Executive Insights:The World Trade Organization—Perspectives and Prospects

This article is based on a presentation made by the author to thestaff of the International Trade Gentre and the GATT in Geneva inthe summer of 1994. It highlights the similarities between the Inter-national TYade Organization (ITO) which was proposed in 1948 andsubsequently rejected, and the newly proposed World Trade Organi-zation (WTO). A changed world environment is seen as favorable tothe WTO. However, caution is expressed against overloading theWTO with issues and causes not germane to trade and investment.

ABSTRACT

In 1948, after years of negotiations, more than 50 nationssigned the Havana Charter to create the ITO, the IntemationalTYade Organization. Several major principles were to governworld trade fi'om then on. One of the principles was the non-discriminatory treatment of parties, and a commitment to re-duce tariffs and other trade barriers and eliminate quotas.Services were to be covered just as well as products, ownersof patents, and intangible assets were to be protected. Foreigndirect investment was to receive fair treatment and domestic-content requirements and public subsidies were to be regu-lated. But in the 1950s, President Truman decided not tore-submit the ITO charter to Congress for ratification due toperceived threats to national sovereignty and the danger oftoo much ITO intervention in markets [Guide 1994).

In 1994, the focus was on a totally new organization whichthe Uruguay Round negotiators agreed on—the World TradeOrganization (WTO). And this WTO, as if by magic, has a lotof components which sound remarkably similar to the provi-sions of the ITO .

But the world has changed since then. In 1948, total worldtrade was valued at just above $58 billion, with the UnitedStates accounting for 34 percent of fi"ee world trade flows[Yearbook 1956). Japan's imports exceeded her exports by160 percent. Today, world trade exceeds $ 4 trillion, theUnited States has a share of 12 percent, and Japan has a his-tory of major trade surpluses. But one needs to look beyondthe numbers to understand some of the macro-economicchanges that have occurred.

Michael R. Czinkota

Submitted August 1994Revised September 1994October 1994

C Joumal oflnternational MarketingVol. 3, No. 1, 1995, pp. B5~92ISSN 1069-031X

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The traditional participants in trade, the Western, industrial-ized nations have been joined by new players—the dragonsor tigers of Asia—Hong Kong, Singapore, Taiwan and SouthKorea, who are now industrialized nations in their own right.Other countries have been industrializing (for example In-donesia, Malaysia, Thailand, Argentina, Chile) while stillothers such as China are preparing to become important tradeplayers. In addition, the entire region, which used to beknown as the Eastern Bloc, has been converted into emergingmarket economies, eager and sometimes even ready to enterthe world trade field.

Collaborative blocs are emerging among these participants.They range from loose agreements for general collaborationto well defined economic arrangements such as NAFTA andinclude intricate political formations such as the EuropeanUnion. These blocs change the way nations deal with eachother; for example, negotiators now often talk to bloc repre-sentatives rather than to individual countries.

Simultaneously, blocs have also disappeared—particularly theCommimist one. This disappearance has opened up trade andbusiness relations in areas that were off limits only a few yearsago. The framework and the way we look at Third Worldcountries and our decisions about whether and how to sup-port them also have been affected. For example, the cold warthreat by governments of "changing sides," which often trig-gered gushers of aid payments, has become meaningless today.

Exchange rates are another area where there has been majorchange. Currency values used to be fixed; later they started tofloat. But a key component of exchange rate theory was al-ways that they were the result of international currency de-mand and supply, which in turn was triggered largely bytrade flows and interest rates. Today, financial flows exceedtrade flows by vast multiples. For example, the total value ofU.S. merchandise exports is about $550 billion per year. Incontrast, the value of worldwide currency trades exceeds$1.5 trillion per day. Therefore, currency prices are no longermainly the result of financial flows that have been caused bytrade. Rather, the financial flows around the world set cur-rency values and often impose the level of interest rates. Fi-nancial flows can now determine trade flows, since highercurrency values mean higher prices for exports and lowerones for imports. Concurrently, a new phenomenon called "sticky prices " manifests itself when trade volumes do not be-have the way they should in response to changes in the val-ues of currencies. This occurs, for example, when theJapanese yen shifts from a level of 250 to the U.S. dollar, toless than 100 to the dollar, and the wave of imports stillkeeps on coming.

