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TRANSLATION EXERCISES
(For K42 Economics of Foreign Trade, FTU)

(1) The bulldozer of Bentonville slows; Wal-Mart

(Copyright 2007 The Economist Newspaper Ltd. All rights reserved.)

Is the world's biggest retailer in trouble?

FOR the first time in its 45-year history Wal-Mart is uncertain what it should be. The company's
obsessive focus on low prices created the world's biggest retailer, its largest private employer and one
of the most powerful companies in history. But Wal-Mart is not doing so well just now: sales growth
is slowing, productivity and profits are falling. The giant retailer is constantly under fire for its pay,
health care and treatment of women and for the effect of its "supercentres" on small businesses. Some
even scoff at the store's efforts to spruce up its image.

All of this has prompted doubts about the company's strategy. Is the single-minded emphasis on low
prices enough? Has the firm's careening growth reached its limits? Have its competitors become
leaner than it has? Should Wal-Mart imitate Target, its nearest rival, with its trendier image, smarter
shops and more upmarket merchandise?

In 2005 Lee Scott, Wal-Mart's chief executive, embarked on an energetic campaign to revive the
company's image. He put Eduardo Castro-Wright, who had transformed Wal-Mart's local subsidiary
into Mexico's most popular retailer, in charge of overhauling operations in America. Last year Mr
Castro-Wright remodelled 1,300 shops, modified the firm's merchandise and cut prices keenly even
by Wal-Mart's standards. But sales did not pick up, even in the second half of the year, when oil
prices came down and people stopped fretting about how far they were driving to go shopping.

Recent months have been marked by public-relations mishaps. Wal-Mart first made headlines by
sacking Julie Roehm, a marketing executive whose sybaritic tastes were at odds with the company's
Spartan corporate culture. In January Mrs Roehm filed a lawsuit against the retailer claiming Wal-
Mart had breached her contract and smeared her in the press. Then on February 6th judges in San
Francisco approved a class-action lawsuit involving up to 2m past and present Wal-Mart employees.
It claims that the company systematically steered women into jobs with little hope of promotion and
paid them less than men. Wal-Mart says women are paid fairly and that there are fewer of them in
senior positions because they do not apply as often for promotion. If necessary, it says, it will appeal
to the Supreme Court.

Investors are unhappy and there is even talk that Mr Scott's job may be in jeopardy. "We had believed
that we were farther along the Wal-Mart turnaround timeline," says Adrianne Shapira, an analyst at
Goldman Sachs, an American investment bank, who downgraded her advice for investors on Wal-
Mart from "buy" to "neutral" at the beginning of the year. One gripe is Wal-Mart's unslakeable thirst
for growth. It has 4,022 shops in America. More than half of all Americans live within a ten-minute
drive of one of its stores. Each year 93% of American households shop at Wal-Mart at least once. Yet
Wal-Mart continues to open stores at the same pace despite this saturation. That leaves new shops
cannibalising sales at old ones and falling sales per square foot.

To make matters worse, building new shops is becoming ever more expensive (see chart). Wal-Mart
now spends more on each square foot of extra retail space than Target does. Wal-Mart's budget of $18
billion for capital expenditure in 2007 is far too high, says Gregory Melich, an analyst at Morgan
Stanley, another American investment bank. He would prefer a sum closer to $10 billion.

Instead of opening new outlets, Mr Melich argues, Wal-Mart should concentrate on sprucing up
existing ones. Shops should be cleaner and better lit, queues at cash registers shorter and parking
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better organised. Kevin Roberts, boss of Saatchi & Saatchi, an advertising agency, agrees that
shopping at Wal-Mart is a "lousy" experience.

This grubbiness is thought to have undermined Wal-Mart's recent effort to mimic Target by launching
Metro 7, a line of fashionable women's clothing. Shoppers do not like to buy elegant luxuries in
dismal surroundings. But Wal-Mart's plans to prettify its shops have not progressed beyond the
construction of an experimental new supercentre in Plano, Texas, which boasts such frills as a sushi
bar and wireless internet access.

Could Wal-Mart channel its ambitions into other countries? Non-American sales account for 20% of
the company's revenues. Present in 13 countries outside America but big in only three, Wal-Mart is
the largest retailer in Mexico and Canada and one of the largest retailers in Britain after its takeover of
ASDA, a British supermarket, in 1999. Yet it has struggled elsewhere. It withdrew from South Korea
and Germany in the face of strong local rivals, and has failed to make much headway in Central
America and China, although it is planning a big push in India.

John Fleming, chief merchandising officer of Wal-Mart, says its "Every Day Low Prices" strategy is
still "very, very effective". That was certainly true in the past: although Target and Wal-Mart were
founded in the same year, Wal-Mart is more than six times bigger today. But Mr Fleming also
concedes that Wal-Mart needs to turn a trip to one of its shops into a more exciting and pleasant
experience. The firm's slogan remains "Always Low Prices. Always." As the inspiration for the
world's biggest retailer, that seems a little bit thin.

(2) Crossroads; Carrefour

(Copyright The Economist Newspaper Ltd. All rights reserved.)

