U.S. Trade Negotiations: Lessons Learned, Lessons Applied

Mickey Kantor

Council on Foreign Relations

November 5, 1997 Elihu Root Lecture

INTRODUCTION: THE ERA OF INTERDEPENDENCE

The challenges of the era of interdependence will constitute the greatest foreign policy test of the 21st century. The war over globalization and interdependence is at an end. Only the battles are yet to be fought. Those who cower behind walls of fear and fail to accept responsibility do so at their own peril, and will not turn containment into engagement, or mutual assured destruction into mutual assured prosperity.

The approach of the new millennium finds us at the intersection of three epochal events: in politics, the end of the Cold War; in economics, the emergence of a global economy; and in technology, the rise of the Information Age. The intersection of economics, strategic issues, and political concerns is creating the glue which will bind together an updated U.S. foreign policy.

Vast opportunities lie before us, and more than a few pitfalls. We face fewer serious military threats but an increasing number of competitors. The rise of competition, the need to create new opportunities, and the confluence of major economic and political changes create a need to intensely focus on U.S. priorities and goals. Despite this urgency, we have yet to fully articulate a foreign policy that matches the era in which we now live, especially the appropriate role of international economics. We need to direct our focus toward the lessons we have learned over the past five years. Seekers of universal truths or simple catch phrases should prepare in advance for disappointment.

U.S. leadership in both the public and private sectors must accept the challenges represented by these enormous changes. Our willingness to take responsibility, clearly define our goals, and recognize our limitations but pursue U.S. leadership at every opportunity will dictate the success or failure of promoting a stronger United States and a less dangerous world.

The goals and objectives are clear: U.S. leadership must pursue peace, stability, economic progress, basic human rights, and sustainable development. In order to address these goals we need to create foreign-policy tools and institutions that are pragmatic, practical, and resilient reflecting the speed with which events, opportunities, and challenges now confront us as a nation.

There is no question that global economics has fundamentally changed the nature of foreign policy. Today, economics and foreign policy are no longer separable, and economic security and national security have become synonymous.

We live in an interdependent, globalized world. No longer are we self-contained, nor is it in our interest to be so. We can no longer take for granted our global economic dominance and turn our back on foreign markets. It is self-defeating in the short run and impossible in the long run to ignore the problems which occur across the border or across the world, and we cannot overlook our responsibility as the world's remaining superpower. Driven by technological change, freed of Cold War conflicts and connected by economic and strategic interests, the era of interdependence demands negotiation, engagement, and leadership. Interdependence dictates that our foreign policy and economic future are increasingly connected to international trade.

Interdependence dictates that terrorism, weapons proliferation, environmental concerns, the drug trade, and economic opportunity are now cross-border issues. These issues profoundly affect the everyday lives of people around the globe. Cross-border issues directly influence policies, laws, and regulations of the countries in question, raising issues such as the rule of and respect for law, regulation and deregulation, privatization, and other concerns heretofore thought to be strictly internal.

This new era requires a redefinition of global leadership. Being the only remaining superpower does not simply mean that we are the strongest military power, nor does it mean only that we are the most economically competitive nation on earth. Both of those statements are true, of course. But holding the position of the world's only remaining superpower in the era of interdependence means that we have the opportunity to take advantage of the vast economic potential which is being created around the globe to the benefit of all Americans, and we have a corresponding obligation to rally other nations to pursue common long-term interests, such as strategic and political stability, economic progress, and sustainable development.

There are other examples which support the notion of new multidimensional international relations. Brazil has dramatically increased its international standing and influence using its potential economic strategic position. During the Cold War and prior to the dramatic growth of economic power and industrialization, Brazil's strategic position would have been defined and dictated by its ability or inability to have an influence over strategic and political issues especially those concerning East-West relations. But today, and in the foreseeable future, not only do countries increase their influence based on economic potential and achievement, but economic considerations and relationships tend to bring entities together which in other circumstances could not or would not cooperate. The recent Middle East Economic Conferences and the participation of China, Taiwan, and Hong Kong in the Asia-Pacific Economic Cooperation (APEC) are obvious examples.

WHERE WE STAND AND HOW WE GOT THERE

It's easy to lose perspective on the significance of the amazing ground we have traveled in the past two decades. After forty years of confrontation on the brink of the apocalypse, the Cold War is over. Championed by the United States for two centuries, democracy has emerged as the world's predominant political system. Who would have thought twenty years ago that the Berlin Wall would have crumbled, the Soviet Union would disappear, and that free elections would be held in Russia, Poland, and Taiwan? Who would have predicted that South Africa would be free of apartheid as a result of a remarkable peaceful revolution?

Gone too are all but the last vestiges of centrally planned economies. From the Czech Republic to Chile the theory of free markets has prevailed. Today, Argentina has inflation under control; China has embraced free-market zones and is a candidate for accession to the World Trade Organization; Chile's remarkable economic growth is based on open trade; South Africa is not only free of apartheid, but is building an economy that represents almost half of the continent's gross domestic product; and Poland, Hungary, and the Czech Republic are serious contenders for European Union (EU) membership as well as the newest members of NATO.

The triumph of market economies in nations around the world was the necessary precondition for the central economic reality of our day the global economy. While pundits and politicians continue to debate the global economy, our businesses have made it a reality. World trade valued at $6.5 trillion in 1996 grew 150 percent over the past decade, and will continue to grow at a rate of 7 percent over the next seven years. Multinational companies are proliferating, investing a record $349 billion abroad in 1996 more than double the amount of foreign direct investment in 1991.

