EU are united behind it.

Proposals to achieve global free trade in the first decades of the 21st century clearly have visionary appeal, but vision must be tempered by a keen sense, based on experience, of what is achievable. The Uruguay Round was not about free trade, but freer trade, yet it almost failed. Ministers at the Singapore meeting would show good sense and a strong appreciation of political reality in avoiding any giant leaps to global free trade. Few countries share the laissez-faire faith of the United States and the United Kingdom, and even in those two countries powerful lobbies would oppose completely free trade. The WTO has an ambitious built-in agenda that will continue to reduce barriers to trade well into the 21st century. A premature effort to force countries out from all protection would almost certainly fail and would probably seriously damage WTO negotiations already under way.

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1 C. Fred Bergsten, "Globalizing Free Trade," Foreign Affairs, May/June 1996, pp. 105-120.

## THE WORLD IS FAR FROM READY

Whatever the appeal of global free trade, the political support for the idea is just not there. The Uruguay Round, for instance, almost collapsed because of U.S.-European differences over agriculture. The United States proposed early in the round that all agricultural support and protection be abolished over a 10-year period, though making it clear that it could consider a longer time frame. The EU's reaction was extremely negative. When the United States refused to abandon its position, exchanges occasionally became bitter, and negotiations, not just on agriculture but on other subjects as well, came to a virtual standstill. The United States gradually softened its position and reached an agreement on agriculture with the EU a year before the end of the round. This agreement, which other governments accepted with some modifications, was a notable achievement but fell far short of free trade. The EU, especially France and some of the southern member states, is probably no more ready to accept free trade in agriculture today than it was at the end of the Uruguay Round.

The EU was hardly alone in its opposition to the zero protection option in agriculture. Japan and Korea fought desperately against opening their rice markets. Only in the last weeks of the negotiations did they agree to any opening at all. Japan finally acquiesced to initial imports of four percent of the market, rising in annual increments to eight percent after six years. Korea, treated as a developing country, negotiated an initial opening of one percent, rising annually to four percent after ten years. Can anyone seriously believe that either country would accept unlimited rice imports in the 2010-2020 period?

Nor do the recent WTO services negotiations give proponents of free trade much hope. The United States has refused to enter into agreements on services, claiming that many offers on the table, especially from developing countries, were inadequate. And the United States was not seeking free trade, only improved access for its service industries. Recent reports from Geneva have indicated no enthusiasm in Europe for making a sweeping new commitment to enter into a global free trade pact. In fact, EU officials privately report that some of their member states believe negotiators went too far in the Uruguay Round.

From the standpoint of American domestic politics, any agreement that would strip away all protection from the textiles industry -- traditionally one of the most heavily protected in the country -- is difficult to imagine. While the industry's attitudes are changing, and it may not have as much political influence as it once did, neither the industry nor its congressional supporters are likely to agree to free trade early in the next century. Furthermore, while the United States is significantly lowering agricultural support and protection, passage of the recent farm bill revealed that not all American agricultural groups are ready to move to completely free markets.

All the industrial countries now are struggling in one way or another with serious economic and social problems. The extent to which increased international competition contributes to job losses in various industries can be debated. There can be little doubt, however, that it is a significant factor, and political objections to job losses are being raised in Europe and America. Increased international trade brings benefits, but it creates losers as well as winners. The burden of adjustment tends to fall most heavily on those least able to handle it -- those who have few skills and little education, or lack job mobility because of their age, health, or economic circumstances. In short, the burden falls on those unable to move into high-paying export-related jobs.

Europe is tightening its belt to meet the Maastricht targets, while in the United States, whether Bill Clinton or Bob Dole wins the November election, many social programs will probably remain under pressure. In most of the major industrial countries economic growth will apparently be in the 2.0-2.5 percent range over the next two years; satisfactory, perhaps, but hardly vigorous enough to contribute in any substantial way to resolving joblessness and other serious social problems.

But the problems of the industrial countries are not the only concern. China has been negotiating for years, first to enter GATT and now the WTO. It has not yet been able to convince the WTO's members, especially the United States, that it will accept the rules and grant sufficient access to its markets. China will not enter the WTO this year, but the hope in Geneva is that it can enter in 1997. To press China, just as it is entering the WTO, to commit to opening its markets completely to foreign competition would be as unwise as it would be futile.