France's answer to Wal-Mart faces some of the same difficulties

IF FIRMS are supposed to learn from their rivals' mistakes, then America's Wal-Mart and France's
Carrefour are doing a bad job. Over the past few years the world's two biggest retailers have made
surprisingly similar errors. Both expanded too quickly abroad. Both dithered over their focus on low
prices. Both toyed with discounters and with smaller versions of their giant shops. Now both are in
trouble.

Wal-Mart's troubles are mainly strategic, but Carrefour is also struggling with uncertainty over its
management and ownership. On March 7th the Halleys, the family in control of Carrefour, replaced
Luc Vandevelde, its chairman, with Robert Halley, a septuagenarian member of the clan. On the same
day Colony Capital, a property-investment company, and Groupe Arnault, the holding company of
Bernard Arnault, a French luxury tycoon, bought almost one-tenth of Carrefour.

The exit of Mr Vandevelde, a former boss of Marks & Spencer, a British retailer, came after weeks of
speculation about Carrefour's future. In mid-February the Halleys said Bernard Bontoux, another
family member, would take over from Mr Vandevelde as their representative on the board. Two
weeks later the French press reported rumours of the imminent departure of Jose Luis Duran,
Carrefour's chief executive, and Eric Reiss, its financial chief.

Then came the surprise swoop by the Arnault group and Colony. "Mr Arnault is likely to do a Vincent
Bollore," says Chris Tinker of ICAP, a specialist broker. (Mr Bollore is France's top corporate raider.)
Mr Arnault and the property investors hope to extract value for investors from Carrefour's property
assets, worth at least euro15 billion ($20 billion). Sale-and-lease-back deals, where a firm sells
property and pays rent to occupy it, generate piles of cash. But Mr Duran dislikes the idea. "Mr
Arnault will seek a board seat and try to influence the company's strategy," predicts Mr Tinker.
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Internecine strife is the last thing Mr Duran and Mr Reiss need as they try to revitalise the company.
To focus on countries where Carrefour is doing well, they pulled out of Japan, Mexico, South Korea,
the Czech Republic and Slovakia and may yet sell subsidiaries in Portugal, Switzerland and Thailand.
They have also tried to re-establish the store's reputation for low prices in France, which accounts for
half its sales. On March 1st Carrefour cut the prices of its own-brand products in France by 7-8%.
There are hopeful signs: net profits rose by 58% in 2006, to euro2.3 billion, though most of the
increase came from the sale of operations in South Korea.

But investors grumble that the company's share price underperforms those of its European rivals by a
large margin. The value of the Halley family's stake has fallen by half since 1999. Until the share
price recovers, the Halleys want Carrefour to stay independent. That is why they fell out with Mr
Vandevelde, who had been in talks with private-equity groups about a buy-out of Carrefour without
the family's consent. But in the longer run they might sell out. As founders of Promodes, another
French hypermarket chain that merged with Carrefour, they are not so attached to the retailer, and
have already reduced their stake from 25% to 13% of shares.

Will anyone bid for the struggling firm? Carrefour's 1999 takeover of Promodes is a deterrent, since it
was the beginning of Carrefour's problems at home. Shoppers who used to go to Continent,
Promodes's flagship chain of hypermarkets, defected to E. Leclerc, a rival, because they thought its
prices were lower. Today, Leclerc is France's leading hypermarket, with a market share of 17%,
followed by Carrefour with 14%. "I don't believe in a takeover of Carrefour," says Jerome Samuel, a
retail analyst at IXIS Securities in Paris.

As hypermarkets in Europe and America go through a rough patch, the biggest are the most exposed.
In particular they face competition from ultra-cheap discounters, such as Aldi and Lidl, which control
about 40% of Germany's retail market and plan to conquer the rest of Europe. Aldi is also making
inroads in America. At the same time both retail giants are under threat from Britain's Tesco, which is
challenging Carrefour's dominance in Europe and is setting up shop in America. Having made the
same mistakes, and facing similar problems, will Wal-Mart and Carrefour now counter-attack along
similar lines?

(3) The politics of pay; Executive salaries

(Copyright The Economist Newspaper Ltd. All rights reserved.)

The rewards of America's company bosses face yet more scrutiny and attack

NOW there is nowhere for the bosses of corporate America to hide their bulging pay packets. In spite
of years of defensive lobbying, they are having to reveal all under new Securities and Exchange
Commission (SEC) rules that have just begun to take effect. This burst of sunlight could not have
come at a worse time for them. It coincides with a shift in the control of Congress to the Democrats
and the start of the presidential election campaign, in which "overpaid" chief executives will make an
easy target.

Although barely one-tenth of the 2,000 biggest American companies have yet reported under the new
rules, the tally of negative headlines is already mounting. "There are already plenty of examples of
firms reporting chief-executive pay packages of millions of dollars more than expected," says Paul
Hodgson of the Corporate Library, a research firm. He reckons that the firms that have already
reported are a representative sample likely to provide a good indication of the overall trend. Top of
the heap so far is Ken Lewis, boss of Bank of America, with total pay in 2006 valued at $114.4m.