In other words, whether we like it or not, America today is part of a global economy. Capital traverses the globe, literally at the speed of light. CNN and the Internet give us a global system for instant access to information and news. Companies today may design a product in Milan, manufacture in Mobile, market through Madison Avenue, and sell everywhere from Montreal to Manila.

For the United States, the emergence of a global economy couldn't have happened at a more opportune time. Remember 1990? Germany was the world's largest exporter. Japan Inc. was the economic juggernaut of the new post– Cold War era. And in the United States, think tanks fretted about the loss of something called “competitiveness.”

Fast forward to today. The International Institute for Management Development just named the United States the most competitive economy in the world for the fifth consecutive year. Meanwhile, Europe and Japan remain mired in pallid growth. And even with weak economies in these important markets for American goods, the United States in 1996 was the world export champion for the sixth year in a row.

Coincident with these incredible changes in politics and economics have been the rise of technology and the emergence of an Information Age. Change and innovation have been the cornerstone of the U.S. economy since this country's inception. Initially, the United States shifted from subsistence to mechanized farming. Then in the nineteenth century, Americans moved from farms to factories. In the late twentieth century, ever more Americans are moving from factories to computer keyboards.

Today, our economy is indisputably and irrevocably technology driven. New technological developments are introduced every day. In fact, the technology of 1997 is already making the technology of 1995 obsolete. The rise of technology permeates every part of our society, from how we communicate to how we buy and sell goods and services.

The rise of technology reinforces both democracy and the global economy. Capital can be moved around the world in the blink of an eye. The diffusion of information (via personal computers, fax machines, the Internet, global news) increases the sovereignty of the individual, raising new barriers to the dictator and the would-be dictator. While satellite television is technically illegal in China, many Beijing rooftops are outfitted with a satellite dish beaming CNN and BBC into the living rooms of middle-class Chinese. As Thomas Jefferson wrote in April 1816, “Enlighten the people generally, and tyranny and oppressions of body and mind will vanish like evil spirits at the dawn of day.”

The confluence of these changes should dramatically affect our thinking and our notions for the future. Public policy and new initiatives will demand a rethinking and, ultimately, profound alterations.

The first and most important policy initiative to be pursued is to communicate our need to impact foreign markets with the corresponding ability to grow and strengthen our own economy. There will be no lasting success in pursuing global trade unless the U.S. domestic economy is productive, competitive, and efficient. In a global economy, which is economically borderless, an advantage can only be sought and retained by creating economic strength which is represented by productive work efforts, burgeoning competition, fostering creativity, and innovation.

Domestic economic policy, both fiscal and monetary, must reflect the need to create new investment and fiscal and monetary discipline. Both public and private institutions need to invest in research and development at increasing rates, and the education and training of the American people must remain our number one priority.

The ability and willingness to cut federal budget deficits in a dramatic fashion and to lessen the adverse impact of unnecessary regulation on U.S. business has obviously fostered huge economic gains in the last number of years. However, those domestic initiatives, standing alone, are not sufficient. Without creating the best-educated American generation in our history, we will be unable to maintain our current position as the world's technology leader and to attract and maintain an increasing and substantial pace of investment.

Further, institutions, foreign and domestic, must be reorganized and incur new dimensions if we are to successfully address our opportunities. This will require a fundamental reconfiguration of how the U.S. government addresses its international economic obligations. The challenge of change is no less demanding than our need to revamp and strengthen health care, Social Security, Medicare, and Medicaid.

The ability to continually increase the standard of living of all Americans is directly tied to our ability to focus squarely on the mutually dependent issues of a strong domestic economy and a successful and aggressive trade policy.

LESSONS LEARNED: CHANGING HOW WE THINK AND ACT

Lesson #1: You Can Run, But You Can't Hide

While the debate surrounding the merits of the global economy continues, our businesses have established it as a tangible reality. Economic prosperity for our children and grandchildren will depend in large part on our ability to compete and win in the international marketplace. International trade already accounts for almost one-third of the U.S. economy. By the end of 1997, well over $2 trillion in goods, services, and investment will be spent by or in the United States, strengthening our economy and creating jobs for our people.

We have little choice. With a mature economy, an aging populace, nearly zero population growth, and less expansion in the labor force than the developing economies and emerging markets of the world, the United States must look elsewhere for consumers of our world-class goods and services. In addition, the United States accounts for a shrinking share of world productivity. After World War II, the United States produced 50 percent of the world's goods; today, we produce only 22 percent.

Thankfully, we live in a world of opportunities. Ninety-six percent of the world's population over five billion people lives outside our borders, many of them in the growing middle classes in emerging markets in Asia and Latin America. China's population, already the largest in the world, grows by the size of one Canada every two years. Emerging markets, such as China, the Association of South East Asian Nations (ASEAN), Latin America, and Eastern Europe, are the fastest-growing and most dynamic markets in the world, accounting for more than 40 percent of world economic growth.

Furthermore, future growth is even more promising. Asia and Latin America have the fastest growing middle classes in the world, increasing at a rate of 6.6 percent and 6.2 percent, respectively. While most of the world's 1.2 billion middle- and upper-class people live in the industrialized world, Asia is closing in fast and growing even faster. The largest share of the world's middle class (25 percent) lives in Western Europe, with a growth rate of approximately 1 percent, while Asia is close behind with 24 percent and Latin America with 7 percent. More than 340 million Asians are considered middle class and in the booming economies of the four Asian tigers, at least 55 percent have middle- or upper-income status. China alone has 75 million middle-class citizens, more than the whole population of Great Britain. In fact, by 2010, the middle-class population in developing countries will be greater than that of Europe, North America, and Japan combined. The Far East alone will have nearly twice as many middle-class citizens as North America and as many as Eastern and Western Europe combined.

