WTO NEWS: SPEECHES — DG PASCAL LAMY
“The Role of the Multilateral Trading System in the Recent Economic Crisis”
Distinguished guests,
ladies and gentlemen,
It is a pleasure for me to be here this evening and to have the
opportunity to talk about the relevance of the multilateral trading
system as governments everywhere struggle to manage the economic crisis
and begin to think about our post-crisis world. I should like to thank
my hosts, the University of Warwick, for making this occasion possible,
and particularly the Chancellor, Richard Lambert, for agreeing to
preside.
The contribution of the multilateral trading system in times of economic crisis
We are faced today with the deepest and most global economic crisis since the 1930s. Indeed, some have pointed out that the trade contraction we have sustained in the last year or so — forecast at some 10 per cent in volume terms in 2009 — has been even fiercer than the shrinkage of trade in the Great Depression. We know that now, as then, trade contraction followed on from economic troubles elsewhere in the economy — it was an effect, not a cause of the crisis.
But back then a protectionist trade response
prolonged and deepened the depression. This time, governments have so
far shown considerable restraint and have largely kept markets open. I
say ‘so far’ because I do not believe we are out of the woods yet. In
comparing policy reactions now and in the Great Depression, authors such
as Douglas Irwin and Barry Eichengreen have shown how active monetary
and fiscal policies have helped to manage today’s crisis, whereas these
instruments played no such role in the late 1920s and early 1930s.
This policy activism has helped to place a floor on economic contraction
and fuelled hopes of recovery in the not-too-distant future. It has
arguably also supported restraint in the application of
beggar-thy-neighbour trade policy. But I believe a much more important
force for good in trade policy has been at work today — namely, the
existence of a multilateral system of trade rules under which
governments have pre-committed to a set of norms which constrain their
policy behaviour.
In the last sixty years the multilateral trade rules have played a vital
role in increasing predictability, reducing uncertainty, underwriting
the rule of law and fostering a sense of legitimacy in trading
relationships.
In the current climate, temptation abounds to placate those most
affected by reduced demand with the temporary but ultimately destructive
balm of protection from trade competition. Trade rules are a source of
opportunity in times of economic growth and a restraining influence in
times of difficulty. It is in this latter role that the rules are
serving us particularly well right now.
But we must nurture the commitment to the rules-based system because it
will not be self-sustaining without the necessary husbandry. One way of
doing this is through policy monitoring and surveillance.
Our new monitoring mechanism under the Trade Policy Review Mechanism is
playing a positive role in this regard. It is encouraging that
governments are willing to engage in constructive debate over their
mutual efforts to keep markets open. But it is not always easy, and our
monitoring reports are showing a certain increase in the application of
protectionist measures.
Moreover, we encounter difficulty in discerning exactly how far
financial rescue and fiscal stimulus packages are frustrating trade
opportunities. Governments will need to maintain their resolve and the
WTO its vigilance as pressures from rising unemployment persist in many
economies.
As we contemplate crisis exit strategies and the shape of the world
economy post-crisis, two questions come to mind. One is how different
the world will look after the crisis, and the other is how the WTO and
our system of global governance more generally should be positioned to
ensure the kind of international cooperation that is becoming an ever
more vital component of a promising future for all peoples and nations.
Le me address both these issues.
Will the world become less globalized?
A key issue that awaits us post-crisis is
whether the world will be less globalized in the future — will we see a
process of ‘de-globalization’ provoked by the current crisis?
This is not a matter just for intellectual entertainment. It matters for
policy and for managing international cooperation. It matters when we
consider how we can secure shared growth and increasing prosperity
across the world.
Underlying the de-globalization question is a distinction between
cyclical and secular forces. Some would argue that the current
contraction in economic activity will be revealed to be nothing more
than a vigorous downturn in the business cycle and that over time we
shall return to the status quo ante. In this case the only real
challenge is to ensure that any damage and contraction occasioned by the
crisis is undone upon exit.
Others adopt what is perhaps a more thoughtful perspective, and argue
that the origins of the crisis and its severity will combine to create a
turning point that will put us on a different, less integrationist path.
This latter perspective must also be informed by a consideration of
secular changes that were already under way in the world economy, and
which perhaps the crisis will accentuate.
The increasing economic inter-dependency among nations captured by the
‘globalization’ rubric has been driven by a combination of technology,
policy, business behaviour, and public attitudes. While all of these
factors help to explain economic growth generally, they have contributed
especially to global integration through trade, finance and migration.
