A DECADE OF FREE TRADE

James Baker on Free Trade and International Finance

James A Baker III was the Secretary of the Treasury in the Reagan Adminis- tration from 1985 to 1988, in which capacity he was central in dealing with the Latin American debt crisis, funda- mental reform of the US tax code, and negotiating the US-Canada Free Trade Agreement. He also served as the Secre- tary of State in the Bush Administration from 1989 to 1992. He was interviewed at the McGill “Free Trade at Ten” confer- ence in Montreal by Christopher Ragan, Editor of World Economic Affairs.

laws apply here. We are just agreeing to another issue that was very difficult to Negotiating the FTA a method of selecting the mediators, bridge and that was the cultural argu- WEA: In retrospect, what do you that’s all.” ments that Canada would come up with. think was the most difficult part of WEA: In reading descriptions of the Quite frankly, that’s something that’s negotiating the FTA? FTA negotiations, one clearly gets a really hard for us to understand. Baker: I think the dispute-settlement sense that the dispute-settlement WEA: That’s because you don’t live mechanism issue was the most difficult. mechanism was a deal breaker for beside a country with 300 million peo- It was the last one we could resolve. It Canada. But one also gets a sense that ple that happens to be the richest and was very difficult for us in the United the Americans didn’t see why it was most powerful country in the world. States and the Congress, particularly the such an important issue to the Cana- Baker: Well, that may be. But that’s a committee leaders who had to approve dians. pretty good basket under which you can this thing. They had some serious diffi- Baker: Well, I don’t know about the hide a lot of protectionism if you want culties from the standpoint of whether American public, but the American to. So we had to look at it with that in we were ceding sovereignty to a dispute- negotiators could understand why it was mind, and we ultimately resolved those settlement panel. We ultimately resolved important. It’s like Derek Burney said at differences. There were times during the that in both countries by saying that if the McGill conference: Canadians were FTA negotiations when I looked at Derek the issue arises in the United States, we not interested in just a tariff deal, Burney or Michael Wilson and said will apply US law, and if it arises in because Canadian tariffs were higher “Hey fellas, let me tell you something. Canada, we will apply Canadian law. So than US ones. Canada needed to get Automobiles are cultural to us. If this is we could go to Congress and say, “Look, something more out of it. We knew that cultural to you, automobiles are cultur- we are not ceding any sovereignty. US and we understood that. There was al to us. Fine, we’ll trade them off.”

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WEA: Your mention of culture election, but it was quite clear that in WEA: Is a President that sells the makes me want to jump ahead a bit. America it was a non-issue—in the idea of free trade going to be suffi- Do you have any views on the recent newspapers, to the man in the street. cient, or will we also need a change in deal that the United States and Cana- Why didn’t Americans care? Congress? da struck on the split-run magazines? Baker: Well, I think it was because we Baker: You certainly need a President Baker: I think it would have been a had just been through a major econom- to sell it. Congress is always going to be good deal if we could have struck it back ic issue that occupied centre stage in our tough on free trade. Doesn’t matter what there in the days of the political and economic the party is. We faced a very hostile negotiation of the FTA, life—fundamental tax Democratic majority in the Congress. but the way we solved that Another issue that reform. We were success- Clinton is facing a very difficult task with was just to eliminate that was very difficult ful in reducing the top the Republican Congress. But without from the discussion. I marginal rate and elimi- presidential leadership, without political don’t approve of the recent was the cultural nating a whole host of will on the part of the President, we are magazine deal but I’m not arguments that deductions. All of these not going to get it. The President has got surprised by it. One of the things hit the American to lead. He’s got to say “This is impor- major strengths of our Canada would taxpayers in their pocket- tant.” He’s got to put it at the top of his country, the reason we come up with. books and it was easy for agenda. He’s got to devote substantial occupy this uniquely pre- them to judge the impact presidential time and assets to it. But it’s eminent place in world Quite frankly, that’s of that. It was easy for not a partisan thing. It’s not a party affairs, not just politically something that’s them to understand. It’s a thing. You’ll find protectionists in the but economically, is be- lot harder for them to Republican party in the United States cause we have been open really hard for understand how they’re and you’ll find an equal number of equal- to immigration and we Americans to going to benefit from ly vociferous protectionists in the Demo- have been open to foreign reducing tariffs or enter- cratic party. It’s presidential leadership investment from around understand. ing into a free-trade that is going to make the difference. the world. We think for- agreement with Canada. WEA: It’s sad to think that protec- eign investment creates economic growth, WEA: But five years later, NAFTA tionism is just one of those elements which, in turn, creates jobs. And so it’s was a much bigger issue. Was this of human nature. hard for us to understand why a country, because Mexico was a low-wage coun- Baker: Sure it is. And it’s easy to dem- particularly in today’s globalised economy, try and was seen as a threat, whereas agogue—it’s so easy. That’s what Ross would say to another country “We require Canada was not much of a threat? Perrot was doing when he was talking that, before you can sell your magazines in Baker: You could argue that. But the about the “giant sucking sound”. It’s just our country, you have to have 51% Cana- real reason was that when we negotiated a hell of a lot harder to make the case for dian content.” That’s hard for us to under- the FTA with Canada our economy was free trade and to make the case for inter- stand—it moves in the opposite direction booming. Nobody was worrying about it. nationalism per se than it is to dema- from economic growth. They were focused on tax reform. But gogue against it. WEA: With the benefit of hindsight, when we negotiated NAFTA five years later WEA: I was pleased to see in your what would you say were the serious we were in a recession. Everybody was comments at the McGill conference shortfalls of the FTA? Given your pre- worried, and it was much that you thought it was vious comments, perhaps culture is harder therefore to negoti- one of those things that part of the answer. ate a free-trade agreement. Without if you make the case, Baker: I think we eliminated a lot of presidential and you make it right, things that were very tough. I don’t think Expanding then it can be political- we got very far on financial services. We the Circle of leadership, without ly successful. didn’t get as far as we could have on Free Trade political will on the Baker: Leaving the investment, but it was such a revolu- WEA: What is the economic ground for a tionary dream that I don’t think you promise you see for part of the moment, we made it in ought to look at it in terms of shortfalls greater trade in the President, we are the Gulf War. When we because it has been a very good agree- Americas? And what is first started talking about ment for both countries. At the time it required to actually not going to get going to war in the Gulf, was a major step forward, and not an get it? hemispheric nobody supported it. Fif- easy one to take. If you want to include Baker: Getting a hemi- teen percent of the the treatment of culture as a shortfall, spheric free-trade agree- free trade. American people said that’s fine with me. ment is going to depend "Yeah, we would support WEA: As you know, the Canadian upon getting fast-track trade negotiating the idea of fighting a major war in the election in 1988 was fought exclusive- authority for the President of the United Gulf.” President Bush—through leader- ly on the FTA. I was a graduate student States. And it isn’t going to happen, in ship, through making the case, through in Boston at that time and missed the my view, until after the 2000 election. going at it, and putting together an

