"Globalization That Works for People" Treasury Secretary Lawrence H. Summers Remarks to the Democratic Leadership Annual Conference, Washington, D.C. October 14, 1999

BG9916E | Date: 1999-11-23

The United States is the world's largest, richest and strongest economy. If leadership in building a truly global trading system is going to come, it is likely to have to come from our country. And now, when our economy stands so strong, now is a propitious time for action. Yet even at this time of unprecedented economic strength, the questions of what our trade policy ought to be -- and our approach to global integration more generally -- continue to be difficult and vexing ones for our country.

I would like today to share some reflections on four aspects of this debate that I think do not always receive the emphasis they deserve.

-- First, the political and national security case for America's open markets policy.

-- Second, the direct economic case for open markets in terms of the living standards of the American people.

-- Third, the difficult question of how to make sure that integration works for people.

-- Fourth, the political challenge of maintaining support for global integration in our country.

I. The Political and Strategic Case for Support for Open Markets

The crucial link between closer economic integration and our national security is this: we are much less likely as a nation to be drawn into conflict if nations of the world are strong, and are forging ever closer connections, than if they are financially unstable and disconnected. In short, trade promotes prosperity and by promoting prosperity, promotes peace.

Fifty years ago, in the wake of World War II, the primary concern the world faced was the economic reconstruction of war-ravaged Europe and Japan. A generation of visionary leaders responded by supporting a successful strategy of rapid economic rebuilding as essential to normalization and prosperity, and increased economic integration, so people stood more to gain from shared peace than from divisive conflict.

Today, the challenge is to integrate the 5 billion people of the developing world -- hundreds of millions of who are now glimpsing the benefits that a global economy can offer -- into a strong and truly global market system. And our answer to that challenge should be the same as it has been since 1945. By supporting liberalization in these countries we invest in our future security and we invest in the spread of our core values.

Examples such as Korea, Taiwan and Argentina illustrate that economic development tends to bring democratization in its wake. And there is no better way to spur this process than by integrating them into the global marketplace.

Let these countries trade in today's global economy and you provide one of the strongest catalysts for reforms that promote our deepest interests. In a 21st century global economy, competition and integration will make them more market-based; more protective of personal and commercial freedoms; more open to the free flow of information and ideas; and ultimately, less prone to conflict with other nations.

Trade, then, is the pursuit of peace by other means. But we should never forget that it is also the pursuit of higher living standards for Americans. To put it bluntly: even if closer integration did not help to make America a safer nation, we would still want to support it because it helps make us a more prosperous one.

II. The Economic Case for Open Markets

Let me now suggest a more academic way of thinking about the economic case for trade that is a little different than usual. Imagine there was a country whose ports were all filled with rocks -- to be sure, a very special kind of rocks -- that blocked all incoming ships but not outgoing ones. Ask yourselves, if those rocks could be removed at no cost, would that be a good thing for that country?

Many people would say that it would be a good thing:

-- It would provide citizens with a wider choice of consumer goods, at lower prices.

-- It would provide producers with a wider choice of inputs, and lower costs, making them more competitive and able to hire more workers and raise their wages.

-- It would provide more competition as a spur to productivity and new ideas - and as a result, lower inflation and lower costs of capital.

To be sure, the removal of those rocks would bring about change in the economy. But looking around, we can see that every day and in every way our market economy -- by bringing about improvements in technology, communications and transportation -- is bringing down natural barriers and making communication and trade much easier.

This, too, brings enormous changes as well as benefits in its wake. Indeed, nearly all the academic evidence in this area suggests that technological change has had a much larger impact on workers than increased trade -- and that trade liberalization has tended to raise the wages of skilled workers rather than reduce the wages of the unskilled. Shutting ourselves off from the new global economy would not help these people -- any more than it would help them for us to turn our back on new technologies.

The question is whether we should respond differently to man-made barriers to trade than we do to those natural barriers that new technologies are now eroding. And should our response be any different if other countries have bigger rocks in their harbors? Would that be a reason to keep the rocks piled high in our own?

The success of the United States in the 1990s is a testament to the benefits that openness can bring:

-- Exports have created millions of new jobs - jobs that on average pay 13 to 16 percent above the average wage.

-- And our openness to imports has fueled competition and innovation and helped to sustain our growth with almost no inflation and long-term interest rates that even now, after eight and a half years of expansion, are around 2 percentage points lower than they were at its start.

But actually I have so far understated the case for open markets, because no one is suggesting that the United States unilaterally lower our own trade barriers without reciprocal steps by others. What is at issue -- in the debates we have had about ratifying the Uruguay Round of the General Agreement on Tariffs and Trade and Fast Track, or that we will have about the new round of negotiations within the World Trade Organization -- is whether we should be involved in a broad project of removing the rocks from our harbors and from other countries' harbors.

It bears emphasis that this is not even a symmetrical debate -- since we already have by far the lowest trade barriers in the world. If we look at the trade agreements we have negotiated in recent years, the reductions in our own trade barriers are a fraction of the reduction that other signatories have undertaken.

To take just one example: in 1993, United States goods faced an average tariff at the Mexican border of about 10 percent, around two and a half times greater than United States tariff on Mexican goods. Thanks to NAFTA, as of July 1999, Mexico's average tariff has already fallen to about 2 percent. Indeed, two-thirds of U.S. exports to Mexico now enter duty-free. Overall, our exports to our NAFTA partners grew by more than two-thirds, or $93 billion in the five years after the agreement was signed.

Looking forward, the gains from future trade liberalization could only be greater, at a time when the major Latin American and Asian economies with whom we are most likely to negotiate new trade agreements have average tariff rates three times higher than our own.

