CDR Trade and Investment Policy Recommendations
Since the Second World War, the United States has applied its unique leadership and economic might to liberalize international trade and investment, expand rule of law, and establish trade and investment rules that have generated historic prosperity at home and lifted hundreds of millions of people out of poverty abroad. This economic liberalization and rules-based economic growth advance stability around the world, as shared economic interests and more open societies support and defend a mutually-beneficial order.
Many developing countries, however, maintain market-distorting trade policies, erect commercial barriers, and fail to protect investments and property, stifling trade and Foreign Direct Investment (FDI) – denying themselves and their people the benefit of meaningful participation in the global economy. Such anti-growth policies deprive entrepreneurs and businesses in developing countries the tools, markets, and capital they need to drive economic growth and lift countries out of poverty.
Today, private capital flows into developing countries far exceeds Official Development Assistance (ODA), yet U.S. development policy and foreign policy in general have undervalued this shift and failed to fully embrace the transformative development power of trade and investment. Globally, ODA is declining in real and relative terms, yet policies aimed at opening markets, increasing transparency, protecting investments and property, and reforming regulatory and customs policies – essential elements for sustainable economic growth – have been a low priority in U.S. development strategies and have lacked the strategic planning, interagency governance, and prioritization necessary to effectively promote our national interests.
U.S. development policy must fully embrace reforms that hasten private sector-led growth in the developing world as a strategic priority. Moreover, U.S. foreign policy must prioritize the expansion of a global trading and investment system and enforceable agreements that promote the economic reforms, rules-based trade, and building of the institutions essential for sustainable development. To do so, the United States should mobilize innovative and powerful development finance tools and trade capacity building assistance to tackle the high costs and barriers to trade and investment that constrain economic growth and stifle poverty reduction strategies in developing countries. Advancing these reforms will fuel sustainable development and create new markets and consumers for American goods and services.
How Trade and Investment Policy can Drive Development
Trade and investment flows drive growth. Developing countries that open competition, remove trade barriers, and attract and protect foreign investment and intellectual property grow faster than countries that do not. As the World Trade Organization has observed, “Those developing countries which trade successfully tend to be those which have made the most progress in alleviating poverty and raising living standards.” The global economy and its centers of growth, trade, and investment are changing and sub-dividing, and the rising importance of trade and investment between and among developing countries offers new markets and growth opportunities through trade with their neighbors and other regional emerging economies. According to the World Bank “More than 50 percent of developing country exports now go to other developing countries. Even when China is excluded, “South-South” trade has been growing at an average rate of 17.5 percent a year over the past decade, with manufacturing trade expanding as rapidly as commodities trade.”
Connecting to global supply and value chains expands opportunity. As global demand and growth trends shift, and manufacturing and distribution networks expand around the globe, the ability of developing countries to connect to global supply and value chains will be a significant determinant of their levels of prosperity. The expansion of these supply and value chains also presents more opportunities for small- and medium-sized businesses in developing countries to access larger production and distribution networks and reach new consumers.  Many developing countries lack large multinational companies with fully integrated production capacity. The emergence of complex supply and value chains, however, creates a demand for the goods and services of small and medium-sized businesses that are far more prevalent in the developing world. Tackling key barriers to accessing these supply and value chain barriers will empower these smaller enterprises to participate and compete in the global economy.
Enhancing trade capacity enhances competitiveness. The World Bank and the World Economic Forum (WEF) have produced extensive research and analysis that demonstrate how dedicating development funding and policy reforms that enhance trade capacity and facilitate trade and investment in developing countries produce greater results than traditional Official Development Assistance (ODA). In its Enabling Trade: Valuing Growth Opportunities paper that examines supply chains barriers, the WEF found that “reducing supply chain barriers to trade could increase GDP up to six times more than removing tariffs.” Moreover, expanding regional trade and investment by removing barriers between and among neighbors will enhance the comparative advantage of many developing countries. To achieve regional integration and global competitiveness requires a focus on enhancing trade capacity. U.S. foreign assistance policy should direct funding toward developing trade capacity by improving trade infrastructure and supporting key economic reforms that reduce trade transaction costs.