In the heady days of sustained high growth prior to the crisis, one
sometimes heard the assertion that globalization was irreversible. We
now know this is an optimistic over-simplification. In considering what
might be reversed — or at least slowed — in the shape and intensity of
globalization, we need a joined up analysis of: i) the key contributors
to globalization; ii) the various impacts of the crisis; and iii) the
role of relative growth rates in determining global patterns of economic
activity.
As far as technology is concerned, the story is fairly straightforward.
Extraordinary advances in information and transportation technologies
have sharply reduced trade costs, generating an intensification of trade
and investment across the globe. The contribution of technology is
unlikely to diminish in the foreseeable future. We do not ‘unlearn’
technologies and there is no reason to expect the pace of innovation to
slow over time.
But what of other influences on international transactions? When the
housing and financial market bubbles burst in the latter half of 2008,
this created a massive negative wealth effect ($10 trillion in the US
alone in 2008). The resulting contraction in consumption, fed by
households attempting to rebuild wealth through savings, has had a
significant knock-on effect on trade.
Trade has contracted much more strongly than output, reflecting the fact
that trade growth has become more responsive to GDP growth in recent
years. A large part of this story may be explained by the manufacturing
model that relies on international production chains, combined with the
fact that we typically measure trade flows in gross terms and output in
net (value-added) terms. Moreover, it seems that trade is likely to
contract faster than output in downturns because goods production
declines faster than services production, and the bulk of GDP is
services while the bulk of trade is merchandise. As virulent as the
business cycle may be, these factors do not necessarily imply a
permanent reduction in world trade.
Demand-driven trade contraction has been aggravated by shortages in
trade finance linked to the credit crunch. This is why the WTO and
others are carefully monitoring the trade finance situation and why the
G20 agreed to a $250 billion trade finance package at their London
meeting. I hope the financial sector, governments and international
agencies between them will be able to repair fully this situation in the
months to come.
What of possible secular factors that do not take us back to established
patterns of trade and output? Two of these come to mind. First, to the
extent that we see increased trade protection, the challenge will be for
governments to restore trade openness as we exit the crisis. A failure
to do this may result in reduced output and lower trade levels over the
long-term.
The second factor concerns the reduction of global imbalances. Reduced
consumption and increased savings in the US will mean smaller imbalances
and may well imply a slower steady state growth rate for trade. This
possibility raises some important questions. One is whether such a
rebalancing will reduce opportunities for emerging economies to rely on
export-led growth as a development strategy. Another is how far
increased domestic demand in some large and vibrant emerging economies
such as China, India and Brazil will fill the gap left by the industrial
economies.
The financial sector was the origin of the crisis and the likelihood of
a return to ‘business as usual’ is small. So how will changed conditions
in financial markets affect globalization? I have already mentioned
trade finance, which I regard essentially as a cyclical factor. But the
systematic reduction in leveraging that characterizes the behaviour of
nearly all financial institutions will surely reduce financial flows and
increase the price of credit beyond the short-term. In addition, new
regulatory structures that are being put in place in many economies will
impose a more careful attitude towards risk.
Capital flows towards developing countries collapsed by more than half
as a result of the global credit crunch. If investment flows do not
recover, this will have longer-term consequences for capital
accumulation and production. To the extent that perceptions of risk have
been altered by the crisis, capital may be more scarce in the longer
term, but perhaps more appropriately priced.
Evidence is emerging of reduced net migration and a fall-off of
remittances as a direct consequence of the global downturn. How
permanent will this be? Public attitudes will be key, and I shall say
more about this shortly. Other long-term factors affecting migration are
differences in expected lifetime income and quality of life between host
and home countries, policy-induced incentives that increase or decrease
migration, and demographic push-pull factors. Demographic considerations
may favour migration, as populations age in industrial economies,
threatening labour shortages and insolvent pension funds.
De-globalization may result from changes in the business practices that
brought us the global fragmentation of production processes.
International production sharing has been driven by differential
wage/productivity ratios in alternative production locations. These
economic calculations can easily change as a result of shifts in
underlying relationships, increased protection, different perceptions of
risk associated with alternative locations, and consumer preferences
that shift towards national production. In addition, there may be a
learning effect as a result of which producers discover unanticipated
production or managerial costs associated with off-shoring. Some of
these effects may be crisis-related, others less so. Some may be of a
permanent nature, and others more temporary.
