Economic Development, Trade and Cultural Affairs

Executive Director
Forum on Democracy & Trade

My thanks to NCSL, including Representative Allen and Jeremy Meadows and all the staff…. plus Kay Wilkie and Peter Cunningham for their hard work in pulling together this meeting.  I look forward to the next two days of informative discussion and the chance to learn from different state experiences.

For this introductory lunch session I’ve been asked to look forward and backwards from a particular point in time—from a moment in which the evolving system of global trade crystallizes in a single event.  Just over a week from now, trade negotiators from 148 nations will converge on Hong Kong, a place which, in Asia, has historically embodied free trade principles and the open-market concept.  Accompanying national trade negotiators to Hong Kong will be literally thousands of industry and farm group and civil society representatives, as well as legislators, central bankers, commercial-service lawyers, and journalists. 

This convergence in Hong Kong is for a World Trade Organization Ministerial, the WTO’s highest-level meeting.  These Ministerials have occurred at roughly two-year intervals since the establishment of the World Trade Organization just over a decade ago.  Hong Kong represents the second Ministerial meeting since the launch of the Doha Development Round in November 2001.  Already, expectations for the meeting have been reduced. Hong Kong will most likely be remembered not as a Ministerial where new agreements were signed, but rather as an opportunity for high-level national negotiating teams to take stock of the each others’ positions, to explore tactical alliances for advancing negotiations, and to seek further trade-offs across the three major negotiating areas—in services, in agriculture, and in tariffs on manufactured goods.  But to be clear: the “recalibration” of expectations from Hong Kong means that, again, many of the hardest decisions for the Doha Development Round of trade negotiations will be pushed back. 

So, barring some completely unexpected breakthrough at Hong Kong, talks on the Doha Development Round will continue into 2006.  While frankly we were all hoping for a breather after Hong Kong, nonetheless I think that from the position of the states, it is good news that talks will continue into next year.  Just as Hong Kong will be an international stock-taking of where global negotiations stand, this particular moment should, ideally, also provide an opportunity for the United States to take stock of its national interests in terms of the global trading system.

The United States Trade Representative negotiates on behalf of the United States based on input from Congress, from other federal agencies, and from the states.  Implicit in the democratic contract that gives USTR its negotiating power, our trade negotiators also have the responsibility to report back from the Hong Kong Ministerial, to tell us what happened, what they learned in face-to-face meetings with other negotiating teams, and what opportunities they saw for advancing American economic interests.   Our responsi-bility, in turn, is to be informed participants in a national conversation about our international trade interests.  And thus I see our task during this Trade Policy Seminar as three-fold: to better understand what’s at stake in the global negotiations; to identify the structural shifts in the global economy that impact states, and finally, how best to communicate specific state-level interests to U.S. negotiators.

As just mentioned, negotiations at Hong Kong will essentially come down to a trade-off between three different areas of negotiation: services, agriculture, and tariffs for manufactured goods.   It would be tempting to focus our attention specifically on what those trade-offs might look like, but doing so risks paying too much attention to the moment of Hong Kong, rather than the broader meaning of a Ministerial.  So what I would propose to do instead is to tell a brief story pertaining to each of these three areas—of services, agriculture, and manufacturing.  In this way, I hope we get a clearer picture of what a WTO Ministerial meeting is all about. 

We’ll start with services.  This story in some ways is the simplest, but it’s also the story that best exemplifies the full complexity of the global trading system.  Let’s look at the two essential facts of the services story and explore the tension between them.  Fact #1: According to US Trade Representative Rob Portman, services today represent three-quarters of the U.S. economy and 80% of current U.S. employment; and services exports account for about 30 percent of the total dollar value of US exports, up from 20 percent in 1975.   So Services are the most important component of the U.S. domestic economy and the fastest-growing sector of our exports.    Fact #2: because of the way it is structured, the WTO’s General Agreement on Trade in Services, the GATS, has the greatest potential impact of any trade agreement on the way U.S. states and cities do business. 

So you can anticipate the question raised by these two facts.  Is it possible to expand market opportunities for U.S. service exporters while also safeguarding state and local authority and regulatory power?  This is the question asked by IGPAC, and by states engaged in trade oversight.  The answer provided by USTR is ‘yes,’ it is possible.  (Actually the answer usually provided by USTR is ‘don’t worry’ and that’s already proven to be a non-starter, because, quite naturally, state leaders are already worried.)  So let’s spend a moment working backward from the Hong Kong Ministerial and understand what’s the concern for states in the services negotiation. 

