Speech – New Zealand Government

Let me start with a statement of principle. Its about the relatively open trade and payments system that we have inherited. It has flaws and shortcomings. There are many vulnerable developing countries at early stages of development that have …Hon Tim Groser
Minister of Trade

26 March 2013

Address to US Chamber of Commerce: WTO at the Crossroads

Let me start with a statement of principle. It’s about the relatively open trade and payments system that we have inherited. It has flaws and shortcomings. There are many vulnerable developing countries at early stages of development that have yet to enjoy its real benefits. For all that, this relatively open system has served three generations of our predecessors well.

This is not just an economic evaluation, though certainly the economic benefits of a system that protects export jobs around the globe, that protects and enhances the value of investments in agriculture, industrial goods and services linked into the global value chain are front and centre of the matter.

But it is more than that. There is a huge political return that comes as part of the deal. The decision of any nation to join the WTO, or the GATT before it, or any number of the new emerging regional trade and investment agreements, is a decision to abide by a system of international norms. These are often, and I think accurately, described as the ‘international rule set’. That has a vital political character.

Let’s be clear about one thing. Joining the international rule set is not like turning on a light. One day your country is outside the system playing fast and loose; the next day you are inside and you switch on the new international rule set and everything is clarified and everyone plays by the rules. No, it is not that simple. It is as much about the culture of observing a set of international rules and norms. With new entrants, this may take a little time.

With long established entrants, there is equally ample scope for cynics to point out the obvious gaps between ‘talking the talk and walking the walk’. But to put it mildly, no political system, domestic or international, works seamlessly – without jagged periods of disruption and inaction before a new consensus emerges on how it can move forward again. So, with all the qualifications we need to bear in mind, this relatively open trading system, of which the WTO is still the central point of reference, is a system that works. It is also, I insist, a system that is in trouble and worth fighting for.

A decision to participate in taking on international obligations, which will involve change, increased competition in your domestic market and new regulatory frameworks, is not an easy debate to manage in any country.

The most recent major economy to join the WTO was Russia. It took 18 years of negotiation, no doubt immensely frustrating for all the negotiators from the various countries who were involved. We also know it ended with a difficult and deeply contentious political debate to get the implementing legislation through the Dumas. Some Russian legislators even threatened – how serious it was I do not know – to try some of the Russian negotiators for treason. The after-shocks of this have not yet passed through their system domestically or internationally. Why should we expect it to be otherwise? Joining the international rule set is not, as I said, like flicking on a light switch that clarifies everything on day one.

It is no different with regional trade agreements. Consider Japan’s decision to request participation in TPP, one of the most recent decisions of real global consequence. The existing TPP members have set a high bar for participation in TPP – I am referring to the Leaders’ Statement of November 2011, chaired by President Obama in Honolulu and which sets out the objectives of TPP in very clear terms. This was, of course, prior to the entry of Mexico and Canada and prior to the formal request just received from the Government of Japan.

If I may return to an analogy I have used previously, we have decided to be rather formal and set in place a strict economic dress code for TPP. If you are only comfortable in loafers, jeans and tee shirts, fine, we get it. But please don’t knock at the door of this club. Jacket and tie are required inside. We have good reasons for this, borne out of experience with second rate FTAs.

We know this has not been an easy decision for Japan, a great economic power with which all TPP members, large and small, want to intensify their trade and investment linkages. It has taken over two years and intense consideration by successive Japanese Governments to make the decision to move from indications of ‘interest’ to a formal request to participate. Personally, I think this is a good sign. At the minimum, it indicates that Japanese leaders – in politics, the bureaucracy, business and other stakeholders – understand participation in TPP is not a small decision.

So none of this – whether it is about the WTO, TPP or other major regional agreements – is easy. It is heavy sledging politically because it is about change. And when it is about change, we all understand it is so much easier to identify likely losers from economic change than likely winners.

Trade of course is not the only source of economic change. Exactly the same applies to change from introducing new technologies, which can also be disruptive and therefore extremely controversial. There is an old saying that if certain people had been around when Benjamin Franklin invented electricity, they would have been opposed to it because of its adverse consequences for candle-makers. Don’t for a minute think that this is taking the matter to extremes. The Luddites were, you may recall, a group who burned mills and factory equipment in the early 19th Century in England over precisely this point.