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There are also major changes in trade and investment orien-tation. Investments used to be the culmination of a long traderelationship and, due to their distance and riskiness, were in-frequent and long term in nature. Today, the rate of global in-vestment growth far exceeds the growth of trade. Suchinvestments have thoroughly affected trade fiows both on theexport and the import side (Okamatsu 1994). The transplanteffect in the automotive sector serves as example for in-creases in exports and market penetration. The effects of in-vestments on the import side can be seen when scrutinizingoutsourcing investments which are designed to create cap-tive sources of supply. In addition, investments today are of-ten of a short-term nature, moving from country to country inorder to benefit from resource and wage advantages.

Major shifts in orientation are also in evidence with regard totrade. Historically, for example, the United States has been"Europe oriented" in its trade outlook. This is easily seen inthe number of staffers in government departments who dealwith Europe. However, since 1978 U.S./Asia merchandisetrade has exceeded U.S./European trade, and the excess isgrowing rapidly. At the same time, this change is dynamic andhas shifted the trade orientation of other nations as well. Forexample, the United States has eilready declined dramaticallyas an export destination for Asia's exports. From a high of 38percent the U.S. market now accounts for only 28 percent ofJapanese exports. The United States is the recipient of only 23percent of South Korea's exports, rather than the 36 percent itwas in the past. Overall, in spite of the mutual feeling of belea-guerment, the exports of Asian countries to the United Statesaverage only about 23 percent of their total exports.

The new orientation in trade is accompanied by trade imbal-ances at unprecedented levels. Today, the United States isrunning an annual merchandise trade deficit of about $120billion, with Japan accumulating a global surplus of aboutthe same size. It is hard to remember that in 1972 PresidentNixon abandoned the gold standard because of a trade deficitof $2.5 billion.

Finally, there is a global recognition of new issues that are toolarge to be addressed successfully by any one country, yet tooimportant to be ignored. Society is increasingly preoccupiedby concerns such as air and water pollution, global warming,ecosystem maintenance, and new diseases. Patterns of long-term structural vmemployment, systemic weaknesses in edu-cational approaches, and growing safety and health careconcerns are just a few other issues which are not local, butglobal in nature. Goverrunents that attempt to address theseissues find out quickly that for reasons of resource con-straints or global linkages, their powers are limited, and theeffectiveness of their actions is often only minor.

Executive Insights: The World Trade Organization—Perspectives and Prospects 87

In sum, on a macro level, there are seas of change. These in-clude changing blocs, changing relations, changing fiows offunds, changing flows of trade, and a decreasing ability bygovernments to affect these changes.

^^^ '̂̂ ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Change is not confined to governments alone. At the globalIHE CORPORATE PERSPECTIVE corporate level many parameters, which were believed to be

fixed, have become fiuid. Competition has increased drasti-cally from expected and unexpected quarters. Not meetingthe competition no longer results in slight decreases in mar-ket share, but in a threat of corporate extinction. At the sametime, the capability to stay ahead is getting to be more expen-sive, with costs of research and development rising exponen-tially. The speed and ease of technology transfer causesinnovations to be diffused very quickly. Today, competitorscan copy or improve innovative products rapidly, providingthe creator often with only limited opportunity to recoup theinvestment made. An example illustrates the type of techno-logical progress achieved. The current innovation period ofcomputer chips is only 18 months. More than 70 percent ofthe sales of the data processing industry were the result ofthe sale of devices that did not exist only two years ago. Ex-perts estimated that this percentage would rise to 80 percentby 1995 (U.S. Senate Committee 1994).

Advances in information and communications technologyhave transformed the ability of firms to select their inputsand their locations. These advances allow the separation be-tween the origination and delivery of a product or service,thus offering firms new options for sourcing and foreign di-rect investment. While the traditional battle in the interna-tional market has been one for the right of establishment, thedelocalization made possible by telecommunication ad-vances may soon require a striving for the right to operationswithout establishment. These advances also enable firms tocarry out product adaptations and market targeting with sur-gical precision. However, the competition and consumer ex-pectations often require such changes, whether they be costeffective or not.

