Asia-Pacific Perspectives on the Future of the World Trade System
by C. Fred Bergsten, Peterson Institute for International Economics
Transcript of portion of Panel 1, Asia-Pacific Perspectives on the Future of the World Trade System, of the East-West Center / US Asia Pacific Council 8th Annual Washington Conference, Washington, DC
May 23, 2011
It’s a great honor to be included on this panel as the only one who is not a trade minister. That puts me at a disadvantage in terms of speaking authoritatively. But maybe it puts me at a slight advantage in terms of speaking frankly. I will note that all three of my fellow panelists are distinguished trade economists, and therefore I do feel akin to them and somewhat on a par with their previous incarnations.
In addition, I’m the only American on this panel, so I have taken it upon myself to present a view from the United States. Note that I say a view from the United States, not the US view. As those of you who know me are aware, I will speak my own mind and offer my own thoughts on these topics. But I do think they will be similar to the views of the current administration and Congress about what could loosely be described as the "current US view" on the range of trade issues we are addressing today.
I would like to suggest that at this time, there are four basic elements in a US view on trade. The first of those four, I’m afraid to say, is that Doha is dead or at best on life support.
I deplore that outcome because I have been a strong supporter of the Doha Round. But I do think the multilateral system and the World Trade Organization (WTO) will survive very effectively even if the Doha Round fails. It would be better if Doha succeeded. But I think the system will survive without it.
The best evidence is that Doha has been on life support for at least three years, some would argue longer. But the WTO system continues to be very robust. The framework Tim (Groser) described about how everything floats in a multilateral sea is correct. It would be tragic if the multilateral system were to disintegrate. But I think it is sufficiently strong and robust to continue even if the Doha Round does not proceed.
I won’t go into the specifics of why Doha is on life support or worse. Rather, I will simply explain why that is the perception in the United States. The chief reason is that the deal is so small. At the request of WTO Director-General Pascal Lamy, the Peterson Institute for International Economics did a comprehensive study on the economic impact of the Doha Round, which we published over the last year. Our study showed that the total gain to US exports from all arrangements now on the table in the Doha Round would be $6 billion per year. In short, it is so small you cannot even see it.
Of course, we proposed adding services, sectoral agreements, and trade facilitation to beef it up to a level that would be significant. But the real truth is that the deal on the table is not very big. The political result of that is that American business, traditionally one of the strongest supporters of multilateral trade liberalization in the world, is far more interested in the US-Panama Free Trade Agreement (FTA), not to mention the FTAs with Colombia or Korea, than it is in the Doha Round. No business leaders have lobbied the Congress in support of the Doha Round for the last three years.
Members of Congress show no interest in the Doha Round and neither does the administration. Unless the deal can be substantially increased and made relevant and worth fighting for, I’m afraid that despite all the efforts of our friends at the negotiating table in Geneva and elsewhere, the Doha Round will continue in this state of suspended animation. As I say, I deplore it, but I think we have to accept this as a very widespread view in the United States at this time.
The second element of the US view on trade concerns China. China is now a major, if not the major, challenge to the world trading system. It is running by far the biggest surplus. It does so in part by cheating. Beijing keeps China’s exchange rate 20 to 25 percent below any concept of equilibrium through intervention in the currency markets to the tune of $1 billion to $2 billion per day. Beijing has allowed the rate of the renmimbi () to increase a bit against the dollar over the last six months. But because the dollar has depreciated against every other currency, there’s been no increase in the real effective rate of the renminbi.
So China’s huge surpluses have fueled an understandable concern about unfairness because Beijing is cheating. It is violating the IMF rules and WTO Article XV—all of the rules that say thou shalt not competitively devalue and thereby gain an unfair advantage in trade.
Others would say China pursues additional policies, such as the indigenous innovation policy, government subsidies, and procurement rules, which also deviate substantially from international norms. That is another tragedy. China brilliantly integrated its development strategy into the world economy and, indeed, joined the WTO under the leadership of Zhu Rongji and Jiang Zemin in order to use the global rules to promote domestic reform. But a decade later we don’t see that same attitude.
