It gives me great pleasure to be in Berlin to address the German Engineering Federation. The VDMA is a clear example of why international trade is important. One of the stated goals of your association is to open the door to world markets for small and medium businesses, through the implementation of export-oriented measures.

We are in a country, Germany, that by all standards is very open to international trade, as testified by a ratio of exports to GDP of more than three quarters. At the same time, the VDMA operates in sectors such as transport equipment and machinery, where a combination of comparative advantages, product quality and know-how contribute to making Germany the top global exporter.

Speaking to such a group from a sector that exports roughly two thirds of its output worldwide, it will not be hard for me today to convey the idea that multilateral trade opening, as supported by the principles of the GATT and the WTO, is mutually advantageous for the countries that engage in it. At least since Adam Smith and David Ricardo, economists have shown that — by allowing countries to allocate their productive resources to the activities they can do best — international trade brings efficiency gains.
Contributions from the 1980s — including those of Paul Krugman, last year's Nobel prize winner— have pointed out that international trade, especially the intra-industry type that is so relevant in high technology industries, is also likely to produce gains from increased variety and pro-competitive effects.

Finally, trade opening is associated with an increase in average industry productivity.

Recognizing the multiple sources of possible gains from trade, European nations started to reduce trade barriers in the second half of the XIX century. The process of trade opening was not smooth, and it came to a sudden and disastrous halt in the interwar period, where the imposition of prohibitive tariffs and the sirens of economic nationalism contributed to exacerbate the Great Depression.

The failure of trade cooperation of the interwar period was a hard-learnt lesson for the policymakers who constructed the global economic architecture at the end of World War II. In 1947 the GATT was created to foster the reduction of tariffs in successive rounds of multilateral trade negotiations. In the eight rounds that took place between 1947 and 1994, tariffs on industrial products in industrial countries were reduced by several magnitudes, and averaged 3.1 per cent at the end of the Uruguay Round in 1994. Importantly, tariff cuts were implemented on a non-discriminatory basis.

The WTO, created in 1994 at the conclusion of the Uruguay Round, strengthened the rules-based multilateral trading system in various respects. It provides a larger forum for developed and developing countries alike, it brings about more transparency by disseminating information through Trade Policy Reviews, and it has a Dispute Settlement mechanism whose decisions bind WTO Members, thereby reducing the scope for the unjustified adoption of trade-restricting measures.

Between 1950 and 2005, world merchandise trade has grown more than twenty-seven fold in volume terms. This expansion has been three times faster than growth in world GDP.

It is therefore no surprise that in November 2001, WTO members agreed to launch the Doha Round of negotiations. This is an ambitious round of multilateral negotiations, with a wide set of issues on the table, ranging from the reduction of tariff and non-tariff barriers in agriculture and manufactures, to services, trade facilitation and more open markets for environmental goods and services. I mention this last issue because I believe it is of particular interest to a number of small and medium enterprises affiliated with the VDMA that produce and export climate-friendly technology, such as photovoltaic solar and waste treatment and recycling technology.

After eight years of negotiations and as we were moving towards the closing stages, we entered the worst and most global economic crisis of modern history — a crisis whose consequences will be felt for some time to come.

Although the crisis had its roots in the financial sector, trade has been affected along with the rest of the real economy. The insecurity created by the crisis has led households to postpone purchases of manufactured goods and consumer durables — the goods that are traded most. Secondly, the risk of bank insolvency dried up trade finance, which is used to fund 90 per cent of the $16 trillion in world trade. Third, the manufacturing model that relies on international production chains has contributed to a trade contraction that is significantly larger than that of output because of the magnification effects of global supply chains.

The current crisis has also negatively affected global foreign direct investment, which fell by 15 per cent in 2008 and is projected to drop further.

This has lead to widespread fears of resurgence of the type of virulent beggar-thy-neighbour protectionism of the 1930s.

The WTO vigorously stepped in to address the situation. We have set up a monitoring mechanism — a type of WTO “radar screen” — to help Members fight against protectionist pressures by ensuring transparency in the measures taken in response to the crisis.

We have not seen the kind of high intensity protectionism of the past, even if an accumulation of lower intensity measures can stand in the way of a more rapid recovery.

Second, together with other institutions we have carefully been monitoring the trade finance situation, including the implementation of the G20 $250 billion trade finance package, agreed at their London meeting in April.

Ensuring access to trade finance is especially important for small and medium enterprises, whose funds are limited and who therefore heavily depend on access to credit to engage in foreign trade.

The effects of the crisis on the real economy has been severe, and is likely to have social and political repercussions, given the rise in unemployment. There are some timid “green shoots” that we must consider with caution, avoiding unwarranted optimism. On the trade side, the contraction appears to have begun bottoming out. In Germany, after a gloomy 29 per cent reduction in exports and 23 per cent reduction in imports between April 2008 and April 2009, exports rose for three months in a row, before experiencing a new slide in August. This is a clear indication that we should be cautious in interpreting signs of recovery amidst a fragile world economy and an uncertain economic outlook.

The efforts to stimulates the economies and stabilize the financial sector have led to the accumulation of government debt experienced by virtually all nations.

In Germany the government devoted 85 billion euros (around 1.6 per cent of GDP) to stimulus measures, provided 115 billion euros for company liquidity and implemented a 500 billion-euro bank-rescue fund to fight the financial and economic crisis. The goal of balancing the federal budget by 2011 had to be abandoned. The deficit is now forecast to return to 3 per cent of GDP — the ceiling of the EU's Stability and Growth Pact — only in 2013, from a high of 6 per cent in 2010.

All other countries in the Euro Area are also experiencing large deficits and an increase in government debt ratios. By way of simple arithmetic, fiscal “exit strategies” aimed at avoiding ballooning public debt must rely on a combination of fiscal consolidation, that is, running a primary surplus, and sustained growth in GDP.

Achieving fiscal consolidation in times of economic hardship is not easy. The presence of automatic stabilizers such as unemployment benefits and the reduced tax revenues collected by the government automatically push in the opposite direction.

Achieving sustained economic growth is no easier. Economic growth can only be maintained by steady productivity increases. As the experience of many European countries since the mid-1970s suggests, when productivity growth slows down, so does economic growth.

It has been repeatedly argued that in order to create sustained economic growth in Europe, structural reforms are needed. I would argue that international trade can also be an engine of growth. The dynamic gains from trade can stimulate innovation and better exploitation of economies of scale. Trade is also a potent vector of direct and indirect knowledge and technology diffusion. Direct knowledge diffusion happens through hands-on experience with the best technology. Indirect diffusion works through communication and information-sharing.

In this context, a successful conclusion of the Doha round can have yield a double dividend. On the one hand, the Doha round can play the role of a global stimulus package. On the other hand, the Doha round can effectively act as a structural reform package. It is the most effective way of further constraining protectionist pressures and fostering a political economy dynamics.

Business support for open trade will be vital to a successful conclusion of the Doha round. Opening up to international markets is a unique opportunity for the most productive firms operating in sectors of comparative advantage to expand business and eventually increase profits. This is certainly well understood by the innovative and technologically advanced firms associated in the VDMA.

This is why I am confident that the VDMA will throw its weight behind the Doha Round and the rules-based trading system embodied in the WTO.

Thank you.