Trade in services and global economic recovery, Global Services Summit — Washington

> Pascal Lamy’s speeches

It gives me great pleasure to join you for the Global Services Summit on Jobs, Growth and Development. Your gathering could not have come at a more opportune moment.

We are just a year past the catastrophic collapse of Lehman Brothers. Since then we have faced the deepest and most global economic crisis since the 1930s. The effects have been devastating and no economy has been spared. But thankfully, through the concerted action of governments, the worst has been averted.

World economy on the path to recovery but still fragile

But there is no room complacency. While fresh buds of recovery are emerging, the situation is still fragile. World economic growth has slowed abruptly in 2008 and the early part of this year. The contraction in demand led to a slowdown in production, and in international trade. World merchandise trade is projected to fall by a full 10 per cent this year, its worst result since the end of the Second World War. Foreign direct investment, which fell by 15 per cent in 2008, is projected to drop further.

The WTO responded quickly to the financial crisis by cautioning against isolationist policies. One of my first initiatives, in the aftermath of the crisis, was to establish 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. So far, thanks in large measure to WTO rules we have not seen a “tsunami” of protectionism.

But, all is not well with the global economy. Our monitoring reports show that trade restrictive measures are currently outpacing trade facilitating measures by a ratio of 2 to 1, despite G-20 pledges to refrain from such actions.

Unemployment remains high and the International Labour Organization tells us that it will continue to rise. The worst of the crisis may be behind us but a sudden chill wind of protectionism can still freeze the buds of recovery. This is why we must remain vigilant to ensure an open international trading system. The best way to achieve that objective is no secret: keep opening trade and commit to the multilateral trading system.

A Tale of a Crisis and a Casualty

Many economic commentators have since described and analyzed the factors involved in the financial crisis. And if you would allow me, as a former banker, I would like to venture some thoughts. On the crisis, I think the verdict is now clear. On the left side of the balance sheet, there was nothing right, and on the right side there was nothing left. Thankfully, that is not the case with trading system.

More seriously, it does seem to me that rather than any economic analyst, it was perhaps Charles Dickens who best captured the prevailing situation. He once said, and I quote:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity”

While Dickens did not have the global economy in mind, his words do seem to me to be particularly fitting. So, allow me to take some liberties with Dickens and continue with, “A Tale of a Crisis and a Casualty”. In this tale, the villains of the crisis are “macroeconomic imbalances”, “lax supervision” and “regulatory failures”. You all know the story well. What started as a financial crisis, fuelled by insufficient regulation, turned swiftly into the worst economic crisis in generations and the first truly global crisis in the history of mankind.

Trade, or more specifically financial services liberalization, was neither a villain nor a cause of this crisis but a casualty. As you all know, in the world of the GATS, “liberalization” is essentially about opening specified sectors to competition on a non-discriminatory basis. It does not mean deregulation. It has long been recognized that opening up certain services, such as financial and telecom services, may require a regulatory framework in order to protect consumer interests, and ensure competitive markets. It is no coincidence that the GATS Annex on Financial Services preserves the right of Members to take measures for prudential reasons even if they do not conform to its obligations under the Agreement.

Indeed, the unsung hero in the economic recession has been the service sector. While goods trade has plummeted, services have been comparatively “crisis-resilient”.

Re-energizing the service sector will be key to stimulating economic recovery. Services are after all vital for leveraging production, distribution and consumption in the global economy. During the crisis, the liquidity crunch badly affected the availability of trade finance, the credit system that oils international trade. Without the continual flow of this vital service, trade in goods would have been hampered.

But the beneficial impact of services goes much further than “trade finance”. Services underpin virtually every economic activity needed in the design, production and distribution of other goods and services. It is not surprising that since the 1980s, world services trade has actually been growing more rapidly than world production and merchandise trade. Today, more than half of annual world foreign direct investment flows are accounted for by services.

