Growing the development dividend: U.S. trade policy and global development in the 21st century
Remarks by Ambassador Michael Froman at the Brookings Institution, 29 July 2014
A Shared History
Martin Luther King Jr. once said, “Human progress is neither automatic nor inevitable.”
And nowhere is that more clear than in the world of development. We need to work at it. That’s why, for the last 70 years, the United States has consciously opened up its market – even at times asymmetrically – to help war-torn countries rebuild and poor nations develop. We have done this not only because it is consistent with our values, but also because we have an interest in the stability that comes with poverty alleviation and the new markets that come from the emergence of a global middle class.
But much has changed over this period, and we face a host of consequential choices about the future of U.S. trade policy and global development, including updating and renewing preference programs such as the African Growth and Opportunity Act and the Generalized System of Preferences.
With stakes this high, the time is right to reexamine the relationship between trade and development and recommit to a U.S. trade policy that will drive broad-based global growth in the 21st century.
And no time is more appropriate than now – as we prepare to host 50 African heads of state and government for the first-ever U.S.-Africa Leaders Summit – to discuss how we can work together to boost growth and prosperity on both our continents.
And as we seek to move beyond the barriers that divide our nations, it is worth remembering that trade is part of a history that we all share. According to anthropologists, the ability to trade across long distances is one of the traits that separate us from other species. From the laying of the Silk Road to the rise of great trading states like the Ghana Empire to the discovery of the New World, trade has always been central to development.
An Era of Unprecedented Progress: Trade and Development since WWII
Now the link between trade and development has never been stronger than during our most recent chapter of world history. Since World War II, the United States has been one of the principal architects of a global trading system founded on the principles of openness, fairness and freedom. Through that system, we’ve seen time and again how trade advances global development by promoting growth and alleviating poverty.
Here are a few of the more recent milestones from what has been an era of unprecedented progress: Between 1991 and 2011, developing countries’ share of world trade doubled, rising from 16% to 32%. During the same period, nearly 1 billion people were lifted out of poverty. In the mid-1990’s, foreign direct investment flows to developing countries grew to surpass official aid flows. And last year ushered in another first: the value of trade between developing countries exceeded that between developing and developed countries.
Looking at the historical record, it is clear that while trade alone cannot solve every development challenge, it is a necessary part of any successful and sustainable development strategy.
And the literature on this is clear:
Trade fuels faster growth, facilitates investment, and reduces poverty in developing countries, which translates into more jobs and increased incomes for the poor.
Trade allows countries to import cutting-edge technologies and inputs at lower prices, it drives domestic firms to become more competitive, and encourages efficient resource allocation and specialization.
For small countries with no trade, there is very little scope for large-scale capital investment and limited prospects for specialization. Without export markets, the production of many goods are economically unviable, but with trade, these countries have broader possibilities.
Higher growth, more employment and higher incomes also create more resources with which to finance investments in anti-poverty programs and provide citizens with better access to public services. This virtuous cycle depends on a number of other factors such as institutions, rule of law, investment in infrastructure and education, but it breaks down when trade is not part of the equation.
Take Singapore’s remarkable rise. When it became independent in 1965, Singapore had a small domestic market, little or no natural resources, and a GDP per capita of $516. Today, Singapore is consistently ranked among the least-corrupt, most-open, and most business-friendly economies in the world. And contrast this path with the choices of Venezuela, which in 1965 had a GDP per capita more than twice that of Singapore, but is now one of the least-open economies in the world. Last year, Singapore’s GDP per capita was around $55,000, a roughly 100-fold increase since 1965, while Venezuela’s was less than $13,000, notwithstanding its abundant resources. Now there are a lot of factors that go into this but open trade is certainly among them.
Moreover, as Chile’s experience demonstrates, openness to trade makes firms more competitive by encouraging efficient resource allocation both within firms and within the greater economy. During the late 1970’s and early 1980’s, Chile opened its economy to trade and, as a result, Chile’s export and import-competing sectors increased their aggregate productivity by roughly 20% and 25% more than the non-traded goods sectors over a period of seven years. Between 1980 and today, Chile has reduced its poverty rate by 75% and raised its life expectancy at birth by a decade.