Today, firms also have many more options for their organiza-tional structure across borders. Joint ventures, value addingpartnerships, strategic coalitions, strategic alliances, cooper-ative agreements, and industry consortia are only some ex-amples of organizations that allow firms to avoid gettingbigger (Naisbitt 1994), yet enable them to exercise their mar-keting muscle and maximize their production capabilitiesacross national boundaries. Overall, on the micro level, firmssee more change, an increase in the speed of change, increas-ing risk, more capabilities, but also more demands.

88 Michael R. Gzinkota

What are the governmental goals in the context of worldwide ====!^==!^=^^^^^^=competition? They are threefold and linked to each other: T H E CONTEXT OF A N E Wensuring success for its firms, both at home and abroad; ere- GLOBAL TRADE FRAMEWORKating employment; and increasing the standard of living.Governments attempt to achieve these goals through both in-ward and outward oriented activities by focusing on marketaccess, stable rules, and market skills. Pressure for action isexerted within the country through domestic constituentssuch as voters and special interest groups. From outside thecountry pressure is exercised by trading partners, trade andinvestment agreements, and multilateral institutions. As a re-sult of these pressures, all government activities are affectedby domestic and international influences. Yet, in the intema-tional trade and investment setting, preponderant orienta-tions can be discovered. When governments need to ensuremarket access for firms, this task requires mainly an outwardorientation directed at other countries. Assuring the stabilityof rules is, again, mainly an outward-oriented activity. Theassurance of market skills for firms in terms of product de-velopment, process capabilities, and innovation is mainly aninward-looking, domestic activity.

From a long-term perspective, a major shift in priorities canbe discovered for these activities. In 1948, during ITO days,the United States was an economically overwhelming globalpower. When it came to market access, the only issue of con-sequence was the access to the U.S. market. The stability ofrules essentially depended simply on the desire for stabilityon the part of the United States. Market skills were highlyconcentrated in U.S. firms. Therefore, within a 20- to 25-yeartime frame, the ITO and its new rules were offering gains foreveryone except the United States. It is no wonder that therewas no desire to give up any sovereignty.

But today, things are different. The U.S. govemment is dis-covering the limits of policy implementation due to the ac-tions of its trading partners. The importance of market accessnow is increasingly critical for U.S. firms if they are to besuccessful. There are now changes in rules and definitionsthat do not emanate from the United States and are not nec-essarily in its favor.

The new medium-term perspective, looking forward to thenext 20-25 years, shows us that there is major world growthtaking place. Access to these growing markets will be crucialfor the success of global firms. This growth occurs in Asia,Latin America, and perhaps in the former Eastern Europe.One result of this growth is a new assertiveness by countriesaround the globe now that the strong bonds forged by thecold war threat have disappeared (Czinkota 1994). One mightspeculate, for example, that the caning in Singapore was notjust a woodshed, but perhaps a watershed of a newly definedU.S. relationship with Asia.

Executive Insights: The World Trade Organization—Perspectives and Prospects 89

Today, there are key benefits to be gained for the United Statesby entering into trade agreements. NAFTA, for example, pro-vides U.S. firms vdth access to a market located next door. Itis hard to overestimate just how crucial such access is. Re-search has shoviTi, for example, that firms decide to go inter-national based on a phenomenon called "psychic distance,"which is a variable composed of geographic distance, culttiralsimilarity and market access (Wiedersheim-Paul 1978). Morethan 60 percent of U.S. firms start to export to markets that arepsychically close. NAFTA has brought Mexico psychicallymuch closer and therefore affords new opportxmities for U.S.companies to get started in intemational business and growinto multinational corporations. On a global level, the WTOcan now assist countries in achieving the important goals ofmarket access and rules stability, which they might not beable to secure anymore by themselves.