Trade is about specialization, and specialization is the basis for higher productivity, higher wages, and material progress; open but well regulated markets domestically and internationally are necessary to make this happen. We also need a few folk in the right places to defend that proposition.

The evidence for that proposition is overwhelming. A group of international institutions, including the OECD, WTO and the ILO, recently completed an exhaustive study of the all the empirical research, covering studies done in dozens of countries, developed and developing, to look at the linkages between trade and growth. It concluded with a somewhat acerbic comment. One rarely sees acerbic, less still ironic, comments coming out of international institutions:

“Despite all the debate about whether openness [on trade] contributes to growth, if the issue were truly one warranting nothing but agnosticism, we should expect at least some of the estimates to be negative…The uniformly positive estimates suggest that the relevant terms of the debate by now should be about the size of the positive influence of openness on growth….rather than about whether increased levels of trade relative to GDP have a positive effect on productivity and growth”.

That’s what the evidence tells us, and societies that do not base their policies on evidence-based political, social and economic analysis are societies that go nowhere. But at the same time, this alone is too austere a message to sell to the general public.

Believe me: I understand this. It is eight years since I left the WTO in Geneva, where I was chairing the Agriculture Negotiations, in order to become a politician. I call this decision to go into domestic politics, ‘crossing over to the dark side’. And frankly, since I took that step, for precisely the point I have just made, in all the speeches, interviews and comments I have made on trade, I have never once said in New Zealand – “Vote for me: I’m in favour of Free Trade”. To slightly rephrase Oscar Wilde’s observation, there are so many ways to screw up in politics, why should you take the most obvious exit strategy?

I have talked about the sensitivity of this issue in Russia and Japan. Let’s carry on putting refined diplomatic politesse to one side and talk about the United States.

Ron Kirk, with whom I have had such a great relationship over the years that he has had stewardship of USTR, claims that there are polls in this great country that show more Americans believe in flying saucers than free trade. I am sure he is right, though I would like to see the way the question was put.

Trade has been controversial in the United States for all the 30 odd years I have been involved in it. I recall the immense difficulty President Clinton, in his first term, had getting Fast Track Negotiating Authority from Congress – in fact he didn’t get it. I recall the huge struggle to get the NAFTA through Congress by a handful of votes and that was over 20 years ago. So to keep matters simple: getting political support for open trade policies is neither a new nor a simple issue in this country either.

Actually, considerable progress has been made in recent years in getting the trade debate here on a far sounder footing. I think there is a better understanding of the linkage between exports and jobs, and better paid jobs at that. But it is also true that real action, not just talk, has been taken in Washington in advancing the trade agenda. I am thinking particularly about the three FTAs – Korus, Colombia and Peru – that went through Congress, and by a healthy margin.

A simple conclusion arises. For all the talk about gridlock inside the Beltway, we know that done the right way, on trade at least there is indeed a way to get solid bipartisan support in Washington when it is needed. I have no doubt this can be attained again – when and if there is a solid, balanced and ambitious deal to be considered in the Washington political process.

This is worth remembering when we consider the near paralysis in the Geneva negotiations. To those who say this is impossible, my first order question is very direct – ‘I know there is nothing on the horizon, but why should you consider it impossible?’

I am a veteran of the Uruguay Round where I was our chief negotiator. This was the Round that was meant to finish in four years and took seven. I have in my files at home, waiting for the book I will never write, many articles along the lines – “the only people who believe the Uruguay Round is not dead are a group of officials with a vested interest in going to meetings in Geneva to collect their per diems”. A great line, but how wrong that proved to be. This was before we found an agreed way to recalibrate the negotiations, and aim for a bigger deal, not a smaller deal.

Let us first deal with the obvious canard – that the underlying reason the Doha Round in the WTO is such heavy going is best explained by that ‘90s cliché: ‘it’s the economy, stupid’.

