The United States, Japan, and the World Trade Organization
Ambassador Thomas S. Foley
Rembe Distinguished Lecture
University of Washington School of Law
November 16, 1999
Introduction
I am delighted to join you today for the annual Rembe Distinguished Lecture. This is a particularly welcome time for me to be able to return to Seattle, two weeks before the World Trade Organization holds its Third Ministerial Conference here.
It is particularly fitting that the WTO will meet in Seattle, and that I have the opportunity to talk about the WTO here at the University of Washington Law School. No state in the Union has a greater commitment to international trade than does Washington. This state ranks 15th in population, but fifth in exports of goods. With only about 2 percent of the nation's population, Washington accounts for approximately 6% of our exports – and 11% of our exports to Japan. Since 1994, when the World Trade Organization came into existence, Washington State has increased its exports of goods by 57%, while the U.S. has increased its exports of goods by 33%.
The picture has not been quite as good with our trade with Japan. Since 1995, Japan has sunk into its worst recession in half a century, leaving it unable to import as much from the U.S. or any other country. Fortunately, while overall U.S. exports to Japan have shrunk by ten percent during this period, Washington state has been able to hold on to more than its share of that smaller export pie, losing only about six percent.
Both this University and this law school have a large stake in the expansion of U.S. trade, particularly with Japan. When I hosted the Tokyo Chapter of the alumni association, 215 people attended on a muggy July evening. The vast majority of them were Japanese. That presence of the University of Washington in Japan is a powerful force for understanding between our two peoples.
When Professor John Haley visited Tokyo last spring, he brought the surprising statistic that there are more graduates of this law school in Tokyo than in any other city in the world save Seattle itself. Your program in Japanese law is widely regarded as one of the most distinguished at the entire University. And one of the major exports of the University of Washington that does not appear on anyone's trade statistics is Foreign Service Officers. At our Embassy in Tokyo alone, eight members of my staff have studied at the University of Washington, including two who passed through Condon Hall en route to the State Department.
Economic and Political Benefits to the U.S. of Open Trade
Let me start my lecture today from a simple premise: Liberalizing trade serves our most important economic and political goals. Increased trade has brought rising prosperity for the United States. In the 1990's, we have now enjoyed an unprecedented 8½ years of continuous economic expansion. Our open economy has created millions of new jobs. Jobs based on exporting goods pay an average of 13 to 16 percent more than the average U.S. wage. Our openness to imports has fueled competition and innovation. The result has been a more efficient economy with almost no inflation and long-term interest rates that are about two percentage points below where they were at the beginning of this boom.
From 1950 to 1998, the world's gross domestic product rose about sixfold, while merchandise exports rose 15-fold. The fundamental principle behind this growth in trade has been comparative advantage. As opportunities to export have increased, countries have been able to concentrate their economies in what they do best. One need look no further than Seattle's best-known corporate names – Boeing and Microsoft – to see a demonstration of the truth of this idea.
The result has been that both producers of goods and consumers are better off, and the choices available to them have increased. More open domestic markets have been powerful incentives to firms to increase their efficiency. Efficiency, in turn, has contributed to economic growth and rising incomes. The statistics show this clearly: in the past decade, countries that have been more open have achieved double the annual growth of others.
Politically, we are far less likely to be drawn into a conflict if the nations of the world have strong economies and rising standards of living than if they are financially unstable and unconnected. One of the important causes of instability during the Cold War, I would suggest, was the lack of East-West contact through trade. Since the fall of the Berlin Wall, though, the patterns of trade in the nations of Central and Eastern Europe have shifted dramatically. Now, 70% of their trade is with the EU, and I would suggest that Europe north of the Balkans is a good deal more stable now than it was a decade ago. Trade is not just an engine of growth. It is an engine of peace.
U.S.-Japan Trade Relations
Given the importance of trade, it is not surprising that trade has played such a central role in relations between the United States and Japan. It was trade that first brought Americans to Japanese shores in search of coaling stations for our rapidly expanding commercial and military fleet. Trade quickly grew, and in the early part of this century, the U.S. and Japan were already major trading partners.
The Second World War interrupted that progress. But in the wake of that terrible conflict, our two nations again strove to assure that Japan took its place as a full-fledged member of the trading community, as it entered the GATT and the OECD with strong American support.
However, concerns about trade imbalances between the U.S. and Japan arose as early as the 1960s, leading to growing pressures to open Japan's market. Those efforts focused first on eliminating trade barriers – tariffs and quotas – through successive GATT rounds, and lowering bars to investment through OECD disciplines.