Russia, the other major country still outside the WTO, has also begun its accession process. Knowledgeable people in Geneva believe that if things go well, Russia could enter the WTO in the next two or three years. As with China, Russia's tradition of a command economy will make negotiations difficult. Could Russia be expected to make a free-trade pledge as the century ends? James H. Billington, the librarian of Congress, has warned that "no mistake has been greater in the West than to assume that the only alternative to Russia's largely authoritarian history and identity must be a total conversion to Western democracy and market economics."2 Jack F. Matlock, Jr., former American ambassador to the Soviet Union, writing about Boris Yeltsin's election as Russian president, notes that "even economic liberals are calling for protectionist measures to revive industrial production."3 Ukraine, Georgia, Belarus, Kazakstan, and other former Soviet states are preparing to enter the WTO but would almost certainly be unprepared to enter into an arrangement leading to global free trade. Nor would the world's low-income, developing countries, which constitute more than two-thirds of the WTO'S membership.

Although there has been a major movement around the world in the last decade toward freer markets and less regulation of economic activity, the developing nations, grappling with social and economic problems that dwarf those in the West, are not about to accept completely free trade. No country in the world embraces the belief in free markets and free trade to the degree that the United States, Britain, and the other English-speaking democracies do. Many would see global free trade as contrary to their traditions, doctrines, and interests.

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2 James H. Billington, "Let Russia Be Russian," The New York Times, June 16, 1996, p. 15.

3 Jack F. Matlock, Jr.,"The Struggle for the Kremlin," The New York Review of Books, August 8, 1996, pp. 23-34.

## FEAR OF REGIONALISM

Free trade worldwide is a distant goal, fraught with difficulties, but regional trading arrangements have been somewhat easier to attain. Many well-informed observers fear that they could go too far and that the world could break up into hostile trading blocs. Anxiety about regionalism goes back to the early 1980s, when the United States, waging an uphill battle to get the Uruguay Round started, made it clear that if global negotiations did not begin it would take a regional approach. At the time the United States was negotiating free trade agreements with Israel and Canada and the EU was expanding its membership. Since then, the creation of NAFTA, U.S.-led efforts to create regional arrangements in the Americas and in the Asia-Pacific area, and further expansion of the EU have kept the concern about regional arrangements very much alive. Yet an examination of the WTO's trade statistics and a sober assessment of what is likely to happen in the Pacific Rim, the Western Hemisphere, and elsewhere suggest that this fear, if not baseless, is much exaggerated.

In 1995 the WTO published a report titled "Regionalism and the World Trading System" that deserves to be better known. The organization's Secretariat notes that comparing trade within regions before and after the completion of regional trade agreements does not support the conclusion that world trade is increasingly regionalized (see Table 1). The report's statistics show that intraregional trade declined somewhat between the late 1920s and the years immediately following World War II, then rose dramatically until the early 1970s, but grew only a minuscule amount between then and 1993 in Western Europe while declining slightly in North America. Only in Asia did intraregional trade grow significantly in those years. This latter development can be explained not by a nonexistent regional trade arrangement but by a large shift of direct investment, much of it Japanese, into manufacturing facilities in Asia.4 Indeed, Japan's total trade (exports plus imports) with the rest of Asia rose by more than 23 percent, or $66.4 billion, from 1992 to 1994 alone, more than the increase in Japan's trade with any other area, in both absolute and relative terms.5 If this is regionalism, it is of the healthiest kind, driven by commercial considerations.