Certainly, we have just gone through the worst international economic crisis in 70 years; some developed countries have got unemployment comparable on some measures to what they experienced in the Great Depression. With unemployment among young people reaching a tragic 50% in some European countries there is potentially a lost generation in the making. And so, the argument goes, this is the worst time to expect Governments to advance the international frontier of trade and investment integration.

It all sounds perfectly plausible as an explanation. The only problem is that it is obviously wrong.

Far from Governments, including European Governments, shying away from trade agreements, there is an explosion of interest right around the world in negotiating trade and investment agreements of which the latest, and potential game-changer, is the Trans-Atlantic Trade and Investment Partnership negotiations between the United States and the European Union. The reality is that it is all happening regionally. One or two baby steps aside, none of it is happening multilaterally.

Before we examine the state of play in the WTO – I have more than a passing interest in this matter, as some of you may be aware – let’s look at this explosion of interest in negotiating trade deals and try to see what patterns are there.

First, Governments have negotiated these deals or are proposing new deals because growth and jobs are hard to come by and trade is a source of growth. When people talk about the EU/US deal perhaps adding 0.5% to 1% growth to annual GDP, we are all saying – ‘Snap. Thank you very much. We’ll take that’. I sense the clearest convergence of views in years in my numerous discussions with Ministers and senior officials around the world on this point. That trade is seen as a source of growth is an old truth, but today there is a new clarity and a new urgency about it.

Second, in terms of the quality of these agreements, there is a new mood to go shopping for deals uptown. Sure, you can go downtown and rummage around the trade policy flea markets of the 1990s and find many counterfeit, second-rate FTAs from that era, but today we are going uptown and we are going for quality.

This applies clearly to new negotiations underway – TPP and the Trans-Atlantic Partnership clearly envisage high quality, comprehensive agreements that do a lot more than just deal with tariffs. But it also applies to deals that have been completed and are in the process of implementation. Certainly, the FTAs that my country has recently concluded have all been extremely high quality, comprehensive agreements – including the FTA we have with China, which is going extremely well since it came into force in 2008.

Third, the central characteristic of many of these regional agreements is that they are collapsing previous bilateral FTAs, or trade agreements by other names such as ‘closer economic partnership agreements’, into larger and larger agglomerations of trade and investment integration. In the process, we are cleaning up the ‘spaghetti in the bowl’ – a problem about trade rule complexity that was always real but, in my view, over-hyped. In any event, we are sorting out the problem now.

I call this trend towards wider and wider regional trade agreements ‘convergence’. It is not a new phenomenon. The EU was perhaps the first pioneer here. In the early 1970s, Western Europe had a Customs Union involving six European countries including France, Italy and Germany. But there was also a geographically contiguous Free Trade Area called EFTA led by the fourth European large economy, the UK.

When the UK entered the then EEC in 1973, along with two other smaller EFTA economies, one could say with only a little exaggeration, that the two regional trade agreements ‘collapsed’ into one wider zone of economic integration, at least with respect to the EFTA countries concerned. And of course, since then, the EU has gone on to reach 27 countries carrying with its own rule set which is not just about economic integration. It also underwrites the subtle political progress across Central and Eastern Europe of the growth of democracy, peace and respect for the rule of law and human rights.

Let us not forget: it was a political, not an economic, agenda that led the two great visionaries – Robert Schumann and Jean Monnet of France to propose to Germany the foundation stone of today’s European Union – an iron and steel community. Thus was started a process of binding together two countries that had fought three disastrous wars in the previous 70 years, two of which turned into World Wars.

North America is itself an exemplar of convergent FTAs. The earlier Canada/US FTA did not last long; it collapsed into the wider NAFTA involving the Mexican economy. If TPP works as we have designed it, even the NAFTA will, for all intents and purposes, be ‘collapsed’ into the new wider Asia-Pacific grouping that is TPP, even if the NAFTA continues to have a juridical and administrative life for certain purposes.

Australia and New Zealand signed a comprehensive FTA, called the CER Agreement, in 1983 – that is where I cut my teeth as a negotiator. It was justly considered the gold standard of the day, though curiously it never even occurred to us to include services. We did that later in 1988.