Of course, our traditional trading partners like Europe and Japan will continue to be important to the U.S. export base. However, like the U.S. economy, those of Europe and Japan are relatively mature. In fact, by 2010, the United States will export more goods and services to Latin America than to Europe and Japan combined. In addition, the world economy will grow at a steady rate of 4.5 percent a year for the next five years, with emerging markets growing significantly faster than industrialized countries. In fact, over the past decade, the U.S. economy has grown 26 percent, the EU 26 percent, and Japan 33 percent, while developing countries in Asia saw their economies skyrocket 109 percent over that same period.

Clearly, the interests of the United States economy now and in the future are directly linked to its success or failure in terms of trade and international economic ties. The United States does not stand alone in that regard. Nearly every nation on earth is increasingly dependent upon international capital, technology, imports, and markets to continue to raise its standard of living and to stabilize its economy.

Many nations have long been dependent on trade. These countries, either because of their geography or resources, have experienced the impact of an increasing percentage of their economy depending upon economic activities connected to other economies.

By stark contrast, the United States was a self-contained economy for much of its history. Certainly the period after the Second World War was characterized by a U.S. economy that represented half the world's gross domestic product at one point and was independent of the need to establish and impact world markets in order to sustain its growth.

A look at the last few years is a stark reminder of how dramatic this impact has been. At the end of 1992, for instance, U.S. exports of goods and services barely exceeded $600 billion. By the end of 1996, U.S. exports had reached nearly $850 billion and are increasing in 1997 at a rate of nearly 10 percent. U.S. exports of goods and services will reach the trillion-dollar figure well before the year 2000, and our economy represents the largest foreign-trade system on earth.

With an increasing U.S. dependence upon trade and the inevitable growth of countries with major populations in the future, we can expect a larger and larger share of U.S. jobs to be dependent upon foreign trade. In addition, it is impossible to substantially increase the U.S. standard of living without impacting these growing economies and ensuring an increasing share of U.S. goods and services are consumed in these countries.

Lesson #2: Failure to Communicate

In the midst of vast opportunities, a misleading debate has done much to promote public cynicism about trade. To promote export-supported economic growth effectively, we need to debunk the distortions on both sides of this debate and create a grass-roots constituency in support of trade. The credibility of U.S. leadership in the international arena is directly tied to our ability to promote economic opportunity and create confidence in an international trading order.

In one corner are the ceaselessly carping Prophets of Doom. In its most sophisticated iteration, their argument is that it is not trade they're against, but unfair trade. Their simple nostrum claims that U.S. trade agreements and globalization adversely affect jobs, wages, and our standard of living. The foundation for this position is based upon the flawed analysis that trade agreements, through lack of discipline, ability, or foresight, are heavily weighted in favor of America's trade partners. They seek to support this claim using evidence such as stagnating wages, income inequality, or the existence of a trade deficit. Their protestations have some basis in history, but their analysis is wrong and their conclusions represent positions adverse to the very interests they claim to represent.

In the late 1940s, we made a decision appropriate at the time that unilaterally opening our market was in our broad, long-term strategic interests. It was the right policy for an era of Cold War and uncontested American economic dominance. But it also put in place a one-way free trade agreement, with an open U.S. market, but protected sanctuary markets for our trading partners.

With the spread of economic power and industrialization and the importance of exports to U.S. growth, that policy is unacceptable. Today, we have moved into an age that demands mutuality of obligation and conterminous responsibility in international trade.

The arguments portrayed are wrong and wrong-headed. Rather than analyze the new world we are confronting, they continue to articulate our economic and trade policy in Cold War, pre–Information Age terms. Stagnant wages and income inequality are the product of many economic phenomena, the most important of which have little or nothing to do with trade. Rapid technology change and revolution in new techniques, products, and processes temporarily eliminated jobs and depressed wages. Income inequality, in the main, is a product of gaps in education and training and the failure to address these issues. The competition of a world in economic transition and a U.S. economy moving from industrialization to the Information Age led to substantially negative economic effects in the late 1980s and early 1990s. Trade in the form of increasing imports combined with a failure to aggressively seek new markets, and fair access contributed as well.

The answer is not to literally burrow our collective heads in the sands of miscalculation, but to understand and to confront a world in transition in order to compete and win.

The trade deficit itself may or may not be any measure of our economic progress or productivity. In almost every case, it is driven by macroeconomic factors, not easily susceptible to or affected by trade agreements in the short run. The trade deficit is in effect a political problem because of its relative simplicity in terms of public explanation or media analysis. However, in nearly every case, it merely represents the interaction between the relative strengths of economies or reflects the existence of unfair and damaging trade barriers.

As a matter of fact, the largest annual U.S. trade deficits since 1980 have been accompanied by the largest annual job-creation numbers in recent memory. The reason is simple: stronger economies tend to have stronger currencies, and the increased economic activities in these stronger economies and exchange-rate differentials lead inevitably to trade deficits. By contrast, trade deficits suffered over a protracted period of time clearly raise the issue of unfair trade barriers. It is these barriers and lack of reciprocity in trade rules which must be addressed.

The only way to move today to a position of greater reciprocity and fairness is by negotiating new, balanced, and enforceable trade agreements. In the North American Free Trade Agreement (NAFTA), for example, we reduced our trade tariffs, which had averaged less than 4 percent. In exchange, Mexico dramatically lowered its tariffs, which averaged 10 percent, and addressed many non-tariff barriers, including the protection of investment and intellectual property rights. Today we export 37 percent more to Mexico than we did before NAFTA. That progress came only because of fighting it out in the trenches of trade negotiations.