Table 1. Share of Intraregional Trade in Total Trade, 1928-93

(exports plus imports as a percentage of merchandise trade)

| 1928 | 1948 | 1973 | 1993
Western Europe | 50.7 | 41.8 | 67.7 | 69.9
Central and Eastern Europe and Former Soviet Republics | 19.0 | 46.4 | 58.8 | 19.7
North America* | 25.0 | 27.1 | 27.9 | 19.4
Latin America* | 11.1 | 20.0 | 27.9 | 19.4
Asia | 45.5 | 38.9 | 41.6 | 49.7
World | 38.7 | 32.9 | 49.3 | 50.4

* Mexico included in Latin America

Source: WTO

The WTO'S statistics, of course, cannot predict the future. A 1994 summit meeting of the Asia-Pacific Economic Cooperation forum (APEC) in Bogor, Indonesia, set a goal of "free and open trade and investment" by 2010 for the region's developed countries and 2020 for developing nations, although it defined neither free and open trade nor developed and developing nations. Similarly, a 1994 Summit of the Americas in Miami, Florida, adopted a U.S. proposal to construct a Free Trade Area of the Americas (FTAA) by 2005, with substantial progress to be achieved before the end of the century.

Are either of these proposed regional arrangements likely to achieve their goals by the announced target dates? Both look as if they will fall far short. Neither of the 1994 declarations is a legally binding commitment; the two are, at best, statements of political intent. And the definitional problems are hardly technical matters. Whether, for example, global free trade is defined to include everything that moves in international commerce or to exclude such sectors as agriculture or services, the resulting debates, domestic and international, are likely to be fierce.

In the case of the FTAA, two ministerial-level meetings have been held since the Miami meeting and several working groups have been established, but continuous, detailed negotiations are not in sight. The United States has reportedly been attempting to schedule a second Americas summit in late 1997 or early 1998, but Brazil, which may be more immediately concerned about the already established Mercosur customs union (Brazil, Argentina, Uruguay, and Paraguay, with Chile an associate member), and other nations seem reluctant to move swiftly on the FTAA. (Customs unions, such as the EU, have common external trade barriers; free trade areas, such as NAFTA, do not.) Brazil had liberalized its economy in recent years, but after running a trade deficit in 1995, it imposed sharply higher duties on motor vehicles and raised barriers to other imports. While these actions affect only a small percentage of imports and can easily be reversed, they raise questions about whether Brazil would be prepared to accept hemispheric free trade by 2005. For that matter, would the United States and other nations in the hemisphere? If it took an all-out effort to get NAFTA through Congress, what kind of political effort would be required to secure congressional approval of a hemispheric trade pact?

After a bold start in Bogor, the November 1995 APEC summit in Osaka ended, noted an editorial in the November 25,1995, New York Times, with a "loosely worded agreement" that did not set a deadline for "eliminating protection from agriculture and other sensitive industries." It is hard to believe that China and Japan want across-the-board free trade with the United States and other Pacific Rim countries. It is also difficult to imagine that the American public and Congress or their counterparts in developed nations would support an arrangement that requires the United States and other affluent countries to open their borders wide to imports of textiles, clothing, electronics, and other manufactured goods, as well as farm products, while their own exporters wait another ten years before developing countries, presumably including China, do the same.

Meanwhile, Thailand, the Philippines, Malaysia, Indonesia, and other countries in the Asia-Pacific region may start to turn away from trade liberalization as export growth slows and merchandise trade balances decline or go into deficit. On October 3 the Financial Times reported that Japan and the United States would soon file complaints with the WTO over Indonesia's "national automobile" program, which they claim will discriminate against their vehicle exports. President Suharto has reportedly warned that increased imports of foreign goods might have a "far-reaching impact on growth and equitable distribution." Malaysian Prime Minister Mahathir bin Mohamad is reported to have said that if import purchases are not restrained, duties should be raised and quotas imposed on "certain non-essential" goods.6 Attitudes can change and barriers that have been raised can later be lowered, but if the growth rates of certain Asian economies decline and large trade surpluses disappear -- a not unlikely development -- the task of putting an APEC trade arrangement into place will not be any easier.

The APEC proposal for regional free trade has a unique aspect dubbed "open" trade or "open regionalism" that will make the agreement both more difficult to achieve and more benign in its impact on the global trading system if it is achieved. As internal or intraregional barriers are reduced, external barriers, or barriers affecting nations that are not part of APEC, will also be reduced. The new arrangement would not be a free trade agreement as customarily understood, in which internal barriers are eliminated while external barriers are maintained, but a vast, open trading area of 18 members. However admirable this goal may be, there is little chance that APEC will even come close to fully achieving it. In the realpolitik of trade negotiations, where reciprocity is a fundamental and universally held notion, negotiators driven by domestic pressures score exports and imports based on the mercantilistic notion that exports are good and imports are bad. Whatever the theoretical arguments for openness, what the concept entails makes the Bogor goals even more unlikely to be met.

