Promoting America's Trade Interests Abroad

Promoting America's Trade Interests Abroad

Shaun Donnelly, Principal Deputy Assistant Secretary of Bureau of Economic and Business Affairs
Prepared remarks for Michigan and the World Conference
Kellogg Center, Michigan State University, East Lansing, Michigan
November 19, 2004

Introduction

We are now at what has become the mid-point of the Bush administration. This is then a good time to reflect on our trade agenda, our accomplishments, and the challenges ahead.

I'll begin by reviewing the philosophy that has guided and continues to guide U.S. trade policy. Our basic premise is that liberalized and fair trade is good for the U.S. and good for the world, including for developing countries. By liberalized trade, I mean less government manipulation of markets through tariffs, subsidies, and other trade barriers, allowing for the freer flow of goods and services. By fair trade, I mean that all partners are liberalizing in a balanced way and that all parties are living up to their commitments. This classic principle has both economic and political benefits for the United States.

Economic Benefits

Economically, liberalized trade promotes efficient allocation of resources to competitive sectors. Increased competition and efficiency spur innovation, the main driver of economic growth. And by reducing explicit or implicit subsidies, liberalized trade frees up government and consumer resources to tackle other problems directly. Consumers in the U.S. and abroad benefit, and that includes companies purchasing inputs for further processing.

For decades, post-colonial developing countries embraced high tariffs to protect domestic, centralized industries and to provide government revenues, frankly just as US and European nations had at comparable stages of development. Unfortunately, billions of average people around the world have suffered from economic stagnation even decline under this discredited development model, while the case for free trade has been getting stronger.

A 2002 World Bank study showed that 24 developing countries that increased their integration into the world economy and liberalized their trade regimes in the 1980's and 90's achieved higher growth in incomes, longer life expectancy, and better schooling as a result. Home to some 3 billion people, these countries enjoyed an average 5 percent annual growth rate in per-capita income in the 1990's compared to 2 percent in rich countries.

The examples set by such countries as China, Mexico, India, and Hungary in taking advantage of global markets have had a profound effect on other developing countries. A study by Stanford economists categorized countries over time as having open or closed trade regimes, based on objective criteria. In 1960, only 16% of the world's countries were scored as open; by 2000, the number had risen to 73%.

What we are witnessing is a new appreciation for the importance of trade and investment in the context of development relative to traditional foreign aid. The U.S. is the single largest contributor of foreign aid in the world, yet this money does not compare to the amount we contribute to developing economies through trade. In 2003, our net imports from developing countries were worth 20 times the value of our aid. In other words, a 5% increase in exports by developing countries would be equal in dollar terms to us doubling our foreign aid. In terms of sustainability, building the confidence and capacity of countries to break the cycle of poverty and dependency, I would argue the impact could be even greater.

Political benefits

In terms of political benefits, we believe that trade, democratization, and stability are mutually supportive. The surge of countries liberalizing their economies closely tracks the trend towards democracy around the globe, with the number of countries openly electing their leaders rising from about 40 in 1974 to over 120 today.

The general trend has been that democratization leads to increased liberalization. But the reverse economic liberalization promoting political liberalization also seems to be at work. Entrepreneurial leaders seek information, access, transparency, and the personal freedoms that their business contacts in other countries have. So do consumers and workers. Chile began aggressive liberalization under authoritarian rule, but is now democratic. Similarly with Korea and Mexico.

China remains a special challenge. We are confident that our engagement with China, including in trade, can over time help nurture political reform from within more effectively than external sanctions and isolationism.

In terms of stability, trade is important in two respects. First, trade is a means for generating the growth that raises populations out of poverty and reduces the brutal toll taken not by armies but by disease and famine. Second, international trade creates interdependence of national interests that provides a bulwark against conflict and promotes stability.

Recent empirical studies have shown that states in highly interdependent economic relationships tend to refrain from fighting with their commercial partners. This is certainly the origin, and I'd argue an important success, of the European Union.

New York Times columnist Thomas Friedman recently commented on this sort of commercial diplomacy, drawing a connection between a recent India-Pakistan cease-fire to the lack of enthusiasm for conflict among India's young high-tech workers, who perceived war to be bad for their jobs, which were part of international supply chains and transferable to other, more stable countries. Friedman quipped, "This cease-fire brought to you not by General Powell, but by General Electric."