Virtually all the elements identified above — trade, financial markets,
investment, migration and business practices — will be affected by
public attitudes towards globalization. Public surveys suggest that
attitudes have become more negative over time towards globalization in
rich countries, while the reverse appears to be the case in emerging
economies. Risk aversion and job uncertainty have a strong positive
effect on anti-trade attitudes in industrial countries. The crisis is
likely to have accentuated a sense of insecurity about the future, as
have the pre-crisis food and natural resource price situation and the
swine flu pandemic. The impulse to turn inwards poses real challenges to
those governments that understand the benefits of international
openness. One response to negative public attitudes is to do more by way
of providing social safety nets, but governments also have a
responsibility to convince the public of why a retreat inwards is no
answer to the challenges of engagement.
The role of the WTO and the system of international governance
As we contemplate the different ways that the
world economy may be affected by the crisis, it becomes clear why we
need the multilateral trading system more than ever. Even if we believed
that all crisis phenomena were cyclical and that we would soon be able
to resume ‘business as usual’, we would still need a strong regime of
international cooperation to exit the crisis. But when we add the strong
likelihood of secular change — that policies and behaviour in the
financial sector will be modified to avoid a replay of the forces that
generated the crisis, that ways of doing business may change, that new
economic structures and patterns of exchange are evolving, and that
public attitudes are likely to exert new influences on governments, this
gives us a second reason for reinforced and more effective international
cooperation.
There is also a third reason. The imperatives of changing economic,
social and environmental circumstances, along with the shared global
challenges of addressing development and poverty, mean that the nature
and substance of cooperation is always changing too. We know we face new
challenges for the trading system such as:
i) managing the relationship between trade
and climate change;
ii) improving cooperation in a world where fundamental changes in
supply and demand relationships are emerging in international food and
natural resource markets;
iii) forging better coherence between regional trading arrangements
and the multilateral trading system; and
iv) addressing some of the more opaque and intractable non-tariff
barriers to trade.
Many of these issues were identified by the
Warwick Commission on the Future of the Multilateral Trading System.
They are important and we must attend to them. But there is something of
equal or even greater importance that we must do first. That is to
complete the Doha Round. As I have argued before, it is not just that a
successful Doha Round offers an attractive global stimulus package and
an important signal to the world economy. It is also that systemic
integrity demands that we finish what we started. We cannot credibly
embrace new challenges without settling our current agenda. I believe
that this view is shared by every government with a stake in
international trade and the rules that underpin the trading system. And
I am heartened by the declaration last week by leaders of major
economies at the G8 Summit in L’Aquila of the intention to complete the
Doha Round in 2010.
Finally, in order to pay tribute to the work of the Centre for the Study
of Globalisation and Regionalisation at Warwick, and also to my good
friend Richard Higgott, I would like to make some brief comments on the
broader issue of global governance and where I see the WTO and similar
international organizations fitting within the system.
In the short-term, we are doing as much as we can to cooperate with
other agencies to promote institutional coherence.
We are coordinating multi-agency endeavours in Aid for Trade and the
Enhanced Integrated Framework, both of which seek to empower developing
countries to make better use of opportunities offered by the trading
system by building productive capacity.
We are participating at the UN High Level Task Force on Food Security.
We are working together with WIPO and the WHO on access to medicines for
developing countries.
We are also involved in multi-agency efforts to ensure the supply of
adequate trade finance, and we have engaged in joint analyses of a range
of policy issues with the ILO, UNEP or UNCTAD to name a few. This work
must continue and expand.
But in the medium term, I see a new triangle of global governance
emerging that we need to strengthen. A “triangle of coherence”.
On one side of the triangle lies the G20, providing political leadership
and policy direction. On another side lie member-driven international
organisations providing expertise and specialized inputs whether rules,
policies or programmes. The third side of the triangle is the G-192, the
United Nations, providing a forum for accountability.
In the longer term, we should have both the G20 and the international
agencies reporting to the “parliament” of the United Nations. This would
constitute a potent mix of leadership, inclusiveness and action to
ensure coherent and effective global governance.
Conclusions
I conclude with three observations.
First, the current crisis will end but it will have changed the world,
against the background of a world already in an important phase of
change, and these new realities will challenge the ingenuity and
commitment of policy-makers across the globe.
Second, we need multilateral cooperation more than ever, including in
trade, and in that connection we must attach priority to the completion
of the Doha Round.
Third, we need a new architecture of global governance to provide a
framework for effective cooperation. These are all ideas that cannot be
fleshed out adequately in thirty minutes, but I offer them for
consideration and debate.
Thank you very much.
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