EXCERPT: OECD REPORT ON BENEFITS OF OPEN TRADE, INVESTMENT
(Rebuts arguments on labor, environment, sovereignty)

Washington -- A report prepared for a group of 29 industrialized countries says that opening markets to trade and investment makes them stronger as competition stimulates efficiency, which in turn contributes to economic expansion and rising incomes.

The report was adopted by ministers of the group, the Organization for Economic Cooperation and Development (OECD), meeting April 27 in Paris.

"Results speak for themselves," the report says. "In the last decade, countries that have been more open have achieved double the annual average growth of others."

According to the report, critics wrongly blame trade with low-wage countries for putting pressure on wages of unskilled workers in industrialized countries.

"Fully 80 to 90 per cent of changes in wages and incomes distribution in OECD countries are the result of factors other than trade with developing countries," primarily changes in technology and business organization, the report says.

In fact, total trade in manufactured goods between OECD countries and emerging economies is broadly in balance, a situation little changed in 30 years, it says.

The report rebuts arguments that liberal trade and investment rules lead to weaker labor and environmental standards and national sovereignty.

Following is an excerpt from the OECD report, the executive summary:

(begin excerpt)

OPEN MARKETS MATTER: THE BENEFITS OF TRADE AND INVESTMENT LIBERALIZATION

EXECUTIVE SUMMARY

1. This study responds to the request of OECD Ministers at the May 1997 Ministerial Meeting that the Secretariat produce a "focused, multidisciplinary study of the benefits of trade and investment liberalization." The study documents the contribution of trade, and investment liberalization to wealth-creation and well-being. But it also addresses and puts into perspective the concern that open markets are responsible for a variety of ills that afflict our societies and trouble our citizens.

2. The study's chief purpose is to help governments better explain the clear net benefits of keeping markets open to international trade and investment and of staying the course of market-led reforms. In doing so, it stresses that market liberalization is not a self-contained, abstract end in itself. Rather, it is one important component of what must be a coherent set of policies aimed at achieving a durable improvement in living standards. It is also recognized that, while there are clear overall benefits for our societies, it is necessary to adopt properly designed and well-targeted policies to assist those who are harmed by change.

The benefits of open markets

3. Trade and foreign direct investment are major engines of growth in developed and developing countries alike. The volume of world merchandise trade is 16 times greater today than it was in 1950. That reflects the dismantling of import and export barriers. Outflows of foreign direct investment (FDI) have grown even faster, rising twenty-five fold during the last quarter century, from $14 billion to $350 billion a year. Trade and investment-induced market integration has led to deeper forms of economic interdependence among nations as a growing number of developing and former centrally planned economies have become more closely linked to the global economy.

4. The case for open markets rests on solid foundations. One of these is the fact that when individuals and companies engage in specialization and exchange a country will exploit its comparative advantage. It will devote its natural, human, industrial and financial resources to their highest and best uses. This will provide gains to firms and consumers alike. Another is the strong preference of people the world over for more, rather than less, freedom of choice.

5. A more open domestic market is not a handicap; it is a source of competitive strength. Exposure to international trade is a powerful stimulus to efficiency. Efficiency, in turn, contributes to economic growth and rising incomes.

6. Results speak for themselves. In the last decade, countries that have been more open have achieved double the annual average growth of others. Liberalization from the Uruguay Round alone has delivered a global tax cut estimated to be worth more than $200 billion per annum: the equivalent of adding a new Korea or Switzerland to the world economy over the next ten years. Liberalization benefits citizens in tangible ways: In the case of Australia, for example, its recent unilateral trade liberalization has, in effect, put $1,000 in the hands of the average Australian family.

7. The case for opening markets to investment is as compelling as it is for trade. More open economies enjoy higher rates of private investment, which is a major determinant of economic growth. FDI is actively courted by countries, not least because it generates spillovers such as improved management and better technology.

8. The benefits are tangible. As is true with firms that trade, firms and sectors with high FDI have higher average labor productivity and pay higher wages. Outward investment enables firms to remain competitive and thus supports employment at home. Investment abroad stimulates exports of machinery and other capital goods and increases demand for intermediary products, know-how and specialized services. A study of OECD countries found that each $1.00 of outward foreign direct investment was associated with $2.00 of additional exports and a trade surplus of $1.70. Without FDI those exports would be smaller, sustaining fewer of the more productive, better paying jobs that go with them.