In recent years, of course, the biggest development story of all has been China. After China began opening to international commerce, its annual GDP growth increased from 4% between 1949 and 1978 to an average of nearly 10% since 1979. This sustained growth lifted 680 million people out poverty between 1981 and 2010, roughly three quarters of the world’s total poverty alleviation during that period. We welcome the rise of a stable, peaceful and prosperous China that upholds the rules-based trading system, not only because human welfare rises with it, but also because as China’s domestic demand grows and as it continues to open its economy to fair competition, American workers, farmers, ranchers and businesses will find more customers among China’s 1.3 billion population and burgeoning middle class.
Take the first class of graduates from the GSP Program: South Korea, Hong Kong, Singapore, Israel and Mexico. Despite their differences, each of these nations chose trade as a key part of their economic strategies. A few decades later, all are development success stories, they’re all significant markets and close partners of the United States. Their citizens enjoy higher standards of living, their industries are more competitive, and they are better able to contribute as responsible members of the international community.
Indeed, witness the distinction between Asia and much of the Middle East. One region has seen an explosion of trade and integration – and significant achievements on virtually all indices of development. Over the same period of time, the other remained one of the most autarchic, least economically integrated regions of the world and has seen much less pronounced progress on the various dimensions of development.
Of course, in seeking development, it is not enough to push just for increased growth. We must seek development that is broad-based and inclusive. We must seek development that is sustainable. And that’s why raising standards is a key objective of our trade policy. Our preference programs are conditioned on the beneficiaries having the rule of law, fundamental protections for workers and basic good governance principles in place. And our efforts to negotiate high-standard agreements with Asia Pacific and European partners are focused on securing the strongest labor and environmental provisions of any agreements ever signed.
Examples like the garment sector in Bangladesh are a cautionary tale, reminding us that trade works for development when its benefits are broadly shared. If workers have no voice and toil in desperate and unsafe conditions, whether in Dhaka or Phnom Penh, the promise of trade will remain unfulfilled.
A World in Flux: Rising Economies, New Trade Dynamics
Clearly, more must be done. Extreme poverty persists for more than 1.2 billion people. Inequality has increased within developing countries even as average incomes have increased. And population growth threatens to outpace the ability of some governments to provide basic services and of some economies to provide sufficient opportunities for its people, particularly for its young.
Moreover, any path forward must account for three changes that are reshaping the world we share and revising the relationship between trade and development.
The first of these changes is the rise of emerging economies. They have benefitted enormously from the openness and predictability of the global rules-based trading system, and as their role in that system increases, it is only appropriate that their responsibilities for maintaining it do as well. With the increasing importance of South-South trade and global investment flows, not only are these countries better able to provide for their own citizens, but they also have an increased role to play in contributing to the development of their poorer neighbors as well.
Second, as it has throughout history, technological change is presenting new challenges and opportunities for global trade and development. Even excluding China, developing-country Internet usage has risen by over a billion users since 2000, and mobile-telephone use has grown even faster. In a world of increased connectivity, farmers and small businesses in remote areas are more able to access market information and reach foreign customers than ever before. And this creates new opportunities to expand trade, promote inclusive growth and address major development challenges.
The third and related change is the importance of looking broadly at all the factors that impact trade. During 1990-2010, through multilateral and plurilateral tariff negotiations and as a result of the WTO accession process, average MFN applied tariff rates decreased by roughly two-thirds. Add to that the development of preference programs and the proliferation of FTA’s that eliminate tariffs, and it’s clear that non-tariff barriers to trade and supply-side constraints on competitiveness play an increasingly important role in determining whether and how trade will contribute to development and poverty alleviation.
When held up against the long arc of history, it is clear that change is occurring at an unprecedented pace. Yet the potential for trade to drive global development remains as strong as ever. To better realize that potential, we need to update our approach to trade and development as well.