Those who whine incessantly and maintain the romantic notion of a self-contained market speak against the interests of American workers and a growing standard of living. They are trafficking in fear and promoting ignorance while advancing their own political ambitions. No great nation has ever increased its worth over time by closing its markets. In fact, history is replete with examples of closed markets leading to destructive economic consequences.

In the other corner of today's trade debate are the High Priests of Denial. They continually allege that trade agreements and trade laws need not necessarily be balanced and reciprocal, but that they only are required to continually move toward free trade. Many are constitutionally unable to advocate reciprocal trade agreements. In addition they recoil in horror at the thought of the United States aggressively enforcing its trade laws or pursuing regional trade pacts, and consistently criticize U.S. policy which pursues new issues in trade agreements formerly thought to be merely the province of the internal political process of another nation.

In essence these folks assume that nearly every new trade issue will be manipulated to reflect and promote protectionist tendencies. They exacerbate these reactions by an unfortunate obsession with multilateral institutions to the exclusion of nearly all other alternatives. The debate on free trade versus protectionism is sterile and has little meaning in an interdependent world.

They maintain that free trade solves everything. Simply reduce traditional barriers to trade, they say, and others will follow our example and thus the United States will benefit economically even with distorted trade and unlevel obligations. The problem with this school of thought popular in think tanks and other places where reality seldom intrudes is that it ignores the complexities of modern trade, the necessity of strengthening public confidence, and the economic well-being of the American worker.

Representatives of this position are describing a virtual world which does not exist. Trade without rules, regulations, and consequences for aberrant behavior is not realistic. It is not appropriate to continue to ask the American people to support open markets at home without equal access to markets abroad. Despite the reality that some phasing-in of market access will take place, the inability to level the playing field across the board will result in less growth, unfairness, and cynicism bordering on rejection of the United States as a leader.

The proponents of both of these positions have no inclination to address or understand a multidimensional foreign policy in an ever more complicated world. Their vision is limited and their view is flat.

In addition, both arguments miss the central point. In order to grow our economies in the 21st century, we are going to be increasingly concerned with the ability to achieve effective market access and equal opportunities in each other's economies. Therefore, we will be concerned about issues, laws, and regulations which were previously determined to be merely internal in nature. Some will argue that negotiations over these issues will adversely affect the sovereignty of the nation in question. However, if it is true that economic and national security have become inseparably intertwined in a global economy, then the ability to enhance the economic prospects of individuals of that economy is going to be based on promoting mutual responsibilities and creating economic growth through removing internal market barriers. Removing these barriers will correspondingly create a higher standard of living for those touched by these changes. Therefore, the economic future of most individuals will be improved and their sovereignty strengthened. Strengthening the sovereignty of individuals enhances the sovereignty of the nation.

Others will argue that we have no right to affect internal policies of any other nation. However, no one will be able to properly compete in the 21st century world using nineteenth century rules. The fact that leadership demands that nations continually address these non-border issues in order to enhance trade and development is in everyone's self-interest.

Failure to confront these challenges is not only bad policy, it is bad politics. We cannot sustain a broad constituency for trade unless the American people are confident that their government is working to address these difficult realities of the modern trading system.

Lesson #3: Consistency: the Hobgoblin of Small Minds

In a simpler world defined by East versus West, nearly all decisions were pushed through the single prism of U.S.-Soviet confrontation. Today's world is multipolar and multidimensional. Decision-making will be more complicated; policies, at times, will appear to be inconsistent.

Yet what works in one situation may not work in another. Our interests economic, military, political in one region may be vastly different than in another. The stakes too may be incomparable. We therefore need a pragmatic foreign policy that is also flexible and that uses every tool at our disposal. In terms of international economics, that means pursuing open markets and fair competition wherever possible, using whatever are the most effective means available including both the most enticing carrots and the most effective sticks. Often that may mean a constant give-and-take between economics, politics, and security issues.

Multilateral When Possible

The World Trade Organization (WTO) was established in large part as a result of U.S. leadership to institutionalize the rules and obligations of world trade and to provide a mechanism for addressing violations of those rules and obligations. Overall, despite some growing pains, the WTO has been effective and the membership roll continues to grow. Recent agreements on information technology and telecommunications have opened those global markets significantly. The telecom agreement, for example, covers 95 percent of world telecom revenue, and under this agreement the telecom industry already worth $600 billion will triple in value over the next ten years, creating approximately a million U.S. jobs. Moreover, it is estimated that consumers will save billions of dollars in phone costs. This agreement is another example of where technology both leads trade and is bolstered by it.

The most important aspect of the WTO has been the invocation of the dispute settlement mechanism. Freed from the “blocking” apparatus employed by losing parties in the old General Agreement on Tariffs and Trade (GATT) arrangement, the WTO has fostered a sense of discipline in world trade.

Clearly, we need to strike similar global agreements in agriculture, financial services, and investment, among other sectors. The United States is highly competitive in all three sectors, yet significant trade barriers remain around the world and must be addressed through the WTO.

However, the WTO must constantly seek to be more relevant to international concerns. That means addressing issues relating to the environment, competition, labor rights, bribery, and corruption. In addition, the sheer size of the WTO makes rapid progress difficult and new negotiations frustrating. Calls for a new round of trade negotiations at the WTO suffer from the lack of an issue definition as well as from the fact that global talks tend to freeze trade progress at every level.

Regional Reality

The WTO is, in my view, an effective mechanism for harmonizing and enforcing the rules and regulations of world trade. However, the WTO is not and should not be the exclusive means by which we can make trade progress. It must be paralleled, supported, and enhanced by other types of arrangements. Regional organizations, such as APEC, NAFTA, and the transatlantic marketplace are not inconsistent with the WTO and in fact serve to hasten the process toward more normalized and globalized trade and investment.

