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GATT is dead; the world economy as we know it is coming to an end, taking the General Agreements on Tariffs and Trade with it.

Since 1945 the world has been moving slowly but persistently toward an ever more open, integrated world economy. The very success of this trend, however, has undermined its continuation and led to an important shift in power: A single polar world economy centered around the United States has been replaced with a multipolar economic world in which Europe, Japan and the United States are nearly economic peers. But many of the current institutions and practices will not work in a multipolar world. The most important of these institutions are known as the GATT-Bretton Woods Institutions. They include the world's trading rules, known as GATT (General Agreement on Tariffs and Trade), and the major financial institutions set up at the Bretton Woods Conference in 1944, or the IMF (the International Monetary Fund) to manage balance of payments problems and the World Bank to finance infrastructure projects.

To make an open, integrated multipolar world bank, the United States, Germany and Japan would have to tightly coordinate their monetary and fiscal policies. Each country also would have to believe it had an equal chance to win -- a level playing field. This would mean harmonizing tax and regulatory policies and broadly similar operations for households and businesses. But no country is prepared to make the necessary changes or yield economic sovereignty.

As a result, the world economy probably will move toward "quasitrading blocs." Trade will be freer within the blocs but managed between the blocs. This is going to have a major impact on how service industries such as accounting function in the world economy of the 1990s and the early 21st century.

THE SHIFT FROM WIN-WIN

TO LOSE-LOSE

In the first three decades after World War II, everyone played a win-win economic game. Imports that looked small to the United States (3% to 5% of the gross national product) provided large markets to the rest of the world. From the American perspective, these imports were not threatening since they came in what were in American terms labor-intensive, low-wage industries that were being phased out anyway.

Balancing America's trading accounts was not a problem. America could grow farm products the rest of the world could not grow, supply raw materials such as oil that the rest of the world did not have and manufacture unique products the rest of the world did not have the technology to build.

Everyone won. In the jargon of today's strategic planners, each country had a noncompetitive niche where it could be a winner.

With success, however, came an American locomotive that gradually grew too small to pull the rest of the world. In 1983-84, the United States pulled the world out of the 1981-82 recession, but in doing so created a huge trade deficit. This deficit cannot be solved without throwing the world back into a sharp recession or without levels of macroeconomics cooperation that are beyond what anyone is prepared to do. Without a solution, the United States will have to go ever deeper into international debt and its assets will become ever cheaper when priced in foreign currencies.

A successful noncompetitive niche export environment has evolved gradually into an intensely competitive, head-to-head export environment. Ask Germany, Japan and the United States to make a list of those industries they think are vital to their success in the 1990s, and all three countries will create the same list--microelectronics, biotechnology and the new materials industries.

The nature of the problem can be seen in the current maneuvering over high definition television (HDTV). Europe, Japan and the United States are all deliberately setting different technical standards for HDTV to ensure that producers from other regions cannot dominate their market. The spirit of GATT would call for common standards to set a level playing field. But no one wants a level playing field; everyone wants an edge. From now on every important technological breakthrough is going to be subject to the same jockeying for economic advantage.

In response, slowly but surely, govenrments are increasingly managing trade. The percentage of imports subject to nontariff barriers is rising everywhere. At the leading edge of technology, the Japanese-American semiconductor pact effectively turns chips into a managed sector; at the lagging edge of technology, the ever-expanding multifiber agreement keeps textiles as a managed sector. In between, autos have been a managed sector for more than a decade.

A PRECIPITATING EVENT

The integration of the European community on December 31, 1992, will be the event that visibly destroys the post-World War II GATT era, but it should be seen as a precipitating, not a causal event. It will make visible and speed up what would have occurred anyway.

While common markets are permitted under GATT rules, they fundamentally violate the spirit of GATT. The EC is talking about offering associate memberships to neutral Western European countries such as Switzerland and to the countries of Eastern Europe that are now emerging from communism. There is no provision for such arrangements in GATT.

More fundamentally, the EC is also going to become more restrictive to outsiders. Consider the market for automobiles. The French strictly limit, the Italians essentially prohibit and the Dutch freely permit the sale of Japanese cars. What will be the common limits on Japanese cars after 1992? The answer in the draft regulations just issued is 9%. Japanese car producers can have no more than 9% of the market (about their current percentage) and, for every car built in Europe, one must be subtracted from Japan's exports to Europe. Since European manufacturers are building facilities to make more cars, Japan will have to cut back sharply on its exports.

These regulations are not surprising. It does not take an automotive genius to note that on neutral turf--the American market--the Japanese have scored what in boxing terms would be a TKO. Fiat and Renault have been driven out of the U.S. market completely. Volkswagen's market share is approaching the point the company will have no choice but to leave, and the market shares of upscale European producers such as Audi, Mercedes Benz and BMW are rapidly eroding as the Japanese competition moves upscale. What the Japanese have done in America they can, if given a chance, do in Europe. No one enters an economic ballgame that is lost before the competition begins.

