The Importance of Economic Openness

As Prepared for Delivery

Tonight I would like to speak to you about openness – specifically economic openness as it relates to global growth.

I also want to talk about openness as an essential antidote to the narrowness and extremism threatening peace, prosperity and security around the globe.

After almost fifty years, is the great era of openness, of economic expansion, of economic opportunity under threat of reversal today?

How do we interpret the difficulties in the Doha trade negotiations, or the increasingly unwelcoming investment climate in France, or even in the United States?

How do we read economic populism’s growing toehold in this hemisphere – and elsewhere?

For the Founding Fathers, economic liberty was at the core of political freedom. The free trade of ideas and the passions of the Scottish Enlightenment – led by such thinkers as Adam Smith and David Hume – found fertile soil here in the midst of the colony’s battles with British restrictions on the free movement of goods between the thirteen colonies and the rest of the world. In Adam Smith’s Wealth of Nations, published the same year as the Declaration of Independence, Smith spoke powerfully of a "system of natural liberty."

In today’s era of globalization, the world is engaged in a world-wide debate on the very question that Adam Smith probed: what causes the wealth of nations?

Former Federal Reserve Board Chairman Alan Greenspan has noted that the world witnessed the purest test of this question with Germany during the Cold War. Germany had the same people, culture, language, education and economic status.

But it was split into East and West– one side a market economy, the other a centrally planned economy – and at the end of 40 years the Wall came down. The experiment came to an end. East Germany’s standard of living was a third of West Germany’s.

The revolutionary idea of generating a nation’s wealth by unleashing individual economic freedom has spread to many lands over the centuries;  perhaps most dramatically to China. During the Cultural Revolution China’s economy was on the brink of bankruptcy. There was widespread famine.

As former Vice Minister for Trade Long Yongtu, China’s WTO accession negotiator, stated in a speech at the Institute for International Economics: "At that time, all the Chinese were equal, but they were equally poor."

In the quarter of a century since then, it is said that China has lifted more people out of poverty than in all of human history.

China has experienced a GDP growth rate of over 9 percent for 25 years. Long credits this with China’s transformation from a planned to a market economy. 

"With this transition [to a market economy]," he said, "1.3 billion people came to understand a very simple truth—that if they worked hard, they could have a better life. "

It is this simple truth that has made the spirit of entrepreneurship come alive in China again. And it’s because of this truth that millions of Chinese entrepreneurs have come into being, thus changing the whole economic structure of China.

Long noted a second driving force in China’s economic success: participation in economic globalization.

One of my first trips in the U.S. government was to Shanghai where U.S. Trade Representative Robert Zoellick, Ambassador Jeff Bader and our team successfully concluded the work of four administrations in finalizing negotiations to bring China into the WTO.

Following China’s accession, they had to change an estimated 3,800 laws and regulations. These new requirements – including of transparency and of national treatment - had to be sold to the Chinese people. Ambassador Long said these concepts were so alien to China that introducing them was like another revolution. 

Transparency, for example, was not an accepted principle in China.

In China there is an old saying that "if the water is too clean, there will be no fish." One has to fish in muddy waters - this has been a tradition in China for thousands of years. So they had to invent a new phrase about catching fish in clear waters.

The principle of national treatment, under which WTO member countries have to treat foreign and domestic enterprises the same, also caused trouble. The new private-sector Chinese companies complained that they wanted the same treatment as Chinese state-owned companies - equal access to markets, land, and financial support.

Another problem was selling the basic "win, win" principle of the global trading system. Ambassador Long said the concept of "win-win" never existed in China. That the closest phrase in Chinese translates roughly as, "I win, you die." Again, a new phrase had to be created.

Globalization has changed the mind-set of millions of people in China and continues to change China every day. And this revolution is happening throughout the globe.

Here in our hemisphere we have Brazil tackling poverty through export-led growth. It is now the 11th largest economy in the world and an agricultural powerhouse. It is the world’s leading exporter of beef and is second only to the U.S. as the largest exporter of soybeans.

Chile is the only country in the world to cut poverty in half since 1990 – exceeding the UN’s Millennium Development Goal challenges. Chile’s country ranking in the World Economic Forum’s Global Competitiveness Index is higher than Ireland, Spain or France. It is also at the top of the list when it comes to numbers of free trade agreements – and it is aggressively negotiating more.

In fact, in this hemisphere, every Latin American country has improved its rating under the UNDP Human Development Index – except for Venezuela, which stayed stagnant with one of the lowest ratings in the region. In fact, poverty increased 10 percent in Venezuela in recent years.