Over the past year, WTO member nations have forwarded literally hundreds of papers to the WTO Secretariat on different aspects of the GATS agreement—describing positions on the way in which services are provided, what economic sectors should be liberalized, and how standard rules for services should be written.  The raw material informing those position papers was provided by national and international coalitions of service-sector firms and the international standard-setting bodies that develop the rules for particular service-industry sectors. 

Here in the United States, USTR works with the Commerce Department to implement what it describes as a “public-private partnership...that engages business leaders in formulating U.S. trade policy.”  That partnership is manifested in the sixteen Industry Trade Advisory Committees, or ITACs.  There are 16 ITACs in all; five of the ITAC committees have the word “services” in their titles.  The members of the ITACs are jointly appointed by USTR and Commerce, and, to quote from the eligibility criteria listed on the ITAC website, members of these committees are to be “representative[s] of a U.S. entity that trades internationally and is engaged in the manufacture of a product or the provision of a service, or an association of such entities.” Members of ITACs are not compensated for their time or travel costs; nonetheless, we can be sure that scores, maybe hundreds of ITAC members, representing particular firms and industry associations, will be in Hong Kong during the Ministerial.

While in Hong Kong, ITAC members will have many side meetings with representatives from associations of service suppliers from other nations, and with members of inter-national bodies who set standards for particular service sectors.  This is all part of the dense web of interests and organizations that provides the momentum for these global trade negotiations, and Hong Kong provides them also with an important networking opportunity.    

State and local governments do not have representation on the ITACs. Again to quote the ITAC eligibility criteria, ITAC members can not be “full-time employees of a govern-mental entity.” As we know, however, Congress did mandate that USTR engage state and local governments in formulating U.S. trade policy; USTR does so through IGPAC, the InterGovernmental Advisory Committee.  At last count, exactly two IGPAC members will be in Hong Kong during the Ministerial.  They will have very few opportunities to meet with representatives from state and local officials from other countries.  And it is not part of IGPAC’s remit to maintain relationships with international standard-setting bodies. 

So just in terms of the sheer input of data and advice into USTR’s negotiating objectives for this Ministerial, USTR hears a lot more from ITAC members, whose primary concern is expanding international trade, than they do from IGPAC members.  This is in no way to minimize the role and importance of IGPAC—on the contrary, we know that in the past few years IGPAC has been vigorously and effectively led and has expanded the opportunities for state and local leaders to participate in our national conversation around U.S. trade negotiating priorities. 

Of course, IGPAC is also interested in expanding inter-national trade, but it is also the organization whose role is to remind USTR of the importance of safeguards for state and local authority.  With the states, it can help clarify what those safeguard options are. 

But again let’s be clear: the Hong Kong Ministerial does provide a clear snapshot of the relative weight and density and positioning of the different building-blocks that make up the global trading system; and state and local interests do not have the inside track.  Over the next two days, and again immediately after Hong Kong, we should be addressing the question of how we build up further the density of our networks, and our opportunities for engaging USTR, on this essential question of balance:  advancing our service export interests while minimizing the impact on U.S. federalism.  Another way to say this: how do we get beyond the “don’t worry, we have your best interests at heart” sort of answer that IGPAC and the states have received from USTR to date, so that the post-Hong Kong period is characterized by an open and honest assessment of new market opportunities in relation to the trade-offs that have been sought by other negotiating blocs. In domestic political terms, the question can be phrased as, How best to remind USTR that democratic accountability to states is part and parcel of its negotiating mandate?

The second story is about agriculture.  This story starts long ago and far away from Hong Kong.  It starts on the European continent, before the European Union was formed, at a time when people were still haunted by ravages of the Second World War, and the hunger they experienced in the decade that followed.  In 1957, a number of European countries came together to launch a common agricultural policy, which took as its primary objectives to increase agricultural productivity and achieve food self-sufficiency. 

Now, almost fifty years later, the Common Agricultural Policy is still in place, and the two basic objectives articulated in that 1957 treaty have remained essentially unchanged.  But Europe’s pursuit of those productivity and self-sufficiency objectives has been so successful in the intervening fifty years that the European Union now finds itself with a completely different set of agricultural problems: namely, how to deal with massive over-production, rural depopulation, environmental degradation, and food safety.  The European Union thus faces problems akin to those which the United States faces in its agricultural sector: low commodity prices, increasing market concentration, natural resource conservation challenges, and heightened concerns about securing our food supply. 

