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John C. Whitehead
Deputy Secretary of State
of the United States of America

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The story of economic summitry began with the breakdown of the Bretton Woods system in 1971, and the first OPEC oil price and supply shocks in 1973. The curtain went up on a new form of economic consultation, one that involved the highest elected officials of the world's foremost industrial nations.

Though the curtain was raised on economic summitry in the mid-1970 s, the prologue was being written and the stage was being set years earlier. The playwrights were scores of millions of the world's people, aided by the intelligent economic policies that rewarded effort and encouraged growth. Between them they made possible history's first global marketplace.

Yet for the sake of perspective, let us begin even earlier than the post-war period.

In one of his recent books, theologian Michael Novak reported that in 1795 four out of five French families devoted ninety percent of their incomes to buying bread to stay alive. Life expectancy in France in 1795 was 27.3 years for women and 23.4 years for men.

Nor were French conditions - despite the revolution and the chaos that followed dramatically different than the conditions found elsewhere in Europe. In the whole of Germany in 1800, fewer than a thousand people had incomes as high as one thousand dollars. Such statistics are all the more remarkable when one recalls that this was the level of prosperity on the world's most economically advanced continent.

In less than two centuries, conditions have improved so dramatically that such pervasive poverty is today scarcely imaginable to people living in modern advanced economies.

Two intellectual giant steps wrought this extraordinary improvement in living conditions. First, and most important, was the liberation of human initiative made possible by the realization on the part of governments that individuals had a right to the fruits of their labours.

Second, there was the crucial understanding that when wealth was invested in economic enterprises, rather than consumed in the purchase of luxury, sport, or trifles, more wealth might thereby be created.

This is what Walter Lipman was referring to some years ago when he wrote: for the first time in human history, men had come upon a way of producing wealth in which the good fortune of others multiplied their own...for the first time men could conceive a social order in which the ancient moral aspiration for liberty, equality, and fraternity was consistent with the abolition of poverty and the increase of wealth.

The increase of wealth - not only in financial terms, but also in improvements in health, life expectancy, and the decline in infant and child mortality - has been greater in our own century than any other.

At the same time, particularly in recent decades, advances in economics, finance, and technology have caused the world's nations, and especially the most advanced of them, to become evermore integrated. We see evidence of this new reality everywhere we turn. For example, consider the tremendous expansion in world trade. Since 1950, the volume of world exports has increased nine-fold, and the volume of world output has increased five-fold. As well, dramatic increases in international financial flows have accompanied the expansion of trade. Consider that the daily volume of foreign-exchange transactions, at over one trillion dollars per day, is about the same as the annual budget of the United States Government.

Consider also the growing international exchange of technology. It too is a mark of the extent to which national economies are increasingly integrated. Today over 40% of the students enrolled in engineering doctoral programs in the US are foreign students, as are over two-thirds of the postdoctoral engineering students. And as with technology, now production and manufacturing also spill over national boundaries. Consider for example that even North American General Motors automobiles consist of parts made in Brazil, Japan, Mexico, France, West Germany, Singapore, the United Kingdom, Italy, and Australia.

Economists have long asserted that an open international economic system accelerates economic growth. Open markets facilitate economies of scale, and allow countries to specialize in fields in which they have the greatest relative advantage. Yet the most persuasive arguments for an open system arise not from abstract reasoning, but from experience. Trade across borders and prosperity within borders are intimately linked.

The post-war successes of the United States, Canada, our Western European allies, and Japan have not been lost on the rest of the world. In 1960, the combined GNPs of the NATO countries exceeded those of the Warsaw Pact by some $2.5 trillion. This growth was possible because the Western European economies were relatively free to expand, while the ingenuity of the peoples of Eastern Europe and the Soviet Union were smothered by red tape, bureaucratic directives, and central plans.