Considering the question this way, the inescapable conclusion is that the pursuit of further trade liberalization around the world is not merely good economics -- but good mercantilism. Of course, it is important to ensure in our bilateral and multilateral trade negotiations that our commercial interests are protected, and that our trade laws are vigorously enforced. But to seek to keep our harbors closed off to foreign competition is to see our long-term core interests precisely backwards.

No country has a greater commercial and broader economic stake in encouraging ever closer global economic integration. Because of the diversity of our population and the centrality of our location, our ties to any given region in the world are stronger than its ties to any other region. And time and again, when developing countries reduce their trade barriers they grow faster, their wages rise -- and their demand for sophisticated American products grows with them.

III. Making Integration Work for People

At the same time, we all have to recognize that trade and integration will not work for America unless it works for every American. To a degree that historians have perhaps under-emphasized, the GI Bill of Rights was an integral part of the strategy behind the Marshall Plan -- just as our interstate highway system was partly the result of an effort to marshal our Cold War defenses.

The lesson of that time is very clear: internationalism cannot be a goal pursued by the elite for its own sake. We need to find ways to make real and more apparent to Americans the strong link between security and prosperity abroad -- and the security and prosperity of every American.

As the President has said, "Working people will only assume the risks of a free international market if they have the confidence that the system will work for them." As we move to a more truly global and integrated economy, and as capital becomes so much more mobile than labor, there are legitimate concerns that companies will exploit that greater mobility by playing off competing jurisdictions against one another. The fear is that we will find ourselves in a race to the bottom -- a bottom in which governments cannot promote fair taxes, uphold fair labor standards, protect the environment or promote other key American values.

That is not the world we want to build. And it not the world that we are building. Just as national regulations and standards evolved in the United States in the last century in response to the consequences of interstate competition -- so international agreements and institutions will be needed to provide an enduring basis for integration at the international level. As the President has said: "A legal framework of mutual responsibility and social safety is not destructive to the market, it is essential to its success."

-- That is why we are working with other countries to promote global cooperation against corporate and legal tax havens and we are working actively in the OECD on the issue of tax competition.

-- That is why I think that the WTO should commit to collaborating more closely with the International Labor Organization, which has worked so hard to protect human rights and to ban abusive child labor.

-- And that is why, among other things, at the WTO ministerial in Seattle we will be calling for the creation of a WTO Working Group on Trade and Living Standards and a thorough review of the environmental impact of the Seattle round.

If we are there working with developing countries to achieve strong agreements which open global markets to them and to us, we can simultaneously promote labor and environmental priorities and other issues that are important to us. What is more, we can offer their workers the most reliable route to higher wages, namely access to global markets and expertise. Without our involvement, neither outcome can be guaranteed.

Let me just add that however these issues play out in context of our broad trade relations, the richest nation on earth can surely afford to open its markets in a limited way to countries in Sub-Saharan Africa and the Caribbean whose per capita income is a fraction of our own. The African Growth and Opportunity Act and the enhanced Caribbean Basin Initiative each represent modest but important steps toward expanding our partnership with these countries -- and promoting the broad economic reform and accelerated growth that they desperately need. These are not steps that a nearly nine trillion dollar economy should find it difficult to make.

IV. The Challenge of Maintaining Support for Outward-Looking Policies in the United States

These and the other broader arguments for open markets should not be difficult to make. But increasingly, they are. I have tried to reflect on why that should be so: why, when the security benefits are so compelling and the economic benefits so clear, it so difficult to make the case for open trade and broader economic integration in America today.

Three reasons stand out.

The first is the natural human tendency to internalize the good news and externalize the bad. How many people working hard at a badly managed firm, with outdated technology, pin the blame for their layoff on foreign competition? How many people, when offered a raise or promotion in a labor-short industry following a surge of export demand, assign the credit to open international markets, rather than considering it to be a deserved reward to their own skill?

The second reason is that the United States is a large country that has traditionally looked inward. Historians have written at length of our oscillations between isolationism and global engagement. In the 1920s and early 1930s we swung, disastrously, in the first direction. In the post-war period we moved decisively toward support for integration.

Today the motivating force of the Communist threat has evaporated, and been replaced by the less salient but no less real threat of foreign economic storms blowing onto our shores. And international economic policy has become more subject to popular influences. I doubt that anyone focus-grouped the Marshall Plan, or that it would have fared well if they had.

The third reason is that trade tends to become the lens upon which all kinds of concerns about a changing world are projected. If Americans are to be able to support and feel comfortable with change, we need to equip workers with the education and skills to manage the transition process and seize the opportunities that come with it.

In the end, a globally integrated America that leaves large chunks of its people behind will not travel far. As we move from an industrial to an information age -- pregnant with possibility but also full of new challenges for ordinary people -- a progressive agenda that seeks to widen the circle of opportunity and prepare people for a global economy is as important as it has ever been.

V. Conclusion

If we are literal about the definitions and define the current century as ending on January 1, 2001, there is much about the 21st century that this century will still shape, the decisions that we and others make on crucial issues of the world trading system:

-- About whether the United States, which has aided Africa and the Caribbean for so long, will pursue policies that recognize that trade, not aid, is the best way to help these countries prosper;

-- Whether China, the home to one-fifth of mankind, will carve its place in an open and rule-based global trading system;

-- Whether we will find the momentum on key regional trade initiatives in Latin America and Asia;

-- And above all, about whether the global trading system will continue moving forward, at the Seattle meeting and beyond.

The decisions that we and others make on these and other questions will in a very real sense set the frontiers of global economic advancement for many years to come. The President has called it "the challenge of the millennial generation -- to create a world trading system, attuned both to the pace and scope of a new global economy and to the enduring values which give direction and meaning to our lives." America has an enormous stake in helping to build such a global system in the months ahead -- and a great deal to lose if we take now as the time to turn our backs.