WTO NEWS: SPEECHES — DG PASCAL LAMY

20 Years in the Multilateral Trading System and Current Challenges Facing World Trade — San José, Costa Rica
“The Role of The WTO in the International Trade Policies of Small and Open Economies”

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Pascal Lamy’s speeches

  

Señor Presidente,
Ministro Ruiz,
Distinguidos participantes
Amigas y amigos,

Es un placer visitar a Costar Rica por primera vez como Director general de la OMC y celebrar los veinte años de la entrada de este país en el sistema multilateral de comercio. No les voy a fatigar con mi español de Normandía. Pero quisiera que estas palabras sirvan para mostrar mi aprecio por el idioma de Cervantes, de Borges y de Octavio Paz y mi cercanía con todos los que lo hablan.

What better way of marking two decades of successful participation in the multilateral trading system than to think about what that system represents for a country like Costa Rica.
  

Costa Rica’s economic and trade performance

I would like to start by registering my admiration for Costa Rica’s extraordinary economic success in maintaining steady growth and development over many years, a process that has been transformational for the country — and this against a background of sustained and remarkable social and political stability. Abstracting from the economic crisis that affected virtually every country on the globe over the last year and a half or so, Costa Rica has registered a steady average of around 5 per cent of real GDP growth for several years, implying that the size of the economy doubles in less than a decade and a half.

Engagement with the world economy is not something that Costa Rica has shied away from. On the contrary, according to the Foreign Policy Magazine 2007 index of globalization, Costa Rica is the 39th most globalized country in the world.

Trade, of course, has played a key role in Costa Rica’s success story, typically growing faster than output. The importance of trade for this country is attested to by the fact that the trade to GDP ratio exceeds 100 per cent. The centrality of trade to Costa Rica’s economy explains the careful attention your Government pays to trade policy, and your active involvement in the WTO as well as in regional trade cooperation.
  

Small economies and the multilateral trading system

Turning now to the question of how small economies might expect to benefit from the multilateral trading system, I would first note that the vast majority of WTO Members are small and medium-sized, so if the WTO cannot offer these countries anything, I would be on very thin ice if I were to say that the WTO strives to be a truly global institution! If I do say this, it is because I firmly believe that the WTO offers something for everyone — inclusiveness is a basic aspiration of our system, based as it is on the principle of non-discrimination.

My second point is that we know there is room for improvement, when it comes to creating the conditions in the WTO that allow all parties to defend and promote their interests effectively. Smaller countries — especially if they are developing or least-developed — should not be expected to match precisely the obligations of bigger and richer ones, and at exactly the same time, when such obligations are not appropriate at a particular level of development. “Special and differential treatment,” as we call it in our WTO jargon, has to be fully recognized.

But even if we got everything right on the WTO side, there is no guarantee that everyone in small and medium-sized countries would necessarily benefit from the multilateral trading system. Countries need to take the necessary domestic measures to reap the benefits of trade opening. The WTO helps in creating benefits, but not in distributing them — this is the role of domestic policies.

Another essential ingredient in securing the benefits for one's country is constructive engagement, on the basis of national interests. If governments do not care to participate in the day-to-day operation of the WTO, and do not align that participation effectively with national aspirations, then the WTO may turn out to be irrelevant for them or, at best, a serendipitous source of incidental benefits as crumbs falling off the negotiating table. Costa Rica is an excellent example of the opposite behaviour.

To use a boxing metaphor, there are three types of Members in the WTO: those who punch equal to their weight, those who punch below their weight, and those who punch above their weight. Costa Rica is clearly in the latter category. Your country has consistently established its priorities and pursued them in an extremely effective way in the WTO.
  

The benefits of engagement

How can a small open economy expect to benefit from the multilateral trading system? I divide my remarks on this question into four elements that correspond to the core functions of the WTO.
  

Trade-opening

Let me start with trade-opening. Successive rounds of negotiations have lowered tariffs and non-tariff obstacles to trade. These have benefited all WTO Members because of the application of the most-favoured-nation treatment, or non-discrimination principle. The most notable successes in removing barriers to trade have been among industrial countries in the area of manufactures. Except for the relatively high protection levels affecting a range of labour-intensive manufactures, tariffs in industrial countries on a very large share of these products are very low or zero. As you are no doubt aware, the picture is somewhat bleaker in agriculture, where the reduction or removal of tariffs and subsidies has proven very difficult. And in services, we have only just begun.

So in terms of what has been done, the benefits have been widespread because of the WTO’s commitment to non-discrimination. But one may well also observe that less has been done in areas that are of interest to small and developing countries, and that the improvement of this unevenness through non-reciprocal tariff preferences has only been partial and discriminatory. If I were to try to provide an explanation for the contention that the WTO is not always as fair as it could be to its smaller and weaker members, the historical product pattern of trade opening would be one of them.

I do not wish to be misunderstood. I believe that the WTO’s contribution to rendering markets more open is very valuable. The point is that it would have been even more valuable if the principles of non-discrimination and reciprocity were not so tightly linked. This link tends to make large countries reluctant to exchange trade opening commitments with smaller ones, for fear that other large countries will free-ride on them and offer less reciprocity on their own account.

This, for me, is part of the reason the system has not done better at establishing a less varied pattern of trade opening, in terms of product coverage. It is ironic indeed that we have finally come closer than ever before, in mainstream Doha Round proposals — especially those in industrial goods — to redressing this historic imbalance, and yet so far WTO Members have found it difficult to move expeditiously to complete the negotiations.

But I have also observed a seeming reluctance of many smaller countries to define their market access commitments in the WTO. Take Costa Rica which has an all-product average real tariff of around 6 per cent and a maximum allowed of over 42 per cent. Clearly, WTO commitments do not constrain trade policy, except perhaps in extreme cases.

