Ambassador Ron Kirk in his speech at Georgetown Law School last month presented us with something of a challenge. On trade, he said, "There has to be a new paradigm". He also added that, given the opportunity at any time in the past few years, Americans would easily have passed a no-confidence vote on trade policy.

I shall be meeting Ambassador Kirk and his colleagues to discuss trade and economic issues over the next few days but I don't believe I need the benefit of direct discussions, not only to know exactly what he meant by the challenge facing him, but to say that I am certain Ambassador Kirk is right.

Trade: a Hard Sell Everywhere

Clearly there has been erosion in the confidence of the American people in trade policy. It is more serious than it has been for some years but at base, it is not a new phenomenon. People tend to forget that the NAFTA squeezed through the US Congress by a narrow margin back in 1993.  President Clinton, during his first term, tried and failed to get what was then ‘Fast Track' negotiating authority.

Let us see if we can agree on a more general point. Around the world, not just in Washington, trade is a hard sell politically. Like many trade negotiators I have been dodging protestors - frequently violent protestors - everywhere from New Delhi, Sao Paulo, Brussels, Geneva and let's not forget the Battle in Seattle.

What is the problem here? Have we trade negotiators brought nothing but misery to the world? No, quite the contrary. There is overwhelming evidence that steady, incremental trade liberalisation, widening from its initial narrow focus on industrial tariffs, has underwritten a huge growth in trade, which has in turn been central to higher productivity, higher growth and the spread of technology to improve peoples' lives.

Developing countries that have picked up on the message and developed strategies of export led growth have transformed their economies. We don't need to imagine what Korea would be like today if South Korea had not embraced a market-led, export-led strategy. We don't need to imagine it because we only need to look to their North to see it. I am sure you have all seen those satellite photos that, taken at night, show a dark patch on the Asian continent as the satellite moves across the DMZ from South to a North Korea, substantially without electricity, food or anything much of use to their people's daily lives.

The Broader Strategic Argument for the World Trading System

Nor is this expansion of the trading system without highly favourable political and strategic consequences. This is far broader than merely commercial matters. There is an equation between open economic and open political markets. That is an equation that certain leaders in this great town - justifiably called the world's capital - have always understood over the past 50 years. When China joined the WTO, yes it committed itself to very substantial liberalisation in its Protocol of Accession. Yes it committed itself to a sophisticated range of instruments such as the SPS code, the TBT code, the GATs and so forth.

But in doing so, China more broadly committed itself to international economic law and thus committed itself to joining what analysts call ‘the international rule set'.

Sure there are difficulties in enforcing that rule set - there are cases against China now underway in the WTO on precisely those commitments it has undertaken. But the reality is that there are difficulties enforcing that rule set every time it conflicts with the domestic political interests of any WTO Member.

As the US works through the issues, I hope those responsible will not make light of this broader strategic point. That equation between open economic and open political markets has not gone away. If the trade issue is seen simply as some type of mercantilist score card, with pro-trade lobbies on one side and anti-trade lobbies on the other, you will not get the right result.

The erosion of political confidence in globalisation has deep causes. The United States is still the dominant world power - the one indispensable country if we are to move forward multilaterally in any arena of world politics - but there is no question that power is more diffuse.

In part, this is a testimony to the triumph of American post war policy. Your forefathers, by showing not just magnanimity in victory after World War II in setting up the post war institutions of which the GATT was part, showed also astonishing wisdom in allowing and facilitating the economic recovery of your former foes. So, underwritten by this longstanding American policy, the world is vastly more prosperous and power is more diffuse.

Technology and the ‘Churn' Factor

The second obvious source of disquiet around this issue is about any community's tolerance for change. Change comes from all manner of sources but trade provides an easy focus for those caught in the vortex of change and who have to adjust to it.

Key to this, most obviously, is the vast increase in the pace of change driven more by technology than by trade per se.

The first Mac came out in 1984, the Intel 386 processor in 1985 and Windows 2 in 1987. The 400-series Boeing 747 entered service in 1989. In technology terms, this sounds almost pre-historic. The World Wide Web started to become a mass-market phenomenon in the early 1990s after the launch of Netscape Navigator. These and many other examples were disruptive technologies. Together they transformed not only our daily lives but the way we do business.

You will also see that it is in the nature of many of these new technologies that their impact did not stop at the border. On the contrary, they had the effect of opening up the world.

The more enterprising companies took full advantage of the revolution in information, communications and transportation. In particular we saw the growth of the specialised multinational supply chains that are a key element in globalisation.

Economists may tell you that the aggregate results were positive for jobs and incomes. And they would be absolutely right. But inevitably the benefits were not evenly shared. Industries moved or faded. Employers started looking for different skills.  Even before the finance sector melt-down there were losers as well as winners. Now the bubble has burst there are many more people with reason to be anxious about their futures.

