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Rationale for Competition Focus

There are several reasons for shifting the focus of trade liberalization and trade-rule-making efforts from an exclusive focus on the removal of explicit trade barriers to a broader consideration of the impact of various policy instruments on international competition and the operation of markets.  

First, the globalization and customization of production has significantly reduced the operational utility of the traditional distinction between international trade and investment, or more broadly the distinction between trade and factor movements.  Before globalization, manufacturing enterprises treated trade and foreign investment as alternative strategies for penetrating foreign markets, and in that context it made some sense to treat trade and foreign investment policies as distinct policy instruments, and to negotiate distinct international regimes.  This distinction between trade and investment in the business and government policy context was reinforced by economic theory, e.g. the Heckscher-Ohlin theorem that showed that trade and factor movements were substitutes.

In the context of globalization, businesses increasingly treat trade and foreign investment not as alternative strategies for penetrating foreign markets, but as complementary means for carrying out comprehensive global production strategies.   Decisions concerning the optimal location of individual production activities, e.g. the production of individual components, parts and services; the assembly of components, and the customization of the final product, thus ultimately determine trade and investment flows in the current environment.  A number of factors enter into such decisions, including the relative cost and availability of critical local inputs, access to transportation, the relative importance of proximity to customers, and the impact of national and local laws, regulations and policies.  The growing importance of customization in many products dictates that certain development and customization activities be carried out in close proximity to major customers.

In light of the increasing complementarity of trade and foreign investment in a globalized economy, the traditional policy separation of trade and foreign investment in both domestic policy and international negotiations makes less and less sense.  This became quite obvious with respect to trade in services during the recently concluded Uruguay Round.  The General Agreement for Trade in Services (GATS), which resulted from these negotiations, provides an integrated framework for addressing cross‑border trade, investment and movement of the producers.  National schedules of commitments are meant to cover the full gamut of trade barriers, domestic regulatory measures, investment and licensing rules, and visa requirements that can affect the international activities of services firms.  This provides a single organizational and legal focal point for addressing the various policy instruments that can affect the many different ways in which firms located in one country may choose to supply services to another country.

Globalization of production has also made it much more difficult to implement trade rules based on the assumption that trade involves an exchange of goods with a distinct national origin.  Obviously, where an increasing proportion of trade involves a flow of goods in various stages of production, containing inputs from a large number of different countries, it becomes increasingly difficult to maintain the notion that such goods have a particular national identity.   Under current trade laws and agreements focused on barriers to trade in goods with distinct national identities, policy makers are often pushed into making decisions that are neither in their ultimate commercial interest nor economically rational.  This is because the apparent origin of a product, that is the country from which a partially or finished product is being imported, may not be the country where the principal value was added, and the principal value may well have originated in the importing country.

The large and growing volume of transactions conducted through foreign affiliates signals the changing nature of competition in an international marketplace and requires a different way of thinking about rules of the game for global competition.

The globalization of production has also reduced the extent to which it can be assumed that the economic interests of nationally owned firms necessarily coincide with the economic interests of the country of origin.  National economic decisions in a globalized world require difficult trade-offs between the national economic interests that flow from the global market position of nationally owned firms and the economic interests that flow from economic activity carried out locally by firms owned by foreign nationals.  Given the globalization of financial markets, even the nationality of some firms is no longer as clear as it was in the past.  In this context, it becomes much more important how policies affect the activities of economic actors and the operation of the market per se, both nationally and internationally, than the national identity of either firms or products. 

In this new globalized environment, in which the national identity of both products and firms is difficult to determine, the best rules are likely to be ones that focus on the impact of policies on the operation of global markets, regardless of the "nationality" of either the products or firms involved.  Such rules could be designed to meet the economic requirement of improving static and dynamic economic efficiency, and meeting the political requirement of ensuring that national interests are being treated fairly by foreign governments.  This can be shown to be the case, for example, with respect to rules requiring nondiscriminatory treatment of domestic and foreign products and firms.  In such cases, politically motivated efforts by any one government to remove discriminatory treatment by another government also can be shown to contribute to national and global economic gains from an improved operation of the global market.   

The globalization process has resulted in a deepening of international specialization and a deep interpenetration of national economies that has been referred to as deep integration.  This means that the economic interests of individual nations have become so closely knit together that the traditional distinction between a domestic economic policy instrument and a foreign economic instrument (foreign trade or foreign investment measure) has become less meaningful.  Any measure that has a significant impact on production decisions by a globalized firm has become a matter of concern for other national governments and the world community as a whole.  This is true whether one looks at the issue from a producer (i.e. a traditional mercantilist) or a consumer point of view. 

From a producer point of view, any measure that affects the operation of foreign owned firms, the availability of essential inputs into production activities carried out in other countries, or market access for goods or services produced with inputs generated abroad becomes potentially a trade issue.  From a consumer point of view, one could say that any measure that forces firms producing global products to adopt less economically efficient production methods, or to carry out production activities in less efficient locations, should become a matter of concern for governments representing their own consumers and the world community as a whole.

The economic rationale for a competition-oriented approach to replace a traditional trade barriers approach to trade negotiations is twofold.  First, it more directly focuses on the impact of policy measures on the efficient functioning of global markets.   Second, it includes under its purview a wider range of policy instruments that affect international competition.  All the economic arguments that have traditionally been made in support of trade liberalization per se would apply to negotiations aimed at removing barriers that impede international competition.  Such negotiations would further enhance the functioning of international markets.

Adam Smith, in The Wealth of Nations, was the first to articulate in a comprehensive way trade liberalization as a means of obtaining the economic benefits of market competition.  He treated open trade as a subset of his more general argument for free and open market competition.  Opening national markets to global competition as the principal objective of trade liberalization is solidly rooted in the history of economic thought.

Relevance of New Paradigm to Developing Countries

Developing countries might be inclined to question the relevance to them of many of these changes in the world economy, since an abundant supply of unskilled workers and a limited supply of capital restrict the prospects for automating production in their economies. Moreover, much of the economic development process involves the accumulation of enough capital to bring a country more fully into the industrial economy. This perspective, however, misses a fundamental point. The economic prosperity of developed as well as developing countries today are tied to world markets. What producers from any one country can sell in foreign markets is dictated by what producers from every other country are offering for sale.

Goods and services produced in developing countries for sale in world markets have to meet the requirements of the new paradigm. Products have to meet current consumer tastes, and production has to adjust rapidly to shifts in consumer tastes to avoid wasteful inventory build-up and loss of market share. There is a niche for cheap, low quality, undifferentiated products, but that is a heavily populated niche. Such products also contain little value-added and therefore will not sustain the increases in real income, which all countries seek.

In order to lift the living standard of their people, developing countries must seek to move to higher value production. That, in turn, means producing parts and components, business services and other inputs used in the global production of high quality goods and services.

Many developing countries have a large pool of educated and skilled workers who are well qualified to produce world-class professional services. However, they will not be able to do so unless they are given access to world quality support services, in particular, a modern telecommunication and transportation system. Analysts at the World Bank and the Asian Development Bank have identified the lack of adequate infrastructure investment as the major obstacle to sustained growth in many high growth developing country economies.

In summary, if developing countries want to take advantage of the opportunities created by the new economic revolution they must seek to reform their domestic regulations.  What they do to open up competition and improve economic efficiency by removing regulatory and other obstacles to the production of efficient goods and services will increasingly determine their economic growth and prosperity.