FROM THE OFFICE OF PUBLIC AFFAIRS

I am glad to be here this evening to speak at the EconomicStrategy Institute's annual conference. I think this group hasdone a great deal to promote important rational economicdiscourse of crucial issues that are very important to the futureof our country. Clyde Prestowitz was one of the earliestcommentators to recognize the overwhelmingly importance of whatwas happening in Asia in the 1980s and that region's incredibledynamism.

Tonight, I want to address what I think is the critical issueof economic strategy for the United States and for the otherindustrialized countries in the years ahead: Is it in ourinterest to promote as active integration as possible with thedeveloping economies of this world, or is that something that weshould seek to resist?

I don't think there will be any other debate in this decade asimportant for the future of security and the future economic wellbeing of our country. If anybody has any doubt as to my view onthis question, let me state my answer: I believe that it isoverwhelmingly in the economic interest of the United States topromote the integration of the global economy and to broaden theeconomy to more fully include the developing countries consistentwith the principle of open-market democracy.

Let me further develop this argument. First, the idea thateconomic dislocations in the United States, as serious as theyare, are substantially due to international trade is wrong.Second, international trade agreements have accounted for only avery small fraction of whatever consequences globalization hashad and its impact, on the whole, has been favorable for Americanworkers. Third, future trade agreements for the United Stateshave enormous potential to improve and increase our economic wellbeing and our competitiveness. And fourth, beyond the issue ofour prosperity it is enormously to our strategic advantage topromote open markets around the world.

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The Role of Trade in Our Economy

What has been the role of trade on our economy? At one level,we have seen profound changes towards globalization. The share ofinternational trade in our economy is four times as high today asit was two generations ago. Imports and exports togetherrepresent nearly 30 percent of our GDP. In a different sense, Iwould suggest to you that to blame unemployment or to blame wagedifferentials primarily on international trade is something thatis not supported by the evidence. Over the last decade, the shareof America's GDP accounted for by imports from low-wage countrieshas increased by only one and a half percent. Over the last 30years, that increase is only about three percent.

How does this structural change compare with other structuralchanges in our economy? Over the last 30 years, the share ofnational defense has fallen by more than four and a half percent.Over the last 30 years, the share of health care has risen bynearly eight percent. Over the last 15 years, the increase as ashare of the economy of the health care sector is twice as fourtimes as large as the change due to the increase in imports fromlow wage countries.

Those are some indicators of structural changes. But one canlook at others such as the relative size of services andmanufacturing in our economy. One can also look at the fractionof women who are working or the expansion of the informationtechnology center of our economy.

The fact is that important as less-developed countries arestrategically and as markets for the United States in the future,the pressures they have brought on U.S. workers is minimal asevidenced by the fact that the total is less than four percent ofGDP at present and the increase over the last 15 years has onlybeen about one and a half percent.

Now, what about that one and a half percent? How large animpact could it possibly have? Here I think it is important torecognize another feature of our economy that is not recognizedin many discussions of globalization. It is still true and willbe true for the foreseeable future that the substantial majorityof American workers are engaged in the production ofnon-tradeable goods: producing houses for America, cuttingpeople's hair, serving meals in restaurants, taking care ofpeople when they are ill, providing them with higher education,doing their wills, selling them clothing: the list goes on andon.

Two-thirds of American workers work in sectors that producenon-tradeable goods and services. I recently saw a study of theeconomy of the Philadelphia SMSA. It said from the point of viewof the Philadelphia SMSA, "More than half the people whoworked there were engaged in production of goods and servicesthat did not cross outside the border of the PhiladelphiaSMSA." These goods and services did not trade with the restof Pennsylvania, let alone the rest of the world.

Why is this fact so profoundly important? It means that thebasic idea that there won't be any work for American workersbecause of international trade is not plausible. The vastmajority of what needs to be done will need to be done regardlessof what happens with international trade. Of course it is true,obviously, as a basic proposition of international economics,that trade and imports could exert forces leading to convergence.And careful studies of rising wage inequality have been done byquite a number of economists who have looked at the change inequality, which is very profound, and have asked how much of thatchange is a result of international trade.

I think it's a fair reading of those studies that the evidenceshows that the amount that is due to increases in trade of risinginequality is on the order of 10 percent or perhaps 20 percent ofthe total. That does not mean it is not a serious issue. It's anissue that we have to address in a whole set of ways, primarilythrough education. It is just not plausible to suppose that thelargest part of the increase in inequality is the result ofchanges in international trade.

