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Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade

Strategies for the Liquid Product Markets Conference
Bear Stearns Headquarters, New York City
September 14, 2006

As Prepared

Thanks for having me here with you today. I would like to talk to you for a few minutes about three trends that will provide an economic backdrop for much of what you have been listening to today. I believe these trends are shaping the world and consequently our nation’s trade policy.

I believe there are three trends that will define America’s economic position in the world:

1) Three billion new customers;

2) The death of distance; and

3) The steep reduction of barriers to trade.

1) Three Billion New Customers

There are more than three billion additional people participating in the international economic system today than 30 years ago, with most of them under 30 years of age.

This is a one-time, seismic jolt to the international economic architecture. It represents more than a doubling of the world population that are potential consumers and competitors in a little more than a generation.

This started with China when they started to liberalize in 1978 –1979, and accelerated with the fall of the Soviet Union. India has also developed more open economic policies. Combined, these three changes resulted in a changed world economic order.

These dramatic events have a range of implications for the United States. Three billion new customers and competitors give a new sense of global economic engagement that is more intense than ever before. For example, this year China will surpass Japan as America’s third biggest export market. This change will continue as China and India each develop modern industrial enterprises and a consumer class of hundreds of millions of people.

Before about 30 or 40 years ago, there never was a global market, however that has changed. In the last 40 years U.S. exports have grown more than 30 fold, and exports have grown from four to 11 percent of US GDP. Today, companies are challenged by and challenging international markets and competitors more than ever before.

2) Death of Distance

The second trend is the Death of Distance. Physical distance between producer and customer had traditionally been a significant barrier to transactions. Today, physical distance no longer serves as the limiting factor it historically has.

For merchandise, the world has become more accessible as a result of the increasingly efficient and low cost movement of goods and people across borders. Jet travel, containerization and global overnight package delivery has shrunk the supply chain, increased reliability and reduced risk.

The adoption of advanced communications technology on a universal basis through the use of the internet, the world wide web and mobile phone ownership in both developed and developing countries has in a practical sense reduced distance. Not only has connectivity increased, but the quality and adaptability of communications has been continuously enhanced, while costs have dramatically decreased. It has also been made easier to provide services remotely, such as electronic banking, in real time, highly secure environments.

3) Reduction of Barriers to Trade

The third trend is a steep decline of tariff and non-tariff barriers to trade. This has occurred in not only in goods but also in services, in the movement of capital, and in the control of fixed assets through foreign direct investments.

U.S. tariffs have decreased, from 40 percent at the commencement of GATT negotiations in 1947 to four percent today. Barriers in countries that were notoriously inaccessible to American farmers, manufacturers and service providers, like India, Japan and Brazil are making strides in opening their markets. This Administration is committed to further efforts to get American products access to these important markets.

Multilateral negotiations, like the World Trade Organization and bilateral agreements, such as NAFTA and other free trade agreements have also increased trade flows by breaking down barriers. Remarkably, our FTA partners receive almost half of our nation’s exports despite constituting only 7.1% of world GDP.

What are some of the implications of these trends?

Magnification Effect

One result of increased access to global markets is that a company’s competitive position is either enhanced or diminished as a result of what I call the magnification effect. If the company was essentially competitive internationally, now it has the platform to compete across the global economic system, magnifying their success. Yet if a company is not internationally competitive, or isn’t capable of getting there, the impact of that deficiency is also magnified.

The magnification effect also applies at a microeconomic, even at an individual level. Consider the relationship between academic achievement and unemployment in the U.S. The unemployment rate for those with a college degree today is 1.8 percent- practically, full employment. For those without a high school diploma, the rate is more than three times as high. Having a higher education- being more competitive- is a significant advantage.

Rise of the Service Sector

Another result of the three trends is the rise of the service sector. More and more Americans are employed in the service sector, and services are in many ways more adaptable to international trade than manufacturing because manufacturing tends to be much more geographically specific. The service sector is less tied to location because inputs can be disaggregated, with different activities taking place in different locations.

Increased Anxiety

A result of the emergence of three billion new participants in the world marketplace, the death of distance and the reduction of trade barriers is that today it has never been easier for any company in the world to do business in the U.S., and it has never been easier for U.S. companies to do business in the rest of the world.

Our interconnected, expanding world has accelerated the pace of change, and this makes some people uncomfortable. While some are more capable of quickly adapting, others are concerned about dislocations and about confronting new and often difficult-to-define challenges, which creates unease. And w hile some companies have eagerly embraced globalization, many companies, particularly small and medium size manufactures have expressed serious concerns about the changes that result from globalization.

Disruptors and Collaborators

These reservations can lead to the creation of disruptive forces that may create a backlash against trade liberalization. Increasingly, those that would act as “disruptors” have gained power over “collaborators” because i n a seamless world, a seamless society, with seamless integration, disruptors can cause an enormous amount of damage. We see this in the guise of terrorism, in the isolationist movement or the populist left movement in places like Venezuela. Their power is enhanced in a globalized economy.

These forces can be strong. We can’t take further trade liberalization for granted and we can’t be complacent. We need to do a better job of breaking down barriers to trade, investment and capital. We have to keep on this course of moving toward a more open trade system, even though we know that there will be some anxiety and some political tension as we do it. I believe that it is in your interest for you to be agents for positive change: to push for open markets and for the creation of clearly defined regulatory environments for business.

This Administration is pursuing a trade agenda that will keep America strong, even if it is accompanied by some anxiety. I believe this is the fundamental challenge of leadership: to pursue policies not because they are popular, but because they are the right things to do for America in the long run. Thank you.