These kinds of developments span the globe. Where nations are economically closed and not integrated in regional or global markets, one sees poverty and stagnation.

Seventy percent of all tariffs paid by developing countries are paid to other developing counties. COMESA, a regional organization of 20 nations in eastern and southern Africa, is boldly reforming but had to cope with fears that reduced tariffs in the region would bankrupt government coffers. They were stunned when tariff revenues greatly increased due to greater trade volume stimulated by lower barriers.

We are seeing such success stories in the Gulf too – from the United Arab Emirates, to Bahrain and elsewhere.

America has also benefited economically in the past fifty years from economic openness. This is why, I believe, we have never had a President who is anti-trade. As Pascal Lamy, head of the WTO, has said, "The beneficiaries of trade are many and silent. Those who are hurt by trade are few and vocal." Openness is not an easy political sell. In fact, public surveys show that the public likes the word "protectionism."

That’s what a government is supposed to do. Protect its citizens. But the question for America, and India, and France, and Bolivia, and Russia and every nation is how do you best protect your public in an era of globalization? In a flat world?

Nations face profound challenges at the dawn of the 21^st century. An environment for growth doesn’t sprout on its own. It starts with educating one’s people to eliminate income gaps. In the United States, the wages of the college educated have grown 22 percent since 1980, while the wages of high school dropouts have fallen 30 percent. The education income gap is widening in India, Brazil, China, East and Central Europe.

To be poised to compete, America must be educated.

Innovation is more and more the thread that ties the American economy together. With more than 95 percent of our potential customers outside our borders, our brand names, inventions, patents and copyrights are vulnerable to counterfeits and pirates.

In order to be sure we at the State Department are best positioned for the challenges of the future, Secretary Rice has asked me to conduct the first ever top to bottom review of the entire economic diplomacy wing of the United States Government. We are looking at how we are structured, how we train our economic diplomats and negotiators, and where we are deployed in the world.

We have asked leaders on issues of competition and innovation, such as Craig Barrett of Intel, former Governor Engler of the National Association of Manufacturers, and Jim Owens from Caterpiller to help us with this examination.

We are asking three simple, but profound questions: Where are we now? Where do we need to be in our global diplomatic positioning for America to compete globally? And how do we reposition to meet those challenges?

As part of this process we have developed an economic diplomacy matrix that reviews and compares the entire spectrum of US economic engagement abroad. Just as a day trader has online data at his fingertips to help make educated decisions, our economic diplomacy toolbox collects in one place information from 17 agencies so we have the best strategic views of countries and regions.

In the Doha Round, the US has a bold negotiating position. The Ppresident has made clear that we are willing to go as deep and wide in liberalization as others are willing to go – including down to zero on agriculture tariffs and subsidies, manufacturing tariffs and services, and has backed this up with a negotiating mandate.

We were disappointed that the April 30 deadline for setting modalities in agriculture and industrial goods was missed.

But the US remains fully committed to successfully concluding an ambitious Doha Round by the end of 2006.

We cannot support a "Doha Lite" package – a high level of ambition with new and real market openings is the only way to achieve meaningful economic opportunities and to meet the development promise of Doha.

A new series of intensive negotiations in Geneva, which began in earnest last week, will require political will to move the negotiations toward the Hong Kong-agreed objective of finishing by the end of the year.

The State Department – and all our embassies – are backing up our lead negotiators Rob Portman, Mike Johanns and Sue Schwab.

It will be paramount for WTO members to make significant progress in the next 6 weeks and before the July 31 deadline set for tabling services offers. This is critical for the American people – of which each family is estimated to benefit $2,400 a year. It is also critical for the global economy and for the world’s poorest and most vulnerable, of which perhaps hundreds of millions could be lifted from poverty if we succeed.

Retreat is not an option. One hundred years ago, another age of integration and globalization came to a shattering halt when a terrorist triggered a cataclysm that began in the Balkans and spread throughout the world. This unleashed an era of grave protectionism, authoritarianism, mercantilism and fascism leading to vast human suffering and economic and human disasters.

Today we are not so much divided into North and South, developed and developing, Muslim and Christian, or Hindu and Jew, but by competing global visions of narrowness and retreat vs. openness and growth.

The dividing line transcends old boundaries. So many nations in the Americas, the Arab world, Europe, Asia and Africa look to the future with determination and hope.