An Indian stockbroker works at the Bombay Stock Exchange, where the index reached an all-time high on February 14, 2005.

 

Why do some countries enjoy robust economicgrowth while others do not? Between 1975and 2003, more than half the countries ofthe world had annual per-capita GDP growth rates of lessthan 1 percent. About one-third of all countries actuallygot poorer. This number would be even greater if onecould include data on more than 35 additional countrieswith institutions too weak to collect reliable statistics.Economists and development specialists seekinganswers are increasingly finding a link to trade. 

 

If onelooks at the world broadly over the last century, it ishard to find systematic evidence for the benefits ofprotectionism. Yet examples of ill-conceived protectionistpolicies abound: U.S. isolationism following the stockmarket crash of 1929 precipitated the Great Depression;developing countries’ import substitution schemes inthe 1960s and 1970s discouraged economic growth;and communism stunted productivity, innovation, andeconomic freedom. Protectionism provides no sustainablebenefits.On the other hand, trade liberalization is makinga significant contribution to economic growth, povertyreduction, and stability around the world. Economicstudies confirm that countries with more open economiesengage in increased international trade and have highergrowth rates than more closed economies. Amongdeveloping countries, those with the greatest engagementin international trade had growth rates three times higherthan lesser trading countries in the 1990s.China and India are the two most visible examplesof the power of trade liberalization. 

 

Thirty years ago,both countries had widespread poverty. They still haveessentially the same natural resource bases they had then.And their political systems have remained relativelyunchanged over the years. Yet today they both enjoyamong the highest economic growth rates in the world.What changed? They opened up their markets to theworld, contributing to the greatest, most rapid declinein poverty in global history. The nongovernmentalorganization Oxfam reported that if Africa, East Asia, South Asia, and Latin America were each to increase theirshare of world exports by 1 percent, the resulting gainsin national income could lift 128 million people out ofpoverty.The United States is a leader in furthering economicopportunities like these around the world by advancingnew and innovative economic policy approaches that linktrade, aid, and development.Secretary of State Condoleezza Rice has emphasizedthe power of trade and growth to transform societies:“There is perhaps no more important tool for the UnitedStates as we think about the spread of stable democracyand liberty than to make use of our economic diplomacy,the benefits of free trade, the benefits of developmentassistance … .”

 

LOWERING TRADE BARRIERS

Through global trade negotiations in the World TradeOrganization (WTO), we are advancing bold proposalsto eliminate tariffs, quotas, and trade-distorting subsidies.And we are challenging others to do the same. Much ofthe strength of the American economy can be attributedto the lowering of trade barriers by the United States andits main trading partners. For goods, average tariff ratesdropped from 40 percent around World War II to lessthan 4 percent today among OECD (Organization forEconomic Cooperation and Development) countries.Lower tariffs encourage competition, innovation,efficient allocation of resources, an exchange of ideas andtechnology, and foreign investment. Lower tariffs alsoreduce the production costs of industries and help themcompete globally.

 

Developing countries have a uniqueopportunity to reap the gains of freer trade, as averagetariffs in those countries are significantly higher than thosein the developed world, and 70 percent of tariffs paid indeveloping countries are paid on items imported fromother developing countries.Reforming agricultural trade is widely recognizedas an important step toward expanding economicdevelopment, and opening access to agricultural marketsthrough ongoing WTO negotiations could lift millionsout of poverty.

 

According to the World Bank, increasedmarket access would account for 93 percent of the benefitsfrom global agricultural trade reforms. For developingcountries, nearly all of the benefit would be fromreduction of their own import tariffs.But trade alone does not automatically lead togrowth, jobs, and the reduction of poverty. 

 

If countrieswant to capitalize on freer trade and encourage economicgrowth, they also need to have in place other soundnational policies: good governance, rule of law, stronginstitutions, sound monetary and macro-economicpolicies, and a commitment to invest in people. Thesetypes of sound policies can be difficult to sustain inthe best environments. Yet many developing countriesare hamstrung by their own policies that inhibitentrepreneurship. On average in sub-Saharan Africa, ittakes more than 63 days to start a business and more than200 percent of annual per-capita income to register it. InAustralia, it’s two days and 1.9 percent. As countries takesteps to develop sustainable economies, investors feel moreconfident to trade with, and invest in, those markets.A business-friendly environment helps to attract moreforeign direct investment, contributing to more jobs,revenues, and economic growth.

 

THE MILLENNIUM CHALLENGE ACCOUNT

Recognizing this, President Bush proposed a new,innovative development assistance program called theMillennium Challenge Account (MCA). The MillenniumChallenge Corporation (MCC), which administers theMillennium Challenge Account, draws on lessons learnedabout development over the past 50 years—linkingsound economic policies to new trade and investmentopportunities. MCC functions as primarily an aidprogram, but it also helps create an environment thatsupports the benefits of freer trade.The United States has also pioneered programsthat pair trade capacity-building (TCB) initiatives withtrade initiatives and has made TCB an integral part ofour global, regional, and bilateral trade agenda—giving developing nations the tools they need to take advantageof open trade. 

 

Indeed, the Office of the United StatesTrade Representative has created a special officespecifically to work on trade capacity-building issues.These efforts have made the United States the largestsingle-country donor of TCB assistance, providing morethan $1.3 billion in 2005 and pledging to double that to$2.7 billion annually by 2010.America’s innovative approach to linking trade, aid,and development is already delivering real results. TheU.S. Free Trade Agreement (FTA) with Central Americamarked the first time that TCB was an integral part ofFTA negotiations. In one example, the United Stateshelped farmers in El Salvador expand into new marketsby improving their marketing techniques, food standards,productivity, and business support services for their crops.Their average income more than doubled. This modelhas since been used in U.S. FTA negotiations with theAndean countries, Southern Africa Customs Union,Thailand, and others.

 

The MCC is also advancing this record. Sinceits establishment in 2004, it has signed assistanceprograms totaling more than $900 million with fivenations: Madagascar, Honduras, Cape Verde, Nicaragua,and Georgia. A little more than two years after theannouncement of MCA indicators in February 2003,the median number of days to start a business droppedfrom 61 to 46 in MCA candidate countries. Accordingto World Bank officials, because of MCA’s incentiveeffect, Paraguay adopted significant policy reforms in2004 that both improved their MCA score on the “daysto start a business” indicator and catalyzed an increase inregistration of approximately 20 percent more firms thanusual.Trade liberalization is a key and necessary ingredientto a successful economic growth program. The UnitedStates is committed to helping countries prospereconomically and to reducing global poverty. And weare at the forefront, working hard with the internationalcommunity and individual countries to increase thoseopportunities. 

 

Our 135 embassies and consulates aroundthe world are actively engaged in promoting this policy.Many developing countries now recognize the vital linkbetween trade liberalization and economic growth. It isincreasingly important that we set in motion programsthat support this effort. Working together, we areconfident we can increase global economic prosperity aswe move forward in the 21st century. «±