Trade Policy for a Networked World

NEW ERA, NEW CHALLENGES

Trade policy has been a notable and bipartisan success of postwar American foreign policy. Across 10 administrations and 26 Congresses, Washington has guided the world's economies toward freer trade and higher levels of development -- from the foundation of the General Agreement on Tariffs and Trade (GATT) in 1947; through the U.S. Trade Expansion Act of 1962 and the Kennedy, Tokyo, and Uruguay Rounds of GATT negotiations; to the U.S.-Canada Free Trade Agreement, the North American Free Trade Agreement (NAFTA), recent trade agreements with China, Vietnam, and Jordan, and legislation liberalizing trade with Africa and the Caribbean. Current challenges along these lines include completing negotiations on free trade agreements with Singapore and Chile, inaugurating a new round of the World Trade Organization (WTO) and negotiating Russia's entry into it, and moving forward on a Free Trade Area of the Americas.

Trade agreements have grown in complexity and scope over time, but the landmark achievements of earlier years all dealt with essentially similar problems. They catalogued and reduced tariffs, quotas, and other trade barriers. As a new century opens, however, trade policy is taking on a fundamentally new set of challenges -- ensuring an open, competitive, well-regulated information economy. One of the principal achievements of the Clinton administration was to begin rethinking trade policy to fit this new economy. And one of the great opportunities for the new Bush administration is to build on the foundational agreements of the Clinton years and fully adapt trade policy to the information age.

SETTING STANDARDS AND PROTECTING IDEAS

Trade has typically involved goods one can see crossing the border: beef, steel, semiconductors, cars, or bottles of wine. Postwar administrations thus initially focused on such tangibles by trying to persuade other governments to remove their import tariffs. As tariffs fell, the focus shifted to eliminating import quotas, which distort market behavior and the allocation of resources. As these formal barriers began to diminish, trade negotiations moved into more arcane fields such as harmonizing technical standards -- so that a semiconductor chip built in Costa Rica and a hard drive assembled in Southeast Asia, for example, can run programs written in India for a computer designed in North Carolina.

As President Bill Clinton took office, the development of a networked world added a new set of questions to these familiar issues. Trade policy in the 1990s had to address not just tangible goods traveling by plane or boat, but also weightless products that move instantaneously around the world by wire or satellite beam. Whereas previous negotiations catalogued and reduced a set of existing trade barriers, now policymakers had to anticipate and prevent the creation of new types of barriers.

This adaptation was a high-stakes challenge with potentially enormous payoffs. History had shown that trade barriers take little time to impose but decades to remove. The newly created information networks, however, had no formal trade barriers. The emerging information economy thus offered two great opportunities: a far-sighted and multilateral U.S. trade policy could help preserve open commerce in cyberspace while creating a legal framework to give all trading nations the maximum incentives for creativity, growth, and development.

The Clinton administration, aware of its great responsibility to help shepherd the emerging global information economy, began with a set of cautionary principles designed to prevent precipitous actions and policy mistakes. Information technology (it) industries are still in their infancy, and policies made now will have enormous effect on the course of their development. And of course, policies are most beneficial and easiest to enforce when they arrive through consensus. So Washington and governments abroad need to develop policies through cooperation and discussion with industry, consumers, and others affected by electronic transmissions. Finally, because the Internet has no natural borders, any one country's policies on Internet services will affect the high-tech economies in the United States and around the world -- so domestic policies must proceed in tandem with the international system.

With these principles in mind, the Clinton administration worked carefully to develop a basic set of standards that, if adopted by foreign governments and international trade organizations, could replicate worldwide the United States' rapid development of a networked economy: strong intellectual-property standards that encourage investment, open it markets that will bring in capital and create economies of scale, competition in the telecommunications industry, open markets in services, and caution about policies that would limit development of the Internet.

The intellectual-property-rights program, dating to the Omnibus Trade and Competitiveness Act of 1988, is perhaps the oldest U.S. initiative designed to foster a worldwide information economy. At the time the act was passed, many countries had no copyright, trademark, or patent laws. Some saw intellectual-property rights -- especially when applied to pharmaceuticals or high-tech products such as computer software -- as obstacles to development. But without laws in place to protect these industries, piracy and counterfeiting were not just common but often nearly universal.