But our bilateral agreement too is being merged, at least in some important respects, with the ASEAN, or South East Asian FTA known as AFTA. This is not a proposal that we are not talking about doing. We have done it. It is being implemented. In some ten years time, we will have one large zone of trade and investment integration in the geographic centre of the Asia Pacific region involving twelve economies and 570 million people. Two of those economies – Indonesia and Australia – each has a GDP over US$1 trillion and Indonesia, with 240 million people growing at 6% per annum is poised to become a huge economy. The rules of origin of this 12-country FTA are region-wide. This is not some minor point of interest only to trade technicians. It means that the preferences are based on the emerging supply chain connectivity of the countries concerned.

Similar developments are afoot in Latin America. Mercosur, based on Brazil and Argentina, now has a rival. The new kid on the block is called ‘The Pacific Alliance’. Currently, it involves Mexico, Chile, Peru and Colombia. NZ, like the US, already has an FTA with Chile and of course Mexico, Peru and Chile are all involved in TPP.

We have been watching with growing interest and growing respect for their achievements the fourth country, Colombia. This is a country with a population about the size of Argentina. My Prime Minister has just agreed in principle with President Santos in Bogotá to negotiate an FTA. So we are a step behind you here since you have an FTA in place, but we are on track. These four Latin countries of the Pacific Alliance strike us as outward looking, and they speak the language of trade, economic integration and political progress. Each of the four has an FTA with each other. The Pacific Alliance is now intended to merge these in what trade policy wonks call ‘a deep integration model’.

I could continue with many other examples, but the central points are, I think, clear.

First, it is blindingly obvious that there is no ‘turning away’ from trade and investment integration taking place because of tough economic times. Not at all, there is an explosion of interest in such agreements. So whatever lies behind the problem in Geneva, it is not ‘tough times’. It is a deeper malaise there that we have to come to grips with.

Second, it is ‘game on’ in terms of quality. We don’t need the second rate FTAs of the 1990s. We want comprehensive, high quality agreements that absolutely deal with traditional trade problems of the 20th Century such as holdout pockets of high tariff protection but which also deal with issues such as regulatory convergence in a serious way. These two complementary agendas lie at the centre of the objectives of the two massive convergent regional agreements the United States is now involved in – both TPP and the Trans-Atlantic Trade and Investment Partnership Agreement.

Third, we are cleaning up the spaghetti in the bowl by collapsing numerous bilateral FTAs into wider and wider zones of trade and investment integration.

So what about the WTO?

I think there are some very obvious lessons here. First if the frenetic behaviour I have just described is what the political competition is doing at the regional level, and we want the multilateral system to keep up, we are going to have to start to think about how to do a bigger deal in Geneva, not a smaller deal.

I think it is tragic but true, given the importance of the WTO and the multilateral trading system, that people are bored with this negotiation. In all human affairs, that matters. Geneva is, as I argued to the WTO Members during my presentation a few weeks ago, no longer the ‘go-to’ place for trade policy. We have to turn that around. New thinking is now required. In saying this, I am making here a simple political and finally an intuitive judgment.

Since 2003, after the disastrous Cancun WTO Ministerial meeting where a group of issues called ‘the Singapore Issues’ fell off the back of the political truck, we have been reducing, not increasing, the size of the deal.

Faute de mieux, we are set on this track for Bali at the end of this year and I absolutely agree that this is the only plausible scenario now facing us. It is far, far too late to re-calibrate the strategy now and the new Director General, whoever she or he is, will have to hit the ground running on 1 September to make it work. The broad political contours of any possible package at Bali are already clear.

But at the outermost limits of optimism about what Bali might or might not deliver, there is still a mountain to climb and we will never climb that mountain by slicing and dicing the existing Single Undertaking into tiny packets to be digested every two years at Ministerial meetings. It would take us decades. Do the math. Furthermore, the target is not a fixed one. What might politically have cut the mustard in, say, 2006, has moved on because the world has moved on.