For a very long time, agriculture was the kryptonite of the global trading system.  No one wanted to go near it in negotiations.  It was too culturally and politically sensitive.  But as more and more developing countries achieved their full independence from the colonial powers, and started to participate more fully in the global trading system, they were quick to notice that they had one area of clear comparative economic advantage: agriculture.  And so in the 1980s, during the launch of a new round of trade negotiations, for the first time there was a critical mass of developing countries insisting on the inclusion of agriculture as part of the work plan for that round.  The United States also wanted to improve market access for US farm exports, so it pushed this angle on agriculture, too.

In the frenzy of those Uruguay Round negotiations, which led in 1995 to the establish-ment of the World Trade Organization, agriculture was included as an area of agreement.  With one caveat: the European Union and the United States asked for a grace period during which time they could address the market distortions that had arisen in their agricultural sectors.  It is important to note that these distortions did not start as some deliberate attempt to shut developing countries out of export markets.  Rather, the distortions reflected domestic political considerations, informed by those concerns of culture, of place, and of the long shadow cast in Europe by the memory of hunger.

Developing countries came away from the Uruguay Round of negotiations feeling that they had successfully negotiated market access for their agricultural products. True, the “Peace Clause” negotiated would give the United States and Europe a decade to review and change their agricultural policies and to remove the tariffs and cut the subsidies that stood in the way of global free trade in food products.  Still, the developing countries looked forward to the restructuring that was going to take place in Europe and the US.

As we now know, there was no overhaul of agricultural policy in either the United States or Europe.  Domestic political considerations, and the particular passions that debates about agriculture ignite, made reform at home a difficult task.  Developing countries were shocked that the goals of Europe’s Common Agricultural Policy remained essentially unchanged; and they were also dismayed by the contents of the 2002 Farm Bill in the United States, which appeared to increase subsidies at a time when they felt they had been promised serious reductions in U.S. domestic support.

It is not my intention to weigh the pros and cons of different national or bloc positions on agriculture going into Hong Kong.  But let me make three observations. 

First, like it or not, a sharp feeling of betrayal pervades the positions of the developing country negotiating blocs at the WTO.  They feel that commitments made by Europeans and Americans as part of the last round of trade negotiations have yet to be honored.  In such a case, they ask, why should developing countries make any new concessions or market-opening offers?

It is significant that, just on the eve of the Hong Kong meeting, a number of developing countries released a paper called “Reclaiming Development in the WTO Doha Development Round.”  In that paper these countries draw attention to the second paragraph of the Doha Declaration, a declaration adopted by all WTO members, which states in part:  “we seek to place the needs and interests of developing countries at the heart of the Doha Work Program.”  Developing countries seek to remind us here in the United States, and in Europe, that this round of trade talks has a middle name, and that name is development, and they want to see real progress on their core issues of concern--most prominently, agriculture. 

Second observation: the Peace Clause has expired, which makes European and American agricultural subsidies highly vulnerable to challenge through the WTO’s dispute resolution system.  As we know, one such case has already been brought against U.S. cotton subsidies; Brazil won that case and is currently mulling over how it intends to retaliate against the United States.  And third, although Brazil’s victory over the United States in the cotton case does not lead automatically to changes in U.S. law or farm policy, the WTO cotton decision will weigh upon Congress as it considers next year legislation authorizing rural-sector support programs—namely, the Farm Bill. 

And thus for the WTO Ministerial in Hong Kong, the most important negotiating tension is the distance that developing countries will push Europe and the United States on agricultural subsidies and market access.  The other way of saying this is: can Europe and the United States push developing countries on services and market access for manufac-tured goods while making only minimal changes to their domestic farm programs?

Of course, the United States and Europe can simply walk away from the negotiating table, saying that the changes in farm policy sought are simply not supportable in the domestic political context.  But remember that walking away from negotiations doesn’t put U.S. farm programs beyond the reach of the WTO.  Brazil, Thailand, Uruguay, or the cotton-growing states of West Africa—all of these countries can, and probably will, use the WTO’s Dispute process to mount attacks on trade-distorting subsidies and tariffs in order to keep the pressure on.  Failure at Hong Kong may persuade Brazil to begin its retaliation against the United States, and Brazil will choose its targets with the intention of inflicting maximum political pain on the national government ahead of U.S. midterm elections.  And states?  States get caught in the cross-fire.