To address this problem, Washington began bilateral negotiations with countries where these practices were most egregious. These negotiations were aided by the "Special 301" law of 1988, which required the U.S. trade representative to investigate countries that denied adequate protection to intellectual property. The talks were difficult; at times, as with China in 1995 and 1996, U.S. negotiators had to threaten sanctions on billions of dollars in trade. But the efforts significantly raised the standards by which foreign countries agreed to uphold intellectual-property rights, spurring passage of internationally compatible copyright, patent, and trademark laws around the world.

A bilateral approach remains necessary in many regions today, but the United States can now go beyond adversarial tactics to more cooperative methods. Having strengthened their legal and enforcement regimes, many U.S. trading partners now enjoy increased foreign investment, which in turn enhances access to technology at home, and have thus concluded that strong intellectual-property standards could speed up their economic development. This consensus allowed for the negotiation of a landmark global agreement on intellectual-property protection (trips), implemented when the WTO was created in 1995. Through trips, all WTO members committed themselves to enact and enforce modern copyright, patent, and trademark laws.

OPENING HIGH-TECH MARKETS AND BUILDING THE NETWORK

Having secured this far-reaching agreement on intellectual-property protection, the administration set out to eliminate trade barriers in high-tech goods. Free trade benefits both consumers and producers of technology: it reduces the costs of goods and enables innovative industries to take advantage of economies of scale, thus recouping their investments in research more rapidly by selling to larger markets. As with intellectual-property protection, international technology trade has evolved from a difficult and confrontational environment toward one in which U.S. trading partners see shared benefits in open markets.

Many countries had long preferred using tariffs, subsidies, or a combination of the two to nurture their high-tech industries. The Clinton administration thus focused its initial negotiations on countries where these trade-distorting practices were especially common -- principally Japan, but also some European countries, South Korea, and other advanced trading partners. The result was a series of market-opening bilateral agreements in specific sectors, such as semiconductors, satellites, computers, supercomputers, and mobile phones.

The success of these agreements helped build an international understanding that tariffs on high-tech goods are extremely short-sighted. They weaken all parts of an economy, from manufacturing to finance, telecommunications to computer services, and countless other fields. So the United States developed a worldwide approach to fighting such barriers. This effort began by broadening the Semiconductor Agreement with Japan to include the world's other major semiconductor producers: Europe, Taiwan, and South Korea. The agreement was also expanded to address a wider array of issues, including research and development, private-sector cooperation with government, and basic market access.

These building blocks in turn allowed the Clinton administration to initiate and negotiate the WTO's 1997 Information Technology Agreement (ita). By 2004, this agreement will have eliminated the tariffs on $600 billion worth of goods, including 95 percent of the world's production of semiconductors, computers, telecommunications equipment, integrated circuits, and other goods associated with the information superhighway. The opportunities thus created -- not only for trade, but also for economic development and long-term growth -- are extraordinary. High-tech manufacturers can now sell to wider markets, develop new economies of scale, and grow. Last year, the United States produced $13 billion in semiconductor manufacturing equipment and exported $8 billion of it; U.S. makers of semiconductor chips likewise exported nearly half of all their production. For consumers overseas, the removal of tariffs has proven equally important, since it has reduced the cost of the equipment and materials that businesses need to make factories more productive, reach the Internet, find customers, and work in real time with overseas partners.

For the global economy to reap the benefits of free trade in information hardware, producers and consumers need affordable access to advanced telecommunications systems. This is the goal of the third major high-tech trade achievement of the 1990s: the WTO's 1997 Basic Telecommunications Agreement. This pact brought to the world the procompetition principles of the 1996 U.S. Telecommunications Act. The agreement now covers 102 WTO members, 95 percent of the nearly $1 trillion a year in international telecommunications trade, and services and technologies from submarine cables to satellites, broadband networks to cellular phones, and business intranets to wireless connections for rural and underserved regions.