Perhaps the most dramatic example of the success of market-based, open economies is the spectacular growth performance of the newly-industrialized economies of Asia - Taiwan, South Korea, Hong Kong, and Singapore. During the past 25 years, this group has grown at a rate exceeding 10 percent per year in real terms.

Despite their considerable differences in form of government, defence commitments, and political economy, each of these economies share two common traits. First, the governments have avoided the temptation to set prices themselves, thus permitting market-based allocation of their resources according to decentralized price signals. Second, they have maintained outward-looking development strategies based on the global marketplace. These four Asian nations are home to a mere two percent of the total population of the world's developing counties, and yet they account for over half the manufactured goods exported by all the developing countries of the world.

Nikita Khrushchev used to predict that it would be in Asia that Communism would win the world's masses. As it happens, it has been the success of Asia's newly-industrialized countries that has dimmed the attraction of Marxist ideology. Many developing countries that adopted the import- substitution policies and central planning in decades past have begun to rethink their approaches.

Perhaps the most dramatic changes are occurring in China. After nearly thirty years of seclusion, China has opened its borders to trade, investment, technology and tourism. The Chinese economy has responded: From 1980 to 1986, it grew at a real rate of 8.6% per year.

But the story does not end here. For just as the weight of historical evidence is winning the intellectual battle for open markets, open-market policies have come under attack in some of the world's most developed industrial countries. The large trade imbalances of the 1980 s have fueled rising concern about, and frustration with, the world trading system. Protectionist measures have gained support as a misguided remedy. And recently, in the United States, alarm over foreign investment has led to proposals to regulate, or even limit, such investment. Such proposals may be well-intentioned, but they are woefully misguided.

It would be tragic if at this juncture the industrialized countries were to turn their backs on the open economic arrangements that have contributed so much to our own well-being, and lighted the way to future prosperity for the less-developed nations.

Policymakers in our democracies face conflicts between the generalized benefits that accompany global economic integration, and the interests of particular domestic constituencies. Furthermore, the integration of the world economy over the past forty years has markedly increased the intensity of competition, and forced structural change with which it is sometimes quite difficult to cope. In such circumstances, policies that soothe powerful domestic interests by promoting isolationism and claiming to advance self- sufficiency have a natural, but superficial attractiveness.

What our current situation requires, therefore, is genuine statesmanship: the overcoming of fragmenting forces of domestic interests for the greater good of our national and international economic well-being.

But a return to economic nationalism must be avoided at all costs. The United States and its trading partners are currently engaged in a wide range of activities to preserve and strengthen our open international economic arrangements. The most important effort involves the current Uruguay Round of multilateral trade negotiations (MTN), conducted by the General Agreement on Tariffs and Trade, or GATT.

GATT has played a major role in lowering the average tariff on manufactured goods among major countries from about 50 percent in the 1930 s to roughly five percent today. But the popularity of trade agreements that are illegal under GATT rules, as well as the falling share of world trade conducted under GATT, have led some to conclude that GATT is not worth salvaging. Clearly, it does not command the respect that other international institutions, such as the World Bank and the International Monetary Fund, do.

In order to revitalize the GATT, one must first improve its institutional framework. Perhaps most important, the existing consensual method of settling disputes should be replaced with a system that is decisive, expeditious, and binding on the disputants.

Second, GATT needs a surveillance mechanism, to provide international scrutiny and discipline of member countries trade policies. The surveillance function should, furthermore, include developing countries, which heretofore have been accorded special and differential treatment under GATT. It is essential that the developing countries, and especially the newly industrialized begin to shoulder the full responsibilities of membership in GATT.

In addition, the GATT framework must be extended to new areas, such as trade in services. In the past, GATT rules have been applied primarily to manufactured goods. Yet the arguments that support free trade in goods apply equally to services. Furthermore, liberalization of trade in services will promote free trade in goods, since the two are closely linked.

