Japan Institute of International Affairs

> Pascal Lamy’s speeches

President Nogami,
Ladies and Gentlemen,

It is a great pleasure for me to be at the Japan Institute of International Affairs (JIIA). This year happens to be the 50th anniversary of JIIA since its establishment by former Prime Minister Shigeru Yoshida in 1959. Over the past 50 years, as Japan's leading think-tank on international relations, JIIA has dedicated itself to researching medium and long-term issues of international political and security affairs and has played an important role in promoting communication and understanding between Japan and its partners. I would like to congratulate you on that.

The challenges facing the world today

The world as Prime Minister Shigeru Yoshida knew it has changed tremendously. His premiership during the hard post World War II years was devoted to rebuilding a country which had lost its industrial infrastructure and which desperately needed economic growth. This was followed by more than 30 years of spectacular growth during which Japan became the second-largest world economy. During the mid-90s Japan suffered a major recession but worked hard to gradually recover.

Today, Japan is one of the leading nations in the field of scientific research, whether in the field of technology, machinery or biomedical. Its close to 700,000 researchers share the third-largest research budget in the world. When one walks around the streets of Tokyo, the port in Yokohama or Kansai airport in Osaka, one has the distinct feeling of having entered the next century.

And yet if I look at the policy reports and papers produced by this institute, the challenges the world faces today — much as those in the post World War II period — are of a global nature. Whether it is climate change, energy security or nuclear proliferation, all of them require some sort of international cooperation to be effectively addressed.

The same is true for the economy and finance. The current economic crisis is a stark reminder of its global reach. According to current estimates, world trade will contract by 3 per cent in 2009 and this is, in my view, a very conservative figure. In fact, trade is dropping faster than growth which is a reflection of the de-leveraging of trade which had exponentially increased as a result of production processes, supply chain management and technology. Trade increased as a multiple of growth, it will decrease as a multiple of recession.

Foreign direct investment is also falling. A report by UNCTAD reveals that global FDI inflow is likely to have fallen by more than 20 per cent in 2008 and will probably decline further in 2009.

In the last three months of 2008, Japan's economy has witnessed a 3 per cent fall of GDP, a decline equivalent to an annual fall of almost 13 per cent, the deepest drop since 1974. Korea's economy is estimated to have contracted by 2 per cent, with 200,000 jobs being lost. A recent Chinese government report shows that about 20 million migrant workers have lost their jobs since last September.

The reality is that the economic ties of our economies are intertwined in such a manner that the decline in demand in one region means a sharp decrease in trade and thus in economic activity and growth in the other.

In response, governments of many major economies have taken action and have passed stimulus packages aimed at fostering a recovery of their economies and, through that, of the global economy.

It is encouraging to see that the messages coming out of the recent G7 finance ministers meeting in Rome or that of European leaders this weekend recognise the importance of the stimulus packages being designed and implemented in a coordinated manner.

For policy makers, the major concern is about how long and deep the downturn will be. I believe the task ahead of us is twofold.

Short term the focus must be on restoring confidence in the financial system so that it can lubricate the wheels of the economy again. In essence, this means tackling bad debts and restoring credit. This is urgent, and my sense is that as long as the view is that cleaning up the financial systems remains to be done, there will be no turning point in the present crisis. If my reading of the numbers of the IMF and the Financial Stability Forum is correct, we are not even half way.

As this happens, it must also mean giving the relevant multilateral organizations the resources needed to help countries confront the crisis today. Regional Development Banks must be re-capitalised. The financial resources of the IMF need to be expanded. Countries need to join in the Vulnerability Fund proposed by the World Bank to help out the poorest. And I want to stress this is for today and not for tomorrow or for next month. I have discussed these issues with the Japanese leadership today and I know they are ready to lead on these fronts, as evidenced by the resources Japan has lent to the IMF. And I know the Japanese leadership is ready to carry this message to the upcoming G20 leaders' summit.

Longer term, the goal should be to establish a comprehensive regulatory framework for financial activity; one that provides a stable, transparent and accountable system; one that reduces risks without crippling this vital economic activity. And, above all, one which restores citizens' faith in an open world economy, working for growth and employment.

How trade fits into the picture both short and long term

In the current economic uncertainty, I see three risks facing the multilateral trading system which I feel need to be addressed urgently.

The first is the risk of increased trade protectionism. The risk is that trade is lumped together with the elements of the Washington consensus which have failed, such as deregulation, and that the baby is thrown out with the bath water.