9. Liberalization can benefit both developed and developing countries alike. As is the case for OECD countries, foreign investment brings higher wages and is a major source of technology transfer and managerial skills in host developing countries. This contributes to rising prosperity in the developing countries concerned as well as enhancing demand for higher value-added exports from OECD economies. In this way, developing countries are becoming major stakeholders in the trading system today as is evidenced by estimates that close to one half of Uruguay Round welfare gains may accrue to them.

How does market openness affect employment and earnings?

10. Despite these gains, concerns are voiced about the impact of openness on labor markets. This is seen to stem from the fact that since the 1970s there has been an increasing differential between labor market outcomes -- employment and earnings -- of skilled and unskilled workers in OECD countries. This has led some to see competition, particularly from low-wage, low-labor-standard developing countries as the fundamental cause of this situation.

11. This study finds that the negative effects of such trade and investment are, at most, modest. Adverse effects in labor markets are primarily driven by changes in technology and business organization. The fact is that these and other changes such as those arising from domestic competition, shifts in patterns of demand and movement in the business cycle occur continuously in modern economies. Thus, the effects of trade and investment need to be kept in perspective. This is why, in the case of the United States, trade has been found to be responsible for less then 6 per cent of the drop in U.S. manufacturing employment between 1978-90. The following factors should also be borne in mind:

-- While it is recognized that trade, investment and technological change have interacted in ways that depress demand for unskilled workers, competition from low-wage countries has not been a major contributing factor. Fully 80 to 90 per cent of changes in wages and incomes distribution in OECD countries are the result of factors other than trade with developing countries.

-- While imports of manufactured goods from emerging economies have grown over the past three decades, their value amounts to a mere 1.6 per cent of OECD countries' combined output. The fact is that total trade of manufactures between OECD countries and emerging economies is broadly in balance, a situation that has changed little since the late 1960s. This draws attention to the mutual benefits of such exchanges.

-- Developed economies today derive around 70 per cent of their output and employment from the service sector. Most of these services remain non-tradable and, to the extent that there is competitive pressure associated with greater trade and investment in services, this comes from other predominantly high-wage OECD countries.

-- Increased foreign direct investment and the outsourcing of production exert at most modest effects on OECD labor markets. As with trade, FDI is still largely an intra-OECD affair. Some 85 per cent of outflows originate in, and 65 per cent of inflows are directed at, other high-wage, high-producing OECD countries. A good 60 percent of world FDI flows is directed to, and sustains employment in, services activities where OECD countries and workers are by far the most competitive suppliers. In addition, the FDI that flows outside OECD tends to go to the largest or richest markets rather than those that could be considered "low-wage platforms."

-- The aggregate contribution of trade to employment has to be taken into account too. Since 1993, exports have accounted for one-third of U.S. economic growth and one in ten civilian jobs are supported by exports of goods and services. The ratio in manufacturing is one in five. In Ireland, one, in four jobs depend on exports; in Canada, it is one in three.

12. Despite the fact that open trade and investment produces overall gains, some citizens and communities (often concentrated in particular sectors) experience adjustment pains and income losses as a result of liberalization. This presents a genuine challenge to our societies. The real question is what is the appropriate response?

The cost of protection

13. One approach has been -- and remains -- to protect industry and workers against imports by raising trade barriers. Societies typically pay a high price when they resort to protection. Protection raises the price of both imports and domestic products, which restricts consumer choice and places the heaviest burden on those in society who are least well off. It slows change and raises its cost, inflicts damage on exporting firms by making them less competitive and almost invariably translates into greater long-term hardship.

14. Protection does not deliver what it promises. In the United States, it has been estimated that if liberalization were stopped right now, the wages of skilled workers would decline 2-5 percent and unskilled wages would remain flat. Imposing a 30-percent tariff on developing country exports would inflict even greater damage; it would cut unskilled wages by 1 percent and skilled wages by 5 percent.

15. The cost to consumers of protection in OECD countries has been estimated to be as much as US$300 billion. The average cost to consumers of a job protected exceeds the wages of employees whose jobs are saved. In one case the consumer cost of saving a single job in one OECD country was estimated to be as high as US$600,000 per annum. Even when the cost is lower, the fact remains that protection consumes resources that could more fruitfully be used to retrain or provide transitional income support to displaced workers or to develop new products or new businesses.

How go deal effectively with the need for adjustment

16. The fact that resorting to protection is not the answer is a vital message in its own right. But it is not the whole story. Policies are still needed to ease the plight of those in the front line of adjustment. There is a need to respond to concerns about distributional issues and the transitional costs arising from that adjustment. It is just as important to stress that there is, in fact, a better way.

