Academic journal article Law and Policy in International Business

Remarks: Jonathan Fried

Academic journal article Law and Policy in International Business

Remarks: Jonathan Fried

Article excerpt

Thanks very much. I will try to stay within the time limit. It is a bit awkward for me to have accepted this invitation. I very much appreciate the opportunity to see my friends, but I was not invited to perform a professorial role, nor was I even invited to be here in a legal capacity. As a member of the Inter-American Juridical Committee, we have done quite a bit of work on reforming institutions and reforming the judiciary in particular. There is literature available, but, ironically, I was invited here to provide a trade negotiator's perspective on institution building. That sounds like a contradiction in terms because we are usually seen as dyed-in-the-wool mercantilists, who are out to beggar thy neighbor to get maximum advantage for ourselves, and give up as little as possible in return.

Let me try to bust that myth a bit because I think--from at least a Canadian perspective--looking at not only our past in the free trade agreement with the United States and more particularly the NAFTA, but looking ahead to the Free Trade Area of the Americas negotiations --which is currently chaired by Canada--I would like to offer you the proposition that trade negotiations today and these multi-lateral trade negotiations in the hemisphere in particular are about institution building--not as an end in itself, but rather as a means to an end. That end, for trade negotiators at least, is economic growth.

I will not bore you with the negotiator's details of a negotiation that is just starting. It is off to a good start, having been formally launched by heads of government in Santiago at the most recent Summit of the Americas in April. Nine negotiating groups have been formed. By the end of this month they all will have met in a central location in Miami. Vice ministers who carry on the supervision for trade ministers on a day-to-day basis will meet again in Paramaibo, Surinam, in December to take stock of progress.

Let me instead just try to summarize what the negotiations are about and then try to draw some lessons about institution building. First, the negotiations encompass continuing discussion on pretty traditional trade barriers: tariffs, quotas, and import restrictions, border measures that really impose administrative burdens rather than lower the costs of moving things across borders. In fact, for many goods, the International Chamber of Commerce estimates that just the transactional costs of getting goods cleared through customs averages about ten percent of the total selling price of goods, so there is still quite a bit of work to be done.

Looking at it in a different way, the average time for clearing a product through U.S. or Canadian customs is about six hours. In Brazil it is about six days. So, as I say, there are still some pretty traditional border-oriented trade negotiations to be done.

But, secondly, as I know John Jackson has always reminded his students, as we lower tariff barriers, we have to be increasingly concerned with the so-called non-tariff barriers, the technical standards, the sanitary restrictions that really, although motivated by good intentions, can sometimes serve as unnecessarily restrictive barriers to trade.

Third, consistent with the multi-lateral trade agenda in Geneva at the World Trade Organization, we are in the Free Trade Area of the Americas process trying to address trade in services, regulation that affects foreign investment and intellectual property. So we have an opportunity to move forward in some of the areas that are the generators of economic growth for most of the economies in the hemisphere.

Fourth, I think consistent with the Attorney General's observations in his written paper about the importance of correcting the imperfections in the market where necessary, we are looking at the relationship between cross-border trade and competition. We are looking at government procurement as an engine of economic activity as well.

If you add all of those elements together, goods at the border, non-tariff barriers, services, investment, intellectual property, you are looking at all the areas of economic regulation that affect the conduct of business across borders. But, having said that, I think that this agenda, sweeping as it is, carries an even deeper significance, particularly in relation to the topic for today.

In effect, although there is some work to be done at the border, the emphasis and focus of trade negotiations today has moved beyond the border, inland. In addition to these customs and procedural matters, we are now looking at domestic regulation. We are looking at licensing. We are looking at inspections and approvals, product certifications, professional certifications, in other words the regulatory framework.

So with this focus on domestic regulatory frameworks, it really means, as Mack McLarty, the President's former advisor for the Americas, I think, said in the spring, the trade agenda is increasingly about strengthening markets in addition to opening markets. In effect, the trade agenda becomes a domestic agenda of regulatory reform consistent with the Attorney General's objectives in Costa Rica.

To put it in its most basic terms, the FTAA negotiations are about good governance. They are about democratic development. They are about creating stable and transparent supervisory structures that ultimately provide a predictable environment for traders, for investors, and for consumers.

