Managing a world of free trade and deep interdependence

Renato Ruggiero

Director-General of the World Trade Organisation

It has been said that most policy makers look for the future in a rear-view mirror. Generals tend to fight the last war. Statesmen and diplomats, tasked with building tomorrow, usually start with a blueprint of the ancien regime. This temptation to look to the past is even stronger in today's globalising economy where all the landmarks seem new and where the ground under our feet is constantly shifting. It is also far more dangerous. We live in a world which is already launched on a path towards global free trade - it is a process which cannot be reversed or rolled back without unimaginable costs to our future growth and our future progress. The challenge now is to come to grips with a world of free trade and deeper integration, and to realise its immense benefits. It is a choice between building a global architecture which is open, universal and rules-based, or living in a system which is anarchic in the most literal sense of the word. If one chapter of world economic history ended with the technological revolution of the last decades and with the mammoth liberalising efforts symbolised by the Uruguay Round, another is about to begin. How it is written will depend on the decisions we make in coming months and years.

To argue that globalisation is an evolving reality is not to claim that we are nearing the point of free trade in all sectors or in every region of the world. Clearly this is far from the case. Trade liberalisation is incomplete in many key areas - substantial tariff peaks remain; negotiations are still proceeding in critical sectors like telecommunications or financial services; and even the Uruguay Round's final results in agriculture or textiles or government procurement leave much to be desired. There is plenty on the liberalisation agenda to keep us occupied into the next century. It is also true that not all countries are equally integrated into the multilateral system. Globalisation has gone considerably further in Europe, in the Americas and in Asia than in Africa. This is to say nothing of major economies like China or Russia which have yet to accede to the World Trade Organization.

Yet, however imperfect our progress, the underlying trend is unmistakable. Multilaterally, regionally, unilaterally - all paths are leading to freer trade. MFN tariffs in all countries, developed and developing alike, are on a sharp downward course, while applied tariffs in many cases are lower still. Much more than one third of world trade will be tariff free when the Uruguay Round is fully implemented. Most non-tariff border restrictions have also been abandoned; those that have not are scheduled to be eliminated or converted to tariffs according to a strict timetable. Services trade has already been brought into the ambit of the multilateral system and investment, logically, cannot be far behind. Inside the border, many countries are undergoing equally radical fiscal, monetary, and structural reforms in an effort to hone their economies to an increasingly 'open' and competitive international environment.

"Yet, however imperfect our progress, the underlying trend is unmistakable. Multilaterally, regionally, unilaterally - all paths are leading to freer trade"

But the most fundamental transformation of all is occurring at the level of awareness. Telecommunications is creating a global audience. Transport is creating a global village. From Buenos Aires to Boston to Beijing, ordinary people are watching MTV, they are wearing Levis jeans, and they are listening to Sony Walkmans as they commute to work. Perhaps in the present world we can still imagine some government blocking Levis jeans or MTV at the border. But if you stop goods and services the consequence would be massive migration of people and of investment. What is going on is a citizen's revolution on a global scale. And even those who do not like the direction globalisation is taking us, have no realistic plan to put the Genie back in the bottle. It is in this very personal sense that we are all free traders now.

These changes are reflected in the growing volumes of world trade. Trade flows have multiplied fifteen-fold in the last four decades - reaching $6,000 billion last year - while production has increased six-fold. The worldwide movement of foreign direct investment is even more striking. In the ten years to 1996, investment flows worldwide easily quadrupled, from around $60 billion to almost $300 billion per annum. In these statistics are revealed the new dialectic of globalisation. The systematic reduction of trade barriers worldwide, combined with dramatic decreases in transport and communications costs, has paved the way for the emergence of a global system of production, distribution and consumption - one in which firms are increasingly free to assemble inputs from around the world and to service an equally global marketplace. This in turn has accelerated the movement of global investment, as firms learn that the best way to achieve comparative advantage in production, in sourcing, in distribution, and in technology is to establish a direct presence in foreign markets.

One by one, trade and investment barriers will continue to be swept away by globalisation, like leaves on an autumn day. But the force of these winds of changes is already testing our ability to adapt. The immediate challenge is to integrate a rapidly ascendant developing world. No one stands to benefit more from globalisation than developing countries. Production is now mobile, capital footloose, technology diffuse. Developed and developing alike, we are all competing for the same investments, for the same markets, for the same innovative edge. In this sense, globalisation has erased the old ground rules of economic growth, providing countries, once relegated to perpetual 'third world' status, with the tools to fast-forward their development. Unprecedented growth rates of certain industrialising countries in Asia and Latin America are evidence that a huge shift in economic power is underway. Developing countries now account for a quarter of world trade compared to less than 20 per cent five years ago. A third of the world's 25 leading exporters and importers are now developing countries, including Argentina. Twenty years ago, industrialised countries imported just five per cent of their manufactured goods from developing countries; by 1990 this figure had risen to 15 per cent, and by 1994, over 20 per cent.