One area of generosity is the chief executive's future pension. Another is "deferred pay", whereby a
top executive leaves some part of his salary in the hands of the firm, as a loan of sorts. GE recently
reported that Robert Wright, until recently the boss of NBC Universal, its entertainment subsidiary,
has accumulated deferred pay worth $40m, the highest so far. Quite why a boss or firm should want to
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resort to this tactic has never been clear, although the suspicion has always been that the firms are
offering managers unusually good returns at the shareholders' expense. Now the details of these
arrangements are being published for the first time, so it will become clear whether that was so.

In a study of 100 firms that have reported, Mr Hodgson found that the perks given to chief executives,
though relatively small, were much higher than those reported last year under the old, less exacting,
disclosure rules. On average, the amounts reported in 2006 under the heading "other annual
compensation" in 2006 were $192,000--131% higher than in the corresponding category in 2005. One
reason for this jump was that the new rules require the disclosure of all perks worth $10,000 or more,
whereas the old rules allowed firms to keep quiet about anything worth less than $50,000.

Of particular interest will be the data on personal use of the corporate jet. This is expected to decline
sharply as firms start to charge the boss for personal flights in order to avoid embarrassing headlines.
No company wants a repeat of the battering suffered by Tyson Foods after revelations that "friends
and family" of Donald Tyson, a former boss, made undisclosed use of the corporate jet--valued at
over $1m--without his even being on board.

Another likely target is the golden parachute for a departing boss, especially if he has left because of
poor performance. This is increasingly a focus of activist shareholders, including hedge funds. On
March 20th John Antioco, the boss of Blockbuster, a video-rental firm, announced that he would
resign by the end of the year. Following a long battle over his bonus with Carl Icahn, a legendary
corporate raider, he agreed to accept much less in severance than he had said he was entitled to under
his contract.

The directors' cut

Boards have already started to pay greater attention to how they set the chief executive's pay and to
being seen to do so in a way that serves the interests of shareholders. One reason is the requirement
that compensation committees consist entirely of independent directors, introduced as a listing
requirement by the New York Stock Exchange in the wake of the corporate scandals at the start of the
decade. These committees must now hire compensation consultants, and many are insisting that they
do no other work for the company. Previously, compensation consultants typically had other lucrative
contracts, which may have swayed their judgment.

The new climate surrounding pay has already had an effect. Base salary has stabilised, though it was
never the fastest-growing part of pay. Options, which even before the recent backdating scandal were
losing their appeal, have been partly replaced by performance-related pay.

"Boards are being tougher with new hires, in particular, as it is hard to get a sitting chief executive to
give up pay promised in his contract, at least without compensation," says Russell Miller of Korn
Ferry, a recruitment firm. Even being tough on new chief executives is not proving easy, however.
Boards know that the choice of a boss can have a huge impact on a firm's performance. Executive
talent is valuable. Private equity is on the prowl, offering packages with incentives that a public
company can find hard to match amid all the denunciation of fat cats. Those are good reasons to
expect pay to continue to grow, in spite of the outrage.

Not everybody is happy with the quality of the disclosures made so far. One issue is the length and
complexity of the statements, which often run to 30 pages or more of opaque legalese. There are also
complaints that the single number for total pay required by the SEC is misleading. "There is more
than one honest answer to the question, 'How much did you pay the chief executive?'" says Joe
Grundfest, a former SEC commissioner who is now at Stanford University. The SEC requires firms to
combine both the actual pay bosses receive each year and an estimate of the value of future
performance-related pay, such as share options, which is calculated using a formula known as Black-
Scholes. But the value of such options changes along with the firm's share price--they could even
prove to be worthless. "The one certainty is that the option grant will not turn out to be worth the
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Black-Scholes valuation," says Mr Grundfest. Which is why the SEC should require two totals to be
published, argues Ira Kay of Watson Wyatt, a compensation consultancy. As well as saying what
managers might earn, they should estimate what they have earned. Unlike the SEC's number, such
"total realised pay" correlates well with firms' performance, says Mr Kay.

Such subtleties may not matter much to the headline writers. Outraged politicians in Washington, DC,
smell blood. Barney Frank, chairman of the House financial services committee, is proposing
legislation to require companies to seek the (non-binding) approval of shareholders for executive pay
packages each year.

There may also be moves to toughen the tax treatment of executive pay, perhaps by removing tax
benefits for performance-related compensation, at least above a certain level, says David Yermack, an
economist at New York University. Share options and pensions may also come under fire. Given the
growing number of middle-class Americans who have to pay the higher alternative minimum tax,
Congress may feel that heavier taxes for corporate bosses have populist appeal. "Anything is possible
in this climate," says Mr Yermack, "so bosses may need to get used to the idea that more of their
compensation will be subject to taxation." At least they can afford it.

(5) Green revolutionary

(Copyright 2007 The Economist Newspaper Ltd. All rights reserved.)

