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Possible Enhancement of the World Trade and Investment Systems

By Lawrence J. Lau

Economic analysis tells us that voluntary free trade benefits both the exporting and the importing countries. It also tells us that direct investment, which is necessarily long-term in nature, and long-term portfolio investment benefit both the investor and the investee countries. So on this basis, both international trade and long-term cross-border investment should be encouraged and promoted. What new initiatives can be undertaken to enhance the growth of international trade and long-term cross-border investment, and in so doing enhance the growth of the world economy as a whole?

The United States, as the largest trading nation in the world, in terms of goods and services, and China, as the second largest trading nation in the world (the largest in terms of goods alone), can jointly provide leadership in global trade promotion initiatives. Similarly, the U.S. and China, as the two largest countries of origin as well as destination of foreign direct investment can also jointly provide leadership in facilitating cross-border direct investment.

Even though for the economy as a whole every trading country is supposed to have a net gain from international trade, trade does create both “winners” and “losers” inside every country. One vexing problem of long standing for governments worldwide is how to redistribute the gains from international trade among their citizens so that everyone, or almost everyone, receives a net benefit. Unless the “losers” can feel that they have also benefited from international trade, they will oppose the expansion of trade and further opening of the economy. This is a problem that we shall attempt to address in Sections 2 and 3.

The harmonisation of product standards is also a long-standing issue in international trade—if standards can become more harmonised, it will facilitate trade, reduce transaction costs and lower the prices of many imported goods. Another major issue is the redefinition of the rules of origin to take into account the fact that the same product is today processed at or includes components and parts from many different economies so that it cannot be properly considered to have originated solely from the location of the final assembly and packaging. There is a crying need for the revision and simplification of these rules and to base them on the relative value added of different economies to a finished product. The treatment of cyber trade is also becoming a hot issue as it has been increasing by leaps and bounds, both within as well as across economies.

The growing proliferation of free trade areas (FTAs) around the world also raises the concern that the world trade system may once again become fragmented. A mechanism for open accession by countries or regions which are not original signatories to specific free trade agreements will help to avoid the increasing fragmentation of the world trade system. There is also a need to facilitate long-term cross-border investment flows, especially considering the vast differences in saving rates and demographic conditions across different economies. Bilateral or multilateral investment treaties based on the principle of national treatment can be very useful in this regard.

Finally, it may be helpful to the reduction of global carbon emissions by imposing a global tax on imports that depend on the carbon content. The tax rate does not need to be high, but such a tax will send a signal that the entire world will be working together to prevent climate change. All of these issues will be discussed.

This is the time for developing innovative ideas! This is the time to consider the next generation of enhancement of the world trade and investment systems!

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