That emphasis shifted in the mid-1980s when the growing trade imbalances between the U.S. and Japan brought us to a new, much intensified phase of our trade relationship. Greater emphasis was placed on bilateral trade talks with Japan, in part the result of a failure to launch a new trade round in 1982. Moreover, bilateral market access negotiations moved beyond eliminating border barriers to trade to a detailed scrutiny of the domestic structure of Japan's economy. This process gained impetus with the Market-Oriented Sector Specific (MOSS) talks of the Reagan Administration, then moved to the Structural Impediments Initiative (SII) of the Bush Administration and culminated in the Framework Agreement of the Clinton Administration. In this Administration, we have concluded 37 trade agreements with Japan, ranging from telecommunications to autos.
Today, the problems facing our exporters of goods and services – and thus our negotiators – are complex and difficult, requiring extensive bilateral and multilateral efforts. Bilaterally we are:
- monitoring and enforcing our trade agreements in sectors from flat glass to insurance;
- creating new commercial opportunities for U.S. companies through new market-opening regulatory reforms in sectors such as pharmaceuticals, housing, financial services, energy, and telecommunications under the Enhanced Deregulation Initiative. This Initiative is also addressing a number of structural issues with the Japanese economy, such as transparency in Government decision-making, distribution, and competition policy.
- Finally, we are improving the environment for American investors in Japan under the U.S.-Japan Working Group on Investment.
I predict eventual success, not just because our arguments make economic sense, but because there is a clear and growing domestic constituency in Japan that recognizes how monopoly prices and restrictive practices have raised costs and slowed Japan's participation in the Internet society. Keidanren, the leading Japanese business organization, recently put forward a list of deregulation proposals twice as long as ours.
Bilateral and Multilateral Forums
Our bilateral efforts at opening markets and creating export opportunities mirror our multilateral efforts. One of the major patterns of our trade relations with Japan over the last 30 years has been that we begin by discussing our differences bilaterally, then take those issues to multilateral fora where the gains can be codified and shared with more of the world's nations. As we negotiated lower tariff rates in the 1960's and e70's, successive GATT Rounds endorsed those reductions. Now, as we address the difficult issues in the Deregulation Initiative, we find the pattern repeating itself. I am struck at how much of our proposed agenda for the next WTO Round finds its roots in the issues we are discussing bilaterally. In much of our agenda for the Round, we and the Japanese share great common interests and want to promote common values. In others, inevitably, we have differences.
Results of the Uruguay Round
The most recent great multilateral exercise at opening the world's trading system, the Uruguay Round, lasted from 1986 to 1994. It brought whole new dimensions to the way the world trades. The nations of the world that concluded the Marrakech Agreement made a number of strides:
- They created the World Trade Organization
- They brought intellectual property rights under multilateral rules.
- They agreed on a first set of rules to govern international trade in services.
- They began to define principles governing international investment.
- Agricultural quotas were phased out in favor of tariffs.
The United States and Japan have both benefited greatly from the results of the Uruguay Round and stand to benefit more from the new Round. Most importantly, exports have expanded for both nations, even in the face of a severe global financial crisis. U.S. exports of goods and services, for example, have expanded by 33% since 1994. For Japan, one of the principal benefits has been a reduction in industrial tariffs by an average of one-third worldwide. For a nation that has based its economy on manufactured exports, that is a hugely significant result. The IMF estimated that the average tariff Japan's manufactured exports faced following the Uruguay Round was less than ten percent.
Another important result of the Uruguay Round was the creation of the Dispute Settlement Understanding. Now, nations can bring their trade disputes to neutral arbitrators in Geneva. The U.S. and Japan have been, along with the European Union, active users of this new system. The U.S. and Japan both value compliance with the rules of the WTO. The fact that we have the neutral forum of the WTO available to us has been an important factor in addressing our differences.
Shared Values
To build an even stronger world trading regime that can adapt to fast-paced change, our two nations are working together to launch a new WTO Round next month that will set the international trade agenda for the next decade. We will have areas where we disagree – agriculture and antidumping, to name two – but as two of the world's largest trading nations we also share the mutual goal of opening markets and deepening and broadening the multilateral trade framework.
As the host of the Ministerial Conference that will launch this Round, we have a special responsibility to help shape the agenda, not only for this meeting, but for the negotiations to follow. Japan, as the world's third-largest trading nation, also bears a heavy responsibility to help shape a successful Ministerial and following Round. Let me suggest some areas where we have specific common interests, and then talk about highlights of the wider agenda that the U.S. is proposing.
Common Interests at Seattle
The United States is proposing that WTO members sign at the Seattle Ministerial a new agreement on transparency in government procurement. Governments purchase $3.1 trillion in goods and services annually. By committing all WTO members to common commitments that will promote principles of fair and honest government, we will take a big step toward making those principles the accepted way of doing international business.