Bob Lane's management philosophy has helped an American firm to reap a record harvest

"I AM not one of those neo-Malthusians," insists Bob Lane. On the contrary, the boss of Deere
believes that technological innovation, not least by his agricultural-equipment firm, will continue to
increase the productivity of farmland, thereby enabling the world's ever-growing population to be fed.
The past few years have seen important breakthroughs, he says, such as the use of global-positioning
satellites to automate ploughing and seeding, reducing wasteful double planting. The latest versions of
the famous green John Deere tractor are "sophisticated mobile information factories", says Mr Lane.
"They practically drive themselves, while the driver uses the internet to sell corn."

Technology is one of three reasons why Mr Lane is extremely bullish. (So are his investors who,
before recent stockmarket wobbles, lifted Deere's share price to over three times what it was when Mr
Lane took charge in 2000--and some 90% above its previous all-time peak.) The second source of his
optimism is the global boom in agriculture, which is leading to record demand for Deere's products,
including combine harvesters, balers and seeders, as well as tractors. The firm also makes equipment
for forestry, construction and even lawn care. Corn plantings in America are expected to be at record
levels this spring, due to the growing demand for corn-based ethanol biofuel. Yet ironically for a firm
headquartered in Moline, Illinois, at the heart of America's subsidy-addicted, protectionist farming
industry, the strongest source of demand is abroad, as agriculture becomes more mechanised in
prosperous developing countries. As Mr Lane puts it, "There are 2 billion more people able to afford
to eat."

Not that global demand is new to Deere. The 170-year-old firm has operated in Europe for over 50
years, and its tractors were exported to Stalin's Soviet Union. A previous boss, the last to come from
the founding family, was on the second corporate jet allowed into China after Henry Kissinger's
icebreaking meeting with Chairman Mao in 1972. But Deere's business really started to blossom
overseas in the 1990s, after Mao's successor, Deng Xiaoping, embraced a version of capitalism, India
started to liberalise its economy and Mercosur, the Latin American trade agreement, was signed.
Today Deere sells its products in 130 countries and makes them in 16. Half of its workforce is based
outside America. Indeed, Deere exports the small, durable tractors it makes in India to America.

Mr Lane is particularly optimistic about demand from Brazil, which is picking up again after some
lacklustre growth in the past two years, due to the appreciation of the real. Deere will open a new
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factory in Brazil this year. In the long run Mr Lane thinks that Brazil is best placed of all the big
emerging economies to increase the amount of land put to efficient agricultural use--and not, he
insists, as a result of deforestation, as the Amazon is well north of the land he has in mind. "Brazilian
society allows the wealthy to own and profit from lots of land," he says, in contrast to China and
India, where rules governing land ownership are holding back the move to efficient large-scale
farming.

Mr Lane's third reason for optimism comes from the big changes he has made in how Deere is run.
These grew out of his own background, in finance, not farming. He grew up in big cities, including
Washington, DC, and did his MBA at the University of Chicago. He first seemed destined for a career
in banking, and joined First National Bank of Chicago (now part of JPMorgan Chase), which sent him
to Germany, where Deere was his main customer. The firm became his employer when it needed
someone to improve the financial strength of its dealers, who were suffering badly during the
recession of the early 1980s.

After becoming chief financial officer in 1996, Mr Lane became increasingly conscious that the firm
was underperforming. It had great products, reflecting the homespun philosophy of its eponymous
founder, who declared: "I will never put my name on a product that does not have in it the best that is
in me." But it was not a great business. Its working practices were old and slow, reflecting a
workforce dominated by the UAW. It had too much working capital and too much gear sitting unsold
in showrooms. It was, says Mr Lane, "asset-heavy and margin-lean".

Show me the money

As soon as he became chief executive he set about converting Deere to the pursuit of shareholder
value, a philosophy he had embraced at the University of Chicago. All of the firm's 48,000 workers
were told that they had to deliver "shareholder value-added", an "easy-to-understand" measure of
profitability Mr Lane devised that involved charging each business unit a cost of capital of 1% of
assets a month. Each business unit was required to earn a shareholder value-added profit margin of
20% on average over the business cycle. Financial rewards are linked to this measure, even for the
unionised part of the workforce: the UAW ultimately proved open to change.

To get so many people involved in this way is "pretty unique", says Mr Lane. It seems to be working.
Productivity is up by 11% since the new contract took effect. There is far less equipment wasting
away at dealerships, thanks to new, lean just-in-time production. The pension-fund shortfall has been
fixed. Deere's dividend payout has been doubled and its debt rating has been upgraded. But the big
test is whether each business unit can maintain strong performance over an entire business cycle, Mr
Lane maintains. "If not, it's just a flash in the pan--it doesn't count," he says. The average target of a
20% margin is supposed to encompass 28% at the peak of the cycle and no worse than 12% at the
trough (compared with zero or worse in the past). The first test may come in the construction division,
given the trouble in homebuilding in America, says Mr Lane. Still, if things continue to go well,
"perhaps, in the year 2014, we could declare ourselves a great business," he says.