The Next Chapter: Beyond Market Access
President Obama’s trade agenda brings traditional policy tools into the 21st century and offers a more comprehensive look at development. This agenda is informed by a hard-headed, honest assessment of trade’s potential to contribute to development as well as its limits.
To begin with, we’re working with Congress to reauthorize GSP and to update and extend AGOA, which has been the cornerstone of our trade policy with sub-Saharan Africa since 2000. Under AGOA, total exports from sub-Saharan Africa to the United States have tripled and, as AGOA countries improved their business and investment climates, the stock of U.S. FDI has almost quadrupled. AGOA has also supported the diversification of Sub-Saharan African economies; since 2001, non-oil, non-mineral exports under AGOA to the United States have increased almost four-fold, but at only $5 billion, there is much room for growth.
Twenty-three hundred years ago, Aristotle observed that “there is always something new coming out of Africa.” And over the last 14 years, thanks in part to AGOA, we’ve seen a lot that’s new coming out of Africa. To name just a few: Between 1999 and June 2011, Lesotho expanded its manufacturing jobs almost threefold. Between 2011 and 2013, Ethiopian shoe exports under AGOA increased more than thirtyfold. And last year, South Africa exported more than $2.2 billion in AGOA motor vehicles and parts.
AGOA has been good for America, as well. Since 2000, U.S. goods exports to sub-Saharan Africa increased fourfold, from $6 billion to $24 billion. Last year, U.S. exports to sub-Saharan Africa supported nearly 120,000 jobs here in the United States. Given that Africa is home to the world’s fastest-growing middle class and six out of the top ten fastest-growing economies in 2014, it’s easy to see why global companies like GE, Caterpillar, and Procter & Gamble increasing view engaging with Africa not as a choice, but as a necessity.
Behind the growing commercial ties between America and Africa are real people – countless families and communities who have benefited from AGOA. There is the story of fashionABLE – a Nashville-based company that employs vulnerable women in Ethiopia, many of them former sex workers, to produce high-quality scarves and leather products.
According to Barrett Ward, the company’s founder, “[t]he solutions to poverty do not lie in developing a business model that gives 10 percent of its profits to charity – the solutions are in developing businesses that do trade with Africa, tying them into the worldwide economy and giving them manufacturing opportunities.”
FashionABLE has relied on AGOA to reduce the costs of selling its products in the United States, in the highly-competitive fashion industry. And for the remarkable women behind these products – who are able to support themselves and their loved ones in a life of dignity – AGOA is much more than trade policy.
There’s Randa Filfili from Senegal, who has expanded her family’s company, Zena Exotic Fruits, to sell processed fruit to over 200 wholesale companies to serve markets in Europe and the United States. Ms. Filfili takes pride in producing a competitive product while giving her 40 employees, 90% of whom are women, a safe and non-discriminatory workplace.
Ms. Filfili’s story – and the numerous others like hers – are to be celebrated. But there is much more work to be done. For too many African businesses, regulatory complexity, weak infrastructure, and other capacity challenges have kept the prospect of exporting under AGOA out of reach.
That’s why we have been involved in a comprehensive review of AGOA, and why I have traveled to Africa four times over the last two years. We have been talking with African and U.S. leaders, ministers, large and small businesses, academics, think-tanks and NGOs to determine what’s worked well and what needs to be changed. As a result of this review, we believe there may be ways to upgrade AGOA, including:
renewing AGOA and its third country fabric provisions for a sufficient period of time to encourage meaningful investment and sourcing;
expanding AGOA’s coverage while taking into account sensitivities here at home;
simplifying the rules of origin to make it easier for African firms to export to the United States while promoting further production in Africa; and
updating AGOA’s eligibility criteria and review processes to ensure that we are raising standards in Africa and have greater flexibility to enforce those standards.
The specific parameters of AGOA are, of course, are ultimately a prerogative of Congress, and we look forward to working with them to put in place a program that reflects the reality of Africa’s rise.
