Reconciling America with an open trading system, Washington, D.C., 24 April 2009

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Pascal Lamy’s speeches

Thanks to Fred and to the Peterson Institute for organising this event and giving us an opportunity to look at trade in the current economic turmoil and how it can be part of the global solution.

We are now confronted with the worst economic crisis in generations and the first global crisis in the history of mankind. A crisis which threatens to undo the economic development achieved by many countries and to erode people's faith in an open international trading system.  

Trade has been another casualty of this crisis, with WTO economists foreseeing a decline this year of nearly 10 per cent in volume terms, its worst result since the end of the Second World War. This virtual freefall in trade and the belief that the more open economies are bearing the brunt of this decline have led some to argue that trade openness has made economies more vulnerable to the crisis.  

At worst, trade has been a mechanism of transmission but surely not the cause of the collapse in demand. The main explanation for this contraction is the simultaneous reduction in aggregate demand across all major world economies.

In addition, trade finance, which oils the wheels of international trade, is drying up and is contributing to its contraction. Further, the fall in aggregate demand is affecting global supply chains which, in turn, are magnifying the contraction in trade. Global production strategies and technological progress saw trade increase above world growth. With the current global contraction, trade is now seeing an exponential decline.

Finally, some countries have increased tariffs, instituted new non-tariff measures, and initiated more anti-dumping actions. Some of the measures that have been introduced to stimulate economies contain provisions that favour domestic goods and services at the expense of imports. True, most of these measures are allowed under WTO rules. True also that none of them has triggered so far a tit-for-tat chain retaliation. But there is no denying the fact that they have had some trade chilling effect.

Opening markets may indeed expose countries to greater volatility. But the response is not to turn away from openness. It is to ensure that market opening is accompanied by international rules and by domestic policies that create insurance for workers and business against the Schumpeterian impact of competition, and the now well known volatility of market capitalism.

Travelling around this country in recent times I have been struck by the malaise in many American men and women who put the blame for their job losses on competition from cheap imports. Who blame trade for the stagnation of their salaries, the loss of their medical coverage and the deterioration of the environment.

We know that countries gain from trade as a result of the increased economic efficiency brought about by specializing in goods in which they have a comparative advantage. We also know that if accompanied by the right domestic policies, trade can be a powerful tool for fostering growth and contributing to development.

The key lies in the “if”. More open trade is essential but it is not enough. We need better worker training, greater mobility in labour markets, more expansive social safety nets. We need investing in critical areas such as health care, education and clean energy. And, not least, a better regulated financial system. Adequate domestic policies also include greater investment in physical, social and government infrastructure, which helps to increase the benefits of trade, in rich and poor countries alike.

While rich countries can count on their governance, on their know-how and their taxpayers’ wealth to implement these policies, many developing countries simply cannot afford them. And yet they keep stressing, rightly in my view, that opening trade is good for them.

By breaking down barriers, trade creates a larger market and enables businesses to operate with increasing returns to scale. This means that even small incremental input leads to large increases in output. These efficiency gains from the international division of labour translate into higher incomes. As a result, many of the economies that have been badly affected by the crisis have been enjoying decades of high economic growth. Take Vietnam, Singapore, China or Chile to name a few. Governments in these countries have built up resources to allow them to manage the worst effects of the current recession.

Since a global economic crisis of this severity is extremely rare, the contribution of external demand to increasing income will, over time, largely outweigh losses suffered during economic downturns. We also know that this global crisis will eventually end, and when it does, economies that are more open will be better placed to stage a faster and stronger recovery.

My point is that retreating from market opening is not a solution to the economic crisis. For countries that depend on trade and have specialized according to comparative advantage, a reversal of openness will impose significant costs on the economy.  What is more, setting up new barriers to trade will be seen as protectionism and will risk retaliation from trade partners. One country's exports are another country’s imports. Rather than reviving economies, the effect of this will be to worsen the global crisis.

Cobbling together complementary domestic policies with trade openness helps magnify the benefits from trade while, at the same time, blunting any vulnerability from sudden shifts in external economic conditions. Openness begets efficiency and higher incomes. Flanking domestic policies enlarge those gains and provide greater security when a crisis strikes. The presence of these complementary domestic policies provides a layer of comfort to workers who are then better prepared to face global competition since they know there are social safety nets that will catch them when they fall.

Without these measures, open economies are more vulnerable to external shocks. Politicians in those economies also face a more sceptical public who will find it easy to blame trade when the economy is buffeted by powerful economic forces that people do not understand.

How does one keep the drive to open markets in a regulated manner — and I wish to stress “regulated manner” — at a time when the trend seems to be the opposite?

The GATT and the WTO have provided the world with more than sixty years of economic stability. What business — and consumers — want is exactly that: stability and predictability, which have been ensured by the very basic principle of binding tariffs, i.e. by opening markets in a sure, definitive way, and by all the disciplines contained in the many WTO agreements.

We now need a successful Doha Development Round, to restore confidence in a moment of crisis and to reinforce the stability and predictability of the global trading system. The Doha Round is simply the lowest hanging global stimulus package. It could complement national stimulus packages that many countries such as the United States have put in place.