(6) Fifty Years of the GATT/WTO: Lessons from the Past for Strategies for
the Future
Part 1. Big is Beautiful

The history of the GATT/WTO, and especially trade policy in the United States, clearly reveals that
large-scale initiatives fare better than modest ones. The political economy is again straightforward:
big-picture proposals capture the imagination of top political leaders and thus induce them to provide
the leadership needed to win domestic support, provide a foreign policy/national security rationale to
amplify the purely economic case for proceeding, and generate such huge stakes that no political
leader is willing to accept blame for failure of the enterprise once it has been launched. "Big is
beautiful," therefore, at both the startup and completion of the process.
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The key example of the United States is again instructive. Extension of NAFTA to tiny Chile would
have been so small that it failed to command any Presidential leadership and business support. The
defeat of fast track was due importantly to the Administration's failure to indicate how it would use
the authority and thus the absence of any apparent stakes worth fighting for.

Each succeeding GATT round has had the important advantage of being more ambitious than its
predecessors. The Kennedy Round sharply increased the amount of multilateral cuts in tariffs, which
remained an important impediment to trade at that time. The Tokyo Round began the process of
extending the GATT system to nontariff measures. The Uruguay Round brought agriculture and
textiles into the system, seriously addressed services and intellectual property rights, and dramatically
improved the dispute settlement mechanism. "Bigger was better" in attracting sufficient political
support to bring each succeeding negotiation to a successful conclusion, despite the bigger battles that
had to be taken on to do so.

There is a natural extension, to the next phase of multilateral liberalization and rulemaking, from this
past progression of escalating increasing negotiating goals: setting a goal of global free trade by a date
certain, perhaps 2010 or 2020.1 Over 60 percent of world trade is already free, or en route to being
free (see Table 1), as a result of the initiatives already completed or undertaken by the several large
regional arrangements (EU, NAFTA, Mercosur, AFTA, Australia-New Zealand, FTAA and APEC).
It is thus a relatively short step to global free trade, and rolling the regionals into such a multilateral
context is in any event the only way to assure the avoidance of conflict among them. Hence a global
free trade goal appears feasible, as well as being a highly desirable big-picture proposal to capture
political imagination and support around the world.

The route to that goal will clearly encompass one or two major "rounds" of WTO negotiation. A
corollary of "big is beautiful" is that multi-issue rounds have been crucial to the outcome of the
successive GATT negotiations. Tradeoffs across issue-areas are required to meet the needs of the
ever-growing number of country participants, and to induce a critical mass to sign on. The three
recent sectoral agreements have probably completed the roster of potential stand-alone deals, and their
negotiation may have even jeopardized later agreements on agriculture and other difficult topics by
"using up" some of the tradeoffs that could otherwise have been employed for that purpose. It must
also be remembered that several sectoral efforts, including maritime services in the WTO and a
Multilateral Agreement on Investment in the OECD, have failed largely because of the absence of
potential tradeoffs with other issue-areas.

The current APEC sector initiatives, which represent the major liberalization effort now underway
and may provide one of the foundations for the Millennium Round, are instructive in this regard.
After their success in galvanizing global agreement on the Information Technology Agreement (ITA)
in late 1996, the APEC leaders decided to try to replicate that event in additional sectors in 1997.
They originally envisaged agreeing on two or three sectors, at their Vancouver summit in late 1997,
but found that "balance among the parties" required a much larger number-so they decided to proceed
on 15, including 9 in 1998. APEC of course hopes to multilateralize these negotiations, as it did with
the ITA, and the EU (and presumably others) have already indicated that they will propose additional
sectors. This broad group of sectors will then undoubtedly be meshed with the built-in agenda already
endorsed by the WTO, setting the stage for the Millennium Round (with or without the "global free
trade by 2010/2020" goal recommended here).

The basic lesson of GATT/WTO history, as well as of trade policy in the United States, is that larger
initiatives fare better than small ones. Application of that lesson to the period ahead is of crucial
importance because of the severe threat to the open trading system from opponents of globalization in
the United States, Europe and some key developing countries. The complaint that rounds take too
long to complete is actually a virtue because, as long as their eventual success remains a realistic
prospect, it is the very existence of the negotiations that propels the bicycle forward and provides a
bulwark against backsliding. If one worries about excessive duration, however, the answer is to divide
the total negotiations into a series of self-balancing, but smaller, "roundups" every two or three years
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to assure the credibility of the process.2 The prescribed course of action is, in any event, the earliest
possible launch of a Millennium Round within the context of setting a policy objective of achieving
global free trade by 2010 or 2020.

Part 2. Building Blocks, Not Stumbling Blocs

Debate continues to rage in some quarters over the compatibility of regional trade agreements with
the multilateral system. Some observers fear that regional participants, once having liberalized
regionally, will not want to give up their preferential arrangements and/or will have "used up" their
liberalization potential and/or trade attention. There are, indeed, a few disquieting signs. NAFTA
employs rules of origin in the textile/apparel sector that discriminate sharply against nonmembers.
Mercosur raised its common external tariff in late 1997 and sometimes expresses doubts about
extending its liberalization to broader groupings. History also suggests the real possibility of clashes
among regional blocs if their relationships are not managed in the context of a successful global
system.