17. Properly designed labor market and social policies that provide adequate income security, facilitating the redeployment of displaced workers into expanding firms and sectors, produce important equity and efficiency gains. The effectiveness of these policies will, of course, depend on the degree of flexibility in labor markets as well as on a range of other policies. In fact, a much broader strategy is called for, one capable of upgrading the skills of workers and raising workforce mobility. Areas such as education, training, taxation, pension reform and the portability of health benefits (where that is an issue) need to be dealt with in a comprehensive way. In addition, introducing greater product market flexibility through well-structured regulatory reform can help firms remain competitive in the face of tougher competition. These steps will ensure that citizens and communities are able to take advantage of and adjust to what is the foremost challenge they face: namely technology-driven structural change.

18. In sum, a balanced mix of policies is needed to reinforce adaptive capacity in the face of all structural changes, including those stemming from trade and investment liberalization. The OECD Jobs Strategy sets out the ways to deal with these issues.

19. Social protection policies also need to be reoriented to ensure that those who lose their jobs -- including as a result of trade or investment liberalization -- are insured against excessive income loss during the period of search for a new job. There is no inevitable connection between increased openness and less social protection. In fact, increased international trade and investment is an additional reason to improve the efficiency of public social protection systems, rather than a rationale for reducing them.

20. In regard to concerns about core labor standards, it seems clear that this issue -- vital as it is -- does not call into question the fundamentals of trade and investment liberalization. Rather, it is a matter of finding the most effective way to ensure implementation of those core standards. OECD studies have concluded that low standards are not generally a significant competitive factor in trade with the countries concerned; and there tends to be a positive association over time between sustained trade liberalization and improvements in core labor standards. At the same time, OECD work has found that concerns expressed by certain developing countries that core standards would negatively affect their economic performance or their international position also are unfounded; indeed it is theoretically possible that the observance of core standards would strengthen the long-term economic performance of all countries.

Is trade and investment liberalization inimical to environmental protection?

21. There are concerns that liberalization of trade and investment may be fundamentally inimical to the environment or will lead to a "race to the bottom" in environmental standards. The fear is that developed nations will be pressured to relax, or precluded from improving, their environmental standards in the face of competitive pressure from developing countries with lower environmental standards and that firms will relocate to take advantage of lower environmental standards in developing countries.

22. Trade and investment liberalization, by promoting a more efficient use of resources and sustaining growth, can make a vital contribution towards creating the conditions necessary for environmental improvement. The evidence shows that there is a positive link between countries' environmental performance and rising per capita income levels, security of property rights and administrative efficiency. That is reflected, for example, in the fact that standards for air and water quality in OECD countries are much higher today than they were 50 years ago, and it is these countries that today apply the most stringent environmental regulations.

23. Trade and investment liberalization is, of course, only a part of the overall growth process, but it can clearly play a vital contributing part, fueling the improvement in environmental quality that has gone with it. It can do so by promoting a more efficient allocation of resources (including environmental resources), removing restrictions and distortions (e.g. subsidies) that are damaging to the environment and improving the speedier transfer, adoption and diffusion of environmentally friendly technologies.

24. The wealth creation to which liberalization contributes should also help reduce poverty, which is often the underlying cause of environmental degradation in many developing countries. It may also provide the means to pay for the prevention or clean-up of pollution. Studies show that pollution intensity has grown most rapidly in those countries that remained most closed to world market forces. In turn, this lends support to the view that openness to foreign competition is more likely to increase the demand for improved, rather than lower, environmental standards.

25. There have been concerns that, with liberalization, investors will be increasingly attracted by "pollution havens." There can, of course, be exceptional cases of this kind. However, experience shows that openness to trade and investment generally translates into increased pressures for more stringent environmental standards. Moreover, multinational firms are adopting worldwide standards for environmental performance. It should also be borne in mind that over 60 percent of FDI takes place in less pollution-intensive service industries and that already the amount of investment in pollution-intensive industries in developing countries is lower as a share of total FDI than it was in 1972.