The agreement has three substantive dimensions. First, it guarantees market access for telecommunications providers, guaranteeing them the right to offer local, long-distance, and international service through any means of network technology, including the Internet. Next, the agreement ensures that the most efficient and innovative companies can acquire, establish, or hold significant stakes in telecommunications companies around the world. And finally, the agreement commits all participants to a procompetitive regulatory structure, so that former monopoly providers cannot undermine their governments' market-access commitments.

Implementation of the agreement over the last three years has shown its benefits for both developed and developing countries. A global, competitive telecommunications industry is immensely important to some of America's leading exporters. It also helps provide a source of new technologies and modern infrastructure for countries in the developing world.

Moreover, consumers enjoy lower prices as dominant overseas carriers lose their ability to keep rates artificially high. Indeed, rates for international calls have fallen sharply to levels approximating domestic long-distance rates -- as low as 5 to 10 cents per minute for calls to Canada and the United Kingdom, or 15 cents a minute for calls to Japan.

The agreement also supports the development of a global telecommunications infrastructure. With broader market access and increased investor stability provided by WTO commitments, new investment in undersea fiber-optic cables may spark a 50-fold increase in capacity by the end of 2001, from levels of mid-1999. Already, in the last five years, traffic flowing over global telecommunications networks has increased tenfold, and with Internet traffic continuing to double every 100 days, the rate of growth is rising.

LIBERALIZING SERVICES AND DIGITIZING TRADE

These three agreements -- TRIPS, the ITA, and the Basic Telecommunications Agreement -- provide a foundation in law and policy for a sophisticated international information network. The next step is to make sure that consumers and industries can use this network to their best advantage. This goal implies, above all, the liberalization of consumer services on a broad scale, to include the sectors that can gain the most efficiency from the Internet: financial services, the professions (law, medicine, accounting, architecture, and engineering), audiovisual and media services, retailing, express delivery, and many others. Liberalizing these services will help exporters take advantage of the opportunities created by an increasingly networked global economy; a more open services industry will also create new demand that can itself accelerate investment in and improvement of the information network.

In this regard, the Clinton administration's next priority was negotiation of the WTO's Agreement on Financial Services, finally signed in late 1997. This agreement -- covering securities, banking, and insurance services in 102 countries -- is fostering the development of financial markets, especially in emerging and developing economies. Many nations had previously begun the process of financial-services liberalization; the 1997 agreement binds these improvements under the WTO's 1994 General Agreement on Trade in Services (GATS), providing secure market access to exporters and choice to consumers. At the same time, through a series of commitments to open markets, the pact has created new opportunities for competitive U.S. financial-services suppliers, who have thus been able to help emerging markets modernize their financial-services systems and improve their infrastructure for trade in goods and services.

The Internet's development perhaps best symbolizes the economic boom of the Clinton era. From fewer than 3 million users in 1994, an estimated 300 million people had gone on-line by the time President Clinton left office. Web-based commerce grew even faster, with the potential to improve productivity in the national economy, make existing industries more efficient, and even create new industries we have not yet imagined.

The initial goal of Internet trade policy was to prevent tariffs from being imposed on electronic transmissions over the Internet. Success came rapidly, with all WTO members making a political commitment to maintaining duty-free cyberspace at the WTO's second ministerial conference in Geneva in 1998. U.S. trade policymakers have since turned to a broader and longer-term program, whose goals include ensuring that our trading partners do not unduly restrict the development of electronic commerce, guaranteeing that WTO rules do not discriminate against new technologies and methods of trade, according proper application of WTO rules to trade in digital products, and ensuring full protection of intellectual-property rights on the Internet.

By autumn 2000, then, most of the world's governments had committed themselves through a network of WTO agreements to strong intellectual-property protections, open markets for it products, a sophisticated and competitive telecommunications network, more open services markets, and an Internet free to develop as a medium for commerce. These initiatives addressed each of the Clinton administration's basic trade concerns. But the work remained incomplete. The Clinton team therefore inaugurated in October 2000 a second-generation approach to high-tech trade: the "Networked World" initiative, a six-part effort designed to adapt the international trading system to the digital age. Completing this initiative should be one of the principal trade priorities of the Bush administration.