That is the setting which every trade minister has to grapple with as we make judgments about how to shape our policies to fit new realities. What is the best way forward?

The Need for Sound Regulatory Frameworks

Reflect for a moment on your own experience. The dynamism of the American economy has several underpinnings. One, perhaps reflecting the character of a migrant society, is an entrepreneurial spirit. Another is the rule of law - providing confidence around property and legal rights and an expectation that those who innovate and compete will be able to reap the rewards.

Whether we are talking about the domestic financial sector or the international trading system, to make markets work requires sound rules and enforcement. Amidst all the talk about failure of the market system around the implosion of large parts of the developed world's financial system, I keep coming back to a famous statement from the man who invented, so to speak, capitalism. This was Adam Smith - more than 200 years ago.

Now I do not want to insult any merchants in the audience, but it is worth recalling that the intellectual father of the market economy famously said: "When two or more merchants are gathered in the same room, it is usually for the purpose of deceiving the public".

The market economy must have appropriate regulatory frameworks around it to meet Adam Smith's point and to be sustainable politically. The market economy has not failed by any rational historical measure - it has been an astonishing success compared with command or feudal economies. It has created vast wealth, a massive increase in life expectancy everywhere, mass literacy, a huge decline in hunger, malnutrition and disease, the spread of economic freedom and ultimately has underpinned the recent remorseless growth towards improved human rights and diverse forms of democratic government.

But completely unregulated capitalism does not make any sense, politically or economically. The problem with the current financial implosion is clearly that the regulatory frameworks had not kept up to the speed of financial innovation. In my view, it is not a failure of the market economy we are witnessing - it is a serious failure of the regulatory frameworks around the market economy.

Internationally, we also need regulatory frameworks for trade. That is what the GATT and now WTO was created to do. In spite of shortcomings, the system has done an outstanding job. There is no doubt in my mind that the sustained post-war growth in trade was made possible in part by the existence of a set of global rules with a bias toward openness and non-discrimination.

These rules, under the GATT and the World Trade Organisation, were a response to the events of the 1930s. When they were being crafted in the late 1940s the form they took was not intuitive - far from it. To push through a new international trade regime founded on principles of non-discrimination - the bedrock of the GATT - was made possible essentially only by American political leadership.

I retrace this history because we live in another one of those periods when governments are under pressure to look inwards and do things that are expedient rather than wise. And because crisis can also be an opportunity to achieve fundamental reform

One test for us will be whether we can find a way to turn crisis to our advantage in the global trade agenda by finding a way to complete the Doha negotiation.

I think it is well understood that the assurances offered by global trade rules become all the more important at a time when governments face pressure to look inwards and put up barriers to imports.

I welcomed Ambassador Kirk's positive comments last month on Doha. But I appreciate that he faces industry and congressional scepticism. There is a real question about how we can make a deal work for the United States as well as others in the negotiations.  

The WTO: an Agent of Evolution, not Revolution

This is a political, not an economic process. If economic logic carried real weight we would eliminate tariffs and subsidies tomorrow. That is not going to happen in the Doha round.

What we have in Geneva is something more like a legislative process. It involves painstaking effort to craft compromises that can accommodate the diverse needs of 153 member countries. But working around political realities means accepting limited objectives for a round. The big reforms will generally only be achieved over several rounds.

What is absolutely clear to me is that the WTO, like the GATT before, is an agent of evolution, not revolution. It is about incremental but positive change. Those who argue that it has to be an agent of revolutionary change are either naïve or, frankly, they are sophisticated cynics with another agenda.

The speed at which the process moves forward is not convenient to New Zealand and I am sure it is not convenient to many of you. But we New Zealanders pride ourselves on seeing the trading world as it is, not as we would like it to be. We are living in the world where everywhere the political support for liberalisation is thin. It is a world where the pace of change - the ‘churn' factor is one way of looking at it - has outstripped the capacity of electorates in many countries.

What I am arguing for is realism. The putative deal on the table in Geneva is not good enough - of that I am certain. Furthermore, in my experience each time a multilateral trade round has stalled short of the finish line the answer has been to craft a deal not by lowering the level of ambition but by lifting it. My sense is that there is scope to bulk out the deal on agriculture and industrial tariffs captured in the texts developed in Geneva up to the end of last year. A lot of work has already been done both to accommodate the more acute defensive sensitivities and key export objectives.

In the late stage of a negotiation it is important that countries talk directly about what more they can do to accommodate each other's critical commercial and political needs. That includes the developing economies that have assumed leadership responsibilities, including Brazil, China and India. They in turn will want to test what more American and European and Japanese negotiators can bring to the table.