Last November in Washington, the G20 Summit underscored the critical importance of rejecting protectionism and not turning inward in times of economic uncertainty. Leaders agreed to refrain from raising new barriers to investment or trade, or from imposing new export restrictions within the next 12 months.

As the guardian of world trade, the WTO has a unique role in ensuring an open, transparent, predictable and fair global trading environment. We have already started monitoring measures taken by members in the context of the crisis. The picture is a sober one: so far there is only limited evidence of isolationist moves. However, as the crisis deepens we need to remain alert.

The G20 London Summit in April should be an occasion for these leaders to hold each other accountable over that pledge and through this to keep isolationist pressures under control.

The best insurance policy against isolationist pressures is to strengthen the global rules-based system through the conclusion of the Doha Development Round of negotiations.

Completing the Doha Round is the lowest-hanging-fruit global solution available to the international community. It would provide a boost to the economy. It would demonstrate that governments are ready to put their money where their mouths are. And it is within reach. I therefore hope that the London G20 summit sends a clear signal of the leaders' commitment to rapidly concluding the Doha Round.

The second risk is the drying up of trade finance. Trade volumes have dropped significantly, not only because of a fall in demand but also a lack of trade finance.

At a meeting with providers of trade finance hosted by the WTO last November, the shortfall in credit for trade was estimated at US$ 25 billion. The response initially focused on providing guarantees for trade credit. The World Bank/IFC announced a tripling of the ceiling, to US$ 3 billion, of its trade finance guarantees. Regional Development Banks, including the Asian Development Bank, also stepped in. However, three months later the problem of a lack of liquidity persists.

The WTO is working with the World Bank, with the IMF and with export and import institutions to try and create a liquidity pool to address this constraint. I hope that countries that have the capacity to do so can contribute to this initiative which should be set up without delay.

Here again, I must commend Japan for stepping in rapidly in this area with its recent announcement of US$ 1 billion to support trade finance through the IFC and the Asian Development Bank. Japan has also been instrumental in setting up the Asia-Pacific Trade Insurance Network which was announced at the APEC summit to promote reinsurance cooperation among regional export credit agencies.

The third risk is that, confronted with the crisis, donors decide to default on their development aid commitments. This is the time for the donor community to honour its promises on Aid for Trade to help the poorest countries take advantage of trade by improving their production capacities.

Japan has traditionally been generous in its contribution to development. Just recently, Prime Minister Aso announced that Japan would provide US$ 17 billion in aid to help Asian countries to weather the current storm. I hope that part of this aid will go to Aid for Trade projects. We will have an occasion to review this during the Second Global Aid for Trade Conference that I will be hosting at the WTO at the beginning of July.

WTO and the Doha Round are vital for Japan

This is the time to invest in the WTO and strengthen the global rules-based system which has so carefully been constructed over the last 60 years. Strengthening the multilateral trading system is in Japan's interest, given Japan's high dependence on trade for its economic growth. I was just looking at the figures which show that over the last five years up to 2007, the share of Japan's exports on its GDP grew faster than that of imports. The Japanese economy has thus become more dependent on net exports.

The WTO remains Japan's most important platform for securing a favourable global trading environment and the Doha Round continues to be the most efficient means to achieve large-scale market opening for Japan.

What can a successful conclusion of the Doha Round bring to Japan? I know that this is a question that many of you ask. First, it will bring better market access conditions for Japan. Average tariffs would be halved as a result of the round. This would mean saving in tariffs of over US$ 150 billion annually once the Doha Round is fully implemented. This is without the new trade flows which would be created as a result of tariff cuts.

Services is another area which holds promise for Japan. The signalling conference that we hosted last July gave encouraging signs of the potential this negotiation holds in this important area; not to mention trade facilitation or disciplines on anti-dumping, on which Japan has spent a lot of its energy.

Of course, Japan will face pressure from other WTO members to further open its agricultural market and to accept new disciplines for fishery subsidies. I understand this is a difficult decision at home and that it will take some time. But I just want to assure you that this happens everywhere. It is not easier for the US or European Union to reduce its agricultural subsidies or for the Chinese government to reduce its industrial tariffs further. Multilateral trade negotiations are a give and take, no country can ever get everything it wants, and no country will lose everything without returns. Eventually, a delicate balance of rights and obligations will be reached.

Concluding remarks

In conclusion, as this Institute celebrates its 50th anniversary, it remains for me to remind you that Japan, as the second-largest economy in the world, and the fourth-largest exporter, has benefited greatly from the multilateral system. In these difficult times, it requires significant players like Japan to show responsibility and leadership in forums such as the G20 and APEC. I am convinced that Japan will live up to these expectations.

Thank you for your attention.

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