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Speeches and Papers

Global Trade: Has the WTO Lost Its Way?

by Gary Clyde Hufbauer, Peterson Institute for International Economics

Outline of opening remarks in a debate between Gary Hufbauer, Alan Tonelson, and Lori Wallach
Moderated by Peter Morici at Columbia University
New York
February 9, 2000


More information on the debate can be found at http://www.jrn.columbia.edu/events/reuters/2000-02-09.asp

 

  • What poor countries have conspicuously succeeded in the post Second World War era of globalization? The list is long. In Asia: Japan, Korea, Taiwan, Singapore, Hong Kong. In Latin America: Chile and Argentina. In Europe: Portugal, Spain, Greece, Ireland, and more recently Poland and Hungary. What do these countries have in common? Progressively greater openness to international trade and investment.

  • Who are the next winners? China, India, Mexico, Turkey and even Egypt. What are their policy foundations? Macro economic stability, private markets, and economies that are open to world markets.

  • What about the United States? We enjoy record prosperity. The three great drivers of our golden age are a flexible economy, information technology, and an open economy. Today, unemployment is 1.5 percent below what economists widely thought was the inflation threshold (the famous NAIRU of 5.5 percent - supposedly the Non-Accelerating Inflation Rate of Unemployment). The figure of 1.5 percent below yesteryear's NAIRU represents 2 million more employed than what was thought possible.

  • An open economy permits a high-pressure, high-employment economy. If future research shows that the open economy is responsible for just a fifth of the unemployment drop below the old NAIRU threshold, the open economy should be credited with permitting demand pressure that created 400,000 jobs. This is a conjecture. We need further research to nail down the precise connection between the open economy and price stability.

  • What has already been demonstrated, time and again, is that the open economy creates better jobs as capital and labor move to the sectors where they are most productive. On average, U.S. export industries pay about 15% higher wages, or about $4000 per worker, than the rest of the economy. An open economy enables poor countries to grow at least 1 to 2 percent faster per year than a closed economy.

  • Despite these proven blessings, globalization in general and the WTO in particular have attracted vocal criticism.

  • The first common criticism of globalization in general and trade in particular: greater inequality in the world at large and the United States. Fact one: the countries that have stalled in the last three or four decades are those that have not embraced the global economy, stable macroeconomics, and private production—notably Russia and many countries in Africa, Central Asia, the Middle East, and South Asia. World inequality is widening because these countries are sinking or stagnating. Fact two: in the United States, in an era of incredible technology, the college premium (higher first job wages paid to college graduates as contrasted with high school graduates) stopped growing in 1994. Gloomy forecasts of ever-larger U.S. wage inequality lost their factual foundation 6 years ago.

  • A second common criticism is directed at globalization: societies do not do enough for losers. Every dynamic economy will have losers - from restructuring, from new technology, from open markets. The central issue is whether the economy is creating new positions, at better pay, so that losers can become winners. The United States is creating these opportunities. So are many other countries that have embraced the global economy—from Australia, to Chile, to Ireland. But even successful societies should do more, through public policy, for losers. We should have wage insurance in the United States. We should spend public money buying farmland from willing sellers and dedicating that land to environmental preservation. Other countries face similar challenges.

  • The WTO plays a vital role in establishing and enforcing the rules of global commerce. Is it perfect? Of course not. But my colleagues on this panel, Lori Wallach and Alan Tonelson, are not seeking to improve the WTO. They are seeking to destroy it and start over. Alan wants to base trade policy on power, not rules. Lori wants to "prune" the WTO back to the roots that existed in 1980. These counsels amount to the discredited approach of the Vietnam era: destroy the village to save it.

  • No one on the open markets side of the debate is satisfied with the system. The WTO must evolve to meet the challenges of markets. I have urged major changes in the WTO: open panel hearings, improved representation of country groups in WTO meetings, and a totally new approach for environmental and labor standards. At the same time, the WTO must carry forward its central mission of reducing barriers to trade and investment. Barriers are still formidable, protecting the U.S. market, protecting the European market, and protecting Japan, and protecting nearly every other country. That's why internal trade - the great engine of specialization, productivity, and prosperity - is five to ten times as large within countries as between countries.

  • The difference between my prescriptions and those of my colleagues on this panel is a difference of quality, not degree. The world trading system is one of our most successful social institutions. I want to improve it. I want to welcome far more trade, and with more trade, improved living standards in rich countries and poor countries alike. I do not want destroy the system, thereby inviting endless new trade barriers that will impoverish us all.