Fortunately, however, the postwar record is an unbroken chain of positive interaction between the
global system and its main regional subsystems. There are clear theoretical grounds for this outcome:
modest liberalization begets broader liberalization by demonstrating its payoff and familiarizing
domestic politics with the issue, regional deals can provide useful models for broader global
agreements, and the adverse impact of new preferential arrangements on outsiders induces the latter to
seek new multilateral compacts.

The regionals have in fact kept the bicycle moving forward both through their own liberalization and
through the impetus they have provided to the successive multilateral initiatives. They have indeed
been a major driving force behind each of the rounds that have been the primary channels for global
progress. Hence the regionals have been key elements in the successful evolution of the two principles
already enumerated, the forward momentum of the bicycle and "big is beautiful."

The key regional arrangement is by far the European Union, and its evolution has been central to the
entire postwar history of the multilateral trading system. The initial creation of the Common Market,
in the late 1950s, was the most important driver of the American initiative to launch the Kennedy
Round in the early 1960s-both for defensive reasons, to start reducing the newly created
discrimination against American exports, and to build the "new Atlantic partnership" enunciated by
President Kennedy. The expansion of the European Community to include the United Kingdom and
others, with the extension of its discrimination to important new markets, was an important factor in
the American decision to insist on the Tokyo Round in the 1970s. The EU decision to launch the
"single market" strategy in 1985, with the implied broadening of discrimination to many new
functional areas, likewise added to the US determination to begin the Uruguay Round a year later. To
its great credit, the EU has agreed to reduce its barriers on a multilateral basis in each of these rounds-
though with great reluctance in agriculture-and thus to sustain the bicycle of global liberalization.

The positive thrust of regionalism for global liberalization has broadened considerably over the last
decade or so. When the EU and others refused to proceed with the new round that the United States
was seeking in the early 1980s, the United States reversed its traditional policy of sole reliance on
multilateral liberalization and agreed to negotiate bilateral free trade agreements with Israel and then
Canada; the EU and others took notice and subsequently agreed to restart the multilateral bicycle.
When the Uruguay Round faltered in the late 1980s, Mexico successfully sought US and Canadian
agreement to negotiate NAFTA and several Asian countries (notably Japan and Australia) took the
lead in creating APEC; the EU and others took notice and the Round regained momentum. When the
Round faltered once more in the early 1990s, APEC's decision to hold annual summits and create "a
community of Asian Pacific economies" oriented toward "free and open trade and investment in the
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region by 2010/2020," as formally agreed a year later, quickly persuaded the Europeans to overcome
their problems and participate in a successful wrapup.

For their part, all of the new regionals have so far emulated the willingness of the EU to
multilateralize at least part of their liberalization (on a fully reciprocal basis). APEC, potentially the
second most important regional grouping because its external trade level closely approximates that of
the EU, has to date remained wholly faithful to its precept of "open regionalism"3 and has in fact
played a key role in galvanizing the conclusion of both the Uruguay Round and the ITA.

It will of course be essential for the major countries, who are at the same time central to both the
global system and the main regionals, to manage the interaction between them in a manner that will
continue to be mutually supportive--as the United States did while simultaneously negotiating
NAFTA and the Uruguay Round. Assuming that the United States (with NAFTA, APEC and the
FTAA) and the European Union (with its expanding network, including Euromed and perhaps EU-
Mercosur), do so, the lesson for 1998 and beyond is clear: implement the liberalization commitments
of the regional arrangements as rapidly and successfully as possible, and roll them into global
agreements especially via the Millennium Round as promptly as possible.

For example, APEC should proceed speedily with its new sectoral approach but offer to include other
countries and indeed the entire WTO, as it did with the ITA, as part of the new Round. APEC should
indeed go even further and challenge the rest of the world to pursue the proposed multilateral
agreement to emulate, on the world level, APEC's own commitment to achieve "free and open trade
and investment" by 2010 (for the industrial countries that account for 90 percent of its trade) and 2020
(for the rest). For their part, even short of such a new global compact, the other regional arrangements
should publicly indicate their willingness, a la APEC, to globalize their regional liberalization (on a
reciprocal basis).

Part 3. Money is Central

International monetary conditions and the related macroeconomic environment, though outside the
purview of the GATT/WTO itself, have been central factors in the postwar evolution of the
multilateral trading system. They have been particularly critical to the launch of the successive major
negotiations, and to the determination of the United States to push for such agreements.

This was particularly true for the Tokyo and Uruguay Rounds. The Tokyo Round was in fact
launched as part of the agreement, insisted upon by the United States, to restore fixed exchange rates
among the major countries and terminate the import surcharge that it had instituted in August 1971--
the most frontal assault on the principles of the GATT in the history of that institution. The American
strategy was twofold: to accomplish a substantial devaluation of the dollar, to restore American
competitiveness and reverse the sharp deterioration (for those days) of its trade balance, and to launch
a new international trade negotiation to help resist the intense protectionist pressure which had
developed by 1971 as described above. (Dollar devaluation was also essential to enable the
Administration to win Congressional support for the new trade round, which it did in 1974.)