Regional arrangements tend to be less complicated because of the fewer numbers of countries involved and their shared interests. More difficult trade issues such as harmonization, investment, or the protection of Intellectual Property Rights (IPR) can and have been dealt with in a more effective fashion in regional agreements. The ability of regional alliances to open trade will inevitably drive the WTO to address the new and more difficult trade issues of the future.

For example, APEC accounts for 50 percent of the world's economies and 50 percent of world trade. The Information Technology Agreement (ITA) which was accepted by the WTO members in December 1996 would not have succeeded without the support of the vast majority of APEC members. Achieving a Free Trade Area of the Americas (FTAA) will be easier as a result of rules established under NAFTA and Mercosur.

Regional pacts may complicate certain negotiations, but they are not only relevant, they are also the most effective tool to open the global trading system in the near term.

Bilateral (and Unilateral) When Necessary

There are times when we can get better agreements with more enforceable rules and higher standards if we negotiate bilaterally, and often bilateral negotiations can serve to move the regional and/or multilateral process forward.

Our growing trade deficit with China has become increasingly difficult and politically embarrassing. This situation has been created by continuing discrimination by China with regard to foreign competitive goods and services as well as the creation and maintenance of sanctuary markets.

If China poses a difficult problem, it also represents a potential opportunity. The United States has staunchly supported China's introduction into the World Trade Organization. However, given China's difficulties in responding to the requirements of the WTO and the lack of progress in creating open markets in China, their application for accession continues to languish. The United States has worked tirelessly with China to address these issues. However, progress has been slow and inconsistent.

China has focused intensely on achieving WTO accession and permanent most-favored-nation (MFN) status. In addition, China is deeply desirous of being considered one of the world's leading nations in terms of international influence. The U.S. agenda with China includes open and non-discriminatory trade; the advance of human rights, including the rule of law; China's commitment to refrain from the proliferation of weapons; and cooperation in maintaining stability in Asia. Each issue addressed separately proves to be difficult given the tendency to let the details internal to each issue overwhelm the overall objective. An independent Asia, politically approached, would dictate putting all of these issues on the table and moving forward in a steady and continuous manner which would allow flexibility of negotiation and a larger vision, and would improve the possibility of success.

The United States and China should reach a bilateral trade agreement based upon the precedent of the 1993 agreement between Japan and the United States. This framework could cover twenty or more areas involving goods and services and be results-oriented in its approach. The ability to create quantitative and qualitative targets for these sectors as well as address overall Chinese structural trade policies would constitute a major step toward dealing with the growing U.S.-China trade deficit, as well as provide a major step forward toward China's accession into the WTO.

A major feature of the agreement would address the issue of dispute settlement within China. Adjudicating rights and obligations in China would protect economic interests, avoid damaging confrontations, and ensure confidence in China's ability to carry out an effective market economy. Without transparency and an ability to protect rights and enforce obligations, China will continue to unfairly make demands and create uncertainties which are serious impediments to real progress. Only through the implementation of a regularized transparent adjudicatory system can we hope to address difficult issues such as forced technology transfer, minority-shareholder rights, and the rights of joint-venture partners.

The absence of such an agreement will, in all likelihood, lead to continuing frustrations on the part of many different sectors in the United States with regard to U.S.-China trade. The continuation of that frustration is not helpful in growing U.S.-China relationships on a broader scale.

We must use all the resources at our disposal including unilateral sanctions and other actions to ensure that our trade agreements are fairly implemented and effectively enforced. It is important that the United States increase its efforts to enforce existing trade laws and confront circumvention of these laws on a bilateral basis. The logic of strong enforcement is clear. Trade agreements and trade laws are impotent if not enforced. Failure to enforce creates a negative backlash which adversely affects our ability to promote new market-opening agreements. Further, enforcement has a positive effect on economic activity and growth.

Lesson #4: Back to the Future

One thing is for certain: we cannot build a 21st century economy with twentieth century tools. We cannot convince the American people of the benefits of globalization if our institutions are still stuck in the past. To that end, we must build credibility by reorganizing for the new world. To this end, two immediate steps must be taken: reform our education system and reorganize some government agencies.

Education and Training

By the year 2000, sixteen million Americans will have jobs directly supported by exports. On the average, these jobs pay 13 to 16 percent better than other jobs in our economy. Imports benefit nearly every American in that they create price competition and force our companies to be more innovative and competitive.

Our ability to grow and strengthen our domestic economy is directly related to our success internationally. This growth will depend in large measure on increasing investment in technology and a well-trained labor force.

Not all ships are lifted by this rising tide. It is therefore critical that we work to give every American the opportunity to compete and succeed in the global economy. That means strengthening our public education system so that every child has access to a quality, technology-based education. It also means increasing resources to provide affordable, accessible training, and retraining programs for young people who do not plan to go to college, or for adults already in the workforce whose skills are somewhat outdated.

We must implement a more disciplined public school agenda requiring higher standards, longer school days and school years, an acceptable system of national testing, tougher teacher testing and requirements, mandatory homework, and mandatory parent involvement. The willingness of public school systems to create a series of innovative, competitive schools would complement these reforms. Charter public schools can create higher goals for an entire system and may produce the kind of graduates who are successful competitors in the first half of the 21st century. In addition, new tax incentives for higher education for American families and more resources for school infrastructure will enhance our delivery of quality education.

Our ratio of administrators to classroom teachers and students is unacceptably high. We should insist that administrative staff be cut and that administrators spend two to four semesters each four years as classroom teachers. A reform of that nature would dramatically reduce class size and give administrators a renewed and helpful experience in the real world of the classroom.