I am inclined to give Secretary Powell, or more accurately Deputy Secretary Armitage in this case, more credit. But I do believe that economic interconnectedness is a powerfully steadying force.

Courageous implementation of this philosophy

Despite these many benefits, it takes vision and courageous leadership to promote trade liberalization, whether in the developing world or here at home. Global competition increases the pressure on our companies to cut costs, frequently resulting in lost jobs. These job losses disrupt families and communities, and in towns that have grown up around a single company or industry, the pain can be especially acute, and root causes must be addressed.

But over the next decade, the U.S. is projected to create an average of three million new services jobs a year -- compared to roughly 200,000 jobs that may go overseas. So while we understand that dislocations occur, our best response is not to protect at great cost uncompetitive jobs but rather to train people for the new jobs, as well as provide income support through Trade Adjustment Assistance while they acquire their training.

The Administration's 2005 budget proposes $23 billion for job training and employment assistance, including doubling the number of workers trained by the largest job training program. Community colleges would get an additional $250 million for training workers for high-growth jobs. Pell grants would be available to one million more students than received them in 2001. In addition, the amount of money specifically for workers dislocated by increased imports or a shift in production to certain foreign countries would be tripled in 2005 to $1.1 billion per year.

While these transitions can be difficult for companies, towns, and individuals, the redistribution of our resources and talent is good for the overall economy. In last 10 years, for example, the U.S. has created 20 million net new jobs.

At the state level, Michigan seems an interesting example. By all measures, Michigan is a highly globalized state economy, in large part because of the North American Free Trade Agreement. It ranks 5th among all U.S. states in exports, and one in eight Michigan jobs is dependent on international trade, including one-fourth of its manufacturing jobs. This is clearly working to Michigan's advantage.

* There are 241,000 more jobs in Michigan than there were in the month before NAFTA was implemented. * Since 1993, U.S. exports have grown 56%; Michigan exports have grown 90%. * Michigan was ranked #1 in the country between 2001-2003 in new and expanded plant facilities. * Export plants are, on average, 30%-50% more productive than non-exporting plants. * Export workers earn, on average, 15% more than non-export workers.

Two other trends are noteworthy, and help explain the figures I just mentioned. First, Michigan is attracting higher levels of foreign investment. Foreign-owned companies now employ over 200,000 Michigan workers, an increase of 45% over five years. Call it in-sourcing.

Second, Michigan's economy is diversifying. Between 1999 and 2003, Michigan exports of transportation equipment globally dropped 2%. But in the same time period, Michigan increased its exports of chemical manufacturing by 31%, computer manufacturing by 37%, and processed foods by 130%.

America's great strength has always been its dynamism, its ability to innovate and develop whole new technologies and industries. Free and fair trade helps us unleash this dynamism and retain claim to a much-cherished reputation a land of opportunity.

U.S. trade policy: a three-pronged approach

Under the leadership of U.S. Trade Representative Ambassador Bob Zoellick, the U.S. government team puts these trade principles into action at three levels: multilateral, regional, and bilateral.

Multilateral Multilaterally, we work through the World Trade Organization, or WTO. This is the big prize in the trade world according to both economists and US business, for it has the potential to provide the most gains for the most countries, and with a single set of global rules for all members. WTO negotiations on agricultural products, industrial and consumer goods, and services could add as much as $3 trillion to the world economy annually by the time full liberalization takes effect. Despite the potential rewards, it is increasingly difficult to reach consensus agreement with 148 member countries. Therefore, the U.S. seeks to complement and build momentum for its work in the WTO through both regional and bilateral agreements

Regional Our regional trade work includes both free-trade agreements, such as the North American Free Trade Agreement (NAFTA) and regional organizations that focus on trade issues, such as the Asia-Pacific Economic Cooperation (APEC) meeting this week in Chile. The Free Trade Area of the Americas (FTAA) is another regional negotiation we continue to explore, though progress has frankly been disappointing.

Regional trade agreements and organizations provide models and proving grounds for more ambitious trade arrangements. NAFTA has been an especially important example, given that Canada and Mexico are the largest export markets for both the U.S. and Michigan.

Bilateral Our bilateral agenda has been especially busy. In the past 3 years, the Administration has completed free-trade agreements (FTAs) with 11 countries and 10 more are in various stages of negotiations.