Expanding trade, investment and innovation grows the private sector. The U.S. private sector has a presence in every country where U.S. foreign assistance dollars are spent, and in every country participating in a U.S. trade preference program, bilateral investment treaty, or free trade agreement. Trade and investment flows in the developing world depend upon American and foreign business participation. American businesses need a stable business environment where investments and intellectual property are protected, where rules and regulations are transparent, and where trade costs are reduced so they can compete. Engaging U.S. private sector actors in the developing world to reform U.S. trade and investment policies and priorities will drive economic development in partner countries and grow markets for American goods and services and therefore expand prosperity at home and abroad. Developing countries that commit to trade, investment, and intellectual property rights protection will attract foreign investment and better compete in the global market place.
Trade and Investment Policy Reforms to Advance Development
A number of ongoing and new initiatives present opportunities to better align U.S. development goals with U.S. trade and investment policy, and to harness the unique capacity the United States enjoys to use trade as a tool for growth, liberalization, economic development. Several U.S. trade preference programs that lower trade barriers to exports from the developing world and require participants to meet certain eligibility criteria are up for review and renewal. The United States continues to negotiate a number of significant trade agreements including with the EU, countries in the Asia-Pacific, as well as plurilateral services and trade facilitation negotiations at the World Trade Organization. Congress and the Administration are also pursuing a reauthorization of Trade Promotion Authority. All these efforts present an opportunity to overhaul how the U.S. government deploys trade and investment policy to spur sustainable development by championing market access, investment, and regulatory reforms within developing countries that will enable them to participate more fully and prosperously in the global economy.
Trade Preferences Reform. An effective preference regime should focus on driving internal economic reforms that will lead to sustainable economic growth and enhanced trade and investment competitiveness. Market access preference is a means to an end, and it should be used to achieve sustainable reforms and be limited to the countries that truly need the preference to enhance their development. These preferences were intended to be transitional; the failure of many participant countries to graduate from these programs demands an intensive examination of why these preference programs continually fail to achieve their intended result. For example, the vast majority of exports under the AGOA program have been petroleum, and the nascent African apparel industry remains wholly dependent on third country fabric despite 14 years of preferential access. A number of reforms could better align U.S. trade preference regimes with achieving sustainable economic growth by tackling the underlying economic constraints that produce these distortions. Following the expiration of the Generalized System of Preference, and with the upcoming debate on renewing and reforming the African Growth and Opportunity Act (AGOA), Congress and the Administration should rethink how to best design the entire U.S. trade preference program regime.
First, the country eligibility criteria should be reformed to incorporate progress on economic reforms that will facilitate trade and investment. A significant focus on reducing trade costs and expanding regional economic integration through policy reforms should anchor the U.S. trade preference regime.
Second, product coverage should be revisited to break down trade distortions and enhance the ability of developing countries to diversify their economies and vertically integrate their industries.
Third, the eligibility review mechanism and graduation process should be strengthened to ensure that benefits are targeted to developing countries that truly need the preference transition to promote competitiveness.
Finally, while trade preference regimes should provide a reasonable degree of certainty and stability to generate foreign direct investment, as development tools, they are not intended to be permanent. Static trade preference programs will not generate sustainable development outcomes, as their value to beneficiary countries erodes over time as the United States enters into free trade agreements elsewhere. To avoid this diminishing value and to maximize their potential to drive reform and sustainable private sector-led growth, policy makers should revisit the structure of current and future trade preference regimes to include incentives for reforms and growth, with the aim of moving demonstrably toward reciprocally beneficial permanent bilateral trade and investment agreements over a reasonable time period. Policy makers should also consider developing incremental negotiating stages in between trade preferences and a gold-standard comprehensive free trade agreement for the same purposes. To complement a restructured trade preference regime, U.S. foreign assistance must better target Trade Facilitation and Trade Capacity Building reforms in developing countries (as described below). By focusing solely on market access to the United States, current trade preference programs do not address sufficiently the range of stifling supply side barriers within beneficiary countries such as corruption and a lack of regulatory and customs capacity. More effectively designing a unified trade preference program to achieve sustainable development by encouraging reforms that improve developing country competitiveness will also open new markets and opportunities for American businesses, farmers, and workers trying to compete in those countries.