China gains more than any other country from the open global trading system. Its trade-to-GDP ratio is double that of the United States’ and triple that of Japan’s. It is one of the most open economies in the world. It is not festooned with protection. It is highly open, and it has benefited enormously. China therefore has a huge interest in maintaining and strengthening the openness of the global trading system. But where is it in terms of presenting that position and furthering the outcomes we need?
I think it’s fair to say none of us at this point have an answer to the China challenge, which will become ever greater as it grows at 10 percent and the United States, in comparison, grows at 3 percent, and our friends in Europe and Japan grow at 2 percent or less.
The third element of the US view on trade relates to the aggressive pursuit by Asian countries and the European Union of regional and bilateral trade agreements. Although it is not their fundamental intent, all of these agreements will discriminate against the United States. Consequently, the United States has a major defensive interest in taking steps that would at least offset the adverse impact of the preferential arrangements being concluded everywhere else.
That’s why President Obama, despite his desire to avoid trade issues, felt that the United States should join the Trans-Pacific Partnership (TPP) negotiations. I’ll come back to the TPP in a moment because I think the outlook is quite optimistic.
But the reality is that other countries are making trade deals. As long as Washington stands aside from most of those deals—as has been its practice during the last few years—it will be increasingly on the short end of the preferential network around the world, which will adversely affect the United States. This is particularly important as the United States tries to expand its exports, reduces its huge trade deficit, halt the growth of its net foreign debt—already by far the largest in the world—and generally try to support the G-20 strategy aimed at rebalancing the world economy by rebalancing its own internal economy.
The fourth element of the US view on trade strays into geopolitics. In part related to the previous point, the United States realizes that it must pursue a more active and aggressive trade and economic policy toward Asia, or it will become increasingly irrelevant in the region.
Some of you may know the famous story about President Obama’s visit from former Singapore Prime Minister Lee Kuan Yew in November of 2009 just before he went to Asia. Lee said very bluntly, "Mr. President, if you continue to sit on the sidelines like you’re doing, China will have all the running in Asia and the United States will increasingly be excluded from the most important region in the world." That view got through to President Obama, and it also resonates with congressmen, businessmen, and others.
So the combined influence of increased economic discrimination against the United States from preferential pacts elsewhere and geopolitical interests requiring an activist stance toward Asia has mobilized the United States to pursue many of the policies that we are discussing today.
Fortunately, in my view, there is one answer that addresses all four concerns underlying US thinking about policy toward the Asia Pacific. That would be the TPP negotiations as a stepping stone toward a Free Trade Area of the Asia Pacific (FTAAP). As stressed by Tim Groser, the FTAAP could consolidate regional agreements and head off further bilateral proliferation, such as a US-Japan Free Trade Agreement, which is inevitable in light of the conclusion of the US-Korea Free Trade Agreement, the pending Japan-India agreement, and maybe even a Japan-EU agreement. Those bilateral accords are inevitable unless a broader regional consolidation compact can be achieved.
TPP also offers a significant response to the China challenge. If a high-quality agreement can be concluded and additional Asian nations join the TPP, particularly Japan and Korea, this ultimately would pose a huge challenge to China. China would not want to be left out, which likely would lead to tricky negotiations. But if the rest of the group agrees to a high-standard accord, this would serve as a big source of leverage in dealing with China on heretofore very problematic issues.
I also would argue that successful pursuit of TPP en route to the FTAAP is the best prospect for restarting serious multilateral negotiations in the WTO. Mari (Pangestu) noted how APEC played a critical role in bringing the Uruguay Round to a successful conclusion in 1993. But it was not because APEC was a cheerleader for the Uruguay Round. It was because, at the Seattle summit ( APEC’s first) in 1993, APEC raised the prospect of adopting goals aimed at liberalizing trade and investment throughout Asia, which, in fact, it would do the following year by setting forth the Bogor Goals.
