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Without Ground Rules, It Will Be Open Season On Open Markets


Economic Viewpoint

WITHOUT GROUND RULES, IT WILL BE OPEN SEASON ON OPEN MARKETS

Two uncomfortable truths are dawning on America's free traders. The first is that if the world is going to be one giant market, it will have to be under a single system of rules. Otherwise, the most opportunistic nations in the system will simply take advantage of relatively open nations, including the U.S. Secondly, it is not "protectionist" to insist that other nations, which benefit from a relatively open system, take steps to ease their own protectionism. Without greater balance and symmetry of access in the global system, the overall constituency for open trade will melt away.

A good illustration is the protection of intellectual property, a nontraditional issue not even part of the General Agreement on Tariffs & Trade agenda until 1986. Its inclusion acknowledged that open trade requires not just tariff reductions but a common framework of commercial rules. If relatively high-wage nations, such as the U.S., are to retain signficant comparative advantage, it must be on the basis of technological leadership. The U.S. remains the world's leader in scientific breakthroughs and commercial patents. But if this advantage is to accrue to the American companies that invest in the technology, it must not be pirated. Otherwise, the opportunity to realize returns on the investment is undercut, as is the incentive to invest.

Not surprisingly, poor developing countries see things differently. Until recently, most of these countries lacked even a rudimentary system of Western-style patent protection. They see industrial piracy as a means of economic development and as a strategy of technology transfer. Moreover, in the case of certain high-technology products, such as pharmaceuticals, these countries also claim a special humanitarian need to manufacture lifesaving drugs locally at prices their people can afford.

NO PRETENSE. Far from being an open-and-shut case of common theft, this strategy has a venerable history. The American textile industry began in 1790, when an English inventor named Samuel Slater pirated the technical specifications of Richard Arkwright's famous power loom at Nottingham and duplicated it at Pawtucket, R.I. But piracy was less of a dilemma in the 19th century because there was no pretense that every country should practice free trade or that the world constituted a single integrated market. Accordingly, most countries constructed high tariff walls.

In recent years, however, as the world has increasingly become one big economy, it is only fair to insist that nations that enjoy access to the huge consumer market of developed nations play by more nearly common rules. Like other laws, these must be devised, negotiated, and brokered on the basis of mutual interest. Unfortunately, the gatt is not really designed to achieve this outcome. It can only operate by consensus: It has no extraterritorial authority, much less a world court of trade, and its members include nations that practice markedly different brands of capitalism. Between the U.S. and Canada, which are supposedly parties to a free-trade agreement, there are major differences even in domestic intellectual-property law.

As the negotiations have unfolded in Geneva, the U.S. has made surprising progress in getting developing countries, led by India and Brazil, to acknowledge the need for a common framework of intellectual-property protection. However, in the draft agreement, the price of this acceptance is a prolonged phase-in period. Developing countries remain free to pirate, while the U.S. must give up recourse to its own domestic-trade and patent law as antipiracy measures.

UNHOLY ALLIANCE? In fact, the U.S. has secured the most dramatic breakthroughs in getting nations such as Mexico and China to pass intellectual-property protection by getting tough on a bilateral basis, not through reliance on the gatt. Key American industrial supporters of the intellectual-property initiative--the pharmaceutical, software, and entertainment industries--are now wondering whether the proposed deal is worth the candle. Conversely, according to India's Ambassador to the gatt, B.K. Zutshi, the Indians feel that they are making a major sacrifice to the American gatt agenda with little in return from the trade round. And some American diplomats see an unholy alliance in which the Europeans back the Indian stance on relatively weak intellectual-property protection, while the Indians back the Europeans' resistance to further concessions on agriculture.

Clearly, if the gatt is to keep moving forward at all, a monumental effort to achieve common commercial rules is required. We need a grand bargain in which poor countries gain freer access to developed nations' markets, and in return, they agree to play by the rules of Western capitalism. But that would still necessitate the acknowledgement that poor nations have special needs--for cheap medicines, debt relief, and Western capital and expertise, public as well as private--issues that are outside the scope of the gatt. A healthier global-market system requires a great deal more than a crusade for laissez-faire. It requires heroic statecraft as well as open markets.Robert Kuttner


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