Now, noble as those goals sound, as I said at the outset, they are a means to an end, not an end in itself. Why? Because business people, traders, are only willing to take business risks and banks are only willing to provide export financing where there is some confidence in the foreign economic environment. Investors will not make a long-term capital commitment in plants and equipment for future local production in another country unless they can map out with some certainty the macro- and micro-economic environment over the life of the plan. And, as the stock markets have shown, investors can only offer financing with some confidence in the transparency, accuracy, and completeness of information that they have access to and in the fairness of the market regulation.

So, in other words, the very values of a well-functioning legal system, law students are taught in their first-year courses, are those that are demanded by the business community as well: certainty, predictability, transparency, and reasoned decision-making as opposed to arbitrary exercises of discretion.

Let me pull in an analogy from another area of the world. If we look at the work that we in the United States, Canada, and other countries in this hemisphere are doing with the IMF to address some of the consequences of the currency turmoil in Asia, it carries some lessons for the FTAA. It is generally agreed that the free flow of capital has not really been the cause of the problem but rather that this free flow of capital has not been accompanied by adequate supervisory or regulatory frameworks to maintain adequate oversight of the capital flows or of the banking system itself.

Thus, if you do, through comprehensive trade and economic negotiations, address economic regulation and provide for supervisory structures as well as greater competition and participation in the market, then you are strengthening markets and you are in effect making economic institutions a major contributor to economic growth.

Let me try to sum up. Again, looking at the volatility of today's markets in Asia and the concern that the Asian flu is contagious and may spill over into the Americas, we are seeing some pressure mounting on currencies within the region, something that we in Canada have not been immune to ourselves. The threats to the currencies in turn threaten higher interest rates, slower growth, and, among certain special interests and protectionist lobbies, increased demand for import restrictions or at least less enthusiasm for continued market opening. These protectionist pressures are not only in the affected countries, but certainly, as I intimated, shared by some special interests here in the United States.

What I am trying to suggest is that if our objective in the short term as governments and as negotiators is to restore growth, to create some employment and to develop these markets in the Americas, then it is essential that the countries of the Americas maintain and gain greater access to markets in North America as well as, of course, in Japan and Europe. Conversely, they themselves, by better adherence to rules of transparency, to fair and nondiscriminatory regulation, and providing market access themselves, will offer traders and investors from North America confidence to enter their markets and to contribute directly to growth and development in the local economy.

Now, it is fair to say that in civil society there are real questions about this apparent drive for liberalization. It appears to some that the trade agenda is designed to free up the flow of goods, services and capital at all costs. Some people ask are we going too far? What happened to the government's right to regulate and to decide for itself? Political scientists, according to my reading of the literature, say that underlying these questions and concerns is the preoccupation about accountability, or what some people call the democratic deficit.

Who are these people in Geneva or in Miami or in the NAFTA making decisions about areas of regulation that citizens care about? In effect, this anxiety, in my view, reflects an anxiety about transparency and the accountability of those in positions of making decisions in areas where domestic government and governance affect trade and investment and vice versa.

That means that there is a premium in our negotiations--in the Free Trade Agreement of the Americas as well as in Geneva--on ensuring that areas that we are concerned about in regulation in the economic field--whether in financial services, standard services, intellectual property, and so on--are transparent and accessible by the citizens domestically, as both Ambassador Jones and Attorney General [Solis Zelaya] suggested. Also, it is important that the international institutions that maintain oversight and surveillance of these areas of regulation are themselves visible, transparent, and made understandable to citizenry in all our countries as well.

For this reason I think it is fair to say that Canada, the United States and the vast majority of other countries participating in the Free Trade Area of the Americas are determined to ensure that a major element of each of the areas that we seek to define for trade purposes does carry a major dimension of transparency and accountability in terms of accessibility by citizens, both to the domestic process and the international process.

In this way, I think it can easily be shown that trade and investment liberalization do not undermine basic values, standards, culture, or the government's ability to regulate. It does not weaken sovereignty in effect by providing the certainty, predictability, transparency, and better connectedness, to use a colloquial phrase, between government and its citizens. Liberalization of trade and investment ensures, frankly, that governments can better provide for their public interests of their citizens.

JONATHAN FRIED, Assistant Deputy Minister, Trade and Economic Policy, Department of Foreign Affairs and International Trade, Canada.

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