THE BEGINNING OF

THE END OF GATT

Beneath the current European euphoria about 1992 is an undercurrent of concern. Each company and geographic region is asking experts to determine whether it is likely to be a winner or a loser after 1992. Many will hear the prediction that they will be losers.

Some American states are empty--two-thirds of America's 3,000 counties are losing population--and others have per capita incomes that are only half the national average. Ireland may be the North Dakota of Europe. In a common market with free labor mobility, workers must move to the most dynamic areas; economic activity seldom moves to where available workers live.

Losing companies or regions will go to their governments and demand compensation for their losses. But from whom are they to be compensated? Why, from outsiders of course--that is by far the easiest political course. Less competition from outsiders will be traded off against more competition from insiders.

Markets for foreign exports to Europe after harmonization are going to be much smaller than before harmonization, a situation that would be somewhat true in the best of cases. (Lowering barriers among insiders always raises the effective barriers on outsiders.) But what will happen will not be the best of cases. If the history of the common market agricultural policies teaches any lesson, it is that outsiders must expect the worst. In the one area Europe has already harmonized, agriculture, as far as outsiders are concerned, the situation after harmonization is far worse than anything that existed before. Products like California olives and Canadian and American wheat no longer can be sold, but the European agricultural policies have also produced surpluses that are then sold on world markets at subsidized prices.

European companies are to have special privileges in Europe, but what makes a business a European company? Is it ownership, management, research and development, production or local content? All of these questions can be answered in ways that keep the rest of the world out of Europe after 1992. Accounting systems eventually will have to be harmonized and it is not clear the harmonization will revolve around traditional Anglo-Saxon practices.

In my trips to Europe I hear over and over again from private businesspeople and public officials the comment, "We are not going to let the Japanese do in Europe what they have already done in the United States."

Under the principles of what economists know as "factor price equalization," in an open competitive world economy workers with equal skills must be treated equally. Companies will produce wherever total compensation is the lowest. European workers cannot be paid more than Japanese workers unless they are more productive than Japanese workers. But Europeans do not want to give up their economic way of life--their long vacations, high minimum wages and generous social welfare system--for the sake of an open world economy. If they want to protect their long vacations and not cut their cash wages, they will have no choice but to keep out the products of Japan and the Pacific Rim.

Europe will be blamed for destroying GATT. It shouldn't be. No one on either side of the Atlantic or Pacific is willing to do what would have to be done, which is change most standard operating procedures to bring them into harmony with the other two great polar blocs. Given the reality of three roughly equal regions, no country should expect to play its traditional economic game more than one-third of the time and all should be prepared to give up two-thirds of their economic ways of life. No country is prepared to do so. The result will be a Europena trading bloc to which outsiders do not have equal access. This bloc might be called a "quasi-trading" bloc to distinguish it from the trading blocs of the 1930s. It will not try to eliminate trade with the rest of the world, as the trading blocs of the 1930s did, but it will try to manage trade between itself and the rest of the world. The rest of the world will in turn have to respond in some manner--most likely by forming trading blocs of their own.

A NEW GLOBAL ECONOMY

What will happen outside of Europe is not clear. Ex-ambassador Mike Mansfield has publicly called for a U.S.--Japan common market. Given great differences in economic life-style, variables between these two countries make establishing a common market difficult. If the world splits into three blocs, the nature of the split is not obvious. Economic geography may dominate physical geography. Korea and Taiwan are much more integrated with the United States than they are with Japan. Many potential opportunities exist for creative or surprising alliances.

An optimist would say that regional (bloc) free trade is a necessary first step to world free trade. To attempt to harmonize economic practices worldwide is to attempt too much. Better to harmonize regionally and then later on harmonize worldwide.

Rather than quarrel about which region of the world is now the most restrictive (and thus causing the world's move toward trading blocs), it is far better to accept the reality of trading blocs and get on with the job of understanding how trade between the blocs could be managed so that it doesn't deteriorate into the negative-sum games of the 1930s. Then the trading blocs (the British Empire, the French Union, the Japanese Co-Prosperity Sphere, Germany plus Eastern Europe, the United States plus Latin America) attempted to stop all trade with other blocs. Managed trade need not lead to less trade if it is conducted in the right framework. In essence, the existing rules of GATT need to be replaced by a set of rules governing what is and is not permissible in managing bloc trade.

GATT IS DEAD!

Diplomatically GATT's corpse will be propped up. No one will officially admit that the post-World War II economic era is over. But GATT cannot be resurrected.

The time has come to build a new world economy based on today's realities.

LESTER C. THUROW, PhD, is dean of the Alfred P. Sloan School of Management of the Massachusetts Institute of Technology. He was a member of President Lyndon Johnson's Council of Economic Advisers and the editorial board of the New York Times, and was a contributing editor for Newsweek. Among the books he has written are The Zero-Sum Society and The Zero-Sum Solution: Building a World-Class American Economy. He appears regularly on The Nightly Business Report television program.
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Author:Thurow, Lester C.
Publication:Journal of Accountancy
Date:Sep 1, 1990
Words:2131
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