Voices of the agricultural status quo in this country have proclaimed that “the WTO will not write the next U.S. Farm Bill.”  That’s true.  But simply ignoring the international commitments made by the United States as part of the last round of trade negotiations is just not a sustainable strategy.  And so the questions that face U.S. states and regions are these: can we rethink our Farm Bill spending strategies in ways that honor our inter-national commitment to reducing trade distortions, while achieving greater prosperity for rural America and improved food security for all U.S. citizens?  What can we do to ensure that the new Farm Bill addresses the backlog of needed investments for infra-structure improvements, for soil conservation, and for rural development in America? 

The last story is about manufacturing, and it’s a brief one.  Actually, it’s more about China than it is about manufacturing, and it’s more about diplomacy than it is about trade.

As you all know, in the last decade China has emerged as a manufacturing powerhouse.  The United States is running an enormous trade deficit with China, in part because the United States generally has low market barriers for the entry of goods.  At the WTO, China and the United States share one major negotiating objective: both countries are pushing hard for tariff reductions on manufactured products.  And if the United States and China are successful in this effort at Hong Kong—who will benefit?  That’s not a question for which the WTO provides an answer.  Rather, that question is answered with reference to the success or failure of domestic industrial policies.  A broad-scale reduction in tariffs will make American manufactured exports more competitive around the world.  It will also make China’s exports more competitive.   

Here’s a little-appreciated fact about the WTO.  Hong Kong and Taiwan are both freestanding members of the WTO, enjoying there the same membership status as the People’s Republic of China.  That is, the WTO is the one global governance institution in which China is forced to acknowledge Taiwan as a political and economic entity—not at the United Nations, not at the World Bank, but at the WTO.  And it was Hong Kong as a WTO member and not China that made the offer to host next week’s Ministerial—Hong Kong, which is confident in its own path of economic development, and which ranks Number One globally on The Heritage Foundation’s 2005 Index of Economic Freedom.

The United States supported China’s membership in the WTO, and beyond the desire to tap into China’s enormous consumer market, there was a very good diplomatic reason for supporting China’s membership.  USTR and others judged—rightly, in my view—that WTO rules and disciplines would inevitably push China toward greater transparency and greater respect for the Rule of Law.  The US helped bring China into the rule-based global trading system, and now we get to live with the promise and perils that brings.  It is worth noting that Chinese companies, through their Singapore-based subsidiaries, could bring today an investor dispute against the United States, similar to cases brought by investors under NAFTA Chapter 11.  The rules of the US-Singapore Free Trade Agreement make that possible. 

This is the system of international trade rules that we have signed up for.  Yes, the WTO is changing the way China does business.  But we should similarly expect that the world’s emerging manufacturing powerhouse will also, in future, influence the way that the WTO conducts its business. 

So that’s it, those are our three stories, each story a double-helix of governance and economic development.  As is always the task at state and local levels.

But to conclude let’s also not overstate the importance of the Hong Kong Ministerial.  When it started to come out in the last few weeks that the Ministerial was not going to be a great success, what happened?  Did economic indicators around the world show a downturn?  Did stock markets crash?  On the contrary, most markets around the globe last month were setting 5-year records.  Global trade doesn’t stop or collapse if negotiations don’t move forward.  On the other hand, the process of global rule-making is relentless, and it behooves all of us to pay attention.

The WTO sets important rules for the global economy, but it doesn’t determine winners and losers.  Success or failure depends, instead, on the quality and health of domestic institutions at all levels.

So what’s also most important in this system is what all of you do. It’s the quality of local institutions that matter most for economic development.  And yet the global trading system—on which for now we’ve staked our future prosperity--has only barely begun to be informed by what we might call the wisdom of place.  Perhaps the folks in this room have a special responsibility to communicate the values associated with place, to say why we hold dear the specific characteristics of our communities, and our landscapes, and our local institutions.  Our democratic system of federalism persists today and will continue to thrive into the 21^st century if those values are not just understood in the global trading system--but also provide the system with the legitimacy that it is struggling to retain.