Making Regionalism Safe

Robert D. Hormats

From Foreign Affairs, March/April 1994

Article preview: first 500 of 3,665 words total.

Summary:  Bringing the newly market-oriented countries of Asia, Latin America and Eastern Europe into the global economy would harness the productive capacity of some three billion people. But increased resistance to free trade has cut the supply of political tolerance for another global trade round anytime soon. An expansion of regional trading areas such as the European Union and NAFTA promises the greatest progress, but international e»orts must keep regional blocs from ­becoming protectionist and ensure they are compatible with the global trade regime.

Robert D. Hormats is Vice Chairman of Goldman Sachs International.

COPING WITH NEW COMPETITORS

The answers to two great questions will soon set the direction of the world economy. One: Will the industrialized democracies cooperate to sustain an open, market-oriented world trade and financial order? To do so, they must rise above the different ways they practice capitalism and mounting domestic pressures for economic nationalism. Two: Can these countries integrate into such an order those countries that are turning from state controls toward market capitalism?

The second challenge, on which this article focuses, requires vision, will and a comprehensive strategy. Established powers normally have difficulty coping with new competitors: France with Britain in the early nineteenth century, Britain with America later, and most recently the United States with Japan. Now, as a group, the industrialized democracies must integrate into the world economy not one but many developing countries, some with enormous economic potential. This process is producing acute concerns among established powers. Will jobs be lost, wages lowered, investment capital diverted? Can workplace and environmental standards be maintained, much less improved?

Despite the frictions of getting from here to there, expanding the participation of these nations in the world economy will greatly enhance the economic growth of developed democracies. Such was the case for the United States in the decades after World War II when farsighted assistance helped revive and reintegrate Japan and West Germany into the world economy. In the next few decades, phasing into a global economic order the newly market-oriented countries of Asia, Latin America and formerly communist Europe would harness the enormous productive capacity and market potential of some three billion people. The result would be an unprecedented transformation and growth of the global economy and a powerful antidote to divisiveness and instability.

But unlike the post-World War II years, no encompassing system like Bretton Woods exists, and no dominating power like the United States was at the time can impose a new order on the world economy. Today?s driving forces are private trade and investment flows. They are vital to growth, technological progress and job creation. These flows are creating inexorable momentum toward the further integration of economies within and across regions. How rapidly that integration proceeds, on what terms and in which parts of the world will shape the new global economic order. The challenge for governments is to reinforce these market trends to harvest long-term benefits while resisting pressures to protect against the short-term adjustments needed for future growth.

The arduously wrought compromises that proved necessary to complete GATT?s Uruguay Round and the North American Free Trade Agreement (NAFTA) amply illustrate that resistance to freer trade has increased. Within developed countries, sentiment is growing that inherent unfairness results from trading with poorer countries where low labor costs are assumed to be the primary source of comparative advantage. And many Americans and Europeans share the apprehension that rising imports from Asia eliminate domestic jobs.

Thus political tolerance would be in short supply for another global trade negotiation soon after the seven-year Uruguay Round. ...

End of preview: first 500 of 3,665 words total.