Already some fear that the emergence of key developing countries will send shock waves through the system. They worry that rising exports from emerging markets will place growing pressure on open economies in the developed world - pressure which, in sensitive sectors at least, could generate economic uncertainty and unrest. Others ask how we will manage an increasingly complex trading system which is growing wider just as it is growing deeper. The short answer is that all these problems can be better managed inside the existing global system than outside of it. As developing countries become more deeply integrated into the global economy we have no choice but to involve them much more closely and transparently in international rule making and institution building - to ensure the stability as well as the evolution of the system. This of course underscores the critical need to get China, Russia and all candidates still outside the multilateral system firmly embedded in the WTO. No-one expects this to be easy. The accession of large transition economies in particular raises fundamental questions of substance which cannot be answered by compromising the integrity of the rules or the interests of existing members. Still we cannot long maintain a coherent system of global rules which is perforated from the outside. Without a massive economic player like China 'inside the tent' we risk being a World Trade Organization in name only.

Another major challenge is to channel constructively the growing international competition for export markets, for investment and increasingly for technology - a competition which is being played out most visibly in an expanding web of regional and supraregional trade areas. The logic of regionalism is that certain groups of countries can move further and faster towards liberalisation than others. But one of the main forces driving regionalism forward so rapidly is the race to grab a bigger slice of the export and investment pie. Countries enter into free trade arrangements to increase their access to markets and investment, which in turn encourages others to join the race for fear of being left behind. Like falling dominoes, free trade agreements beget more free trade agreements. Already some one hundred bilateral or regional groupings had been identified by the WTO last year, and each month we hear of new or expanded alliances.

So far this has generally been for the good. Regional arrangements have provided stepping stones to global liberalisation, they have served as important crucibles for trade policy innovation, and they can be a source of creative tension in the system as a whole, forcing the pace of other regional and multilateral initiatives. My concern is not so much that regional arrangements will turn inward, but that their very momentum will leave the multilateral system behind. If regional liberalisation outstrips the WTO process, there is a danger that we will lack a common framework of rules and disciplines. If our economic interests are increasingly defined regionally and not globally, it will be more and more difficult to find the critical mass of countries needed to sustain the multilateral system. The risk then is of a fragmented world - one which fosters inter-regional frictions and rivalries, but lacks the global architecture of rules and procedures needed to manage them.

The long-term solution is not to try to restrict regional agreements, beyond ensuring that they remain trade-enhancing and adhere to Article XXIV of the GATT - this would be like trying to harness globalisation. The solution is to ensure that regional and multilateral liberalisation are mutually reinforcing - that all paths eventually lead to the WTO. The solution, in other words, is to multilateralise regionalism whenever possible. One answer may be found in the principle which some of the newer regional groupings have enunciated - the commitment to 'open regionalism'. What this means in theory is convergence - that the elimination of barriers within a bloc will be implemented at more or less the same rate as the lowering of barriers to non-members. What it could mean in practice is truly revolutionary - that in committing themselves to 'openness', regional trade agreements could provide the catalyst for global free trade.

This leads to the third challenge facing us in the years ahead - ensuring that the multilateral trade system is truly universal. We may be moving in the direction of freer trade, but the progress is uneven. Residual barriers and discriminatory practises distort trade and investment flows, which can in turn cause uncertainty and friction. This situation is made worse when trade rules do not keep pace with deeper economic integration. What most impacts on the shape and direction of economic activity today - particularly the rules of competition and the movement of global investment - is not so much the barriers at the border, but the domestic economic structures inside. Here there is growing room for trade friction, not because of differences over rules, but because rules do not exist.

Liberalisation remains the single most important engine for growth at the world level. This fact is reflected in studies like the recent Human Development Report which observes that while 1.5 billion of the world's people are poorer than in the past, over three billion are better off today than at any point in history. The overall trend is towards a "slow but significant improvement in human development in almost all countries in recent decades". Free trade cannot be responsible for the distribution of the wealth it generates. This is the main task of government at the national and - because of the increasingly global dimensions of the problems - at the international level. If countries seek greater protection from the global economy in the name of seeking greater socio-economic equality, they will be throwing out the baby with the bath water. But, by the same token, if we do not find solutions to the problems of poverty in the least developed countries or unemployment throughout the world, then I am certain we will put global growth and global progress at grave risk.

The success of our new organisation will hinge largely on the work we do in the time ahead. We have to consolidate what we have achieved in the Uruguay Round. We need to agree on a workplan for the remainder of the century - a workplan which had already been envisaged at the end of the Uruguay Round in the so-called build in agenda. And we need to begin to meet the really big economic and geopolitical challenges presented by a globalised world. But more than just a plan, we need a guiding idea. That idea is the realisation of global free trade - the demolition of the last walls of the old economic order. The goal of barrier free trade was accelerated in the Uruguay Round by expanding the so-called zero-for-zero negotiations. And it is being realised regionally in Mercosur, NAFTA, APEC, the EU and the many other customs unions and free trade areas spreading throughout the world. Now is the time to draw all of these disparate threads together. Using the timetables we have already established in the various regional agreements, let us move towards a world free of economic borders. The first WTO ministerial meeting in Singapore [was] the first major step towards answering these questions.

What we can demonstrate is that the WTO is focused clearly on the future, that we have a working plan, and that the road from Singapore is a bright one. What is at stake as we contemplate the future of the multilateral system is much more than trade or economics. It involves questions of political and economic security. It is about how relations among countries and among peoples are to be structured. It determines whether we foster international solidarity or descend into a spiral of global friction and conflict. Fifty years ago, in the crucible of war and economic ruin, statesmen set their sights on a free community of nations co-existing in a borderless world. At the end of the century and the end of the millennium their vision is becoming a reality. At the moment of victory, let's not lose the strength of our convictions.