Importance of Free Trade, Access to Global Markets – Susan Schwab

Former U.S. Trade Representative Schwab is a trade strategist and negotiator. Read her views about the importance of free trade, access to global markets.

December 2007

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Former U.S. Trade Representative, Susan C. Schwab and the nation’s top trade strategist and negotiator, talks about the importance of free trade and unfettered access to global markets.

Access Review (AR): Where does the U.S.stand in the stalled Doha round of WTO talks, and how has American trade policy evolved in the meantime with these new free trade agreements in Latin America and Korea?

Schwab: U.S. trade policy occupies three principal baskets: multilateral, in the form of the Doha Round; bilateral or regional, and there we’re talking about the four free trade agreements that are pending; and the third is enforcement of existing agreements, primarily the WTO.

The Doha Round has been off-and-on again since 2001. After you’ve gone through eight multilateral rounds of negotiation, the only things left are the tough stuff. We’re talking about very difficult political and commercial decisions that we all know are necessary to generate more economic growth, more development, and alleviate poverty, but that doesn’t make them any easier. On the bilateral front, we have agreements pending with four countries — Peru, Colombia, Panama and Korea — that are all huge current or potential markets. If you put the three Latin free trade agreements together, you’re talking about a population of almost 80 million people. Korea is the 11th largest economy in the world, and our 7th largest trading partner.

We’re talking about very difficult political and commercial decisions that we know are necessary to generate more economic growth, more development and alleviate poverty.

AR: Speaking of Access, when did you first become aware of Access as the underlying principle or driver of free trade, and how do you see it functioning in U.S. trade policy?

Schwab: I became acutely conscious of it in the late ’80s and early ’90s. Back then, I was the director general of the U.S. and Foreign Commercial Service, which is the export promotion arm of the U.S. Government. It’s a field operation — we had a presence in 130 venues overseas and 70 at home — and it became very clear to me as both a longtime trade negotiator and as an economist that all of the numbers we throw around about U.S. exports, imports, trade imbalances, and so on, are made up of one transaction at a time.

There’s a limit to a role government can play as a facilitator or negotiator, but there are an awful lot of players in any given transaction. The service sector is involved in every step, and you’ve got a lot of different means of communication. It was very clear to me that so many flows — flows of information, flows of capital, flows of goods — underpinned these transactions, and I became very self-conscious about it, particularly as it involved small and medium-sized companies in the United States, because they were our clients, and many of the same companies that take advantage of FedEx’s global network.

AR: The flows you describe observe neither national borders nor politics. And many of the companies you once worked with have become multinationals, or at least global in their outlook. How has the radical increase in Access over the last two decades — trade liberalization, foreign direct investment, the Internet, and so on — affected the role of governments in setting trade policy? It seems to me that the settings for these transactions matter less and less, and the players more inclined to ignore borders.

Schwab: Clearly, there are a lot more multinationals and a lot more trans-national investments. But on the other hand, each of those multinationals is working very, very hard to be local citizens in whatever country they’re in, because they do consider themselves citizens. So while you have more multinationals with global presences and interests that transcend borders, they’re also very conscious of being good corporate citizens of wherever they happen to be. And that’s not just American companies acting abroad; you increasingly have companies with foreign names and ultimately foreign ownership showing up as major employers in various states in the U.S. And you know what? If you’re employing my constituents, you’re a constituent as well! It works both ways.

AR: You’ve said before that no one has been able to articulate the benefits of free trade for Americans, while it’s been all too easy for its opponents to underscore the harm. How do you make the case in favor of free trade, open markets, and increased Access — rather than protectionism — to the average American?

Schwab: It’s a constant challenge, and it’s always been a challenge. The benefits of trade tend to be very diffuse and broad-based. But there are some companies and some communities where it is so incredibly obvious that you don’t have to make the case. Look at certain businesses — ports, express package delivery, a lot of service business associated with trade — and whether the product is moving into the country or out of the country, it creates jobs in the United States.

Then you’ve got the data. The Peterson Institute for International Economics says that the liberalization of trade since World War I has been worth $9,000 per American family, in our pockets. And if we could ever figure out how to eliminate the rest of the world’s trade barriers, that would be another $4,500 in each of our pockets. NAFTA was worth somewhere between $1,300 to $2,000 alone.

Trade liberalization is essentially a big tax cut. By eliminating tariffs on goods, you’re passing along the equivalent of a tax cut in terms of the impact on citizens. But that’s still a very diffuse benefit. When you go shopping, it doesn’t occur to you that there is more money in your pocket and a wider set of choices on the shelves because of open trade. But when individuals or individual firms or communities are negatively impacted by free trade, it’s very obvious, and they can be very vocal about it. We can’t forget that this is a serious problem, and therefore we need to help them adjust and respond, but we have to do so in a way that doesn’t kill the rest of the economy — and kill the goose that laid the golden egg — by throwing up barriers, or by avoiding globalization.

AR: As a developed nation, don’t we bear an ethical responsibility to help developing nations as well? I recently read an interview with Princeton professor and New York Times columnist Paul Krugman in which he said he supported free trade not because of its impact on the U.S. economy, but because the impact of a protectionist stance on developing nations would be utterly devastating.

