Competitive Liberalization and Global Free Trade.docx

Competitive Liberalization and Global Free Trade.docx

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CompetitiveLiberalizationandGlobalFreeTrade

CompetitiveLiberalizationandGlobalFreeTrade:

AVisionfortheEarly21stCentury

by C.FredBergsten,PetersonInstituteforInternationalEconomics

©InstituteforInternationalEconomics

TheMarchTowardFreeTrade

Alargepartoftheworldhaseliminatedallbarrierstotradeorisintheprocessofdoingso.ThefifteenmembersoftheEuropeanUnionhavecreateda"singleinternalmarket."AustraliaandNewZealandhavecompletedtheirfreetradearea.Severallargegroupingsareenroutetoasimilaroutcome:

theNorthAmericanFreeTradeAgreement（Canada,Mexico,UnitedStates）,Mercosur（Argentina,Brazil,Paraguay,Uruguay）,andtheASEANFreeTradeAgreement（Brunei,Indonesia,Malaysia,Philippines,Singapore,Thailand,andnowVietnam）.Therearenumerousfreetradeareasamongsmallercountries.

Inaddition,aseriesofnewgroupingshavepledgedtoabolishallimpedimentstotheirinternationaltradeinthecomingyears.TheEuropeanUnionandtheMediterraneancountries（EUROMED）havecommittedthemselvestofreetradeby2010.The34democraciesoftheWesternHemisphereagreedattheirMiamisummitinDecember1994toworkoutaFreeTradeAreaoftheAmericas（FTAA）by2005.TheeighteenmembersoftheAsiaPacificEconomicCooperation（APEC）forum--whichaccountforhalfofwouldoutputandincludethethreelargestnationaleconomies（China,Japan,UnitedStates）--decidedviatheirBogorDeclarationofNovember1994toestablishfreetradeandinvestmentintheregionby2010fortheirhigherincomemembers,thatmakeup85percentoftheircommerce,andby2020fortherest.Historysuggeststhatthesetargetswillbemetwellaheadofschedulebecauseprivatesectorsbegininvestingtotakeadvantageoftheeventualsteadystate,andtherebyacceleratethewholeprocess,assoonasthedealsbecomecredible.1

Therehavebeenmanyproposalsforadditionalfreetraderegimes.ThemostsignificantbyfarwouldbeaTransAtlanticFreeTradeArea（TAFTA）,joiningEuropeandNorthAmerica.Inawhollydifferentsetting,RussiahasproposedrevertingtofreetradeamongsomeoftherepublicsoftheformerSovietUnion.IndiaispromotinganassociationofcountriesthatrimtheIndianOcean.

Evenwithoutanyadditionalconfigurations,over60percentofinternationalcommercenowtakesplacewithinexistingorplannedfreetraderegimes（table1）.Thisshareisrisingrapidly,bothbecauseoftheonsetofnewarrangementsandbecausetradeexpandsmorequicklyundersuchconditions.Thequestionthusarises:

whynoteliminatealltradebarriersthroughouttheworld?

WhynotlaunchamovementtowardglobalfreetradeattheWTOMinisterialConferenceinSingaporeinDecember1996?

Whyshouldn'tAPEC,havingagreedtoachievefreetradeinitsownregionbutnotwantingtocreateanewdiscriminatorybloc,proposethattheworldasawholeemulateitsapproach?

Table1:

RegionalFreeTradeArrangements（shareofworldtrade,1994）

EuropeanUnion

22.8

EUROMED

2.3

NAFTA

7.9

Mercosur

0.3

FreeTradeAreaoftheAmericas（inadditiontoitssubregionals）

2.6

AFTA

1.3

Australia-NewZealand

0.1

APEC（inadditiontoitssubregionals）

23.7

TOTAL

61.0

CompetitiveLiberalization

Inansweringthesequestions,itisfirstessentialtounderstandwhysomanycountries,insomanydifferentpartsoftheworld,withsuchdifferenteconomicsystems,atsuchdifferentstagesofdevelopment,haveallheadedinthesamedirection.Thereareofcoursedifferentnationalcircumstanceswhichexplainthedetailedstrategiesandtimingoftheindividualinitiatives.Theoverarchingforce,however,hasbeentheprocessofcompetitiveliberalization.

Therapidincreaseofglobalinterdependencehasforcedallcountries,whatevertheirpriorpoliciesorphilosophies,toliberalizetheirtrade（andusuallyinvestment）regimes.Economicsuccessintoday'sworldrequirescountriestocompeteaggressivelyforthefootlooseinternationalinvestmentthatgoesfartodeterminethedistributionofglobalproductionandthusjobs,profitsandtechnology.Mostcountriesofferdirectincentivestoforeigninvestorsbutanopentradeandinvestmentregimeisessentialforthispurpose.Mexicoovercameitshistoricaversionstotradeliberalizationandembracingitsnorthernneighbor,andproposedNAFTA,whenitbecameconvincedthatdoingsowasessentialtoavoidlosingoutintheglobalcompetitionforcapital.

Moreover,successintoday'sglobaleconomyrequirescountriestocompeteeffectivelyininternationalmarketsratherthansimplyathome.Thisistruenomatterhowlargethedomesticmarket:

theworld'smostself-containedeconomiesincludingBrazil,China,India,RussiaandperhapsmostnotablytheUnitedStates--whichmaintainedextensivequotesonautos,machinetools,steelandnumerousotherproductsonlyadecadeago--havealljoinedthecompetitiveliberalizationrace.