Although many developing countries initially opposed the inclusion of services in the Uruguay Round, it now seems likely that a code on services can be negotiated. Services account for a growing share of most economies, in developing as well as developed countries. In Mexico, for example, services now account for about 40 percent of the gross national product. A number of developing countries have relaxed their opposition to a code on services, upon realizing that many LDC's enjoy comparative advantages in service sectors. The newly-industrialized Asian countries, for example, are internationally competitive in such fields as shipping, financial services, and construction.

Agricultural trade is another area that must, at a minimum, be brought under normal GATT discipline. Many nations, particularly developed nations, have pursued farm policies that are inconsistent with liberalized trade, in order to achieve other goals, such as income maintenance for farmers.

Restrictive agricultural policies impose tremendous costs on consumer and taxpayers - costs that far exceed the gains to farmers. By some estimates, world GNP could increase by at least $40 billion annually if the major industrial countries were to partially liberalize agriculture.

The skyrocketing costs of current agricultural policies have created an opportunity to reach an agreement on agriculture in the new GATT round. Last year, the United States proposed the gradual elimination, over ten years, of all subsidies that distort agricultural imports. The US initiative was consistent with proposals put forward by Canada, as well as by the Cairns Group, an informal organization of fourteen self-proclaimed nonsubsidizing nations, including major exporters from both developed and developing nations. A final issue in the new GATT round addresses the protection of intellectual property rights. This is an extremely important matter, not only for nations such as the United States and Canada - who are pioneering the technologies of tomorrow - but also, ultimately, for future generations throughout the globe, who will benefit or suffer according to whether technological innovation (not to mention artistic creativity) is rewarded or stifled. Unfortunately, copyright piracy is widespread in many parts of the world, and in many countries patents are violated with impunity.

According to the US International Trade Commission, intellectual property infringement costs some $20 billion annually in lost sales, but the ultimate losses from intellectual piracy, which stifles the very incentive to innovate, cannot be measured.

The Canada-United States Free Trade Agreement (FTA) has provided an example for worldwide trade liberalization under GATT. The FTA highlights the unique relationship between the US and Canada without disadvantaging other countries unfairly. It is the first major agreement to establish rules for trade in services. It establishes useful precedents for multilateral negotiations and encourages trade liberalization worldwide. Its provisions regarding services, investment, elimination of export restrictions, and efficient resolution of disputes are especially instructive. The FTA has another strength. It can be adapted to a changing environment through consultations and mutual agreement.

Any discussion of trade liberalization and the Uruguay Round is incomplete without mention of the Trade Bill now before the US Congress. there is great interest here, and elsewhere, in the omnibus trade bill, in large part because it was originally highly protectionist. As Congress looked at the legislation more closely, it eliminated many, but not all, of the most objectionable provisions. Congress continues to make revisions, but it still contains some provisions the administration opposes, such as mandatory sanctions against non-US companies in cases involving the export of controlled goods or technology to the Eastern Bloc. Such sanctions would weaken, not strengthen, the security of the West because they would undermine support for multilateral efforts to control technology transfers.

Because such troublesome provisions remain, President Reagan is faced with a difficult decision - whether to veto this bill. Congress must decide whether it will override a Presidential veto. Few pieces of legislation have received such widespread attention in the US. The principal goal is to ensure that the resulting legislation is not protectionist in nature.

Important as they are, renovating GATT and liberalizing trade policies are not only concerns. There is a need as well to move toward a free market in international investment. Doing so, will contribute to more efficient use of investment capital, and at the same time promote more favorable circumstances for improved trade in goods and services. A lessening of restrictions on foreign investment will greatly assist developing countries as they strive for economic growth.

One of the reasons for the LDC debt problem is that developing countries financed long-term equity investments with short-term loans from international banks. Had they relied on foreign investment capital instead, they would have avoided, or dramatically lessened, the debt-servicing problems that resulted from the adverse developments of the early 1980 s.

