Foreign Relations of the United States, 1981–1988, Volume I, Foundations of Foreign Policy

329. Editorial Note

On October 10, 1988, Secretary of State George Shultz addressed the Financial Executives Institute in San Francisco. In his introductory remarks, Shultz stated: “This is a time of watershed events and watershed rearrangements in thinking. The flow is toward political and economic openness. The success of these ideas since World War II, with strong and creative leadership from the United States, has rearranged the political and economic map of the world. And an information age is here, where knowledge and the ability to create and use it is the source of comparative advantage and general progress. These developments reinforce the powerful thrust of the very same political and economic openness that has brought us our present good fortune. So I am here to talk about success—and the problems of success.

“Over the course of our history, America has seemed to swing between involvement and isolation. We have eagerly engaged with the world, or we have tried to look inward. You know that America no longer has that option; nor should we want it. Your financial world operates on, as Walt Wriston says, ‘an information standard,’ and it is global in scope. You know that from your own experience. So I want to take these few minutes together to tell you what is on my sketch pad for America: our success; the reasons why; the road ahead, with its opportunities, problems, and demands. Make no mistake about it: We are part of global developments which we did so much to create. With national will to stay engaged, to join in active and enlightened leadership, we can be confident of a free and productive future.”

Shultz then outlined various global and U.S. achievements during the postwar era. He highlighted some of efforts made towards shaping the “new and open global economic order.” The Secretary also anticipated future developments, asserting: “To build on our success and to stay on top of this exciting world ahead, we must be prepared and we must be engaged.

“What are some of the key issues to watch as indicators of our ability to deal with the problems and opportunities at hand?

“First, regional economic cooperation and prosperity: The global trends now underway are leading national governments to tackle broader issues that cannot be managed within a single nation state or national economy. Regional initiatives are playing an ever more important role in promoting freer trade, closer economic cooperation, and stronger growth. As such creative initiatives increase, we will all benefit.

“We saw this new reality some years ago. That is why I and others suggested the formation of a Pacific Basin Forum, where representatives from like-minded economies could compare experiences, discuss ideas, and prepare analyses on subjects of mutual interest.

“We are also nearing completion of years of work that can make a giant step toward the goals of open trade and enhanced economic opportunity by removing the barriers to free trade and investment between Canada and the United States. Our two nations exchange more goods and services—$166 billion worth last year—than any two countries in the world. If Canada’s voters agree, the elimination of tariffs and most other barriers to trade and investment between the two countries under the U.S.-Canada Free Trade Agreement will increase economic growth, lower prices, expand employment, and enhance the competitiveness of both countries in the world marketplace.

“Another potentially magnificent example of regional cooperation is now underway. The acceleration of European economic integration, as embodied by the single-market program, clearly is a seminal step in the postwar economic and political development. Europeans increasingly see the benefits of cooperative engagement and the promise of openness. But this vision will be tested.

“• There is a stifling regulatory overlay on much of Europe. Will it be applied on what might be called a ‘worst common denominator’ basis? Or will policies be adopted that are market oriented, that promote growth and efficient use of resources?

“• Protectionism everywhere must be defeated. It would be a tragic irony for a group of nations to create a common market amongst themselves and then to erect new trade barriers against countries outside its borders.

“• Economic and political change has been possible because strength and common purpose have deterred war and kept the peace. European integration must strengthen, not undermine, those commitments.

“European integration will bring substantial changes in the vast system of ties that forms the existing U.S.-European relationship. The impact will be felt well beyond trade and investment. If we all manage this well, the mutual benefits will be enormous.

“Second, the U.S. deficits: Before we get too carried away advising others what to do, we should take a good look in the mirror and at our budget and trade deficits. In order to ensure continued nation and global economic expansion, the U.S. budget and trade deficits must shrink—the sooner, the better.

“We have made important progress on both fronts. We need to continue our strong efforts, and we need to succeed quickly. Some believe that we can balance our internal and external books by turning inward and ignoring our international interests and obligations. They would counsel isolation as a solution to both deficits. But that’s a recipe for economic and political disaster, not success.

“Our budget and trade deficits are interrelated. Our Federal excess of spending over receipts absorbs savings that could otherwise be available for investment in the private sector. Financing from abroad has enabled us to fund our deficit while continuing to expand our investment and, therefore, our economy.

“But foreign capital flows—perfectly welcome on their merits and a sign of our strong attraction to investors—do build up foreign claims on public and private assets in the United States. As income generated from those foreign claims exceeds the income to the United States from American capital abroad, then the strain on our current account increases, with consequent pressure to attain a better balance of trade or even run a surplus. That is why we need to press ahead in reducing our budget and trade deficits. As we do, other countries will need to make important adjustments of their own. Our healthy trading partners with export surpluses must maintain open and growing markets at home. And to service their debt, the heavily indebted nations must seize opportunities to increase exports and to attract new foreign capital.

“It is essential, but not enough, for nations to fight off protectionist forces. The stakes for the economies of the United States and our trading partners are too high. We must all go on the offensive for freer trade. This is the true meaning and genuine necessity of the Uruguay Round of trade talks now well underway.

“Never forget: The wealth and size of our market are vital to many countries and to the world economy. American purchases of manufactured goods from developing countries nearly doubled between 1982 and 1986—from $41 billion to $81 billion. And markets abroad are vital to our own economic health. Our strong export performance—up $96 billion between the third quarter of 1986 and the second quarter of 1988—has contributed mightily to growth at home.