While national expenditure programmes stoke domestic demand, the Doha Round would fuel foreign demand for a country's goods and services through the concerted reduction in trade barriers, boosting the confidence of business and consumers.

All available estimates of the benefits from the Doha Round show the world as a whole would benefit from the reduction in tariffs and subsidies. US business knows that. As the world’s leading exporter of goods and services and as the country with one of the world’s lowest tariffs barriers, it is clearly in the US interest to conclude a global agreement bringing down barriers to trade and opening markets in other countries.

This is exactly what the Doha Round would do. Available calculations about what is already on the table show world tariff ceilings halved and subsidy ceilings dramatically cut as a result of this Round. But these studies under-estimate the benefits. They have not factored in gains in the very important sector of services and the rules-related aspects of the Doha Round, including trade facilitation, an often neglected aspect of the WTO system. These rules and market access bindings make trade policies more predictable, and there is evidence that this predictability reduces instability in trade flows. By reducing uncertainty in market access, bindings can have an equivalent effect as actual reductions in applied tariffs, even if the latter will also be cut.

Since the beginning of this crisis, I have been concerned about a surge in protectionism. I have now in my office a picture of two men smiling as they shake hands. Visitors often ask whether they are my relatives, my uncles or perhaps my grandparents. In fact these two gentlemen are Senator Smoot and Representative Hawley, the authors of the famous 1930 Smoot and Hawley Tariff Act and in my view the true founders of the World Trade Organization! This picture is a reminder about rises in beggar-thy-neighbour trade responses which can quickly spiral out of control, as we saw in the 1930s.

The WTO has started monitoring measures taken by our members during the crisis, as a device to provide transparency and, through peer pressure, pre-empt this dangerous threat. It operates on the principle that sunlight is the best disinfectant. Like the canary in the mine, it tells us if we are keeping isolationist pressures at bay.

As important as it is to keep trade open, we must also keep opening trade. A successful Doha Round would show that even in the midst of a global economic crisis, nations can successfully cooperate to reach global solutions. This would augur well for our ability to find cures for other pressing global problems which require nations to cooperate, such as climate change, where the clock is ticking for Copenhagen.

I have heard some academics argue recently that the Doha Round is no longer relevant. That its agenda is outdated and that therefore we should call it a day and start again.

Let me be very frank with you: I have been puzzled by such comments. But many WTO members have been angered.

Take the African cotton producers who are awaiting the conclusion of the Doha Round to see cuts in trade distorting cotton subsidies. Or those who are awaiting the elimination of current export subsidies on dairy.

Take also the negotiations on climate-friendly goods and services which is part of the Doha Round. Here is a chapter with a huge economic but also job creating potential.  The Obama administration has committed itself to reducing US greenhouse gas emissions and to making the United States a leader on climate change. A successful Doha Round could deliver a package of open markets for environmental goods and services. A more open trade in this sector will increase the availability, and lower the cost, of climate-friendly goods, services and technologies. This outcome would complement a much-needed climate change agreement at Copenhagen later this year.

Take also fishery subsidies where the Doha Round could create the first international agreement aimed at reducing wasteful government support for activities that deplete the world’s oceans of one of its vital resources.  

Not to mention regional trade agreements or rules of origin, already there since the Tokyo Round, which are part of the Doha menu and which are often quoted by economic operators as necessitating clearer WTO rules.

It is not that our current agenda is outdated or our mandate obsolete. It is that trade opening is, and will remain, an unfinished business, having to cope with changes in technology, production patterns, consumption models and number and position of players. It is therefore about first things first. It is about addressing our most immediate challenges first so that we can build on them for the future.

Our challenge remains concluding the Doha Round which would put another brick in our 60 year old global trading system.

But while the logic of these arguments may be compelling, there are Doubting Thomases who are sceptical about the political viability of US support for the Round. They point to a recalcitrant Congress who may actually wield the balance of power on US trade policy. They also believe that the American public has soured on trade because of the crisis.

If you believe the latest Gallup poll, a small plurality (47 per cent versus 44 per cent) of the US public is more negative than positive about international trade. But if you believe Pew, a clear majority (53 per cent) of Americans continue to believe that international commerce is good for the United States. What these poll numbers suggest is that US opinion on trade is in flux, but also that with strong political leadership it is possible to fashion a multilateral trade deal that the US public will support.      

It is not less trade that the United States needs, but more and better domestic policies. There has been excess attention on trade and a serious deficit of attention on domestic policies which help translate trade into benefits for the people. This is where the task of reconciling the people with trade must start.

Many of the priorities announced by the Obama administration — better regulation of financial institutions, improving the educational system and creating a more affordable and accessible health care system, helping smaller business — can be seen as crucial components of these complementary domestic policies.

They should prevent a recurrence of the crisis that now envelops us and they will better prepare Americans to participate more confidently in the global economy. US business, academics and political leaders can help galvanize American public support for Doha by explaining that these policies help make US workers and firms better prepared to compete in a world with lower trade barriers.

We owe the post World War II vision of an open, non-discriminatory international trading system to the United States. Historically, it has played a leadership role in previous rounds of multilateral trade negotiations. The world now needs a committed US to strengthen the multilateral trading system. A US once more willing to make history.

Thank you very much for your attention.

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