Some nations are reluctant to support this proposal because they fear that it will be a step toward guaranteeing other nations access to their Government procurement markets. This proposal, however, does not seek to go that far. It seeks only to establish openness and honesty as agreed principles of the way Governments buy the goods and services they need.
Japan shares this goal. While we have not yet agreed on specific language, I am confident that within the next two weeks, we, the Japanese and other Governments will together find enough common ground to present to the Ministers a strong Agreement. Signing such an agreement at the beginning of the negotiation would send a strong signal that the world's trade ministers are serious about the Round.
Electronic commerce is an area as important for the way it symbolizes the new ways people will buy goods and services as it is for the dollar volumes it already represents. At the end of the Uruguay Round five years ago, the word "e-commerce" scarcely existed. Three years from now, it could be worth $1.4 trillion in the U.S. alone. It is growing so rapidly because it is growing tax-free. The nations of the world have agreed to keep the status quo – not taxing e-commerce transactions – until now. We are proposing that this ban be extended indefinitely when the Ministers meet. Japan and many other nations share our position, and we hope the Ministers will be able to sign an agreement here in Seattle that symbolizes the willingness of the world to embrace this exciting technology.
Projecting the growth of e-commerce is at best an inexact art. The Japanese government put the value of electronic commerce in Japan last year at $78 billion. By 2003, they estimate it could grow more than eight times, to $650 billion. Given the strong position U.S. industry has in all phases of electronic commerce, that growth will be worth literally billions of dollars to American firms and American workers.
Also in Seattle, we hope the Ministers will be able to adopt the "ITA - 2" Agreement that will make more information technology products tariff-free. Japan and the United States are leading producers and users of this technology, and we both see the benefits that broader access to it brings, particularly to developing countries. The export potential for the United States is clear when we consider that in Japan, there is one cell phone for every three people: 43 million cell phones for 130 million people. Japan is a society that embraces telecommunications technology, and that means the export of billions of dollars of equipment and services as the old ways of doing business give way to new, more efficient ones.
The Next Three Years
Beyond Seattle, in the negotiations, we are proposing an ambitious three-year timetable. By setting a time limit for ourselves at the outset, we believe we can avoid making this Round another marathon like the Uruguay Round. We – and many others – do not believe we need that scope of negotiation again so soon. To help keep that goal realistic, we propose that the Ministers set some benchmarks for the negotiators and meet midway through to assess progress.
Our goals for the Round itself are twofold. Building on the achievements in Seattle and taking advantage of the impetus they will give the negotiations, the U.S. will:
- Focus on opening international markets for agriculture, goods, and services and ensure the effective implementation of the rules of the WTO.
- Continue the institutional reform of the WTO to make it more open and accountable to citizens and workers, promote sustainable development, and better integrate poorer countries into the international trading system.
Agriculture
Just as electronic commerce – the world's newest business – is on our agenda for the new Round, so is farming – the world's oldest business. The United States is the world's largest exporter of agricultural products. One in three acres planted in the United States is growing food for export abroad. We need to move forward fairly but aggressively to expand opportunities for our farmers and ranchers.
- First, we must eliminate export subsidies. Farmers around the world should have a chance to compete based on the quality of their goods, not on the size of other countries' grants. In the European Union, however, half of the total budget is spent on agricultural subsidies. This protection of producers lowers standards of living for consumers who must pay too much for their food and for producers who have less incentive to become more efficient.
- Second, we must lower tariff barriers. Global agricultural tariffs are still too high, averaging 50%.
- Third, we must work to reduce domestic supports that distort trade by paying farmers to overproduce and drive prices down.
- Finally, we should ensure that producers, consumers, and the environment can realize the promise of biotechnology. We should work to establish regulatory processes in this field that are transparent, predictable, timely, and grounded in sound science.
It is in agriculture where many of the toughest negotiations will take place. In Japan and in Western Europe, agricultural production is far less efficient than in the U.S., Canada and many other nations. I would suggest that a longer view of one's self interest – in improving the living standards of both farmers and consumers – will do much to lead to the success of this negotiation. We are prepared, as the largest trading nation in the world, to press for the lowered tariffs and export subsidies that will bring dramatic benefits to the developing nations of the world. I would suggest that Japan, as the second-largest economy in the world, bears a similar obligation.
Services
In the Uruguay Round, services were brought into the disciplines of the world trading system for the first time. That in itself was a major accomplishment, given the variety of services that are provided among the nations of the world. But the commitments made by the nations of the world were minimal. The importance of services in the world's economy, on the other hand, cannot be overstated. In the U.S., service industries add $6 trillion to our domestic economy – more than three-fourths of all domestic private-sector economic activity. Our service industries are highly successful exporters – our private sector exported $246 billion last year.