Valuing the Deal So Far

Meanwhile sophisticated analysis is needed to show the true value of what is already on the table. I broadly share Pascal Lamy's views on this. The pressures to increase protection and support domestic producers have dramatically shown the value of ‘water' - the gap between the tariffs and subsidies countries are entitled to use and the actual rates, which in good times are generally much lower.

We can't politically sell a deal just on granting greater security and ignoring the need for significant new access opportunities. But an analysis of the gains from this multilateral Round that assumes away the benefits of greater security is simply deficient.

It is a little like a fire insurance policy. In the middle of winter who cares about fire insurance? But on tinder dry summer day when your neighbour's house is burning down, the first thing a rational person does is check that their fire insurance premium is up to date. In the current meltdown of world trade, we are operating in a tinder dry environment for protectionist measures. Robert Zoellick, now President of the World Bank and of course a former USTR of great distinction, pointed out recently that the World Bank has shown that 17 of the G20 countries that made a public promise to resist protectionism have implemented trade-restricting measures. Lowering the bar on legal protectionism is no small achievement.

Right now, the global trading community's fire insurance premia have not been paid for years. There is massive scope for legal increases in protection - for the technicians here I am referring to the scope to increase border protection to bound levels. One estimate I have seen is that if full recourse was made to such perfectly legal protection increases, it would lead to a further 11% decrease in world trade. It is time, ladies and gentlemen, to pay the premium and underwrite our own future trading security.

Second, we need to expand the current deal that is incomplete. I cannot see a deal that simply draws the line under the current level of ambition implied by the NAMA, Agriculture texts and the implicit deal on services. We will, I am sure, only find a political way through by increasing the level of ambition. Of course, this judgement needs to be tempered by realism as to how much the political traffic will bear - and there will be highly sensitive sectors in the United States that will be seeking to minimise market access concessions. No country is immune to these realities. But we all have to understand the basic point here: we need to sweeten this deal, before it can be swallowed politically.

Third, we need to have a vision of what lies beyond Doha. The current agenda was based on what was called the ‘BIA' - or built in agenda. That was as much a product of US insistence as it was the product of any country's position when the agenda for this negotiation was set. There was too much unfinished business left over from the Uruguay Round to be ignored.

But the world has moved on. In closing this deal, sure we all need to keep an eye on the rear view mirror, but let's look ahead too. I have a number of ideas as to where we need to fashion the international trading system, and I am sure you do too. Let me share just a couple of them with you, while recalling that we don't even get to talk about these issues until we have finished the current Doha agenda.

Post Doha: Looking Forward

First, and with agriculture in mind, I even speculate that this might be the last pure ‘agriculture' negotiation. What do I mean by this since assuredly there will still be further liberalisation required in agriculture even if we can achieve the more ambitious outcome both the United States and New Zealand desire?

Twenty five years ago when a number of US, Australian, New Zealand and other negotiators were debating how to get agriculture properly within the system of world trade rules there were two competing views. One view - the more extreme view - was that above all we should refuse to have a separate agriculture negotiation. Agriculture, according to this logic, was no different to any sector of world trade. We should have a single unified market access negotiation and a single unified subsidies negotiation.

The other view - I held this view - was that this was naïve. The distortions in world agriculture were so vast that this was a certain recipe for failure. That view prevailed and ever since, agriculture has been compartmentalised in a separate negotiation, which itself is divided into three ‘pillars' or sections - negotiations on export competition (a euphemism for export subsidies); a negotiation over subsidies, both trade distorting and minimally trade distorting subsidies, and finally a separate ‘pillar' or negotiation on market access.

Any final deal we can finesse in the current Doha Round will involve the elimination of export subsidies. It will involve massive - up to 80% - cuts in trade distorting support and significant cuts in agriculture tariffs (up to 70% in certain cases).

So what would the next negotiation look like? Fundamentally, it will be a market access negotiation only. I don't believe there will be any need for a negotiation on export subsidies - unless the rules and disciplines prove inadequate and they have proven robust up to now.

With respect to trade distorting support, once you have taken up to 80% of the mess out the EU's and 70% out of the comparable Japanese and US trade and production distorting subsidies, the obvious objective would be elimination of trade distorting support. Personally I think the safe harbour - the Green Box - will continue to work pretty well. That type of negotiation could be reintegrated into the negotiation on subsidies more broadly - the quantum of distorting subsidisation would then be another ‘peak' in the overall pattern of world subsidies.

Where there would be still heavy lifting in agriculture left from this Round would be in market access. Why not reintegrate agriculture back into an overall market access negotiation? In industrial products, now universally referred to as NAMA, one of the problems is the inherent lack of reciprocity left amongst developed countries after so many successful tariff liberalising Rounds over the past 50 years. Put remaining agriculture tariff peaks into the mix, the developed world has something to trade with. Our successors would not then have to grapple with the immense problem of trying to forge a negotiating linkage between the NAMA and Agriculture negotiations. You would have the basis of reciprocity within a single and coherent market access negotiation.