But perhaps the clearest lesson from AGOA over the past 14 years is that market access – while important for spurring trade and development – simply isn’t enough. For sub-Saharan Africa to deliver on the promise of being an emerging economy, we must deal with the supply-side constraints that infringe on Africa’s ability to compete and integrate successfully in the global trading system. Here too the academic literature is clear: Tariff preferences are not enough; we must address the impact of surrounding constraints.
For the United States, this requires a comprehensive, whole-of-government trade and investment strategy with a renewed AGOA at its core and the support of both the public and private sectors on both continents – an “AGOA Compact” that brings together our collective resources and puts us on a common course to trade-led growth and development.
It requires hard infrastructure: roads, ports and very importantly, access to affordable, reliable electricity. USAID, MCC, OPIC, Ex-Im and TDA are active in this area, including by driving Power Africa.
It requires trade capacity building: technical assistance to implement critical standards, including by training local laboratories and inspectors to meet SPS standards, so that African farmers can export more of their product to global markets.
It means providing training and support for young entrepreneurs, such as the participants in the Young African Leaders Program and the African Women’s Entrepreneurship Program, and for small businesses through enhanced Trade Hubs so that they can take better advantage of market opportunities.
It requires soft infrastructure, or trade facilitation: single border crossings, consistent customs procedures, IT systems that allow customs organizations to share information so that when a shipment is cleared in Mombasa or Dar es Salaam, it doesn’t have to be re-cleared by the customs officials of each country in the East Africa Community whose territory it traverses.
Unfortunately, a couple countries now appear to be revisiting their commitment to implement the WTO Trade Facilitation Agreement later this week. The first fully multilateral trade agreement in WTO history, the TFA would make border procedures more efficient, and in doing so, cut trade costs by almost 14.5 percent for developing countries and 10 percent for developed countries.
We are hopeful about achieving a consensus, because alongside the economic stakes, the credibility of the WTO as an institution rests on the swift implementation of the Trade Facilitation Agreement. Bali breathed new life into the multilateral trading system; it would be short-sighted – especially for a couple developing countries – to block the implementation of the Trade Facilitation Agreement this week, putting at risk again the continued viability of the multilateral system and undermining the development efforts of so many countries reliant on that system.
Addressing Africa’s supply-side constraints is critical, but there is more that can be done to create demand and build markets as well. Creating market demand at scale by deepening regional integration is important, and our support for those efforts, including through our work with the East African Community to develop a regional investment arrangement, is key. Demand can also be promoted through the type of public-private partnerships we’ve developed in the context of Power Africa and the New Alliance for Food Security and Nutrition.
Of course, we are not operating in a static world. As Africa enters into reciprocal trade arrangements with the EU, for example, trading relationships begin to change. European companies have preferential access to Africa’s markets while we are giving African firms preferential access to the U.S. market. In addition, the EU and Canada have each revised their GSP program to adjust to the rise of emerging markets. We need to take these developments into account as we consider our approach going forward.
Indeed, as we look to the next chapter of U.S. trade and investment relations with Africa, and as Africa itself furthers its efforts to deepen its integration – first as regional economic communities and ultimately in the context of a continent-wide free trade area – we need to think through how our trade relationship with Africa might evolve from one built around a unilateral preference program to a more reciprocal set of arrangements over the medium and long-term.
This isn’t every country’s approach to trade and development. Some go into developing countries more focused on taking resources out of those countries than on investing in human resources in them. It’s important that we remain fully engaged and deliver on this comprehensive trade and investment strategy to demonstrate that there is a better way.
As President Obama said in Africa last year, we seek “a new kind of relationship – a partnership rooted in equality and shared interests.” Next week, when the President gathers 50 heads of state and government for an historic U.S.-Africa Leaders Summit, defining the next generation of trade and investment relations will be at the center of their discussion. It’s an important moment – for Africa, for the United States, and for our continuing efforts to further development through trade and investment.