One easy way to see this is to ask the question: what hashappened to the quality of skills in less-developed countries? Asthe classic international trade theory suggests, what happenedwas that less-skilled workers in developing countries wereexporting their products to the developing world and more skilledworkers of America were exporting their skills to developingcountries. One would expect this convergence in both directions.One would expect a pressure on the wages of less-skilled workershere, and one would expect pressure on the wages of more-skilledpeople in developing countries as American products reflectingskill were exported to their countries.

That is not what has happened. Instead what has happened isthat, worldwide, there has been an increase in the return onskill and an increase in the return on education suggesting whatI think most observers have recognized: That it is really theprofound changes of technology and the rise of informationtechnology that have permitted the greater leverage of skills.This development is far more responsible for changes in the wagestructure in this country than is international trade.

Expanding Trade and the US Trade Regime

The second crucial point, which I think is also very importantin assessing what the impact of trade on the wage structure hasbeen in the U.S. is this: If you think about the increases intrade that have taken place, it is certainly true that importsfrom less-developed countries have increased very substantiallyeven though as I've suggested, it still represents a relativelysmall share of our economy.

The crucial policy question to be asked is: How much of thatincrease is a reflection of trade agreements that the UnitedStates has negotiated, and how much of it is a reflection ofimproved transportation, improved communication, and improvedeconomic capacity on the part of many developing countries?

Here I think, the answer should be clear to any thoughtfulobserver. The vast majority of any increase in imports that wehave seen is not the result of trade agreements. We had very fewtrade barriers against less-developed countries fifteen yearsago, on the order of five to 15 percent.

In fact, the increase of trade is largely the result ofreduced transportation costs. And it is the result of the growingcapacity of other countries to produce competitive goods andservices.

If we had not had the Uruguay Rounds, if we had not had NAFTA,if we had simply maintained the trade regime that the UnitedStates had in place in 1980 over the last 17 years, I wouldsuggest to you that we would still have seen a large increase inimports. Those imports reflect the capacity of other countries toproduce goods and services, capacity that has increased sharply.This is not to minimize in any way what I think is our mostimportant national economic problem which is to raise the realwages of average and below-average Americans and createconditions in which they can once again look forward to rapidincreases in wages of the kind that were enjoyed a generation ortwo ago. I would suggest to you that the idea that the tradeagreements that we have reached are responsible for the pressureon those real wages is not a case that has been established. Ifthat case has not been established, then neither is the argumentthat these agreements are not in our economic interest.

Even less plausible is the case sometimes made that extraimports place burdens on low-wage workers. The case that importshave increased unemployment, or reduced total employment creationin the United States is a very difficult case to make at a timewhen the unemployment rate is lower than it has been in a verylong time and a time when job creation has proceeded more rapidlyover the last four and a half years than at any time in ourhistory with the exception of the period following one of ourmost serious recessions.

The Case for Trade Agreements

I think the question that has to be asked is what are the bestmethods of promoting trade? And the answer to that question isvery profound. Think about this: the United States has only aboutfour percent of the world's population. Ninety-six percent of theworld's consumers live elsewhere. All of the world's populationgrowth over the next 25 years will take place in developingcountries. Developing countries not only have more rapidlygrowing population and labor forces; developing countries alsowill have much more rapid productivity growth which means muchmore rapid income growth which means that they are much largerand faster growing markets.

The best opportunity we have to tap these markets is throughentering into market opening measures that insure that Americanfirms have fair access to these markets. After all, these arewhere the great commercial opportunities of the future lie. We inthe United States do not currently have major barriers toimports. Trade agreements like NAFTA, like the Uruguay Round andlike any potential future trade agreements that we are able tonegotiate are not just good economics, they are good marketing aswell.

In any such agreements, trade barriers in other countries willcome down by far more than trade barriers in the United States.In the case of NAFTA for example, Mexican tariffs came down byfour times as much as American tariffs. In addition, many tradeagreements address issues like intellectual property orinvestment protection that stipulate nontariff improvements inthe trading regime that we are not required to make because wealready have a totally liberal regime.

None of this is to say that the only route to liberalizationis through trade agreements. In many cases, laws already exist.What is required is better enforcement of trade agreementsalready in place. Where trade agreements are violated, the UnitedStates is and will be prepared to respond sharply. Where tradeagreements are not in place but where nations behave in a waythat is inconsistent with fairness, the United States too must beprepared to respond as the Economic Strategy Institute haspointed out over the years.

