America's Interest in the World Trade Organization: An Economic Assessment
November 16, 1999
A Report by the Council of Economic Advisers
Whole Paper (339 kb)
The U.S. economy looks to the future from a position of strength, due in no small part to its openness and flexibility. U.S. tariffs are among the world's lowest, averaging only 2.8 percent on internationally comparable terms. The United States is also the world's leading trader in goods and services, accounting for about 14 percent of world exports and about 16 percent of imports. Americans benefit directly from open markets. U.S. producers benefit from exports of high-tech manufactures, agriculture, and services, among other products. U.S. workers enjoy higher paying jobs and U.S. consumers enjoy lower prices and more product variety.
For over half a century the multilateral trading system, first consisting of the General Agreement on Tariffs and Trade (GATT) and more recently the World Trade Organization (WTO), has played a key part in meeting U.S. trade policy objectives. It has reduced barriers to trade, strengthened the rule of law, and encouraged economic development internationally. The post-WWII period has seen exceptional growth in much of the world as the global economy has become increasingly integrated.
While its achievements have been considerable, the trading system remains a work in progress. A new round offers opportunities to enhance market access, improve the functioning of the WTO, more effectively integrate labor and environmental considerations, and ensure that the benefits of trade are shared more widely.
America Benefits from Market Liberalization
On the threshold of the 21st Century, two related features of the U.S. economy are particularly striking. First, it has never been more prosperous and, second, it has never been as integrated into the world economy. The U.S. economy provides its citizens with living standards that are higher than those in many other major industrial economies measured in terms of purchasing power, per capita income in the United States is 27 percent higher than in Japan and 41 percent higher than in Germany. The U.S. economy is able to provide such high living standards, in part, because Americans engage extensively in international trade. As an indicator of its size and scope, U.S. trade's value relative to U.S. GNP has been almost 25 percent in recent years, the highest it has been at any point in the past hundred years.
The WTO Promotes Market Opening
America gains most when other nations lower their trade barriers as we reduce ours. Indeed, as one of the world's most open economies, we have a particular interest in promoting liberalization abroad. The system of binding commitments first established in the GATT and now advanced by the WTO has provided a framework for liberalization. Consistent with U.S. goals for an open multilateral trading system, the GATT was founded in 1948 on principles of reciprocity and non-discrimination. On this basis, it has been extremely successful in opening markets.
The Uruguay Round, concluded in 1994, reduced tariffs on industrial products and extended agreements to previously neglected sectors, such as agriculture, textiles and clothing, and services. Recent economic studies evaluate potential gains from the Uruguay Round, but capture only the effects of certain conceptually quantifiable features, namely reducing tariffs, reducing export subsidies, and eliminating quotas on some goods. They do not capture gains from provisions for services, dispute settlement, and intellectual property.
Post-Uruguay Round negotiations yielded additional market access commitments in financial services, basic telecommunications services, and information technology, opening up new opportunities in some areas in which the United States is highly competitive. Growth in U.S. exports of private services point to potential gains from market opening.
The WTO Promotes the Rule of Law
To fully realize the benefits of trade, however, requires more than agreement to reduce barriers. Sustaining support for the trading system also requires rules that are credible and equitable. For firms to undertake the necessary investments to service foreign markets, they need to believe that new barriers will not be raised and that old ones will not reassert themselves. To rely on foreign suppliers, buyers need to believe likewise that market access will not be disrupted. Traders need assurance that commitments will be binding and that markets will remain open in the event of changed circumstances. Moreover, the rules should ensure that governments play fair that they not seek advantage for favored interests by subsidizing their producers or passing regulations that unnecessarily distort international trade. Fairness also requires that the gains from trade are shared widely and do not come at the expense of core labor standards or the environment. In so doing, the WTO must strike an appropriate balance between the needs of the trading system and those of sovereign nations. The WTO Agreements do not and will not preclude the United States from establishing and maintaining its own laws; impair the effective enforcement of U.S. laws; or limit the ability of the United States to set and achieve its environmental, labor, health, and safety standards at the levels it considers appropriate. Through consensus, the WTO has done much to achieve both credibility and fairness.
By and large, WTO members have adhered to their commitments. The sustained trend towards market liberalization over the postwar period and the maintenance of commitments not to raise barriers even in the face of international financial crises, stand in sharp contrast to the trade policy experience during the inter-war period.
The WTO Extends the Benefits of Trade and Encourages Growth
The United States has long advocated the use of the multilateral trading system to promote economic development internationally. The success of the trading system and its value in reinforcing market-oriented development strategies has become increasingly appreciated over time. Between 1989 and 1997, developing countries increased their share of world trade. Originally dominated by the developed countries, participation in the multilateral trading system has grown as others have sought inclusion. Today, the WTO has 135 members and another 32 nations are seeking accession. This allure of the trading system supports the view that international trade is not a zero-sum game. Both the United States and its trading partners reap the benefits. In fact, the shared aspect of the gains from trade, between trading partners, is a core principle of economics. However, not all WTO members are currently well positioned to use the system effectively. Some of its least developed members lack the necessary institutions and infrastructure to reap the full benefits of trade in those cases, capacity building and technical assistance, coupled with market opening, could help spread the benefits.
The U.S. Agenda Meets the Challenges of the 21st Century
The prospect of another round of multilateral trade negotiations provides new opportunities to advance U.S. interests in opening foreign markets, establishing an effective rule of law, and promoting economic development internationally. Barriers remain high in agriculture and services, sectors in which we are highly competitive. In agriculture, for example, bound tariff rates average about 50 percent around the world compared with less than 10 percent in the United States. Average food and related prices in the EU and Japan are 34 and 134 percent higher, respectively, than in the United States. Moreover, the system of commitments and rules, though much improved, still requires further strengthening. And, much work remains to be done to ensure that developing countries including the least developed obtain the market access and technical assistance they need to realize the benefits that international trade can afford. The United States is also committed to putting a "human face" on the global economy.
For these reasons, the United States is proposing to launch a new round, lasting no more than three years, that focuses on market access in services, agriculture, and industrial products. It is also seeking immediate tariff cuts in eight key areas, agreement on transparency in government procurement, extension of the prohibition on e-commerce duties, and an agreement to make additional information-technology products tariff free. The United States also sees the need to strengthen the WTO's relationships with other international organizations and to make the WTO more open and accessible. The United States has sought to create a trading system that spreads the benefits of trade as widely as possible, both across and within countries, and is supportive of core labor standards and the environment. Thus, the United States is:
The WTO provides its members with some of the conditions that are necessary for successful economic performance, but the benefits it confers are not automatic. To fully realize the benefits of trade, it is necessary to adopt complementary domestic policies, such as those to help ensure that displaced resources are successfully re-employed. This requires effective mechanisms that help workers, farmers, and firms adjust to change when need arises though economic studies typically find that trade is a small factor in overall job displacement. The Clinton Administration has made opening markets at home and abroad a major pillar of its economic strategy, but it has also adopted the complementary policies of investing in people and fiscal prudence.
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