Free-trade agreements with Jordan, Morocco, Chile, and Singapore have been enacted and are in force. Negotiations with Australia, Bahrain, and Central America-Dominican Republic have been completed. And we are currently in negotiations with three Andean countries, Thailand, Panama, and the five countries of the Southern Africa Customs Union. Taken together, these partners would constitute America's third largest export market, trailing only Canada and Mexico, and would constitute the sixth largest economy in the world

Bilateral FTAs provide unique opportunities. For one, they offer immediate opportunities for our exports. For example, as a result of our FTAs with Singapore and Chile, which took effect on January 1, 2004, U.S. goods exports between January and June of 2004 were 25% higher to Singapore and 32% higher to Chile compared to the same period in 2003.

Our FTAs also provide opportunities to be even more ambitious than in global fora on certain policy issues of great importance to us, such as labor rights, the environment, intellectual property rights, biotechnology, and agriculture. U.S. leverage is maximized in bilateral negotiations. I will discuss these items in some more detail later.

Looking Ahead

As we look ahead, I am confident the Administration will continue this ambitious agenda.

First, we will need to push forward on the WTO and reach a conclusion to the Doha Round, so called because of the 2001 Ministerial in Doha, Qatar that launched this current round of negotiations. You may remember that a year ago, the Cancun Ministerial failed to produce a framework for concluding the negotiations. Happily, for all countries I believe, such a framework agreement was reached this past July in Geneva. Specifically, the key elements of that agreement included:

1) negotiating frameworks for agricultural trade reform and for non-agricultural market access; 2) a commitment to intensify negotiations on opening markets in services; and central for the U.S. 3) an agreement to launch negotiations on trade facilitation, including customs procedures.

Salvaging the Doha negotiations this summer was a crucial step for global trade. Ambassador Zoellick reached out in Geneva to a broad group of trading partners in intensive consultations, playing a vital leadership role. Following those tough but successful deliberations, he offered this appropriate analogy: "After the detour in Cancun, the WTO negotiations are back on track. We have laid out a map for the road ahead. Next, we will negotiate the speed limits for how far and how fast we will lower trade barriers."

I believe 2005 will be a critical year in this regard. We must get Doha done before the end of 2006 while the President still has Trade Promotional Authority and before our next election cycle.

Second on the agenda, and consistent with our belief that trade promotes prosperity and stability, expect more free-trade agreements, especially with Middle East partners. This fits with the objectives of the President's vision for a Middle East Free Trade Area (MEFTA) by 2013. And it is consistent with our Broader Middle East and North Africa (BMENA) Initiative launched by the G-8 in June, a partnership with Middle East countries that will help to:

Promote trade and investment reform;

Promote transparency, reduce monopolies, and combat corruption; and

Support entrepreneurship and access to capital.

Morocco will host the inaugural meeting of the Forum for the Future on December 11. The Forum will bring together government, business and social leaders from the Middle East, North Africa, and the G-8 countries to discuss programs aimed at creating greater freedom, democracy and prosperity in the Middle East and North Africa region.

And third on the agenda, we will continue to push areas of special attention I mentioned earlier. Some of these are labor and the environment, intellectual property rights, biotechnology, and agriculture.

Labor and environment

On labor and environment, we firmly believe that trade agreements can be a force for improving conditions abroad. Much of this force comes from generating economic growth. Workers have more leverage when unemployment is low and the economy is growing. Water quality improves dramatically as per-capita income increases. The most dangerous form of air pollution has decreased in each of the three largest recipients of foreign direct investment Brazil, China, and Mexico during the era of globalization. Far from a race to the bottom, the clearer trend is that trade and economic growth are pulling up both labor and environmental standards.

We are also seeing improvements to labor and environmental laws among our free-trade partners resulting from the spotlight of our negotiations and U.S. insistence on upholding labor and environmental standards. There is no cookie-cutter approach to these labor and environment provisions they are tailored to specific countries and conditions. The Australia FTA, for example, is different from those with Central America or the Andeans.