One of the goals of US policy, therefore, is to encourage conditions favorable to greater investment in developing countries. One initiative - the recent creation of the Multilateral Investment Guarantee Agency - will insure investments in member countries against expropriation, political violence, and in cases where there is breach of contract or earnings are not convertible. An end is also sought to such restrictions on trade-related investments such as domestic-content regulations, export requirements, and exchange controls. Furthermore, since 1982, the United States has signed bilateral treaties with ten developing countries as part of our efforts to promote growth-oriented policies and a more favorable investment climate.

Economic Summits, such as the one Toronto will host in June 1988, reflect the increasing desire among all members for greater coordination of international policy than existed - or, indeed, was necessary - in decades past. It is one of a number of innovations of recent years intended to help deal with the new reality of a global economy.

International policy coordination has made considerable progress during the past few years. As each trading nation experiences effects resulting from the decisions of other trading partners, the usefulness of consultation and policy coordination becomes increasingly clear. Of course, there are still those who maintain that such matters as monetary and fiscal policy, and structural questions involving labour markets and subsidies, are strictly domestic issues. This is an understandable, but unnecessary, position. In our increasingly integrated international economy, it is in everyone s interest that decision-makers be aware of the impact of their economic policies on other nations.

Recognizing this, the leaders of the Summit countries have encouraged the evolution of a mechanism for economic policy coordination with the participation of the International Monetary Fund. This institutional mechanism is working.

When the leaders of the Group of Seven countries meet, monetary and fiscal policy grab headlines. Yet these macroeconomic issues do not exhaust the agenda for policy coordination. Over the past several years, for example, the OECD has pioneered analysis of microeconomic, or structural, issues, with particular attention to their effects on the functioning of market economies. Since 1985, successive OECD Ministerial meetings have emphasized the importance of structural issues.

In other coordination efforts, the United States and its allies are attending to economic security issues. One effort has been to strengthen the Coordinating Committee for Multilateral Export Controls (COCOM). COCOM is emerging from the shadows in which it spent its first years of existence. At a meeting in January, the member countries agreed to improve coordination and enforcement of the rules governing the export of high-technology products to the Soviet Bloc. Particularly noteworthy have been the measures taken by Japan in the wake of the Toshiba machine affair. Tokyo has expanded its export-screening staff and lengthened prison terms for violators.

All remember the difficulties that followed the interruption of oil supplies in the 1970 s. In another example of coordination, the Western countries, through the International Energy Agency, have undertaken an oil stockpiling effort to guard against the disruptive effects of future temporary interruptions of oil supplies.

Assistance for Third World economic development also requires international cooperation. The developing countries benefit from a system of international institutions that provide them with financial assistance and technical support. The World Bank, established initially to channel reconstruction funds to Europe, is the preeminent institution for development lending.

Recently, the executive directors of the Bank agreed to a general capital increase of approximately $75 billion to support continued lending to developing countries. Furthermore, in recent years the Bank has enlarged its efforts to provide policy advice and assistance to client nations. In addition, it has joined with the International Monetary Fund to encourage sound, market-based, economic policies conducive to growth in developing countries.

All our efforts to strengthen the international economic system have only one thing in common. They will succeed only if all who benefit from the system cooperate to improve it.

The United States led the world economy in the post-war period, with a GNP equal to 60 percent of the combined GNP of the OECD countries in 1950. Today GNP of the United States equals roughly 37 percent. Some say this decrease in the US share of world trade and output is an indication of America's decline. Rather this trend demonstrates the growing strength of international trade and this strengthening is good for the United States. The growing roles that the European Community, Japan, and Canada share in world production and trade demonstrates their contribution to a healthy global economy. That growth brings with it responsibility, that Canada and others have assumed, to help foster a more open and efficient world economy.

This is the responsibility of developed and developing nations alike. As developing countries, especially the newly-industrialized countries, continue to advance, they must gradually accept the responsibilities of full membership in the global economic community.

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