Second crucial caveat: if we are ever to move beyond taking baby steps we should have a completely open mind about the way forward. In presenting my vision to the WTO Membership when I made my pitch for the Director-General position, I said ‘I am not a man with a Plan; I have perhaps a dozen different scenarios in mind’. I quoted the great Prussian strategist, Field Marshall von Moltke, who famously said two centuries ago ‘No battle plan survives the first encounter with the enemy’. The only that is fixed are your objectives.

The Director General of the WTO is in a very unusual position. He or she is not like the President of the World Bank or the Executive Director of the IMF, both of whom are decision-makers, both of whom have billions of dollars, conditionality, and access to capital markets to use as leverage to advance the objectives of their institutions. The DG of the WTO does not decide anything, other than management issues concerning the Secretariat. There is no pot of gold to lubricate the process. It is all about skills, networks, creativity and facilitation. It is a tough job. Really tough.

Nor is it an intellectual problem we are trying to solve here. It is a political problem. There would probably be twenty or thirty people in this town alone with the requisite knowledge and experience to put together a plausible ‘Plan’ to resuscitate the Geneva negotiations: country A gives more on that issue, country B responds by reciprocating on some other issue, some additional technical assistance to this group of countries facilitates their agreement on this or that issue and so on. It is not hard to write such a plan. Done well, it would be elegant and well informed. It would also be completely irrelevant.

Any plan that is going to work has to be built up piece by piece through consensus. It cannot be delivered ex-cathedra by the Director General who then calls for a vote on it. Alexander Hamilton famously said “Men will often oppose a thing simply because they have had no hand in its making”.

Nor is this going to be done by some intellectually challenging but futile idea of abandoning the existing mandate, junking the term ‘Development Round’ and starting from scratch. After all the work that has been put into this negotiation, it would take years before parties would be prepared to sit down even to begin a formal discussion about a new mandate, such would be the cynicism and bitterness that would set it.

There would be huge and utterly justifiable suspicion that this was intended to set aside major, unresolved twentieth century trade problems of legitimate concern not just to many developing WTO Members but to countries like NZ. The most obvious of these is the huge overhang of trade and production-distorting agriculture subsidies that are central to many of these countries’ concerns.

Then, even if you could get past that deep well of cynicism and bitterness, the idea that you could negotiate a new mandate that would pre-negotiate the most controversial issues is completely naïve. A mandate sets objectives and directions, but ambiguity is built into every negotiation mandate. That, in some ways is the point of it: if there were no ambiguity about the result, there would be no need for a negotiation.

If we are going to have a bigger deal, a more interesting deal, a more relevant deal, it will have to be put together discreetly with a lot of reflection and taking full account of the existing mandate. To do that, it will be vital that the new Director General has the confidence of all the Members – not just this ‘group’ or that ‘group’ of countries.

It will have to be done discreetly. I have said to trade journalists in Geneva, and let me admit to a certain degree of perverse pleasure, that if I were to become Director General, I would be a ‘trade journalists’ nightmare’. OK – it is a deliberate exaggeration on my part in order to make a broader point. Actually, in public the Director General needs to be a forceful public advocate of the system, leading intellectual and political discussion on why we need a system of multilateral rules. And we need the help of the world’s media to achieve that.

But when it comes to the sensitive negotiating issues, I believe the Director General must be completely silent in public and open to many different solutions. There is never one, unique solution to any problem in trade negotiations.

But whatever the specific solutions may be – and I am certain there are many different possible paths – after Bali, we need to start thinking bigger, not smaller. That is not only what the competition is doing with this explosion of far-reaching regional agreements such as the EU/US announcement or the Pacific Alliance in Latin America. These are not baby steps being discussed regionally. It is also the enduring lesson from the last successful multilateral Round, the Uruguay Round. We faced exactly this conundrum with the last negotiating Round and the only way we got that over the line was shifting direction towards a larger deal.

If you compare the actual results of the Uruguay Round with the original Punta del Este negotiating mandate, you will not see any suggestion of an entirely new institution – the WTO – in the mandate. I do not recall anything that foreshadowed an internationally binding new dispute settlement process with an Appellate Body at the top.