I would argue more generally, therefore, that so far, market access benefits deriving from the WTO for small open economies in the export markets of the major trading countries are positive but not as large as they could be, for the reasons I have already stated.

However, on the import side, many small open economies have in the last decades reduced barriers to trade — sometimes importantly — but have not relied on the multilateral trading system to do so. Market opening has tended to be unilateral in nature, or undertaken in the context of preferential trade agreements. Indeed, over three-quarters of Costa Rica’s exports are, or soon will be, covered by preferential agreements.

One of the key challenges currently facing WTO Members is how to ensure that the trade opening conferred by preferential agreements synergizes with the multilateral trading system.

The multilateralization of bilateral preferences can be achieved in different ways. One is to ensure high-quality regional trade agreements that avoid product exclusions or restrictive rules of origin that will limit their impact. In my view, regional trade agreements should be comprehensive in scope and depth even in sensitive sectors, thereby opening the possibility for dynamic gains from trade opening. For instance, Costa Rica's ratification of CAFTA entailed the opening of its telecommunication and insurance markets to competition. Likewise, the use of cumulation in rules of origin will generate complementary paths to multilateral liberalization.

Another way to spread more evenly the benefits of existing regional trade agreements, which has been discussed by some WTO Members, would entail the inclusion in such agreements of MFN or sunset clauses, with reasonable periods of adjustment for sensitive domestic industries. This would ensure an inbuilt convergence between bilateral and multilateral trade opening.
  

Rule-making

Let me turn to the second of the functions of the trading system, that of rule-making. Creating rules has become increasingly important in the work of the WTO over the years, as governments have sought to harness changing economic realities. All WTO Members, large and small, have benefited tremendously from the existence of rules. Now, just as with the market-opening story, I do not want to claim perfection for the WTO. Not all the rules are as good as they could be. And this is one reason why they are continually under negotiation in successive trade rounds. But the WTO rules provide a unique public good, which in my view is a very attractive and valuable feature of the multilateral trading system. And this has proven extremely valuable in the crisis we are just living through.
  

Rule-keeping

As for the third core function of the trading system — rule-keeping — the WTO dispute settlement system has been widely praised for its effectiveness in settling trade disputes among WTO Members. Its high success rate is testimony to the commitment of Members to maintaining the integrity of the rules and of the WTO system of trade cooperation more generally.

Indeed, the WTO rules are far more meaningful because they are enforceable through respected legal processes. Larger and smaller countries alike have been able to benefit from the dispute settlement mechanism. Take the example of this country, which has been complainant in three cases and sought consultations in four others.
  

Fostering cooperation through transparency and information-sharing

The final function of the WTO that I mentioned above is to foster cooperation through transparency and information-sharing. Information about what governments’ trade policies are and how they change is essential for efficient trade policy conduct. To the extent that information is available, the benefits can be shared by all in the fashion of any public good.

Sharing information also provides a basis for informed dialogue among trading partners. And it also provides a platform for a better discussion of policies at home.

I have tried to give you a sense of where I see the strengths of the WTO as a vehicle for promoting a better trading environment for its Members, including the small and open economies among them. The case I seek to make is for informed engagement and sustained commitment to making the WTO work for all parties. I believe I am preaching to the converted as far as the majority of this audience is concerned. Costa Rica has consolidated a reputation for serious engagement in the multilateral trading system, thanks in no small measure to the hard work of its Mission in Geneva and that of its Ministry here in San Jose.
  

Looking ahead

Let me close by briefly noting some of the challenges I believe we will face in the months and years ahead. The first, most immediate priority is for governments to take the necessary decisions to complete the Doha Round. An unfinished Round means foregone economic opportunities and, I believe, mounting credibility costs for multilateral cooperation. The Doha Round is not an island in a sea of alternative opportunities — failure on Doha would spill over into other present and future cooperation efforts, and not only in the trade policy domain. In our joined-up world, countries simply cannot go their own way and disregard the costs of neglecting international cooperation.

As far as trade is concerned, the economic crisis has played havoc. We saw a 12 per cent reduction in the volume of trade in 2009, and trade actually fell more than it did at the height of the Great Depression. We know that this is a reflection primarily of collapse in demand, accentuated in the early stages by a fairly widespread shortage of trade finance.

The trade policy implications of this have been a source of concern in many quarters, but so far, trade policy has remained robustly oriented towards an open stance, with only moderate slippage in some instances. The challenge for all governments is to remain open, notwithstanding protectionist pressures that are likely to persist if the nascent recovery proves fragile, or if unemployment remains stubbornly high. We need to remain vigilant and keep trade channels open.

Unless we can complete the Doha Round in the near future, and maintain markets open, we will find it harder to address other challenges where international cooperation is essential. This involves issues such as climate change, coherence between a future climate change regime and the trade regime, managing increasing prices and scarcity of some raw materials, and ensuring adequate coherence between regional and multilateral approaches to trade cooperation. This is not an exhaustive list, but it does convey the urgency, I believe, for all of us to play our parts in advancing the trade agenda.

Let me finish by quoting a recent speech by President Arias, in the Third Ministerial Meeting of “Caminos de la Prosperidad en las Américas”. You said, Mr President, that “If we all aspire to prosperity, then we should not step down from the train of free trade. On the contrary, we must make sure that there are always more people stepping onto the train.” Costa Rica has been a faithful and well served customer of the train of free trade. I can only support you, Mr President, in encouraging others to join.
I thank you once again for the invitation to share in the celebration of this occasion with you. Thank you very much.

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