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unprecedented international coalition— economy, the size of our economy, but dollarising now in this hemisphere, par- pulled together sufficient support and he more than anything else, the political ticularly in South America. That may had the strength of his convictions to stability that our system offers. And it’s protect those currencies from manipula- take it to the Congress and get an up-or- political stability that is represented by tion and currency speculators but if the down vote in both Houses. That’s the one country, not fifteen. Let me preface United States is booming and one par- kind of presidential leadership it takes. all of this by saying it would be really ticular South American economy is not To be fair, that’s what Clinton did on good for the United States, and I assume and we are raising interest rates in the NAFTA. He bucked his own party on for Canada, but certainly for the United United States and they dollarise—it’s a NAFTA—the same people problem. I hope the euro who objected to his send- succeeds. I see some prob- ing up the fast-track nego- lems for them on the hori- tiating authority for hemi- zon but even if it succeeds spheric free trade. He it is not going to displace bucked them on NAFTA the dollar as the world’s de but he wasn’t willing to facto reserve currency. buck them again before Not in my lifetime and the 1996 elections. And probably not in yours. that’s why we didn’t make WEA: For the last two progress on hemispheric years, beginning with free trade. the Asian crisis, there WEA: Many people were many calls to have expressed concern reform the world’s about the distortions “financial architecture”. that accompany region- Two years later, things al trading blocks. Do seem to be pretty much you have the same con- on the mend. What do cerns, or are you more you see as the main pragmatic? problems in the global Baker: I don’t have any financial system? concerns about them as Baker: I think its really long as they are GATT good that every country in consistent. As long as they the world has embraced are consistent with the reform, politically and global trading rules, I economically, save a few don’t see a problem. I James Baker addressing the “Free Trade at 10” Conference in Montreal. rogue nations like North don’t see that NAFTA is a Korea, Iraq, Iran, Cuba problem to other regions, or to other States, if the euro succeeded because it and a few others. Everybody wants countries. I don’t see that the European would be really good if we could deal democracy and free markets. That’s Union is a problem. As long as they are with one Europe. It would also be good good, but it is not enough just to say you not protectionist in nature—as long as for Europe because it would increase want the benefits of the free market. they reduce impediments to trade and their growth and eliminate all the You’ve also got to take on the obligations don’t increase them. exchange-rate problems. of the free market. The obligations are My job as Secretary of that your free-enterprise system has to Recent Financial It’s a hell of a the Treasury was to co- be transparent. You have to have suitable Turmoil lot harder to make ordinate one country’s fis- bank regulatory laws. You have to be as WEA: Let’s change cal policy with its mone- free as possible of corruption. You have over to discuss financial the case for free tary policy. And it was to avoid the problems and the pitfalls of issues. What do you see trade than it is damn tough. I don’t crony capitalism. These emerging as the impact of the understand how it’s possi- economies that have signed on to the euro on the US econo- to demagogue ble to co-ordinate one free-enterprise system have got to, if they my? Do you see any against it. monetary policy with 15 are going to be successful, reform their danger of the greenback fiscal policies. What are economies so that they are more like the losing “market share”? they going to do when economies of the United States, western Baker: None at all, and I’ll tell you France is booming and Germany is in a Europe and Canada—where transparen- why. The greenback is the de facto recession? What will be the monetary cy, fairness and a system of laws is para- reserve currency in the world. It’s going policy for the European Central Bank? mount. The lack of such reforms is one to remain such. Why? Because of a This, by the way, is one of the problems of the things that led to the Asian finan- whole host of things—the strength of our with dollarisation. We are talking about cial crisis.