Lifetime learning and training is in the interest of the U.S. private sector and should be led by these institutions.

Our people are our greatest resource. The United States is the most competitive nation in the world because our workers are the most productive. In order to ensure that they continue to lead the world in productivity and quality, we must equip them with skills appropriate to our times. We must invest now in our people if we want to invest in the long-term health of our economy. Both private and public resources need to be increasingly devoted to research, technology, and the development of new products.

Government Reorganization

The world no longer fits into neat boxes. Instead, the issues with which the United States is faced are so wide-ranging and complex that they defy such categorization. As a result, the way in which the U.S. government functions are organized is obsolete and must be revamped.

Many Commerce secretaries have defended the Department's essential role while they are in office, and then turn their back on the Department as soon as they leave, calling it irrelevant and overly bureaucratic. As a former Commerce secretary, I can confirm that the Department is still highly relevant. I stand by the argument that my predecessor, the late Ron Brown, and I both made in support of Commerce: it is critical that the business community have a seat at the Cabinet table. Business is the engine of economic growth, and for the continued health of the American economy, we must protect and promote our companies.

That said, there is no question that the Commerce Department needs restructuring. It is organized in such a way that it no longer entirely meets the needs of the business community, American workers, or the overall goal of economic growth. That may sound like sacrilege to many of my former colleagues, but it is not meant to be. Nor is it intended as an attack on any of the dedicated and hard-working civil servants who do the country's business each and every day. Each of the functions that Commerce carries out is critically important. In today's interdependent world, with increasing dependency on international trade, the Commerce Department's role must be altered in order to ensure we have a focused and disciplined trade policy. They just don't all need to be housed under the same roof, nor is it necessarily effective for them to be.

Previous public debate on this subject has been characterized by partisan attacks and nearsighted motives. The debate has had little to do with pursuing a positive agenda but much to do with political attacks designed to embarrass, harass, and make partisan political points. The alteration of the Commerce Department and trade functions will help launch the U.S. private sector into the 21st century. The question is not merely information, it is about winning and losing in a global marketplace.

For example, there is no rational reason why the Import Administration (IA) of the Commerce Department, which is charged with enforcing our anti-dumping laws, should not be a part of the United States Trade Representative (USTR), which is responsible for enforcing our trade laws. In addition, the functions of the International Trade Commission should be transferred to USTR in order to ensure a more consistent enforcement approach to our anti-dumping laws. The Patent and Trademark Office (PTO) is self-financing. We should combine PTO with the Office of Copyrights in an independent, off-budget government corporation that is self-funding and independent.

The Economic Statistics Agency (ESA), which produces data on the health of the economy as well as the Census, should be merged with the Bureau of Labor Statistics to form the National Statistics Agency an independent organization comprised of first-class economists. The National Oceanic and Atmospheric Administration (NOAA) should be moved to the Interior Department.

The other functions of Commerce involving urban and rural development as well as support for minority and women's economic activities should be combined with the Department of Housing and Urban Development and the Small Business Administration as well as specific functions of the Treasury Department in a new U.S. economic development department.

What you are essentially left with is the International Trade Administration, the Bureau of Export Administration, the National Information Technology Agency, and the Technology Administration. Add the Export-Import Bank, the Overseas Private Investment Corporation, a number of the Agency for International Development (AID) programs, and the Trade and Development Agency, and you have the makings of a strong and effective Department of Trade and Commerce.

The State Department is similarly organized to address a Cold War world. For example, Foreign Service officers need to be trained differently, with a background in economics as well as history, political science, and diplomacy. Embassies should be working in concert with the International Trade Administration to aggressively advocate on behalf of U.S. businesses. Other Foreign Service officers should be specially trained in new areas of interest, such as human rights or the environment. The department has made valiant efforts over the past few years to move in this direction. Those efforts should be supported and increased.

Finally, USTR's budget should be substantially increased. The fact that our nation's trade agreements are being negotiated and our trade laws are being effectively enforced by a staff of about 160 people is truly remarkable. USTR must remain independent and continue to serve as the president's chief adviser on trade and the country's leading negotiator and enforcer of trade agreements and trade laws. Arguments to combine USTR and the Department of Commerce have not considered the inherent conflict of interest present when an agency attempts to promote, regulate, and negotiate.

Lesson #5: Lead, Follow, or Get Out of the Way

Leadership on the economic front requires us to work at every level with our trading partners to defend the issues and challenges which will confront us over the next ten years. Many of these issues will have an effect on our political and strategic roles as well. However, given the historic moment in which we find ourselves, addressing these issues will have a profound effect upon success or failure.

U.S. leadership will be critical in meeting these opportunities. In order to do so, we need to address the following:

U.S. and developed-country leadership must meet the issue of credibility of our nation's policies and approach to trade and investment. This must be an ongoing, continuous, and connected approach which is nonpartisan in tone and nontheological in approach. Only if our populations provide the support and enthusiasm for increased economic relationships can we continue to build the multifaceted connections which should mark relations among countries in the 21st century.

No single issue will be more important in promoting trade than the invocation of the rule of law. The ability or inability of an economy to be subject to firmly established procedures, legal avenues of approach, and the ability to enforce agreements including the sanctity of contracts, will be at the core of an effective international trading system. This issue cannot be ignored and demands negotiation and agreement as new trade regulations and trade pacts are formed.

Interdependence and globalization inevitably lead us to address non-border issues. These issues were previously seen to be only internal to the nations involved and were not considered appropriate for trade negotiations in the past. However, each has a proven effect upon the ability to open trade and create stronger markets.