The launch of the Uruguay Round was similarly linked to a monetary crisis. The huge dollar
overvaluation of the early 1980s, stemming from the massive budget deficits and benign neglect of
the first Reagan Administration, generated a huge current account deficit and converted the United
States from world's largest creditor country to world's largest debtor. As a result, protectionist
pressure escalated rapidly and Reagan himself, despite his devotion to open markets in general and
free trade in particular, "granted more import relief to US industry than any of his predecessors in
more than half a century."4 In addition, leading Congressmen commented that "the Smoot Hawley
tariff itself would have passed had it come to the House floor in the fall of 1985." The Administration
therefore adopted a two-part strategy similar to 1971: depreciate the dollar sharply, primarily through
the Plaza Agreement of 1985, and launch a new multilateral negotiation to counter the protectionist
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pressure. Dollar devaluation was again essential to achieve the stronger trade position that would
garner Congressional approval for the new trade talks, as ultimately achieved in 1988.

The Kennedy Round also originated partially in a monetary crisis. The first run on gold in the postwar
period occurred during the Presidential campaign in 1960, and President Kennedy reportedly viewed
the balance-of-payment problem along with the risk of nuclear war as his top policy priorities. The
Administration's strategy for correcting the deficit (as defined at the time), as developed during its
first year in office, included a major effort to open foreign markets to American exports. This in turn
led to the proposal to launch the Kennedy Round.

Today's circumstances replicate these previous episodes to an important extent. The US merchandise
trade deficit has already reached an annual rate of $225 billion and, with the adverse affect of the
Asian crisis, will probably rise to $250-300 billion later this year and into 1999. The IMF has
predicted that our current account deficit will reach $230 billion this year, almost 3 percent of GDP,
and the actual outcome could be even higher. The imbalance is of course primarily a macroeconomic
phenomenon, as in the past, and will require substantial correction in the exchange rate of the dollar--
which is currently overvalued by 15-20 percent in trade terms.5

In the meanwhile, however, substantial protectionist pressures will undoubtedly arise once the US
economy slows and unemployment begins to increase--and be blamed on the record trade deficit. As
noted above, the opponents of globalization have successfully resisted new Presidential negotiating
authority even while the economy has been proceeding successfully. The monetary imbalance will
thus again require the United States to press for a new multilateral negotiation, to restart the bicycle
and help resist the backlash against liberalization.

In this particular circumstance, monetary and macroeconomic events elsewhere reinforce the need for
an early start on a new Millennium Round. The new euro will start at a level that is undervalued, in
trade terms, by 15-20 percent--the natural mirror image of the dollar's overvaluation.6 Once the new
European Central Bank establishes the credibility of the new currency, it is likely to start assuming an
important role in world finance and a major portfolio diversification from dollars into euro will
ensue.7 This will produce an appreciation of the euro and a sharp fall in Europe's trade balance, in the
face of unemployment levels already running above 10 percent in all the major countries, and trigger
protectionist pressures there. It will be extremely prudent to launch a new WTO negotiation in time to
generate forward momentum with which to resist these tendencies as well.

The Asian macro situation adds to these requirements. As the real effects of the region's crisis unfold
over the next year or two, with millions of unemployed and thousands of bankruptcies, calls for
withdrawal from the liberalization pattern of the past are bound to increase. Here too it will be highly
desirable to commit governments to renewed progress, as APEC has already done to an important
extent, before the pressures in the opposite direction become too great.

There is thus an intimate relationship between the global trading system and
monetary/macroeconomic imbalances. The latter trigger changes in trade balances that generate
protectionist processes. The imbalances cannot be corrected by changes in trade policy but rather
must be resolved by changes in macroeconomic and currency policies. These changes take time
(usually two to three years) to play through, however, and the trade policy pressures must meanwhile
be countered by restarting the bicycle of liberalization. This pattern has played a significant role in the
launch of all three major GATT negotiations and is likely to do so again for the first major WTO
effort.

Part 4. Leadership

The final key variable in the successful management of the GATT regime was leadership, usually
exercised most visibly by the United States. As noted throughout this essay, American events and
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initiatives played a central role in the launch of all three GATT rounds (and most of the smaller
negotiations as well, including the recent sectoral talks).

It must be remembered, however, that the European Union has been an essential partner in each of
these ventures. The reason is simple: the EU, since it expanded beyond the original six members in
the early 1970s, has had an economy as large as that of the United States, has been an even larger
trading entity, and has spoken with a single voice on most trade policy issues. Hence Europe has been
a fully equal partner to the United States on trade issues, has been able to veto any global trade
accord, and hence has been a necessary co-leader of all multilateral enterprises.

With the creation of the euro, the EU will shortly achieve a similar degree of equality on monetary
and macroeconomic issues. Particularly in light of the critical importance for trade policy of
prospective monetary developments, in both the United States and the European Union, it is thus even
more important than previously for this de facto G-2 to provide leadership for the WTO system.

In recent years, the United States has sought to magnify its leadership by mobilizing Asian
cooperation through APEC. As noted above, APEC has already played a crucial leadership role in the
global system on at least two occasions--the conclusion of the Uruguay Round and the negotiation of
the ITA. The United States generally takes the lead on trade issues within APEC but the group as a
whole must now be viewed as an important player in the global trading system. But the new bipolar
power structure will still require joint US-EU leadership to launch the Millennium Round and all
other global trade initiatives for the foreseeable future.