This is an idea ahead of its time. First we need to do this deal. You don't get even to consider the next agenda without closing the Doha door.

Climate Change and the WTO System

And there are other new issues that any sensible international system of trading rules needs to deal with. The interface between international climate change disciplines and the WTO is an issue of great importance. I am also responsible for international climate change negotiations. But I can see major issues about the way in which international disciplines on climate change may cut across world trade. We cannot ignore this. It is far too late to change the mandate of the Doha Round. But as a minimum I think we need some type of political commitment in the wash-up to this Round to put in place a Peace Clause to allow our negotiators time to work through many of these complexities.

Now is the time for a tough-minded judgment on what is achievable in Geneva - coupled with some creative thinking about what might have to be pursued elsewhere.

Trade and Investment Integration in the Asia Pacific

At this point I turn deliberately to Asia and the Pacific and, while I am addressing trade policy architecture, I want to put my remarks in the wider context of what I think is in the strategic interests both of the United States and my own, much smaller, Asia Pacific country.

The nations of Asia have a history every bit as turbulent as that of their European counterparts. The strategic implications of that history are understood in Washington better than in most places. The United States has been part of the Asian balance at least since Perry took his fleet into Yokosuka in 1853.

But my point today is that some of the most important things happening in trade diplomacy and commercial integration across continents and cultures are the efforts being made to develop trans-Pacific links.

New Zealand is deeply committed to this process. We have in the past two years signed a trade agreement with China which is remarkable not only for the obvious asymmetry but also for its ambition. We are the only developed country in the world that has such an FTA. It effectively delivers full free trade in goods within a little more than 10 years, and most of it well before then. And it is designed to help us over time to build a much closer relationship with Chinese regulators in areas that affect trade.

Our new Prime Minister, John Key, has just returned from a highly successful visit to China, convinced that the Chinese leadership is ready to engage across a broad variety of fronts. China represents 24% of the world's consumers.

I give you another example. Within the last few months New Zealand and Australia signed a deal with the ten countries of ASEAN whose quality likewise surprised onlookers. Again, within about a decade, we will have one large and fully integrated free trade zone involving the economies of Australia, NZ, Indonesia, Malaysia, Singapore, Vietnam, the Philippines, Thailand and all the other countries of South East Asia. The rest of the world may be having a long reflective conversation with itself on trade, but the countries at the core of the Asia Pacific region are not. We are doing business.

This logically and politically brings me to a trade initiative where both we and Australia very much hope the US will provide the leadership we need. I am referring to an initiative, the name of which constantly changes but I think is now called by Washington trade insiders ‘TPP' or ‘Trans-Pacific Partnership'.

Let me explain what this is in mechanical terms first. It started ten years ago as something called ‘P2' - an FTA between NZ and Singapore since we were frustrated at the slow pace of change regionally and multilaterally. As I said earlier, never accuse a New Zealander of lacking ambition on trade. Where we do not back so-called ‘ambitious' trade ideas, it is not because we lack ambition, it is because we think they are unrealistic and thus will lead nowhere or worse.

Over time, the deal between Singapore and NZ became P4 - Chile and Brunei joined in. Then crucially, USTR officials started to show interest in the idea as a possible building block for long-held US ambitions in the Asia Pacific region.

Early signs of interest by senior US trade officials had an effect: Australia, Peru and Vietnam decided that they wanted to be part of it. We are all countries that want to see what I often call ‘the one indispensable' country, namely the United States, at the centre of trade and investment integration in the Asia Pacific region.

No political decision has been made. Given the fundamental point made by Ambassador Kirk about the need to find a new paradigm on trade, we are very comfortable waiting until the Administration completes its review and makes its decision.

I strongly hope that it makes a decision to proceed. With this group of countries we have an opportunity to set some new benchmarks in terms of structure and quality. It is certainly time for us to start untangling what has been called by trade policy theorists, the ‘noodles in the spaghetti bowl' caused by so many bilateral FTAs and start putting in place a regional trade regime that offers business-friendly rules and lower overheads.

In doing this we need to be thinking of eventual expansion beyond the current eight countries. Whether the initiative can deliver on its true potential will hinge on our ability to build it into a larger group that includes other major markets in the region such as Japan.

You will gather from these comments that we see the Trans-Pacific initiative as an opportunity for a new type of trade deal: one that brings together diverse economies separated by great distances, and that seeks to provide a foundation on which a wider regional deal might over time be built and that allows a special focus on the issues of concern to business in the 21^st century.

Thank you.