The world identifies us very much by the services we provide – our movies and music are among the most sought-after entertainment in the world. Our financial services companies have revolutionized the way people and businesses save, borrow, and invest. Even major industrial companies like Ford, IBM and General Electric earn more from providing services than they do from manufacturing.
In services, then, our negotiators must be forward-looking as in no other sector. Technology is developing so rapidly that they must negotiate principles for the delivery of services in ways that may not even exist yet. We seek to liberalize a broad range of sectors, including distribution, telecommunications, finance, audiovisual and environmental services. The traditional offer-and-request means of negotiating, however, holds only limited promise in this complex area, so we will be looking for a range of new ways to negotiate.
In the services negotiations, Japan has an opportunity to bring great benefits to its economy. Historically, its international services sector has been relatively weak. By embracing the trend to "globalize" services, Japan can give its domestic service providers the incentive to become more efficient. It can provide its consumers with a better standard of living. And with its highly educated work force and cutting-edge technology, it has the potential to become a major services exporter. Here, as in telecom, the outmoded old ways of doing business will eventually pass from the scene. By moving swiftly to embrace the new, Japan can improve the standard of living for its people and demonstrate its leadership.
Industrial Goods
Manufacturing generates a fifth of our gross domestic product and two-thirds of our exports. It employs more than 18 million Americans. Our goals for further liberalizing trade in goods in this Round are straightforward:
First and foremost, to ensure compliance with and enforcement of existing agreements. Those who suggest we should reopen the anti-dumping or subsidies agreements should rather turn their energies to ensuring that these agreements are fully implemented before seeking new agreements.
Second, to reduce tariff and non-tariff barriers, to develop new sectoral agreements, and to increase participation in existing agreements, including zero-for-zero tariffs and tariff harmonization.
We believe an important start toward this goal has been made in APEC, with the proposal to eliminate or reduce tariffs in eight important sectors provisionally at the beginning of the Round, to go into effect only upon completion. Having the Ministers sign such an important provisional agreement at Seattle would be the surest possible sign of their commitment to a wide-ranging and successful Round.
As major exporters of manufactured goods, the United States and Japan share important goals in this Round. Ministers from 16 APEC Member economies, including the U.S. and Japan, agreed in Auckland to work toward concluding an agreement in Seattle on the eight sectors. That package was a carefully balanced mix of sectors that would provide all nations with significant gains. No nation can expect to gain all it wants without giving up anything. In reducing tariffs on industrial goods as well as on fisheries and forestry products, the APEC proposal provided much enticement to developing countries to come into this Round. I hope forward-looking Japanese leaders will be able to move toward a more proactive stance that will provide benefits to all.
Trade and Labor
Let me now briefly also say a few words about our proposal for a Working Group on Trade and Labor. All WTO Members believe that trade should be conducted so that it improves living standards, increases employment, and raises the real income of workers. After all, without workers there can be no trade, and when those workers leave the factory or the field or the office at the end of the day, they become consumers.
But many workers and their representatives see the WTO as unconcerned with their interests. President Clinton has said that "working people will only assume the risks of a free international market if they have confidence that the system will work for them." For this reason, we are proposing that at the Seattle Ministerial Conference, the WTO establish a Working Group to take a hard analytical look at the linkages between trade and labor in a global economy. We also think that the WTO should work closely with the International Labor Organization, the ILO, in examining these linkages. Inviting the ILO to have official observer status at the WTO would open that communication further.
While some may fear a "race to the bottom" in which nations compete to have the lowest wages and weakest environmental standards, the evidence suggests this does not happen. Otherwise, why would the United States and Japan, two of the world's largest traders, also be two of its highest income countries? We and the Government of Japan share a commitment to the core labor standards that embody basic human rights and define the dignity of workers. We both recognize the important relationship between trade and labor. I am confident that the discussions we are having now will be instrumental in formulating an agreement that will bring labor issues within the WTO and demonstrate to working men and women that trade liberalization is not a threat to their well-being.
Conclusion
Last month, President Clinton set forth a vision for this Round: "We can expand the circle of opportunity, share the promise of prosperity more widely than ever, and in so doing also help to bring down walls of oppression in other countries. We can, in short, put a human face on the global economy."
I harbor no illusions about the amount of hard work ahead in this Round. What I have laid out here is an ambitious plan for just three years. We have, however, much to gain from a successful trade Round. Our major Latin American and Asian trading partners have average tariff rates three times as high as our own. We still struggle to open major markets for telecommunications and other services. Agricultural tariffs still cost farmers and consumers too much. We will need to work hard at the negotiating table, but just as much, we will have to work hard to educate our fellow citizens to appreciate the subtle but profound benefits of further liberalizing trade.
Thank you.