Free Trade Agreements (FTAs), Bilateral Investment Treaties (BITs), and Trade and Investment Framework Agreements (TIFAs). Current U.S. negotiations should focus on the trade and investment policy reforms and commitments that will best achieve sustainable economic growth in developing countries participating in the negotiations with the United States. Moreover, the U.S. government should review existing FTAs, BITs, and TIFAs, and prioritize accelerating market openings and adopting additional regulatory and non-tariff reforms to enhance the development potential from existing U.S. agreements. Identifying and reforming the key policies and barriers that inhibit growth, trade and investment in developing countries should anchor all U.S. trade and investment negotiations. U.S. trade and investment negotiation and agreements should also emphasize regional economic integration. Revisiting rules of origin, cumulation, and other regulatory harmonization reforms could significantly improve the development outcomes within developing countries. The United States should press its developing country trade and investment partners to reduce barriers to each other as well as the United States (statistic). The share of world goods trade among developing countries has more than doubled in the past two decades, from seven percent in 1990 to 17 percent in 2009. The World Bank notes that import duties on goods traded between southern countries is on average 6.1 percent, compared to 2.5 percent in the West.
Trade Facilitation (TF) and Trade Capacity Building (TCB). Reducing the high trade costs in developing countries through a range of bilateral, regional, and multilateral trade facilitation efforts is potentially the most cost-effective efforts to spur trade and investment and advance development. A recent OECD study found that comprehensively addressing trade barriers would generate significant reductions in trade costs for developing countries, reaching almost 14.5 percent reduction of total trade costs for low income countries, 15.5 percent for lower middle income countries and 13.2 percent for upper middle income countries. Past WTO Director General Pascal Lamy has said that concluding a trade facilitation deal could increase global GDP by $1 trillion. For example, the World Bank recently measured the cost to export a 20-foot container in U.S. dollars. In 2012, the cost in Malaysia per container was $435, while in Chad it was an astounding $5,902. Reducing these high trade costs in the developing world will increase developing country global competitiveness. To that end, the World Trade Organization's recent “Bali Round” agreement includes commitments by developed nations to help build the institutional capacity of developing nations and to identify and bring down barriers to trade and investment-led growth. Such institutional capacity helps governments manage resources and increase revenues, and provide cooperative avenues to take full advantage of available trade agreements and customs preferences with the United States. However, U.S. Government TF/TCB efforts are under-appreciated for their potential as both economic growth and development tools. Programs have developed among many agencies, but lack strategic coherence, coordination, and performance objectives. Legislation under consideration in the Senate and House of Representatives aims to elevate TF/TCB to a strategic priority for U.S. policy and to provide the necessary legal authority, funding, and coordination and leadership structures to U.S. government programs. Congress should act expeditiously to pass such legislation and the President should provide the necessary commitments and resources to take full advantage of the potential for TF/TCB to server our national interests and advance development.
Trade Promotion Authority (TPA): To achieve any of the trade and investment recommendations highlighted above, the President should have Trade Promotion Authority. Any TPA legislation should set revised negotiating objectives that address trade capacity, trade facilitation, investment protection, intellectual property protection, regulatory reform, and other barriers that particularly impact developing country participation in the global economy.
Only through private sector-driven economic growth, and not through ODA alone, can countries truly develop sustainably. Today’s global economy demands innovation, low trade costs, protections of investment and intellectual property rights, and the free flow of trade and capital for countries to thrive. The emergence of global supply and value chains offers developing countries a new range of opportunities. But these opportunities can only be seized through trade and investment reforms that will spur competition and ignite the economic growth necessary for truly sustainable development. Consequently, U.S. development objectives can only be achieved through market liberalization, regional integration, and adoption of rule of law, transparency, and investment protections. U.S. government development policies and programs must embrace economic growth promotion as development and seek to build trade capacity and reduce trade costs so developing countries can better compete in a global economy and gain access to the markets, know-how, and capital necessary to successfully participate in the global economy.