CIAO DATE: 07/06

Global Issues

 

U.S. Transformational Economic Policy: Linking Trade, Growth, and Development

U.S. Under Secretary of State for Economic, Business, and Agricultural Affairs Josette Sheeran Shiner discusses the relationship between trade and economic growth.

Why do some countries enjoy robust economic growth while others do not? Between 1975 and 2003, more than half the countries of the world had annual per-capita GDP growth rates of less than 1 percent. About one-third of all countries actually got poorer. This number would be even greater if one could include data on more than 35 additional countries with institutions too weak to collect reliable statistics.

Economists and development specialists seeking answers are increasingly finding a link to trade. If one looks at the world broadly over the last century, it is hard to find systematic evidence for the benefits of protectionism. Yet examples of ill-conceived protectionist policies abound: U.S. isolationism following the stock market crash of 1929 precipitated the Great Depression; developing countries' import substitution schemes in the 1960s and 1970s discouraged economic growth; and communism stunted productivity, innovation, and economic freedom. Protectionism provides no sustainable benefits.

On the other hand, trade liberalization is making a significant contribution to economic growth, poverty reduction, and stability around the world. Economic studies confirm that countries with more open economies engage in increased international trade and have higher growth rates than more closed economies. Among developing countries, those with the greatest engagement in international trade had growth rates three times higher than lesser trading countries in the 1990s.

China and India are the two most visible examples of the power of trade liberalization. Thirty years ago, both countries had widespread poverty. They still have essentially the same natural resource bases they had then. And their political systems have remained relatively unchanged over the years. Yet today they both enjoy among the highest economic growth rates in the world. What changed? They opened up their markets to the world, contributing to the greatest, most rapid decline in poverty in global history. The nongovernmental organization Oxfam reported that if Africa, East Asia, South Asia, and Latin America were each to increase their share of world exports by 1 percent, the resulting gains in national income could lift 128 million people out of poverty.

The United States is a leader in furthering economic opportunities like these around the world by advancing new and innovative economic policy approaches that link trade, aid, and development.

Secretary of State Condoleezza Rice has emphasized the power of trade and growth to transform societies: "There is perhaps no more important tool for the United States as we think about the spread of stable democracy and liberty than to make use of our economic diplomacy, the benefits of free trade, the benefits of development assistance … ."

Lowering Trade Barriers

Through global trade negotiations in the World Trade Organization (WTO), we are advancing bold proposals to eliminate tariffs, quotas, and trade-distorting subsidies. And we are challenging others to do the same. Much of the strength of the American economy can be attributed to the lowering of trade barriers by the United States and its main trading partners. For goods, average tariff rates dropped from 40 percent around World War II to less than 4 percent today among OECD (Organization for Economic Cooperation and Development) countries. Lower tariffs encourage competition, innovation, efficient allocation of resources, an exchange of ideas and technology, and foreign investment. Lower tariffs also reduce the production costs of industries and help them compete globally. Developing countries have a unique opportunity to reap the gains of freer trade, as average tariffs in those countries are significantly higher than those in the developed world, and 70 percent of tariffs paid in developing countries are paid on items imported from other developing countries.

Reforming agricultural trade is widely recognized as an important step toward expanding economic development, and opening access to agricultural markets through ongoing WTO negotiations could lift millions out of poverty. According to the World Bank, increased market access would account for 93 percent of the benefits from global agricultural trade reforms. For developing countries, nearly all of the benefit would be from reduction of their own import tariffs.

But trade alone does not automatically lead to growth, jobs, and the reduction of poverty. If countries want to capitalize on freer trade and encourage economic growth, they also need to have in place other sound national policies: good governance, rule of law, strong institutions, sound monetary and macro-economic policies, and a commitment to invest in people. These types of sound policies can be difficult to sustain in the best environments. Yet many developing countries are hamstrung by their own policies that inhibit entrepreneurship. On average in sub-Saharan Africa, it takes more than 63 days to start a business and more than 200 percent of annual per-capita income to register it. In Australia, it's two days and 1.9 percent. As countries take steps to develop sustainable economies, investors feel more confident to trade with, and invest in, those markets. A business-friendly environment helps to attract more foreign direct investment, contributing to more jobs, revenues, and economic growth

The Millennium Challenge Account

Recognizing this, President Bush proposed a new, innovative development assistance program called the Millennium Challenge Account (MCA). The Millennium Challenge Corporation (MCC), which administers the Millennium Challenge Account, draws on lessons learned about development over the past 50 years—linking sound economic policies to new trade and investment opportunities. MCC functions as primarily an aid program, but it also helps create an environment that supports the benefits of freer trade.

The United States has also pioneered programs that pair trade capacity-building (TCB) initiatives with trade initiatives and has made TCB an integral part of our global, regional, and bilateral trade agenda—giving developing nations the tools they need to take advantage of open trade. Indeed, the Office of the United States Trade Representative has created a special office specifically to work on trade capacity-building issues. These efforts have made the United States the largest single-country donor of TCB assistance, providing more than $1.3 billion in 2005 and pledging to double that to $2.7 billion annually by 2010.

America's innovative approach to linking trade, aid, and development is already delivering real results. The U.S. Free Trade Agreement (FTA) with Central America marked the first time that TCB was an integral part of FTA negotiations. In one example, the United States helped farmers in El Salvador expand into new markets by improving their marketing techniques, food standards, productivity, and business support services for their crops. Their average income more than doubled. This model has since been used in U.S. FTA negotiations with the Andean countries, Southern Africa Customs Union, Thailand, and others.

The MCC is also advancing this record. Since its establishment in 2004, it has signed assistance programs totaling more than $900 million with five nations: Madagascar, Honduras, Cape Verde, Nicaragua, and Georgia. A little more than two years after the announcement of MCA indicators in February 2003, the median number of days to start a business dropped from 61 to 46 in MCA candidate countries. According to World Bank officials, because of MCA's incentive effect, Paraguay adopted significant policy reforms in 2004 that both improved their MCA score on the "days to start a business" indicator and catalyzed an increase in registration of approximately 20 percent more firms than usual.

Trade liberalization is a key and necessary ingredient to a successful economic growth program. The United States is committed to helping countries prosper economically and to reducing global poverty. And we are at the forefront, working hard with the international community and individual countries to increase those opportunities. Our 135 embassies and consulates around the world are actively engaged in promoting this policy. Many developing countries now recognize the vital link between trade liberalization and economic growth. It is increasingly important that we set in motion programs that support this effort. Working together, we are confident we can increase global economic prosperity as we move forward in the 21st century.