“As we meet our own domestic challenges and global economic integration intensified, we see new opportunities for productive cooperation and engagement—bilaterally, regionally, and internationally. Wherever I go, that is the appeal I hear—sometimes publicly, but always privately; often from governments, but invariably from their citizens: ‘America, stay engaged.’

“Third, debt and development in the Third World: The hard realities of the Third World debt situation must be faced. As thinking about this process continues to unfold, I have a word for debtors and a word for creditors.

“—To the debtors, growth remains the key and—today as in the past—growth requires investment. A country can test itself on the progress it is making in encouraging investment by looking at savings. Do its policies encourage saving? Do its own savings stay home and get applied to its own capital needs? Is domestic and other private capital returning from abroad or is it continuing to flee?

“If the answers are positive, the country will find itself in good standing in what we might call ‘the court of the allocation of world savings.’ If the answers are negative, the country should take a hard look at how thorough and market-based its own process of economic reform has been.

“—To the creditors, time has given you a break. Major international efforts over the past 6 years have bought time during which private creditors have had the opportunity to put their own houses in better order. But harsh realities remain.

“As creditors continue to work with debtors, they and all of us must learn to take into account a fundamental economic idea: High marginal rates of taxation discourage effort, and confiscatory rates can turn effort off completely. I’m sure everybody in this room has preached that sermon. Now, turn it around. Reform is difficult. If all the gains from reform are taken by debt service, then the necessary actions may simply not be politically sustainable. Rescheduling packages must reflect this reality if they are to succeed.

“But succeed they can. Experience shows that economic expansion is possible almost anywhere with the right kind of economic policies. Economic success depends less on market size or national resource endowment and more on making the right policy choices. Technology has linked distant markets, lessened dependence on natural raw materials, and created new products and production processes. Global economic integration now enables countries to experience explosions of economic activity—if they adopt policies which encourage innovation and remove barriers between the individual and the marketplace.

“Regional efforts at economic cooperation—efforts which strengthen the role of market forces in the economies of the debtor nations—can be a powerful springboard for global economic activity and engagement. That is why the United States supports CARICOM [Caribbean Community and Common Market], the CBI [Caribbean Basin Initiative], and the recent trade agreements between Brazil, Argentina, and Uruguay—all outward-looking initiatives which remove barriers to the growth of trade. This type of cooperative effort between nations and regional groupings can help resolve the most difficult political and economic problems associated with debt and development in the Third World.

“Fourth, and finally, international economic institutions are due for a searching and square-one examination. The World Bank, the International Monetary Fund, and the GATT have played important roles in the postwar period of economic development. As the scene has shifted, so have their activities, with some present activities happening almost as a matter of circumstance and convenience.

“As we consider the next decades, these roles and their interrelationships should be carefully considered. Trade, investment, and other capital flows interact in ways that the founders of these institutions could not have anticipated in the late 1940s. Established as independent organizations with separate responsibilities, they now face a world where the interaction of these global flows resembles a seamless web.

“Questions arise. Should, for example, the IMF really be a banker of last resort and the setter of conditions for access to its own resources? Should it be the stalking horse for the rescheduling and debt-management efforts of private lenders? Such a banker’s role is a far cry from what was originally intended for the IMF and for which it was designed. How, as national economies—including those of the Soviet Union and China—take steps to adjust to new realities, should they relate to the international economy? Can we ensure the continued relevance of the GATT by covering services and intellectual property rights and by dealing effectively with the runaway problem of subsidies to agriculture. So these institutions, designed to provide a framework for international economic transactions, must be tested for their capacity to respond to the promising, yet complex, world of the next century.

“The American philosophy is pragmatism. Pragmatism dictates that problem solving be a cooperative process. We will welcome the actions and ideas of others on the world stage—whether developed or developing, capitalism or communist—if they are geared to promoting openness and world economic growth.

“There is a lot of creative thinking going on out there. Japan and the European Community are large, vibrant, and important players, and we want to hear their ideas. The Soviet Union and China have launched upon processes of political rethinking and economic restructuring and, by doing so, seek to participate more fully in the global economy.

“All of this holds promise for the United States if we approach the future with confidence and vision. After all, our willingness to innovate, to engage, and to cooperate has been the secret of our remarkable progress. It is, if anything, even more needed at a time when others, too, have economic wealth and capability.

“We must build coalitions of common sense. We need patience, discipline, and staying power. We need openness and the swiftness to seize the opportunities openness creates.

“I have traveled over 1 million miles as your Secretary of State and received leaders from every part of the world as they visit Washington. During the past 2 weeks, I met, individually or in groups, with representatives of 132 countries. The atmosphere was, by general agreement, the best in many decades. The sense is that problems are there to be solved rather than used to berate each other. Presidents Reagan and Gorbachev receive, and certainly deserve, great credit and praise.

“In these discussions, people can be critical or apprehensive but also constructive and even creative. There is the sense that something different and better is on the horizon. And the basic message to us is always the same: Stay engaged. America’s ideas, presence, and influence are essential.

“Enlightened engagement will take us into a free, rewarding, and productive future. That is the opportunity we face and the responsibility we bear.” (Department of State Bulletin, December 1988, pages 16–19; all brackets are in the original)