None is more important than the issue of bribery, corruption, and illicit payments. This plague puts a premium on illegal activity while ignoring price and quality. It is impossible to develop confidence in an international trading system when bribery and corruption are such prevalent aspects of many economies in the world.

The greater reach of trade issues reflects the growth of economic interdependence that is the reality of the day; as nations count on one another for trade and for business opportunities, laws matter beyond borders.

Not just laws, but lawlessness as well. Business leaders I have met around the country have told me, almost without exception, that the number one issue they are concerned with in international trade is corruption extorted bribes, lack of transparency, the routine offering of illicit payments, and the overall effect these have on business.

Where corruption and bribery occur, they are serious impediments to political and economic development. They distort trade and investment. They waste resources. They subvert fair trade. They erode trust in institutions and leaders. And at the core, bribery and corruption sacrifice the gains to be had from skilled workers, quality craftsmanship, experience, and innovation.

The protection of investment;

Intellectual property rights and their enforcement;

Worker rights, including the use of child labor, prison labor, slave labor, discrimination at the workplace and freedom of association;

The failure to address environmental concerns either by lack of enforcement or by laws and regulations which are so inadequate that they provide an unfair competitive advantage to the countries in question;

We need to begin to address competition policy in trade agreements in order to ensure that monopolies of all kinds are addressed in order to provide more freedom of entry for internationally competitive goods and services; Ill-formed or inadequate accounting systems as well as discriminatory and unfathomable tax laws are a real and difficult impediment to trade.

The United States and Europe have begun to address mutual recognition agreements and trade facilitation measures. Trade facilitation has also been part of the APEC discussions. However, we have a long way to go. Harmonizing standards, certification, and testing will be a major challenge over the next few years.

You cannot open trade and create new investment without allowing for the free flow of economic information both into a country and within an economy. Countries who believe that they can control economic information or manipulate it to their advantage will only stymie investment and create distorted trade flows. This issue has had far too little discussion among trade and financial officials over the years and needs to be confronted on a more realistic basis.

The question of how to enforce trade laws and agreements without prior invocation of economic sanctions will seriously challenge our conceptual and diplomatic skills. You cannot build creditability for an effective trade policy without enforcing trade agreements. Dispute-settlement mechanisms such as those implemented under the Uruguay Round or NAFTA provide examples of how a dispute-settlement system can operate in an effective manner. However, the continual enforcement of national trade laws in implementing new dispute-settlement mechanisms among and between nations must be part of new bilateral, regional, and multilateral agreements. The use of economic sanctions in order to address unacceptable behavior on the part of countries in the international sphere will continue to test our ability to be flexible and to create multilateral responses in this area. No single criterion or set of standards will be satisfactory in an attempt to define when and where such sanctions should be used. There is an obvious need for economic sanctions in certain situations, and the ability to implement them in a creditable fashion is a serious challenge.

Opening up various economies to the international service industry, including financial institutions and professional organizations, continues to be difficult for some and delicate for all. However, in the Information Age this is becoming a larger and larger part of international trade. It appears that more progress in this area can be made bilaterally and regionally than in the multilateral framework.

Many of the issues listed depend on the willingness of economies both emerging and developed to deregulate and privatize. Government control of open economic activity will only thwart and limit the ability of an economy to attract investment, increase productivity, produce new jobs, and raise standards of living. In addition, the combination of economic progress with deregulation and privatization supports democratic societies and contributes to stability.

A key principle of physics states that objects which are placed in motion tend to remain in motion. This principle can also be applied to U.S. leadership in trade. The implementation of the FTAA and APEC will not take place until 2005 and 2010, respectively. The transatlantic marketplace is forging ahead to make progress but suffers from a lack of impressive ambition. Any new effort to institute a comprehensive WTO Round would surely “freeze” trade progress and, if history is any indicator, will take all too long to complete. Given the importance of continually growing trade ties and solidifying our relationship with our allies and trading partners, complementary and supplemental vehicles should be pursued.

The Quad Organization, composed of the EU, Japan, Canada, and the United States, has met on a regular basis for a number of years. It has proven to be an important negotiating mechanism addressing issues of multilateral, bilateral, and even plura-lateral concern. For example, one of the most divisive impediments in 1993 to a successful conclusion to the Uruguay Round was the inability to formulate and execute a market-access agreement. The discussion featured a set of contentious issues which involved the desire to remove all tariffs in a number of sensitive areas. The ability to use the institution of the Quad was critical in negotiating the market-access agreement in July 1993. It constituted a major step toward the successful conclusion of the Round.

The Quad is effective because of the multiple and complementary interests of the participants. Together they represent the world's largest economies and those nations whose activities and policies undergird stability around the globe. Their continuing ability to work cooperatively and to provide leadership is critical.

The Quad, because of a confluence of interests and similar economic characteristics (level of development, technology, wage rates, education levels, and many other factors), offers an opportunity to create a comprehensive open trade agreement between the world's largest economies. Such an agreement would cover trade issues such as tariff reduction, trade facilitation, mutual recognition agreements, protection of intellectual property, investment, services, and dispute settlement. Such an agreement would offer the tantalizing opportunity to address many difficult, somewhat untraditional trade issues as well. This venture, if successful, would clearly motivate regional trade arrangements and the WTO to move expeditiously in addressing these new trade issues as well.

This arrangement would have a number of advantages:

The prospect of truly open markets among the world's most developed and largest economies would fuel growth in these countries and naturally result in stimulation of global growth.