This, in turn, caused Europeans to worry about the prospect of being excluded from an Asia-Pacific economic bloc. They quickly realized that they had better try to head off that outcome by shoring up the global system. After three years of blocking the successful conclusion of the Uruguay Round, the Europeans agreed in the month following APEC’s Seattle summit to bring it to a successful conclusion. European negotiators told me flat out that was the reason.
I think Mari’s point is right, but it means that APEC cannot stand back and bring the Doha Round to a successful conclusion by cheerleading. Rather, APEC must take actions of its own to pursue the liberalization process in precisely the way Tim Groser described, by building on the Australia-New Zealand agreement to the P4 agreement, building on the P4 to the TPP of nine, and building on the TPP of nine to a TPP of eleven, to ultimately realize the FTAAP.
That is the process I initially described as competitive liberalization, which was a concept of the APEC Eminent Persons Group 15 years ago. The process involves ratcheting up the pace of liberalization, broadening the groupings involved, and in so doing, bringing real economic pressure—not cheerleading—on outsiders to get inside the tent. And those outsiders recognized that if they did not try to get inside the tent, they would be in deep trouble.
At the time, many people thought I was pursuing an American strategy aimed at broadening NAFTA. Now I take some wry interest in the fact that competitive liberalization is being applied to the United States. And I applaud it, because without competitive liberalization we may not be able to overcome some of our internal difficulties and get back on the track of trade liberalization.
My final point is this: Many of you are asking, and quite justifiably, whether US domestic politics will permit the United States to participate in TPP! I suggest that there are two overwhelmingly compelling reasons why politics ultimately will not stand in the way.
First, the economic discrimination the United States will experience from other countries’ deals will persuade domestic critics to support TPP. Second, even a US congressman can understand the implications of what Lee Kuan Yew told President Obama. If the United States sits back and doesn’t engage with the most dynamic part of the world, China’s dominance will grow even faster.
After its usual kicking and screaming, I’m confident that the Congress, in fact, will allow the United States to proceed with the TPP. Not only this, I will go even further and suggest that by the time of the APEC summit in November, the Congress will have passed the three pending FTAs with Colombia, Korea, and Panama. Once these agreements are brought to the floors of the House and Senate under so-called fast-track rules, I have no doubt that Congress will pass them.
When President Obama hosts the APEC Leaders Meeting he will do so under somewhat similar conditions as President Clinton hosted the Seattle summit in 1993. Those of you who are veterans will remember that President Clinton went to Seattle two days after Congress passed NAFTA. He rode in on that stallion, so to speak, and said, "And now let us do the same thing in the Asia Pacific." I later asked President Clinton what he would have done if Congress had not approved NAFTA. He said, "Fred, I wouldn’t have been able to show up." And that’s probably the case.
But I think President Obama will go to Hawaii with an agenda that includes very strong, renewed support of trade. It will indicate that the United States has not lost interest in trade liberalization and trade expansion. As I said, we know we have to rebalance our economy in that direction. The problem has been that the Doha negotiations have not put enough on the table to be worth the effort, whereas these other negotiations, in fact, provide a much bigger payoff. That is why the FTAs and TPP have generated more interest.
This suggests that we should be shooting for the maximum possible outcome on TPP by the time of the APEC Hawaii meeting—not just a statement of principles or a framework. Rather, the nine countries currently participating in the TPP talks should strive for an agreement that would represent the first steps toward reducing barriers among themselves. In addition, they should issue a clear statement of intent to address more difficult barriers, including the behind-the-border types we have discussed today.
The TPP participants also should commit themselves to bringing additional member countries into the agreement, several of whom have already indicated a keen interest in joining, in order to accelerate momentum in favor of better coverage and more extensive and qualitatively superior agreements. This would serve to restart the liberalization process with APEC once again in the lead. Thank you.