Both the proponents of regional trade agreements and those who fear them may believe that difficult problems can be overcome by leaving some products and sectors out of the pacts and by writing in long transition periods for still others. Certainly there is some flexibility under the WTO rule that permits preferential agreements, but the rule does not permit wholesale exceptions or inordinately long transition periods. It requires that barriers be eliminated on "substantially all" trade among an agreement's members, and over a period not to exceed ten years, other than in "exceptional cases." If agriculture, for example, were left out of a free trade agreement, the WTO would probably find the agreement illegal.

Although neither an FTAA nor a regional arrangement between the APEC nations is likely to come into being anytime near the target dates now being discussed, this should not suggest that regional integration will make no progress over the next 10 to 15 years. The Mercosur customs union has already included Chile, and will probably soon add Bolivia. Certain nations in Central and Eastern Europe, such as the Czech Republic, Hungary, Poland, and Slovenia, will likely enter the EU. Negotiations to bring Chile into NAFTA have been frustrated by the U.S. Congress, but that setback can probably be overcome. Nor is it inconceivable that other Latin American countries may enter NAFTA. In Asia, the ASEAN nations are making progress toward creating an ASEAN Free Trade Area by 2003, although difficult problems remain, particularly in agriculture. None of these developments, however, would pose a serious threat to the global trading system, where barriers will also be lowered. These countries account for a small fraction of world trade. For instance, the total merchandise trade of the ASEAN nations, whose economies have been growing rapidly, accounts for only around five percent of the world total.

Statistics aside, the world's manufacturers and service providers, aided by falling trade barriers, swiftly expanding transportation networks, and an explosion of technology, have established links between the world's regions too numerous to count and almost too difficult to conceive of. These links virtually ensure that the world will not break up into trading blocs or slide backward into large-scale protectionism.

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4 See Martin Wolf, "Japan Looks to Asia," Financial Times, June 11,1996, p. 14.

5 "International Trade, Trends and Statistics," Geneva: WTO, 1995, p. 166.

6 The Economist, August 10, 1996, p. 57.

## WTO'S BUILT-IN AGENDA

Not only are the dangers of regionalism exaggerated, but the WTO's built-in agenda sets out an ambitious program calling for major negotiations. Compared with previous successfully completed rounds of trade talks in the almost half-century since GATT'S founding, the current agenda is much more ambitious than any but the Uruguay Round, lacking only a component on manufactured goods, which could still be added in Singapore at Australia's behest. In any case, tariff reductions on manufactures were agreed on at Marrakesh, and tariffs in the industrial nations are already quite low, while developing nations have brought tariffs down from the sky-high levels common just a decade ago.

During the last two years negotiations have been held on financial services, telecommunications, and maritime transport, perhaps the most important sectors of the services industry. These negotiations, which were too difficult to complete during the Uruguay Round, have not gone particularly well. Last year the United States, claiming that other countries' offers to reduce barriers were inadequate, withdrew new offers that it had made in financial services and refused to take part in a partial agreement put together by the EU. Negotiations on basic telecommunications and maritime transport have not been completed in accordance with the 1996 deadlines established in the Uruguay Round. New, 1997 deadlines have been set for basic telecommunications and financial services, and there is some optimism in Geneva that they will be met. Maritime transport negotiations, however, will not be resumed until 2000, when there will be a fresh burst of successive rounds of talks on specific commitments to further liberalize trade in services. Likewise, new negotiations to reduce agricultural protection and support are scheduled to start at the end of the century. Agriculture brought the Uruguay Round to the brink of failure, and the new discussions promise to be difficult.

The WTO must review the rules on trade-related investment measures and propose any amendments that might be appropriate not more than five years after the WTO'S entry into force on January 1, 1995. Negotiations on investment have begun in the OECD and, as noted, it is quite possible that this Singapore meeting will decide that the WTO should begin discussions on investment soon. In addition, the WTO iS to complete a full review of dispute settlement rules by January 1, 1999, and a ministerial meeting will decide whether those rules should be continued or changed.

