> Pascal Lamy’s speeches

It is a great pleasure for me to be at the Centro de Estudios Publicos today and to have the opportunity to participate in this discussion about the crisis and its impact on the multilateral trading system.

But before beginning, allow me to extend my heart-felt sympathy to you and to the people of Chile for the terrible earthquake that you have just lived through. From the outside one can only begin to imagine the shock, hardship and suffering that such an event causes, and I know that I speak not just for myself, but for the WTO family as a whole, in expressing these sentiments.

Turning to our topic today — how the multilateral trading system manages in times of economic crisis — I think that I have a positive, if still cautious, message to deliver. The world economy has taken a severe battering, as bad as anything in the last 70 years. All countries were affected, although some resisted better than others thanks in part to sound macroeconomic management.

Now, we seem to be emerging from the crisis, although it would be rash to assert that it’s all over and we can behave as if nothing happened. The nascent recovery is still fragile. We need to attend to some financial sector reforms, we must manage exit strategies so as to avoid inflation and the dangerous piling up of sovereign debt, while at the same time staying out of the hole from which we are emerging, and we have to tackle the serious unemployment problem, which I am afraid, will remain stubbornly high for a while, even if everything else goes well.

The comparison between what happened to output and growth last year and what we are predicting will happen this year is stark. Output fell in volume terms by -2.3 per cent last year, and trade by a massive -12 per cent. The consensus forecast for output growth in 2011 is a positive 2.9 per cent, and we have just released our estimate of global trade growth, which is a rebound of nearly 10 per cent over 2010. Admittedly, this is from a low base, but it is still a very promising turnaround.

By historical standards, the economic contraction of the last couple of years was of alarming proportions. For a while there was genuine uncertainty as to how the world economy would extricate itself from what could have become free-fall. Yet when we compare this crisis with that of the 1930s, the speed of the turnaround this time was remarkable. This is no doubt in part because we have learned how to manage the economy better. But I think there is more to it than that. Back then, we did not have institutions for international cooperation like we have today.

I am thinking particularly of trade relations and the WTO. In the 1930s, just like in the recent crisis from which we are apparently emerging successfully, trade was not a proximate cause of economic contraction. But in the 1930s, a contagion of inward-looking trade policy and protectionism prolonged and deepened the recession. That has not happened this time. We certainly live in a more trade-dependent world now and governments would certainly have thought twice about the implications of turning their backs on trade. But I am sure that a vital factor also at play was the existence of an institutional setup of international trade rules.

We all know that governments could do things to restrict trade without infringing their WTO obligations, but the rules draw a line beyond which it is not possible to go without breaking the system, and more importantly in my view, the WTO has created a culture of cooperation. The trade rules have stood to the protectionist pressures but we now need to ensure that this culture of cooperation brings the Doha Round to its completion. We need to ensure that the rules of the WTO, which are a public good, are improved and updated. Failure may be costly on a global scale. Take the example of fishery subsidies. We have a mandate to negotiate the prohibition of certain subsidies which contribute to over-capacity and over-fishing. Present disciplines are inadequate. Scientific studies tell us that over 80 per cent of fish stocks are over-exploited. We need action and for that, we need leadership from our membership. The coastal population in Chile which has been severely affected by the earthquake and which is dependent on fishing activities knows this only too well.

The fact that the trading system has made a contribution to sound policy and international cooperation gives no grounds for complacency. We are not out of the woods. Governments will continue to feel protectionist pressure, especially if the unemployment scene does not improve. But there is something else that I think we need to take care of, especially in public debate. There has been a growing public sense that globalization is not all that its supporters make it out to be. Part of this anxiety finds its way into thinking about trade and sometimes manifests itself in intellectual debate.

We are all very familiar with David Ricardo’s key contribution to trade theory, which showed how all countries can benefit from trade even if some countries seemed to be so much stronger and better at everything than others. The reason that all countries could benefit was because the gains from trade were determined by relative and not absolute advantage. Countries would specialize in what they were relatively more efficient at doing, and all would benefit. A recent contribution to the literature by Paul Samuelson has shown, however, that technological advance in one country could reduce the gains from trade in another country. This could be envisaged, typically, as a situation where an emerging economy was trading with an industrial one, and acquired new technological expertise.