26. Of course, the concern that economic growth should not harm the environment is real, and the need to avoid this is imperative. But it is vital to target the actual policies and situations that are the problem and to tailor the responses accordingly. Trade and investment liberalization are not the root causes of environmental problems. Under trade agreements such as the WTO, governments retain the sovereign right to set their own environmental objectives. And they can apply measures to enforce achievement of them within their territories -- just as long as they are not more trade restrictive than necessary and they do not apply a double standard by discriminating against the commerce of other countries. In fact, the real problems that arise can in many cases be traced to situations where the use of environmental resources is not properly priced and reflected in the prices of goods and services consumed by firms and people. What is needed, however, is not a halt to liberalization efforts but sound environmental policies that are properly integrated with trade and investment policies.

27. While the demand for environmental quality is likely to rise as societies move up the income ladder, this is not inevitable. Neither is there any guarantee that significant improvements in environmental quality will be demanded early enough in the development path to cut the pollution intensity of production fast. Nor can we ignore the risk that liberalization of trade and investment may exacerbate problems if environmental policies are poorly designed or weakly enforced. But that does not mean there is any reason to retreat from liberalization. On the contrary, it underlines the fact that countries need to have adequate environmental policies and infrastructure in place to address the environmental effects of economic growth generally and that coherent and mutually supportive trade, investment and environment policies are of paramount importance.

How does market openness affect national sovereignty?

28. There are concerns in some quarters about the way in which market openness affects national sovereignty. More particularly, there are concerns that increasing trade and investment flows, and multilateral rules for trade and investment, may erode the capacity of governments to exercise national "regulatory" sovereignty. That is, to decide the appropriate policies and regulatory approaches for their own country or region, on issues such as environmental protection or consumer health and safety, as well as on trade and investment matters. There is also a perception that multilateral agreements encourage or even require such regulatory standards to be reduced or eliminated.

29. Trade and investment liberalization, in fact, forms part of overall strategies to maintain and even strengthen a country's capacity to determine its own future (and thus its sovereignty), by improving its competitiveness and income, and making it less vulnerable to external shocks. Thus liberalization and regulatory reform are undertaken by national governments (whether unilaterally or in the context of international negotiations between sovereign governments) to enhance national interests. Such decisions are made precisely in order to gain the added security, stability and enhanced prospects for national welfare that internationally agreed rules provide. An agreement such as the WTO is essentially an exercise of national sovereignty rather than a surrender of it.

30. Multilateral trade and investment agreements do not regard all national regulatory measures as unnecessary. Nor do they require the removal or reduction of all barriers to foreign trade and investment. Indeed, governments retain the sovereign right to set their own objectives on such matters. The rules do require countries to prepare, implement and administer national regulations that affect foreign goods, services and investment in a transparent, non-arbitrary and non-discriminatory way. But that is because governments have taken a sovereign decision to abide by such rules. And they have done so because they recognize that discriminating between foreign and domestic firms is rarely, if ever, necessary to achieve domestic policy goals; and that such rules help promote fairness and stability in an international economy in which all countries have a stake. Such agreements explicitly provide that high-quality effective national regulation be permitted to work properly in a number of areas. Where the rules place limits on recourse to certain trade or investment restrictions, this arises from the agreement of sovereign member countries that it is in their mutual interest to have each other do so. Moreover, the WTO rules and dispute-settlement processes recognize that there can be legitimate grounds for exceptions from these rules in certain circumstances, or to achieve other policy objectives.

What is the role of politics and leadership?

31. Past experience makes it clear that liberalization should be sustained in order to continue to improve the living standards of our citizens. More open economies typically grow faster, and the rising incomes they provide are likely, on balance, to provide greater freedom of choice, as well as greater efficiency. At the same time, proponents of market opening need to devote more time and effort to addressing concerns about trade and investment liberalization. Efforts must also be made to explain that pressures on jobs and incomes or on the environment are best dealt with tough targeted and coordinated policies addressing the problems at their root. Protectionist responses almost always make matters worse.

32. The liberalization debate is a debate over ideas, and it matters greatly that OECD Member governments be in a position to communicate why and how market liberalization forms part of the answer to the concerns of citizens, rather than being their root cause.

33. The immediacy of pains that liberalization can generate and the more diffuse, longer-term manner in which its benefits tend to materialize for economies as a whole will always complicate the lives of advocates of market openness. Done properly, liberal trade and investment are, and must be seen as being, not only about prosperity and greater freedom of choice but also about fairness. Fairness in ensuring that the general interest -- concern for the welfare of all citizens -- prevails over special interests; and in seeing to it that the dividends of liberalization are distributed more equitably, both within and between countries. This is why the politics and exercise of leadership at the national and international level continues to matter greatly.

(end excerpt)