The "Networked World" program began with the observation that current WTO provisions do not address electronic commerce directly in any meaningful way. E-commerce is still so new that only one free trade pact in the world -- the U.S.-Jordan Free Trade Agreement -- includes provisions for it. And apart from the 1998 duty-free cyberspace commitment, the WTO is largely a void in this area: although it has held extensive discussions on electronic commerce, no formal rules prevent its members from discriminating against products traveling by wire or satellite.

The WTO should therefore find global consensus on a set of general principles for Internet trade. First, WTO members should commit to technological neutrality, which means ensuring that current WTO agreements and basic WTO concepts of nondiscrimination, national treatment, and most-favored-nation status apply to e-commerce as well as to conventional trade. Next, the treatment of digital products must embody a similar principle. The WTO has correctly avoided making a decision on whether to classify products delivered in digital form as services or goods or to create a new category for them. Whatever the ultimate decision, it should not disadvantage digital products in favor of identical, physically delivered goods. For example, a software program, whether downloaded from a Web site or bought on a compact disc in a store, should not be subject to any greater trade restrictions. Finally, WTO member states should commit to regulatory forbearance, so that they avoid regulatory and oversight policies that would constitute trade barriers. The first option should thus be market-based self-regulation. This is not always possible: governments will always have to enforce laws and protect consumers. But the rapid pace of change in technology also means that effective pursuit of legitimate government responsibilities depends on working closely with the private sector.

In the field of intellectual property, the development of the Internet has both heightened the urgency of familiar questions and raised new issues. The Internet enables users to make unlimited copies of all sorts of materials -- music, film, multimedia, text, and software -- and send them instantaneously to thousands or ultimately even millions of people worldwide. This creates obvious new opportunities for artists, scholars, and innovators; it also raises obvious concerns about potential problems, ranging from massive piracy to hacking into Web sites and altering published work on-line.

These concerns can be addressed effectively only on a global basis. At the least, the response must apply existing international agreements to the Internet, but ultimately it should develop new standards for the on-line environment. Two critical treaties negotiated at the World Intellectual Property Organization are a good starting point. The first agreement addresses computer software and databases, the distribution of copyrighted materials over networks and in tangible formats, legal protections for antipiracy technology, and guarantees for new means of on-line licensing of copyrighted material. The other brings protection for sound recordings into closer accord with the protection available for other creative works, such as books, movies, and computer software. The treaties' ratifiers include the United States, most industrialized countries, and some in the developing world. This group still includes only a minority of WTO members, however, and the Bush administration should make universal ratification an early priority.

TAKING THE NEXT STEPS

The liberalization of trade in high-tech goods is also incomplete. The ITA itself misses several important categories of goods, such as radar-navigation equipment and circuit boards, which have long been proposed for inclusion in an ITA II. Furthermore, the agreement as a whole will need to be updated in the coming years as new technologies emerge and as older categories of goods begin to fuse through the development of multimedia technologies.

Today's home computers routinely perform a broad range of tasks beyond the realm of data entry and data processing -- functions that include telephone answering, electronic translation, video reproduction, stereo sound, still and video camera input, scanning and copying, faxing, playing DVDS and CD-ROMS, and providing global positioning system data. Similarly, a wide array of peripheral goods is acquiring the capacity to perform tasks for which people used to rely on computers. These devices include personal organizers, phones that convey information about weather, traffic, and news, and even "smart" washing machines and refrigerators.

This transformation raises long-term questions about how to classify technology goods for tariff purposes. Classification is already complex and somewhat arbitrary -- the Pentium III microprocessor, for example, is an essential component of many computer systems, but the World Customs Organization has an ongoing debate over whether to classify it as a semiconductor or as a "part" of an "automatic data processing machine." Classification will become even more difficult as new products continue to flood the market. Given that many countries maintain high tariffs on products considered to be consumer electronics, the ita will need to be widened to include new categories of products and ensure that existing high-tech products do not slip out of the duty-free category.