This insight has fed a view in some circles, that comparative advantage and open trade are not necessarily beneficial to all parties. As several economists have shown, this is not the appropriate conclusion to draw from the Samuelson construct. In his paper he showed that if China experienced a productivity gain in its export sector, both it and its trading partner — the United States — would benefit. But if the productivity gain arose in China’s import sector, that would narrow relative productivity and the United States would lose a trading opportunity. All that this means is that a previous gain from trade has been lost, not that trade hurts countries that engage in it. Far from using this kind of argument to question the benefits from trade, as I am afraid seems to have happened in some quarters, the lessons to draw from this is that nothing is static, and trade opportunities come and go. Hence the importance of domestic policies on competitiveness. Relative efficiency and competitiveness change over time, not the essence of how nations gain from trade. That message needs repeating from time to time.

A second concern I often hear is related to the interface between macroeconomic policy and trade policy, and in particular, the idea that trade policy can fix current account imbalances. Current account imbalances are not an intrinsically undesirable phenomenon. But it might be right to worry about them if they become very large among countries with very different macroeconomic policies, institutional structures, and regulatory frameworks. The danger is that imbalances become reflective of "distortions" in policy, for example, an unsustainable fiscal deficit in one country, rather than of differences in savings and investment behaviour by the private sector. In such a situation, imbalances could become a source of economic uncertainty and ultimately, instability.

But fundamentally, current account imbalances simply reflect differences among countries in saving and investment behaviour. Some countries are consuming at a higher rate than they are saving and other countries are doing the opposite. The country that is dis-saving by spending more than it is earning will run a current account deficit while the country that is saving more than it is spending will run a surplus. As financial and capital markets have become more integrated globally, larger current account imbalances reflect an international allocation of capital that, in the absence of distortions in the relevant markets, leads to greater efficiency.

If, however, governments believe that these imbalances are undesirable and are indeed the consequence of underlying problems in the market, then they may be moved to do something about it. This is where the trade problem comes in. There is always the temptation to think that by putting on trade restrictions a country can reduce its trade deficit. Trade restrictions might reduce import demand in the short-term, but they will not fix a phenomenon that has an entirely different provenance — the savings-investment balance. In fact, trade restrictions probably make matters worse, not just because the imbalances will not be reduced, but because such action will also turn trade relations sour. This then is another part of the challenge of ensuring that open markets are not compromised for entirely the wrong reasons.

Let me just mention one more issue on which I believe vigilance is needed. This is the idea that open trade, particularly among rich and less rich countries, will destroy the social fabric in rich countries. This is not exactly a new argument, and I am probably talking to the converted, but I see it coming back in different guises. The idea is that social standards, labour rights, and environmental quality will be compromised in relatively high standard countries in the headlong rush of competitive pressure in open international markets. This reasoning provides the logic for policies that reduce market opportunities — a shrinkage that might in the first instance look as if it only creates one set of victims, the developing countries, but which actually harms the restricting country as well.

Just as an empirical matter, there is scant evidence to make the case. If anything, there are good reasons for arguing that open trade raises standards in the lower-standard country. One is that open trade is generally associated with rising income, and as income goes up so do standards. Another is that consumers in rich countries are sensitive to these matters and that has an influence on suppliers in poorer countries. In the matter of labour and wages, it is clear that relative productivity goes a long way in explaining differences in workers’ incomes. Once again, if we allow trade policy to be misappropriated by flawed reasoning, or for that matter by protectionist opportunism, we will compromise the basis for growth and development, and we will be investing in political tensions from which none will gain.

I have spoken at length about the dangers of misusing trade policy. Let me finish by looking at the other side of the coin, and I think this is just as important. There has been an intellectual line of argument over the years favouring the view that open trade is the cure to all ills, the sure path to growth and prosperity. Well, I cannot think of any country that has prospered without trade, and I guess here I am again preaching to converts, but that is a far cry from asserting that just opening to trade is a magic policy potion that ensures success.

Open trade needs a context in which to deliver its benefits. The benefits of trade work in an environment where other conditions are met. These include the necessary investments in infrastructure and in institutions. These include an economy where price signals are actually transmitted to the agents that benefit from such signals, and where the benefits of growing prosperity are widely shared, and not just the preserve of a few. We need to think broadly about the ingredients of success, and how the pieces fit together.

In sum, I believe that the trading system has a vital role to play, including — and perhaps especially — in times of crisis. I also believe that the case for open trade needs bolstering against the various poorly-premised arguments that some like to array against it. And finally, I think it is important to remember that trade is no panacea on its own. It is a very useful instrument which needs to be put to work for good together with many other ingredients of public policy.

Thank you very much for your attention.

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