Nagging trade problems among and between the four countries could be addressed given the inducement to all in joining such an arrangement. Certainly, given Japan's tremendous reliance on these markets many of the most pernicious and difficult restrictions on open markets and investments in Japan could be addressed. That is not to suggest the other three do not maintain certain barriers and have not maintained obvious impediments to an increased flow of trade. They have and do. But Japan's persistent and damaging trade surplus has created potential tension and problems and has allowed Japanese industry to grow capital in their own market as a result of remaining unimpeded by competition. Their capital has been used to capture market share worldwide. In addition, the persuasive influence of the United States, Canada, and the EU would be enhanced in confronting this challenge as contrasted with the traditional methods in placing bilateral and multilateral pressure on Japan.

Because of gains made in the Uruguay Round in agriculture, intellectual property rights, investment, lower tariffs, disciplines on subsidies, and dispute settlement, many difficult issues have already been addressed. This has been complemented by the Telecommunication Accord, the Information Technology Agreement, and by a possible agreement on financial services. This foundation has been attained through years of tough bargaining. Only a similar effort among the Quad in new areas will ensure rapid progress. New momentum needs to be created if we are to continue to strive for compatible goals of increasing stability through economic interdependence, enhancing economic growth, and ensuring we continue to promote the credibility and fair operation of trade through the pursuit of single undertakings (i.e., everyone plays by the same rules).

This venture would have an interesting potential effect on current EU concern over integration. Today's drive in the EU to create a European Monetary Union is obviously causing a wide-ranging and intense dialogue which is often rancorous and adversely affects European unity. The launch of a major new initiative which is so clearly to the benefit of the EU and its economic recovery would present the EU with an issue around which to unite.

There are obviously potential negative effects. I am convinced these are limited and far outweighed by the potential of such an agreement. Some will argue the Quad undermines the WTO. Others will observe that the developing countries are uniting to the exclusion and detriment of underdeveloped and developed worlds. China could characterize the discussions as a step toward an attempt to contain their trade fortunes and economic future. These arguments, although projecting an air of logic and trade anguish, should not deter what in all likelihood would spark a huge new round of investment and growth worldwide. Further, the leadership exhibited by this arrangement would serve as a strong motivational force propelling reforms in trade regimes at every level.

CONCLUSION: NO FREE LUNCH

With the end of the Cold War and the growing importance of trade to our economy, economic concerns are now as important in our foreign policy as strategic or political concerns. After World War II and during the Cold War, the United States used trade policy as part of the strategy to help rebuild the economies of Europe and Japan and resist communist expansionism. We led the world in global efforts to dismantle trade barriers and create institutions that would foster global growth.

During that period, we often opened our market to the products of the world without obtaining comparable commitments from others. As the dominant economic power in the world, we could afford to do so. And as part of a strategy in the Cold War, we needed to do so.

Despite the uneven commitments, the resulting expansion of trade fueled growth, stability, and ultimately proved to be the winning card in the Cold War. While these countries closed off their economies from domestic and international market-driven competition and stagnated the Western world pursued the opposite strategy of opening up their markets to increasing internal and external competition and prospered.

But now we are no longer the sole dominant economic power in the world. We are the world's largest economy and largest trading nation but our economy, which represented nearly 50 percent of the world's output following World War II, now represents just over 20 #160;percent. Europe and Japan rebuilt and became tough competitors. The newly industrialized nations, such as the so-called Asian tigers, became increasingly productive, winning a share of our market without opening theirs equally.

Although we should welcome the products, services, and investment of other nations here in the United States, we must insist that the markets of our trading partners be open to the products, services, and investment of the United States. We should no longer tolerate “free riders” in the global trading system and we must demand reciprocity in our trade agreements. This would mark a critical change in the way we view both trade policy and foreign policy.

In addition, it is important to fostering global stability that we expand economic ties with other countries. Nations around the globe have found the best road to prosperity and stability is in large part connected to our open markets. Those economic reforms, in turn, have helped support the remarkable transitions to democracy we have witnessed in recent years and have helped build the middle class in those countries. Fostering growth in other countries is still in our interest because as the middle class grows, stability increases, as does the ability to buy our goods and services.

Other overriding issues will have a cumulative and positive impact on economic growth and stability.

The willingness to implement the rule of law including protection of economic rights and enforcing commercial rules combined with deregulation, privatization, and the protection of investment will inevitably lead to enhanced growth and the creation of new jobs and a higher standard of living.

Creating new investment, industrialization, and the embracing of technology increases the availability of information and communication. Newfound prosperity and the availability of information and technology inevitably will lead to the opening of societies, and the increase of participation will empower individuals and support burgeoning democracies.

These issues will inevitably create tensions and controversies. It will be alleged that the sovereignty of the nation in question has been compromised. Some will use these issues to create nationalistic fervor for their own political purposes. These battles will make it difficult to rapidly address critical concerns which will ultimately affect our collective abilities. However, the instigators of the battles ignore the reality of a global economy. The result of the war over interdependence and globalization will not change.

Those who close their eyes to the world will find themselves blind to its realities. Those that seek to isolate the United States will find themselves roadkill in the path of international competition. As much as some may try to avoid or ignore the reality of the global economy, the fact of the matter is that globalization is here to stay.

We have to put economics, trade, and U.S. leadership on the front burner of our priorities. We cannot afford to let our ability to pursue new initiatives be hampered or strangled by ideological purity or partisan bickering.

No one should allow themselves to sit on the sidelines in silence and create a vacuum of leadership. While those who support open trade, reciprocal agreements, and aggressive U.S. trade leadership ignore the problem and expect others to carry the argument, the substance and pace of the debate will be formed and advanced by those who see the future through a rearview mirror. The battles over interdependence must be won in spite of the fact that the war is over.