But the WTO vkdll not fix all trade ills. The key third dimen-sion of success—superior market skills—represents mainly adomestic issue in spite of the importance of sharing manage-rial insights beyond national borders. For the United States,export trade is only one, albeit an important component ofthe economy. In light of 120 million employed in the UnitedStates, and the fact that about 20,000 jobs are associated witha $1 billion increase in U.S. exports (Davis 1992), even a ma-jor trade liberalization with $10 billion in new U.S. exportswill only create 200,000 jobs. Of much greater importance isa nation's ability to maintain its global competitiveness on arelative basis. CATT economists predict that by the year 2002annual increases in global exports will be in excess of $755billion (Uruguay 1994). To persevere against this wave oftrade fiows, the key to economic progress has been, and con-tinues to be, the fostering of market skills for firms and em-ployees. Encouraging those skills will require stimulatingand implementing reforms in the educational system, re-training the labor force, and promoting scientific awarenessand progress (Simai 1994). Such an educational push mustconsist of a two-pronged approach: It needs to include majorefforts to get people ready for economic processes, and itmust redefine the processes to get them ready for the workforce. An example of the latter approach can be found in thecomputer industry. Its success in penetrating markets is notthe result of a major increase in the programming skills of thepopulation at large, but rather of the growing user friendli-ness of the machines and software.

—^———^————^^—-——— It is meaningful and of value for the United States to be part ofT H E FUTURE OF THE WORLD the WTO. Congressional ratification was the right step. But the

TRADE ORGANIZATION WTO must have the opportunity to become a successful orga-nization. As to the prospects for such success, one must refiecton all the "social causes" that are now being introduced into

90 Michael R. Gzinkota

trade decisions. It is debated whether the WTO should alsodeal with issues such as labor lavv̂ s, competition, and emigra-tion freedoms. Clearly, there are many important issues otherthan trade, in addition to the social issues mentioned above.Religion, health care, the safety of animals, the pursuit ofhappiness, all of these are worthwhile concems and desires.There is something of an irony if one considers that all theseissues might have been easily included by the United Statesin the ITO back in 1948.

Today, however, the genie is out of the bottle. There are now125 govemments that participated in the Uruguay Round. Theyhave diverse perspectives, histories, relations, economies, andambitions. Many of them fear that social causes can be used todevise new rules of protectionism against their exports. Thereis the question as to how much companies—^which, after all,are the ones doing the trading and investing—should be bur-dened with concems not germane to their activities. There istoday no single country with sufficient global market impor-tance to unilaterally impose its will.

To be successful, the WTO needs to be able to focus on its coremission, which deals with intemational trade and investment.The piling on of social causes may appear politically expedi-ent, but will be a key cause for divisiveness and dissent withinthe WTO and thus inhibit progress on further liberalization oftrade and investment. Failure to achieve such progress wouldleave the WTO without teeth and would negate much of theprogress achieved in the Uruguay Round negotiations.

There are other organizations that can take on social causes,for example the International Labor Organization, for laborissues. Such groups can and should study ways of further im-proving the well-being of human kind.

What the WTO can help with is the implementation of activ-ities that work in support of social causes. For example, theIntemational TYade Centre, cosponsored by UNCTAD/GATT,could provide training on how to utilize rain forests or howto improve labor conditions. The core contribution of theWTO, however, will be in the fact that the flag follows tradeand investment. Over time, increased economic ties willcross-pollinate cultures, values, and ethics between eco-nomic partners and, together with the income effects on indi-viduals and countries, cause changes in the social arena.

Together with the other pillars of the global economy—theWorld Bank for development and the Intemational MonetaryFund for finance—the WTO can form the underpinnings for aworld economic platform. After that platform is secxired, fur-ther societcd dimensions can be built on top of it.

THE AUTHOR

Michael R. Czinkota teaches in-ternational marketing and busi-ness at Georgetown University. Hislatest book. The Global MarketingImperative, was published by NTCBusiness Books in 1995.

Executive Insights: The World Trade Organization—Perspectives and Prospects 91

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Naisbitt, John. Global Paradox. New York: Morrow, 1994.

Okamatsu, Sozaburo. "Japan in the World Economy." Speech ofthe Vice Minister of MITI before the Chicago Council of ForeignRelations, 11 May 1994.

Simai, Mihaly. The Future of Global Governance. Washington,D.C: United States Institute of Peace Press, 1994.

U.S. Senate Committee on Banking, Housing, and Urban Affairs.Subcommittee on International Finance and Monetary Policy.Benewal of the Export Administration Act. 103rd Cong., 2ndsess., 3 February 1994, 2 (testimony of Paul Freedenberg).

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