Trade policymakers must reexamine the Basic Telecommunications Agreement, which is now almost four years old. The telecommunications industry must first and foremost aim to ensure that its regulators remain committed to the agreement's procompetitive principles. Historic monopolies -- such as Nippon Telegraph and Telephone (NTT) in Japan, Telmex in Mexico, China Telecom, British Telecom, and Telkom in South Africa -- remain entrenched and powerful in many countries. As the Clinton administration came to an end, U.S. negotiators were engaged in talks with Japan and Mexico, with some important successes, to ensure that the dominant local carriers, NTT and Telmex, did not attempt to evade their WTO responsibilities. Monopoly service providers are not the only impediments to telecommunications liberalization, however. While negotiating with U.S. trading partners, the Clinton administration was also fending off short-sighted proposals in the U.S. Congress to evade commitments on openness to international investment in the American telecommunications sector.

After ensuring a competitive market, the second goal is broader participation in the Basic Telecommunications Agreement. Some WTO members are not participating at all; others have made a highly limited set of commitments, particularly concerning foreign investment. Canada, Malaysia, India, Thailand, Mexico, South Korea, Indonesia, and others still do not permit majority foreign ownership of telecommunications companies.

Beyond telecommunications, many service sectors worldwide remain protected and closed. The GATS itself implies that market-opening commitments in services are exceptions to a general rule of closed markets. With respect to trade in physical goods, ever since the Kennedy administration, international negotiating rounds have typically begun with an overall commitment to reduce tariffs; governments then seek exceptions for especially sensitive products. By contrast, in services trade negotiations, governments offer liberalization in selected areas but remain free to keep the vast bulk of services sectors off-limits. Services negotiations are now underway at the WTO, with trade proposals under consideration in sectors as varied as financial services, travel and tourism, distribution and express delivery, and the professions. GATS should ultimately move from this policy of occasional and limited market-opening to a presumption that open markets are generally desired, with exceptions to be negotiated and noted in the resulting agreements.

Closely linked to the liberalization of technology-related services is the need to reconsider policies that will encourage investment in telecommunications network development. As technological advances lower costs, surging demand strains networks' existing capacities. As a result, there is a long-term need for enormous investment to build networks with broadband capacity and the versatility to respond to increases in market demand.

A central role for the WTO is to encourage an environment conducive to investment in and use of such networks. Useful American precedents are policies that have avoided giving preference to any particular technology or means of delivering services and have promoted competition through enforcement of antitrust laws and the 1996 Telecommunications Act. Trade policy can contribute to creating this international environment, in part by encouraging foreign governments to privatize telecommunications services and open the sector to foreign investment.

OVERCOMING THE DIGITAL DIVIDE

Outside the trade policy context as strictly defined, new U.S. policies and international agreements must be complemented by practical work to prevent an international digital divide. This work should begin with a sustained commitment to technical assistance and capacity-building. This assistance would help those governments that have committed themselves to competition and market-based economics develop the regulatory capacity and civil service expertise necessary for modern telecommunications policies. It would also help ensure that WTO members can participate fully in the Basic Telecommunications Agreement, the Agreement on Financial Services, and prospective future services liberalization. Finally, assistance would achieve effective intellectual-property protection. These goals are fundamental to the capacity-building programs begun during the Clinton administration, which help developing countries gain expertise in it skills, develop Internet capability, and otherwise take advantage of the opportunities that the networked world offers.

At the same time, the United States can encourage its trading partners to help themselves. Governments in the developing world, for example, can be quick to adopt information technology and thus help spread it skills and computer literacy throughout their economies. In the commercial field, nations can unilaterally facilitate trade by making greater use of electronic networks for customs clearance, licensing, government procurement, and dissemination of regulations; similar possibilities will emerge for tax regimes, financial policy, environmental monitoring, the law, and other fields.

In this context, the direction of high-tech trade policy in the decades ahead becomes clear. Just as the shape of today's trading system was implied in the first major multilateral trade agreement -- the establishment of GATT in 1947 -- the Clinton administration's foundational high-tech agreements and Networked World initiative have laid a path for a series of further negotiations. This path leads to a highly sophisticated, competitive, and innovative worldwide information economy. Few initiatives are so demanding, but few have such promise.