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Alternative Trade Liberalization Strategies C. Fred Bergsten Director Institute for International Economics Presented at the 2001 Annual Policy Conference PBEC U.S. Member Committee January 31, 2001 THE TOPIC OF THIS PANEL IS BILATERAL, regional, and multilateral trade liberalization strategies. Among the three alternatives, the trend in the last few years has been toward bilateral or very small subregional agreements. There have been no negotiations within the World Trade Organization (WTO) for several years since the numerous sectoral agreements were completed. The mega-regionals like APEC have been dead in the water as well. To partly fill the vacuum, therefore, a number of bilateral and subregional agreements have emerged. The Institute for International Economics is about to release a study that quantifies the economic impact of 15 to 20 (depending on how you count it) such agreements-some have been agreed to already, some are being negotiated, and others are being actively considered. An important driver of that development is the historic change in trade policy of the three big Asian economies-Japan, China, and Korea. Japan and Korea, until recently, relied totally on the global multilateral system; in fact, they strongly opposed regional agreements-either among others or among themselves-partly because of the history of having been discriminated against and partly to avoid such policies. However, in the last couple of years they have changed a hundred and eighty degrees. Japan is now actively negotiating bilaterally with Singapore, Korea, and Mexico, and has a number of others-including Australia and perhaps even the United States-in mind. Korea is also involved in a series of negotiations. China changed more recently. It stunned the fourth ASEAN + 3 summit in Singapore a couple of months ago when Premier Zhu Rongji proposed a China-ASEAN Free Trade Agreement. That was later broadened to include Korea and Japan. The heads of state of these countries, which account for about 40 percent of the world economy, have launched a serious study of the possibility of an East Asia Free Trade Area with very different rhetoric and motivation, the equivalent of the East Asian Economic Group that Prime Minister Mahatir Mohamad of Malaysia proposed 10 years ago. We now have either in train or at least under active consideration a whole series of regional and subregional agreements around the world, particularly in the Asia Pacific-from small bilaterals like Singapore-New Zealand to an East Asia Free Trade Area, which, if it happens, would be an earth-shaking event. It would create, for the first time in history, a three-bloc economic world and change the global architecture far more than what the International Monetary Fund, the G-7, or other multilateral institutions have been considering in recent years. Though these new developments have a series of underlying causes, one of the more important causes, particular to this group, is that the United States has essentially absented itself from the trade negotiation business for the last several years. This comes as a shock, even to many Americans who say that the United States has been active with permanent normal trade relations, the African Growth and Opportunity Act, and CBI. But we must recall that the US President has had no authority for almost 7 years to negotiate any reduction in US barriers. It means that he was unable to put forward balanced proposals to pursue either multilateral, regional, or any other kind of trade negotiations. A cardinal reason for the failure to launch a WTO round at Seattle was that the United States presented a very unbalanced proposal. It had a lot of ideas for how other countries can reduce their barriers to US exports but was not willing to say much about what the United States would throw into the pot. That was, in part, due to the absence of any kind of negotiating authority here in the United States, which reflects the domestic political stalemate within the United States over the whole globalization issue. Despite the incredibly strong US economy over the past 6 years, this domestic stalemate over the trade policy issue prevails. Every time Congress has addressed the topic it has been virtually split-sometimes it came out pro-trade after a huge effort, as with PNTR, sometimes it failed, as with fast track. The bottom-line has been the United States' inability to participate actively, let alone lead the international trade negotiating process. Hence the United States has been absent from much of the effort, whether it is APEC, or a Free Trade Area of the Americas, or the WTO, or even bilateral agreements, except with Singapore, Jordan, and recently Chile. Therefore the rest of the world, not wanting to stop because the United States stopped, has moved ahead. The important point for US business is that the result is an increasing number of trade agreements around the world that discriminate against the United States. In the new study that we will release shortly, we quantify this and we estimate the impact on US trade and the US economy of these subregional trade agreements-from a Singapore-New Zealand bilateral to an East Asia Free Trade Area. The latter, which is the biggest, would discourage at least $25 billion a year of US exports, taking about a quarter percent off US GDP. I say "at least" because estimates of this type in economic analyses always understate the impact because they cannot capture many of the dynamic effects of trade liberalization and the investment that go with it. Having said that, an East Asia Free Trade Area, at a minimum, would knock a quarter of one percent off our GDP simply through the trade diversion effect against US exports. If that were cumulated with other subregional and regional agreements, the effect on the United States would be even more negative. It is my suspicion that if we cannot overcome the US domestic stalemate and again enter actively into international trade negotiations, we will see an East Asia Free Trade Area over the next 5 years. We will see more international agreements without the United States. There will be increased discrimination against our trade and as a result, our economy will suffer. That is why I am delighted that Robert Zoellick and the new administration are actively talking about getting back into the game, but that depends on working out agreements with Congress and overcoming the current domestic political stalemate over the issues. I have painted the negative and worrisome sides from the US perspective-and I think a global