IPR

An increasingly important issue in trade has become the protection of intellectual property. The U.S. has an innovation-driven economy. Over 50 percent of U.S. exports now depend on some form of intellectual property protection, compared to less than 10 percent fifty years ago. In 2001, the U.S. copyright industries achieved estimated foreign sales and exports of $89 billion, leading all major industry sectors, including motor vehicles (equipment and parts), aircraft and aircraft parts, and the agricultural sector. Some of these other sectors, of course, include important IPR aspects embedded in their goods and services.

Piracy and counterfeiting cost U.S. industries billions of dollars every year. The theft of intellectual property robs our businesses of their competitiveness, our governments of tax revenues that fund social programs, and our citizens of their jobs and their livelihoods. It is important that we work now to establish legal and enforcement principles early before weak enforcement is considered normal or acceptable.

In this regard, we have just announced the Strategy Targeting Organized Piracy or "STOP!" the most comprehensive initiative ever advanced to control the trade in pirated and counterfeited goods and to help small businesses secure and enforce their rights in overseas markets. The U.S. government is also providing vital IP enforcement training to prosecutors, judges, customs officials, and IP professionals around the world.

These efforts work. Between 2001 and 2002, according to industry estimates, software piracy in Indonesia decreased from 89 percent to 68 percent. In South Africa, it fell from 63 percent to 36 percent. Hong Kong, once a piracy haven, is becoming a model of IPR enforcement. Everywhere, countries are joining this fight with the U.S. as they come to understand the cost of IPR theft, including the costs to their citizens' health and safety, such as in the case of counterfeit pharmaceuticals and autoparts.

Biotech

Another important new issue in which we are engaged is agricultural biotechnology, an issue that affects both our trade and development policies. Many countries in the developing world are coming to understand the tremendous potential that agricultural biotechnology offers to enhance sustainable development and food security by increasing crop yields, reducing the need for chemical and water inputs, and increasing resistance to crop stress such as drought.

As with many breakthrough technologies, progress has been slowed by misinformation and fear, much of it related to Europe's refusal to import bioengineered crops and food products in recent years, despite their own scientific findings. So we work diligently around the world to provide accurate, scientific information about the proven safety of the bioengineered foods currently in the marketplace and to assist countries in developing science-based regulatory systems so these countries will be able to avail themselves of biotech's enormous potential.

These efforts are also paying off the climate for biotech is improving steadily. But we still have a lot of work to do.

Agriculture One last critical issue is agriculture. Any meaningful agreement in the WTO must include significant agriculture commitments, which were not adequately addressed in the previous round of WTO negotiations, the Uruguay Round. For many countries, agriculture is the central issue in the Doha Round and a prerequisite for agreement on an overall package. It is a very sensitive sector around the world, including here at home.

The U.S. has demonstrated leadership and courage on this issue, proposing complete elimination of export subsidies, substantial cuts in trade-distorting domestic support, and greatly expanded market access. Ambitious agricultural trade liberalization will benefit consumers and producers worldwide and in the U.S., and it must include all types of trade barriers.

The rich countries should be prepared to cut their domestic support and export subsidies, and all countries with high tariffs, both rich and poor, must be prepared to lower those barriers. In fact, lowered tariff barriers in developing countries are likely to benefit developing countries most through increased "south-south" trade among developing countries. The more everyone puts into this round, the more everyone will get.

Implementation and Enforcement The last point I wish to make is that it is not enough to have trade agreements. These agreements must be implemented fully and on time by all trade partners, including ourselves. Congress, the Department of Commerce, USTR, and the State Department are making sure that our trading partners live up to their commitments. We have been aggressive in monitoring and enforcing our rights, including through WTO and NAFTA dispute-settlement cases.

The Administration has significantly enhanced our ability to level the playing field by creating at the Commerce Department three new units dedicated to enforcing of our trade laws and preventing unfair trade practices. USTR has also created a separate China office and established a new Office of Small Business Affairs to solve problems that make it difficult for small- and medium-sized businesses to export. In addition, our American embassies abroad play a key role in monitoring trade activities and advocating for U.S. trade interests. For every official dispute panel that we convene, many more disputes are worked out in other channels.

My colleagues and I in the U.S. Government welcome a dialogue with all stakeholders around the country (including businesses, labor, NGOs, state and local governments) on the whole range of trade issues. Also, if Michigan companies are having any problems overseas or are looking to increase their international activities, I encourage you to contact us.

Thank you, and I'd be glad to take your comments and questions.

[End]

Released on November 29, 2004

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