2003 Speeches
“The US and FTAs: Partnering for Mutual Benefits”: Remarks by Ambassador Franklin L. Lavin at The Indus Entrepreneurs (TiE) Singapore
Wednesday, October 29, 2003
Thanks to Inderjit for inviting me. I’m happy to be here with my good friend Tommy Koh.
Since Tommy is chairing this panel, I’ll follow his example and cover three points in my remarks.
My first point is that the logic underpinning FTAs is win-win, and the greater the openness achieved, the bigger the benefits. Second, U.S. approach to FTAs is part of a competitive liberalization strategy. This is even more of a strategy of Singapore, and it is increasingly a strategy of India. Third, FTAs do not occur in a vacuum. The world is getting smaller, and more competitive, and in that context, countries can degrade their relative competitiveness even as they improve their absolute competitiveness.
FTAs are win-win
My first point is that FTAs are win-win. Open economies enjoy faster growth rates, deploy their resources more efficiently, and compete more effectively in the world economy. These points are as broadly accepted by economists as any economic thesis.
The real question is: since FTAs are almost universally applauded, why are they so difficult to reach? What can we do to move ahead on this agenda?
In my view, the resistance to trade liberalization comes from political leadership, not from economists or business people. All societies have segments that garner advantages from protection and will resist efforts to make the economy more efficient. This sentiment can be most pronounced in the agricultural sector, which tends to have the greatest political constituency.
Additionally, many societies have a nativist or even a xenophobic community that views the outside world with suspicion. It is easy to raise fears within this group.
Trade liberalization thus requires backbone from political leadership to offset vested interests and political pressure. Indian leaders deserve credit for trying to move their country the right way. They know that the benefits to India will vastly offset the dislocation. They further know that benefits from trade can be diffuse and not even fully perceived, whereas the adjustment costs of trade can be seen as acute.
It is an ongoing political discussion in the U.S., Singapore, and India to remind leadership of the benefits of a more rapidly growing economy. Unfortunately, in trade liberalization the victims are frequently absent from the debate. We will not hear from those who would benefit if India’s economy were to expand even one extra percent a year. How many million more jobs would be created if India’s investment code were as good as Singapore’s? How many people would have better access to clean water, electricity, health care, and education if there were increased private sector participation in these sectors? How many would be able to escape poverty if India’s capital markets operated as effectively as Hong Kong’s?
One of the paradoxes of trade is that those segments of society most involved in the international sector are the most prosperous, yet it is the other segments of society, those not involved in the international sector, who tend to most oppose liberalization.
FTAs can assist the process of domestic policy reform, like Singapore’s enhancement of its IPR regime and financial liberalization process. They can also help governments lock-in difficult liberalizations. NAFTA was a catalyst for economic reforms that moved Mexico to better growth and a higher level of competitiveness. These might have happened without NAFTA, but duty-free access to the US market served as a powerful incentive for change.
We should welcome a Singapore-India FTA as significant in its own right, and also for its potential as a reinforcement of domestic and foreign trade liberalization in India.
Competitive Liberalization
Second, let me outline the U.S. approach to FTAs. Since the beginning of this Administration, we’ve been pursuing a competitive liberalization strategy based on opening markets in three areas – globally, regionally, and bilaterally.
Our approach to liberalization, in fact, is pretty similar to Singapore’s. As I mentioned earlier, India is increasingly looking in this direction as well. We would prefer to see multilateral liberalization, but we believe it is unwise to put all our eggs in one basket. This competitive strategy recognizes that every country has a different appetite for liberalization. We will move ahead with those who want to move ahead, and those countries that cannot move will have their position respected.
The U.S. has six FTAs in place, with Canada, Mexico, Jordan, Israel, Singapore, and Chile. These countries account for approximately 40% of our trade. We also have negotiations underway with Australia, Morocco, five Central American nations, and five nations in Southern Africa. In addition, we’ve announced our intention to negotiate next year with the Dominican Republic, Bahrain, and just last week, Thailand.
The Cancun round showed that the multilateral path will have many twists and turns. There was a positive development at APEC ten days ago, when APEC trade ministers all agreed to work off the text that was developed in Cancun. This is significant, because Cancun broke up because there wasn’t an agreement to work off the same text.
But this positive development has to be seen against the negative backdrop of what unfolded in Cancun. The outcome of the round is unclear. But what is clear is that the US has no intention of sitting idly by.
I should note here that Trade Promotion Authority doesn’t last forever. Congress granted it to the President only through 2005. We use it by then, or we lose it.
Not only are the bilateral and regional FTA initiatives not only are consistent with multilateral liberalization, but now seem vital to building momentum to move the WTO process forward.
Absolute vs Relative Progress
This brings me to my third point, that the world is getting smaller. We have seen the “death of distance.” Goods can be made anywhere. Services can be done anywhere. A global MNC can base its telephone or email help desks just as easily in India or the Philippines as in the US, Europe or Singapore.
But the globalized world is a very competitive world. If I am a manufacturer, I don’t have to make my widget in your country; maybe I can make it cheaper somewhere else. Investors – be they foreign or domestic -- have never had so many choices.
The upshot is that perceptions matter; performance matters. A comparison of relative FDI flows into China and India clearly shows this. India embarked on a reform agenda, but China embarked on one earlier, and more aggressively. China embraces foreign manufacturing investment, and its WTO accession commits it to open services to foreign investment.
With India, there’s a ways to go. India still seems ambivalent about foreign investment, as the Singapore Airlines case shows. Average tariffs are higher than in China. Protectionism remains a potent political force.
As a result, investors see China as a more attractive locale. I think India has great potential, and can be as successful as China, but the reform process would have to move faster and deeper. People occasionally ask me about when India will catch up with China. Depending on what figures you look at, this might be viewed as a futile question. India is not catching up at all, it is falling further behind – this despite the progress it has made.
Last month, UNCTAD released investment figures for 2002. It showed that China had attracted over $52 billion in FDI in 2002, and India had attracted just over $3 billion.
I do not want to insult anyone in the room, but let me share a somewhat depressing statistic with you from the same UNCTAD report: the inward FDI performance index. This index measures the percentage of world FDI that flows to India against the percentage of world GDP that India comprises. In this FDI performance index, India ranks 120th in the world, behind Burkina Faso and Pakistan, but ahead of Haiti and Zimbabwe.
I realize that just last week, India has made moves to improve its investment climate by relaxing caps on foreign ownership and we can hope that next year’s rankings will show improvement.
Which brings me back to my opening point on the US FTA agenda. The US remains committed to multilateral liberalization, but we are not prepared to let the “won’ts” set the agenda and block progress on liberalization.
We are reflecting on the best way forward for the WTO agenda, but in the meantime, like Singapore, we will continue to work to free up trade with the “cans”. I hope Tommy will forgive me for using a bit of Singlish, but I hope one day we will see our good friends in India saying, “also can”.
Thanks.