Conclusion

My assessment of the last fifty years thus identifies five key principles as explaining the essential
success of the global trade regime. The five have generally worked together in mutually reinforcing
ways:

• Monetary and macroeconomic imbalances trigger a need for new global negotiations, to
contain the protectionist impulses generated by large trade deficits;
• New regional arrangements, which create new trade discrimination and thus motivate
outsiders to negotiate globally in response, also trigger such a need;
• New multilateral rounds are then undertaken to restart the bicycle of liberalization, in order to
counter the risks of backsliding and even reversal of previous openings;
• Large initiatives, especially comprehensive rounds, are utilized in implementing the strategy
to appeal to the widest possible group of participating countries and thus to propel the bicycle
most effectively;
• Leadership is provided by the largest trading entities, heretofore the United States and the
European Union, as the natural de facto stewards of the system.

This five-part pattern largely explains the inauguration, course and completion of the three large
rounds which have represented the dominant developments of the postwar trading system. The pattern
is re-emerging today and is likely to do so clearly over the next year or so. I hope that the system will
respond with the Millennium Round on this occasion as it did with the Kennedy, Tokyo, and Uruguay
Rounds in the past.

It must be recognized, however, that today's circumstances differ in important ways from those of the
past. For example, the threat to the open trading system--at least so far--is not the crude protectionism
of the past that, in the case of the United States, produced a "Mills bill" and import surcharge in the
early 1970s and a series of VERs in the middle 1980s. The ostensible threat is a more nuanced
reaction to globalization, accepting the inevitability of that phenomenon but seeking to manage it in
potentially destructive ways.
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One set of these efforts focuses on neomercantilistic devices, like the "super 301" provision of 1988
US trade legislation. Another promotes linkages between trade policy and nontrade objectives,
notably regarding international labor standards and environmental issues. Most important is the
explicit effort to stop the bicycle by calling a "strategic pause" in further liberalization,8 perhaps as a
prelude to reintroducing traditional protectionist efforts if the system's forward momentum can be
decisively Broken. The advocates of that strategy in the United States can claim at least two recent
successes with their defeat of fast track negotiating authority and the MAI.9

This "new face of protectionism" offers both opportunities and risks. It poses opportunities to address
a series of real problems which its advocates identify, including barriers to trade not yet covered by
the WTO (eg, centered on competition policy in Japan) and interrelationships between trade, on the
one hand, and labor and environmental issues, on the other. The risk is of course the derailing of the
bicycle of liberalization and thus a potential reversal of the progress of the past fifty years.

It is also important, at this point in time, to note the backlash against globalization in other parts of the
world. There is a minority, but nevertheless strong and perhaps growing, sentiment of this type in
Europe--with the creation of the euro as something of a symbolic equivalent to NAFTA in the United
States. The Asian crisis, as its real economic costs unfold over the next year or two, will undoubtedly
trigger a similar backlash in Asia (though one that may focus more on separation from the
international capital markets than from trade). The issue for the global trading system is thus far more
than "simply" countering the risk of backsliding in the United States, important as that consideration
alone continues to be.

The monetary impetus for a new trade initiative also now takes on a broader geographical dimension.
As noted above, the prospect of record trade deficits in the United States--largely as a result of
renewed dollar overvaluation--is again the chief consideration. But the prospective sharp decline in
high-unemployment Europe's trade balance, as the creation of the euro and the inevitable depreciation
of the dollar lead to a sharp fall in the region's competitive position, adds substantially to the case. So
does Asia's need for continued success to the American and European markets to enable it to recover
from its current financial crisis.

The third key reason to launch a new negotiation, the need to channel the regional arrangements in a
cohesive global direction, is also more extensive than in the past. This dimension of the prior rounds
aimed primarily to reduce the discriminatory impact of the European Union. Now, however, it is also
important to generate similar opening by NAFTA, Mercosur, and several other regional groupings
that have become economically significant in the 1990s. The need for a new global trade negotiation,
again, has varied geographical as well as substantive dimensions.

In pursuing that negotiation, I have argued for the most far-reaching application in GATT/WTO
history of the principle that "big is beautiful." All of the past rounds were quite ambitious, by
contemporary standards, but they sought merely to reduce barriers (and write new rules) in the search
for freer trade. Now that so many regional arrangements have already blazed the trail to free trade, I
believe the time has come for the global system to adopt a goal of eliminating all barriers by a date
certain (perhaps 2010 and 2020, a la APEC and Euromed). In addition to all its substantive benefits,
this would keep the bicycle of liberalization moving forward--in the Millennium Round and perhaps
even a successor--for at least the next decade or two.

When our successors meet in 2048 or so, I hope they will be able to look back and see that we, at the
turn of the century, met the challenges of the global trading system as successfully as did our
forebearers in creating the GATT system a half century ago. We can only do so if we learn the lessons
of this enormously fruitful period of global cooperation, draw the appropriate lessons for the future,
and proceed courageously to implement those conclusions. I hope this paper will contribute to that
purpose.