Competitiveliberalizationispursuedbycountriesthatuntilrecentlyhaddeeplyentrenchedprotectionisttraditions.Franceisadramaticcasesinpoint.SoisvirtuallyallofLatinAmerica,whichembracedimportantsubstitutiondoctrinesasrecentlyastwodecadesago.ThemoststunningreversalofallcomesfromtheformercommandeconomiesoftheCommunistworld,rangingfromChinathroughCentralEuropeandtheformerSovietUniontonowVietnam.

Anintellectualandideologicalsea-changeunderliesthishistoricdevelopment.Import-substitutionandevenautarkicmodelsofdevelopmentandnationaleconomicstrategywerereasonablyrespectableintothe1960sandeventhe1970s.Buttheirfollieswerethenexposed,includingbythethirdworlddebtcrisisofthe1980s,andreplacedbyanewconsensusof"outwardorientation."Thepoliticalonsetofconservativegovernmentsthroughouttheindustrializedworld,andinmanypartsofthedevelopingworldaswell,hastenedtheimplementationofthesereformmodels.

Thischangeinbasicthinkingdoesnot,however,explaintheonsetofregional（orotherinternational）tradearrangements.Whydidn'tthenewattitudesimplyproduceaspateofunilateraltradeliberalization,whichalltextbooksrecommendasthemostdirectroutetomaximizingtradebenefitsforanindividualcountry?

Theanswerliesinthepoliticsoftradereform.

ThePoliticalEconomyofTradeReform

Tobesure,agooddealofunilateralliberalizationhastakenplace.ThishasbeenespeciallytrueinEastAsia.IthasalsooccurredintheUnitedStates,mostofwhosequotaswereabolishedwithoutanyforeignquidproquo.Butdomesticpoliticaloppositionusuallyblockedcountriesfromsimplyabolishingtheirtraditionalbarriers.Entrenchedinterestsfoughthard,andfrequentlywithprolongedsuccess,tomaintaintheirprotectedpositions.Thepoliticsofeconomicreformweredifficultandcontentiousinvirtuallyeverycase.2

Thestandardstrategyforachievingtradereformwastomobilizeenoughpro-tradeintereststoovercomethosewhoresistedfurthermarketopening.Theseincludedbeneficiariesofimportssuchasconsumersandindustrialusersofimportedinputs.3 However,suchgroupsrarelyorganizedandtheirgainsfromliberalizationwerebothmodestandwidelydiffused.Hencetheyproducedlittlepoliticalcounterweightagainstthosewhowouldbeadverselyaffectedbyincreasedforeigncompetition.

Toovercomesuchopposition,itbecamenecessarytoappealtoexportersandotherswhogaindirectlyfromtheopeningofmarketsabroad.Thepoliticaleconomyoftradeliberalizationinindividualcountriesthusrestedheavilyonparallelliberalizationinpartnercountries.Themostassuredtechniqueforachievingsuchparallelactionwastoinsistonreciprocity,throughthenegotiationoftradeagreementswithenoughexistingorpotentialmarketstotiptheinternalbalanceinfavorofthedesiredliberalization.TheUnitedStatesfinallyagreedtogetridofitstextilequotasbynegotiatingforeignconcessionsfromtherestoftheworld,intheUruguayRoundattheGATT,onintellectualpropertyrightsandagriculturalbarriers.Throughthatsamenegotiation,JapanandKoreabegantoopentheirricemarketsbyappealingtotheexportinterestsoftheir（especiallyhigh-tech）manufacturers.

Negotiatedliberalizationthusturnedouttobefarmorefeasiblethanunilateralliberalization.Thekeybecameacountry'sabilitytopersuadeitsforeignpartnerstoproceedintandemwithit.Largetradingentities,suchastheUnitedStatesandtheEuropeanUnion,obviouslyhavethemostleverageinthiscontextbecauseoftheattractiontoothersoftheopeningoftheirmarkets.

Anotherkeyvariableisthestageofliberalizationatwhichacountryfindsitself.Initialreductionsofveryhightariffsarefrequentlyeasybecausetheyputfewdentsinthereallevelofprotectionandthuscanoftenbeimplementedunilaterally.Butmostcountrieshavefoundthattheymustapplythetraditionalpoliticaleconomyapproachtoengineerthelater（andmostbeneficial）phasesoftheprocess.

Chileisarecentcaseinpoint.Itspolicydesiretoachievetotallyfreetradeisclearbutitmustnowmobilizestrongsupportfromitsexporterstoovercomeresistancetoeliminatingitslast10percentorsoofprotection.Itsstrategyistotrytonegotiatereciprocaldealswhereveritcan--inMercosur,NAFTA,APEC,bilaterallyand/orgloballythroughthenewWorldTradeOrganization（WTO）.

Regionalvs.GlobalLiberalization

Inseekingreciprocalliberalization,countriescouldturneithertotheirrespectivegeographicregionortotheglobaltradingsystemasawhole.Theglobalapproachisfundamentallysuperiorbecauseitmaximizesthenumberofforeignmarketsinvolvedandavoidstheeconomicdistortions（andpoliticalrisks）ofdiscrimination