perspective, too-of a continuation of the regional approach without anything new at the multilateral level. As Renato Ruggiero put so nicely while he was head of the WTO: we are going to have regionalism; the only issue is whether it is regionalism within a cooperative multilateral global context-an umbrella, in which case it can be a positive, catalytic, and desirable element-or whether the regionalism is going to proceed in a world where the multilateral and global institutions are increasingly ineffective and indeed eroding. In the latter case the risk of conflict-through straightforward trade diversion, and more broadly and politically in terms of security-becomes very apparent. That is the negative side and the risk is acute if the United States is not able to actively lead the global trade process again. The good news, if the United States can resume its active participation, is that the regional or subregional agreements may be positive catalysts to move the global system forward. The incentives are clear for the reason I just mentioned. When various bilateral pairs or small sub-groups get together and divert trade from outside, there are strong incentives for those outsiders to either join the existing group or negotiate broader liberalization packages that will reduce the new discrimination and reduce the trade diversion and negative impact on market access. Indeed, that is the story of the postwar global trading system. Every time the European Union took a new integration step-creating itself, bringing in the British and others in the early 1970s, going for a single market in the 1980s and early 1990s-it created new trade diversion against the United States and other outsiders. The United States responded quite appropriately by saying, in every case, let's have a new multilateral round in which, among other things, we bring down immediately some of those new discriminatory barriers that you just erected. To their credit, and partly for broad geopolitical reasons, the Europeans always cooperated. Again, the story of our trading system is essentially one of ratcheting up dynamic, positive interaction between European integration and a few other regional steps in the late 1980s and early 1990s, and the multilateral liberalization process. That could again occur if the United States and others try to manage it in that direction. The situation is a bit different now. There is now a panoply of countries, particularly in East Asia, negotiating agreements with increasing discrimination against the United States, and against the backdrop of the US internal debate over whether new trade liberalization is desirable. In the past the United States was quite eager to engage the Europeans and others in bringing down global barriers and the adverse impact of new regional agreements. Whether that will play through at this point is not so clear. If it can be done then one could view the regional and bilateral agreements as a fourth strategy to realize the APEC goal of free trade in the Asia Pacific. I say the fourth strategy because APEC, having set the free trade goal at Bogor in 1994, has attempted three different strategies to achieve it, all of which have failed. The first-the individual action plans and so-called concerted unilateralism-has had a favorable effect in some countries, including Australia, but has not gotten very close to free trade in the Asia Pacific. The second effort was the sectoral approach. Building on the very successful Information Technology Agreement of 1996, APEC tried to generalize the approach; it defined nine sectors in 1997 but failed in 1998 at Kuala Lumpur to move that program forward. So early voluntary sectoral liberalization-the second strategy-also failed. The third strategy was developed at Auckland in 1999 where APEC vowed to take the lead in pushing for a new multilateral round at the Seattle ministerial, but it failed to do so-in fact, it was nowhere to be seen. The main APEC countries-the United States and Japan-were at odds and the differences between them were among the key reasons why Seattle failed to start the new round. So the third strategy also failed. One might therefore view the emergence of these subregional agreements as a fourth strategy in which smaller groups start coming together, thereby creating incentives for the broader group to get its act together-be it APEC or the WTO-and move forward. If the United States is able to get back in the game effectively and actively, the subregionals and bilaterals can be channeled in a direction that leads to broader liberalization and achievement of their own benefits. The final point is, again with reference to APEC, that the stars may be aligning here in 2001 to catalyze such a positive program. I mentioned the big success of the Information Technology Agreement in 1996. At the APEC summit in Subic-led by President Clinton, President Ramos, and a few others-the APEC leaders went well beyond what their ministers had been able to do and agreed to implement the trade liberalization goal of the ITA strategy. APEC was then able to take that agreement, which included half or so of world trade in the ITA sectors, to the WTO ministerial conference 3 weeks later, bring the European Union and the rest of the world together, and create a global ITA in a very short order with huge effects-half a trillion dollars worth of trade in one of the world's most dynamic sectors. This has probably been APEC's single success so far in terms of actual trade liberalization. A similar sequence could occur this year. APEC is meeting in Shanghai mid-October, 3 weeks before the WTO ministerial in Qatar. If APEC works hard enough to overcome the disagreements that prevailed in Seattle on launching the round, which still exist, so that it could credibly indicate at Shanghai that it was prepared to participate actively in the new WTO round and lead the world in that direction, then APEC could go to Doha three weeks later with a credible and substantive agreement in hand. APEC could again bring the European Union and the rest of the world together and launch the new round, which I believe is essential to getting the multilateral process back on track, to getting Congress to agree to new US trade initiatives, and to overcoming the risk that I cited at the outset. It could be a very active year for trade in the region. However, there are some worrisome signs and current trends could move in dangerous directions. There is, at the same time, huge potential-for both the region and the world economy-to move forward in a positive direction. That is the challenge that lies ahead.