The Uruguay Round agreement on government procurement is one of four that do not bind all WTO members, only signatories to the agreements. Although it has only 11, predominantly industrial members, including the United States and the EU, the agreement is one of the more important to emerge from the Uruguay Round, and its negotiation was hard-fought. Talks to improve and broaden the agreement are scheduled to begin by the end of 1998. As this incomplete list suggests, the WTO already has a heavy and difficult negotiating schedule. If successfully completed -- and success is not assured -- it will provide a fresh impetus to world trade growth through the opening decades of the next century.

## NO GRAND BARGAIN

If there were a need for Bergsten's grand bargain, perhaps the political difficulties of achieving free trade could be overcome. Fortunately, the possibility of a major reversion to protectionism by the "old rich" is remote. A major move to protectionism by any large industrial nation would be enormously disruptive, perhaps irreparably damaging a vast web of commercial relationships among not only importers and exporters, but also producers and distributors. It would be like dropping a boulder on a table set with fine crystal.

The United States is the only major industrial country that might revert to large-scale protectionism, but the danger is slight. Like most peoples, Americans may support protecting particular industries from time to time, but most of them would not follow the prescriptions of Pat Buchanan, erstwhile candidate for the Republican presidential nomination, because they understand protectionism's consequences. The governments of Japan and other countries are well aware of this political fact of life.

But suppose the unthinkable were to happen and a WTO member retreated into serious protectionism. That country would be in violation of countless WTO commitments, and an effective mechanism to address such a situation now exists. Under a new procedure negotiated in the Uruguay Round, every WTO member has the right to bring a complaint alleging violation of the WTO'S rules to an independent, expert dispute settlement panel. A defendant country cannot block or unduly delay the process. If it loses such a case (it also has the right to have the case reviewed by an appellate body), it must either change the offending practice, which is the preferable outcome, or offer compensation by lowering some other trade barrier. If it does neither, the complainant has the right to raise trade barriers against certain exports. In the final analysis, a government could refuse to accept any of this and withdraw from the WTO on six months' notice. But doing so would place its exporters of goods and services at great risk.

While further insurance against a reversion to protectionism by the "old rich" is unnecessary, the other side of the grand bargain -- full access by the United States and other high-income nations to the markets of lower-income nations and Japan -- would likely have limited appeal. In the United States and elsewhere, the concern would be that although formal, governmental barriers might disappear, exporters would still confront hidden and subtle practices restricting trade that private companies maintain. The WTO'S rules do not provide adequate remedies, and the countries where firms engage in such practices have virtually no incentive to negotiate changes. The United States and other industrial countries have little trade protection left to use as bargaining chips on the subject.

## THE RIGHT COURSE

The United States must boldly lead any move toward global free trade if the initiative is to have a chance of success. The Clinton administration has been wise to resist calls to follow a course that would be divisive at home and vigorously opposed abroad. Just as the controversy over what was widely seen as America's extreme proposal on agriculture nearly derailed the Uruguay Round, so an effort to abolish global trade barriers could well interrupt, and would probably seriously damage, the WTO negotiations already under way. If those negotiations can be successfully completed, they will give a further stimulus to global trade, which now is expanding impressively (see Table 2).

Table 2. World Merchandise Exports, By Volume, 1980-95

(annual percentage change)

1980-85 | 1985-90 | 1990-94 | 1994 | 1995
2.0 | 6.0 | 5.0 | 9.6 | 8.0*

* preliminary

Source: WTO

In a March 22 press release, the WTO predicted that merchandise trade would grow at a "robust level around 7 percent" in 1996. If it continues to grow at current rates, it will double in ten years to about $10 trillion. And that is just merchandise trade; exports of commercial services could easily total $3 to $4 trillion 10 years from now. To put the total gain in perspective, $13 to $14 trillion is about half of current total global output.

The glass is not half full; it is more than half full. The success of the Uruguay Round, rapidly expanding trade, and an agreed-on list for further trade liberalization together should allow the victor of the 1996 U.S. presidential election to emphasize international issues that are crucial to peace and stability, secure in the knowledge that an agenda is already in place that will keep negotiators busy and trade expanding well into the early years of the 21st century.

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