Schwab: Here’s a great statistic on that. Take sub-Saharan Africa, which currently constitutes maybe 2 percent of global trade. It used to be 6 percent, by the way, but now it’s only 2 percent. If we could figure out how to increase Africa’s share of global trade by just one percentage point, that would be the equivalent of $70 billion in income in Africa, which is three times the official amount of development assistance they get. And trade is so much healthier than development assistance, right? Trade is the most effective form of assistance for developing countries and poor countries. And it’s trade that doesn’t hurt us but also helps us to the extent that as these developing countries grow, they’re also going to be our customers.

AR: But what can government do to create that 1 percent growth? What difference can you make at the policy level?

Schwab: There are a couple of things. Probably the most significant unilateral U.S. action has been AGOA, the Africa Growth and Opportunity Act, which opened the U.S. market to some 98 percent of all African exports. That was legislation passed back in 2000, and it’s increased sub-Saharan exports to the United States, but slowly. With it has to come a lot of capacity building, helping them to diversify their exports. We import some oil from Africa, but that’s not the same as importing products.

That’s one example. Another would be the bilateral free trade agreements we’ve negotiated with developing countries. Both create markets for U.S. exports, but they also create platforms for investment and exports by those nations as well. And if you look at the pending Latin American FTAs, you’re also talking about providing people with opportunities to produce things other than drugs. And on a multilateral basis, it goes back to the Doha round, where not just developed countries, but advanced developing countries — those with rapidly emerging markets – really need to be opening their markets to the less developed countries.

AR: And how do you convince those nations to increase access to their markets when their homegrown industries are desperately competing with U.S. multinationals or a flood of inexpensive goods from China?

Schwab: One reason is self-interest. Which developing country has moved most rapidly from undeveloped to developed? Singapore, which unilaterally opened its markets, especially with regards to services. Let’s talk about services, and Access, and networks: if you’re a developing country and you open your markets to telecommunications, financial services, transportation services, express package delivery, and so on, you are really giving a shot in the arm to your own entrepreneurs, to foreign companies looking to invest, and to importers and exporters. My answer to developing countries is: ‘Look around you. Doing this unilaterally is probably the smartest way to go, but politically, it’s very hard. Very few countries can do it. So you should use trade negotiations to do for yourself what you ought to be doing on your own. At the same time, leverage other countries into opening their markets.

Then there’s the question of obligations and the broader responsibility for global economic growth. When you’re talking about these rapidly emerging markets — China, Brazil, India, South Africa, Indonesia — that are between developing and developed, they need to be doing more trade with each other. They need to open their markets to products from even less developed countries. That is both an economic opportunity and a moral obligation. And it helps generate global economic growth.

AR: Your prescription of opening up markets to services rather than manufacturing sounds a lot like what a handful of states likes Dubai are doing. They’re trying to skip over the messiness of industrialization and build a post-industrial service-based economy from scratch. Rwanda is trying to do much the same thing in Africa, building a software and airborne logistics industry to compensate for the fact that it’s landlocked with few natural resources.

Schwab: We’ve just signed a BIT [Bilateral Investment Treaty] with Rwanda. They’re doing incredible things in terms of opening up their markets and creating an environment where entrepreneurs can thrive. And you know what? Other countries are taking notice. Multinationals are taking notice, too. And they’re starting to attract inward investment and generate entrepreneurial opportunities. So yeah, it works! What does it take to become another Singapore? I don’t know the answer to that, but I do know that keeping your markets closed isn’t going to get you there. Protectionism isn’t going to create any jobs.

The most interesting thing about India is its trade with the rest of the world. Talk about your underutilized capacity and potential. But India is very interesting. Where is the Indian economy growing most rapidly? In sectors it liberalized in the early 1990s, namely in IT. Where is it not growing? In agriculture, where India has been protectionist, and where it maintains its protectionism. And its overall level of competitiveness in agriculture has continued to decline as a result. If you look at India’s trade with the rest of the world relative to its economy, it’s pretty small. It could be much bigger, to the benefit of Indians, and to the benefit of the rest of us.

Here are some other interesting statistics: 70 percent of tariffs paid by developing countries are paid to other developing countries. The average U.S. tariff in agriculture is 12 percent. In the E.U., it’s 24 percent. Globally: 62 percent. India: 114 percent. The U.S. has some tariff peaks, so we don’t have entirely clean hands, but on the other hand, the U.S. market is fairly open. But there are some serious peaks in advanced developing countries.

AR: Considering the resistance by advanced developing nations such as India to the Doha round, is the greatest progress to be made in bilateral, regional trade blocs — such as NAFTA and the EU — or will an overarching framework like the WTO ultimately prevail?

Schwab: Some of it depends on what happens in the Doha round. If it ultimately succeeds, I think that will reinforce faith in multilateralism. There are hundreds of bilateral and regional deals being negotiated as we speak, and we’ll see a step up if the Doha round fails. But there is some degree of compatibility between them. When we’ve negotiated deals, our standard FTAs are very comprehensive in terms of what they cover — services trade, intellectual property, labor, the environment, and so on — and we’re able to use that to build support for including these multilateral agreements eventually. I think that’s healthy. The risk is that these deals become “free trade lite,” protecting sensitive industries, and that just perpetuates bad things.

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