Let us not forget that the best prospect we have for promotingexports which are a principle engine for economic growth is byincreasing our access to foreign markets. Trade agreements enableus to do that.

Opening markets abroad is very important for American workersbecause study after study after study has found that if youcompare jobs in sectors where exports are produced with jobs insectors that compete with imports or with jobs on average in thewhole economy, the jobs in the export sectors pay higher wages,carry better fringe benefits, and are more secure.

Some might argue that this just proves the argument I wastrying to refute before, namely that it is America's elite whoare involved in exports while it is others who must compete withimports. In fact, careful studies have examined, for a workerwith a given set of characteristics--for a worker who is a highschool graduate--who is a high school dropout--who has two yearsof college--or who has seven years experience--how do wages inexport industries compare with wages in import competing sectors?Again, the answer is the same. Workers in export sectors are paidbetter, have more secure jobs, and get better fringe benefitsthan workers in other sectors of the economy.

By promoting more trade and by promoting more exports, even ifthat means more imports, we are creating better jobs in Americaand giving American workers a better chance. That is ultimatelythe economic case for trade agreements.

But there is another case for an outward looking and ambitiousAmerican agenda. It involves a debate that I have often discussedand that soon may become yesterday's debate. It is the debateabout whether economic integration is a good thing or a badthing. That may not be the question we face. The question we facemay be whether America should be part of the economic integrationthat will inevitably occur or whether economic integration shouldtake place without America?

Should Latin American trade agreements be with the UnitedStates or should Latin America trade agreements be with Europe?Should the United States be a participant in trade arrangementsin Asia, or should those trade arrangements have Japan at thehub?

I would suggest to you that the answer to that question isvery clear. It is enormously in our national interest to takeadvantage of the fact that we sit at the hub of the global systemwith denser trade relations with Europe, denser trade relationswith Latin America, and denser trade relations with Asia than anyof those regions have with one another. That is a pricelessstrategic asset. And it is one we must not squander.

Trade and National Security

There is a final case for more trade that I think is perhapsthe most important case of all. It relates to America's role inthe world at this point in history. I would suggest to you thatthe challenge facing the United States is this: We must becomethe first continental, outward looking, nonimperialist power inthe history of the world. There have been continental powersbefore. Some like Russia were outward looking but alsoimperialist; others like China have been neither outward lookingnor imperial; but there has never been a power that was outwardlooking and that was concerned with stability but that was notimperialistic.

Yet, if the United States is going to achieve its goals ofmaintaining stability in a world that is very rapidly changing,that is what we must achieve. History teaches us what the cost offailure can be. There is the often told story of depressionfollowing the inward turn of the 1920s and following thatdepression, a world war. A history that less often told is thatof European protection against German products before the FirstWorld War and American and European protection against Japaneseproducts before the Second World War. In a world of rapidlyrising economic powers, a strategy of protectionism is anenormously dangerous strategy and one that I believe we must notpursue.

Our strategic interest since lies in making ourselves a forcefor interaction among the nations of Latin America. So we mustwork to complete the goal of free trade in the Americas. If theUnited States is not going to be the force that leads the worldtowards more open markets and towards more integration, I don'tsee where that force is going to be coming from. I think thelesson of history is very clear: when the protection of tradebarriers starts to go up, other consequences follow afterwardsthat are far worse than the loss of some jobs.

That's why I think the most important strategic debate that weare going to have in this country over the next few years isgoing to be what our attitude should be toward the developingworld. The question is whether our view will be that they shouldwalled off, wished away, or whether they will be seen as aprofound source for an opportunity for American producers. In myview the answer is clear. The question of how to view thedeveloping world is a profoundly important one where America canassert leadership and can show the way.

Conclusion

Now at a time when our ideas about market capitalism,democracy, openness, and the free flow of information aresweeping the globe, the United States should consolidate thatvictory through active support for liberalizing world markets.That, then, is really what the trade debate in the next few yearsis all about. Should we look outward or inward, should we beinclusive or exclusive, should we be leaders or followers. Wehave to make a choice.

The President said in his State of the Union address that weno longer had an enemy in the form of Communism. So he asked whatwas the enemy of our time. His answer was that the enemy of ourtime is inaction. That's true with respect to many of ourproblems at home and that is true with respect to our principlemission following the end of the Cold War which is the promotionof global economic integration. Thank you very much.