In the negotiations at official level leading up to the formal launch of the Uruguay Round in 1986, I was asked to write the mandate for the textiles and apparel negotiations, precisely because New Zealand was seen as a neutral party in a then bitterly contested part of the system. I can assure you that when I achieved informal consensus on that mandate, there was no way I thought this was going to lead to the end of the discriminatory system of quotas among developing countries called the MFA, or ‘Multi-fiber Agreement’.

And as for the General Agreement on Trade in Services, or the GATS, well, as my professors used to say in setting assignments, ‘compare and contrast’ the result – a separate new agreement – with the timid language of the services mandate. I know what Sherlock Holmes said on this matter – “From a single drop of rain one can infer the presence of oceans”. Intellectually, I get the point, but in 1986 you would indeed need to have been the ‘world’s greatest detective’ to have detected the existence of the GATS from the original negotiating mandate.

None of this movement up the quality chain after the palpable failure of the first four years of negotiation was forced on anyone. It was all done skilfully, discreetly and through consensus. Can we do it again? I don’t know. It depends how worried people are about proceeding in the 21st Century without the bedrock of the multilateral trading system unifying the world economy.

Of course, some people assume this will never be at issue. We got through the 2009 crisis without major protectionist slippage. People take this relatively benign state of affairs for granted as if it were there rock-like, permanent and immutable as a defence against earlier irrationality and therefore needs no political investment or political maintenance. Aldous Huxley once said human beings have an almost infinite capacity for taking things for granted.

Precisely because regional integration is proceeding faster and deeper, we need to advance the frontier of multilateralism to keep up and maintain coherence among these regional groupings. I see these various regional trade blocks as large vessels floating on the now relatively benign seas of the multilateral trading system. Whenever I feel enthusiasm for the Asia Pacific (“the world’s most dynamic growth region” etc) is getting just a step ahead of reality, I like to pose the following question: “who is China’s largest trading partner?” The answer of course is the EU-27. We are all finally bound together and the rapid development of the global supply chain simply sharpens that reality. It is not called the global supply chain for nothing.

This is a system that still matters and it matters a lot. Even if you exclude intra-EU trade (and that is a huge amount of inter-country trade), some 70% of world trade still takes place on MFN or ‘multilateral’ rates. If the WTO were a huge corporation rather than a multilateral political institution, it would still be the market leader. But not having brought out any important new products or services for almost 20 years means its brand is losing its shine to its customers. Its judicial system is vital for all countries, including the largest of countries. Would that last indefinitely if the system of rules it is upholding were never refreshed? Sounds a little dangerous to me.

I also continue to believe that there are certain issues in trade policy that no regional trade agreement can deal with adequately – including subsidy peaks, contingency protection and such like. The EU/US announcement may test that judgment, of course. Maybe you and your European partners will decide, for example, to liberalize agriculture market access without doing anything about harmonizing subsidies across competing sectors; maybe you could do a bilateral deal on some subsidies and not worry about the free rider problem you would both then face from Japan and others with major non-Green box subsidies. Or maybe moving forward in Geneva on some re-calibrated basis would facilitate this all important and potentially game-changing negotiation across the Atlantic. It might even facilitate TPP.

One thing is certain. Yes, the United States is today facing a very different world from the world your predecessors faced in 1945. It is a far better world of course by any realistic measure of human progress.

After the War, the United States enjoyed a totally dominant share of world economic power as you faced your shattered rivals – the countries that were later to become your major partners. At that time, this single country could indeed do almost all of the heavy lifting on its own. And according to my view of history, the rest of the world benefited enormously from the non-punitive peace and the multilateral institutional machinery that an earlier generation of American political leadership put in place.

It is a mistake to say the system of multilateral trade, then underwritten by the GATT, was ‘invented’ by the United States. That would make Lord Keynes, who led the British Treasury negotiating team from 1942 through to the Bretton Woods Conference, turn in his grave. But the very least that can be said is that this system would never have come into being without political leadership from the United States. It is as I said, a system worth fighting for. If we can ever again find a creative way forward, I am sure you will be up for the fight.

Thank you.

ENDS

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