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WEA: Does it worry you when, in the things in the financial architecture. We Baker: I think they can happen. I wake of such a crisis, you see coun- certainly don’t need to flip back to capi- think many of them will happen because tries like Malaysia starting to think tal controls, centrally planned the IMF has lost a lot of support, not just seriously about capital controls? economies, and managed trade and all among the countries that have benefited Baker: Yes. One of the problems with that those things that have been proven from its programmes or that are subject such a crisis is that the country will be not to work. What we need is to reform to its programmes but from contributing tempted to backslide. Malaysia has been the IMF (there are some important states as well. backsliding. Russia has been backsliding. changes that are needed there) and then The worst possible thing we need intensive efforts, Foreign Policy that could happen is that by the G7 countries par- WEA: Do you think the process of we would lose the impe- It is not enough ticularly, to co-ordinate globalisation has changed the way tus for reform on the part just to say you their underlying econom- foreign policy gets conducted? of countries all over the ic fundamentals. Not Baker: Well, I think it has affected it world to embrace the free want the benefits fixed exchange rates. But in the sense that the technological revo- market. We can’t afford to of the free market. take co-ordinated and co- lution has created one global market and lose that. Now that it operative actions that has impacted the formulation and looks like we are coming You’ve also got to work. Last fall we had a implementation of foreign policy. For- out of the problem there take on the co-ordinated round of eign policymakers, for instance, no is a temptation on the interest rate reductions longer have days to consider a reaction part of these countries to obligations of the at a time when the global to a fast-breaking event around the stop reform—slow it free market. economy looked like it world. You do it in hours. You have to down or stop it. You are was in the tank, and it have your policy ready to go in hours or seeing it in South Korea. was terrific. That is the you have to at least know what it is you South Korea took on an IMF pro- kind of thing we need more of. are going to say about it. That is differ- gramme, they implemented it pretty WEA: You have just said that one of ent than the way it used to be. And that’s well, they’re coming out, they’re doing your criticisms of the IMF is that it a function, I think, of globalisation. well, but now the chaebols are resisting does not enforce its programmes well Beyond that I am not sure I see a major the reform steps that they have to take. enough. Other people—Jeffrey Sachs, impact on the implementation or for- WEA: Who should be the force for example—would claim that the mulation of foreign policy. making sure this backsliding doesn’t IMF has been enforcing the wrong WEA: What are the big challenges happen? Or do we just leave it to pri- programmes. What is your response? for foreign policy in the years ahead? vate decisions? Baker: Well, Sachs has suggested that Baker: I think one of the most impor- Baker: No. The IMF has to play a role we give the Soviets a hell of a lot more tant things we have to do is integrate in it because the IMF programmes have money. But it doesn’t do any good, as we Russia and China into the community of got to insist upon reform. One of the have seen, to give them all that money if nations. It’s really important for the mistakes we’ve made in Russia, frankly, you don’t get the reforms implemented. West to make those relationships work— is throwing $18 billion at the problem But there are a few changes that I to have viable and good relationships and not insisting that the reform part of would like to see in the IMF. They need to with China and Russia. We need to deal the programme be implemented. It’s sad address the moral hazard problem. They with the proliferation of weapons of to say, but a lot of the money is going need to deal with that so that imprudent mass destruction in a realistic and strong into Swiss bank accounts. The US Trea- investors do get penalised if they have and forceful way and we need to find sury also has to be involved and so do all made a dumb investment. They need to ways to band together to sanction rogue of the countries of the industrialised not put any money out for countries to nations that deal in weapons of mass world that have successfully functioning support an exchange rate that is pegged destruction. We need to figure out what free market systems. Everybody’s got to at an unrealistic level. They ought to get we are going to do about global terror- be engaged in it and we have to contin- rid of that as a cornerstone in their poli- ism. We need to find ways to make the ue to promote the benefits that can flow cy. They need to be more transparent in global economy function effectively and from successfully embracing the market. what they are doing. Tell us what it is so we need to find ways to smooth out the WEA: I take it that you don’t put people understand what these structural natural bumps in the road that are going much importance on re-designing the adjustment programmes are. And they to occur as emerging markets embrace financial architecture. need to understand that one size does not the free market. We need to encourage Baker: When I was Secretary of the fit all—that the problems of East Asia in these countries to adopt the kind of free Treasury, a lot of people used to say we the 1990s are not the same as the prob- enterprise systems that have been suc- need a new Bretton Woods, we need a lems of Latin America in the 1980s. cessful in the West. These are some of new system of exchange rates, we need to These are some of the things that need to them. There are probably others. go to target zones or fixed rates. I don’t be changed. WEA: It was a pleasure speaking think we need those kinds of things WEA: Are you optimistic that those with you today. Thank you very much today. What I think is needed are two sorts of reforms are going to happen? for your time. ࡗ

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