Services trade as a stimulus for global economic recovery

Services may no longer be the “new kid” on the trade block, but it still has some way to go to reaching its full potential. Services account for nearly two-thirds of global economic activity but less than one-fifth of world trade. Even taking into account that the real size of services trade may have been underestimated, since international trade statistics simply do not cover all trade in services as defined by the GATS, there is tremendous scope for growth.

Recent research by the World Economic Group (Groupe d'Economie Mondiale) at Sciences Po, Paris shows that, even if there are no tariffs on services, the costs of trading services internationally are at least twice as high as for goods. One may quibble over the figures, as trade in services is subject to wide range of regulatory measures that are not easily quantifiable. But even a rough estimate, suggests that the removal of these costs will have a very significant global impact. Indeed, the one consistent message from a broad range of economic studies is that the gains from further opening of trade in services far exceed those from opening trade in goods.

In the aftermath of the financial crisis, we are experiencing a worrying erosion of global economic confidence. One symptom of that erosion has been hesitation of governments in going forward with multilateral trade commitments.

In the area of services alone, commitments under the GATS, which were mainly taken some 15 years ago, no longer reflect market realities in many cases. Markets and governments have moved ahead unilaterally but most of these market openings are not bound in the WTO. And some recent policy responses to the economic crisis have shown the importance of WTO commitments to preventing back sliding.

To speed global economic recovery, we will need to shore up peoples' faith in an open international trading system. We will need to demonstrate that continued policy and regulatory reform in favour of services trade will be vital to supporting economic recovery. This may be clear to all of you attending this Summit, but you are the “converted”. The challenge is to take this message beyond these walls. Sectors such as transport, telecoms, finance and distribution are after all the backbone of our international trading system. Other sectors such as energy or environment hold a huge potential, in particular in the fight against climate change.

The private sector has a key role to play. As the engines of growth and jobs, your active support and engagement is needed to restore global economic confidence. And one very obvious step that can be taken in this direction is the timely conclusion of the Doha Development Round. After all, you, as the private sector, will be the main beneficiaries of a new global trade deal. The WTO needs you to get involved in these negotiations, and to work even more closely with your governments on the specifics, so as to drive the Round towards completion.

Services negotiations in the home stretch for the Doha Round in 2010

World leaders have set 2010 as the date fort he conclusion of the Round. It is now the time to “walk the talk.”

The Hong Kong Ministerial Declaration contains a roadmap for the completion of the services negotiations. It also provides a clear set of objectives across all modes of supply.

If we look back at the July 2008 Ministerial Meeting just over a year ago, many would view it as a high-water point in the services negotiations. The Services Ministerial Signalling Conference gave important indications of possible commitments that surpassed most observers’ expectations.

These signals now need to be elaborated upon and translated into concrete initiatives.

It remains true, however, that the failure to achieve a final breakthrough on agriculture and manufactures has slowed the pace of progress across the board. Not as many headlines may have been devoted to services as compared to agriculture and goods, and some commentators may have even gone as far as to argue that services were being left behind. But make no mistake: services are a vital market access pillar of this Round. There will be no Doha Round without a substantial services package, even more so now that many emerging economies are on the offensive on services.

Looking ahead — the next logical step in the market access component of the services negotiations is the submission of final offers and draft final schedules by those WTO members who participate in the services negotiations. A decision on the timing for submitting such offers would be extremely helpful in re-energizing the negotiations. However, it is understood that such timing cannot be determined in isolation from the rest of the items and in particular agriculture and manufactures.

We will also need to progress on the rule-making areas. Whether on domestic regulation or on GATS Rules, including emergency safeguard measures, subsidies and government procurement, we will soon need to look closely at what can practically be achieved in this Round on these areas.

Another area of priority is the implementation of modalities for the special treatment of the world’s poorest countries. The progress achieved in this area now needs to be expedited to establish a mechanism enabling Members to grant special priority to services exports from these poorest countries.

My prognosis on the next steps, which applies to services as well other areas of the Doha Round, has not changed. The task which faces us all is a difficult but far from an impossible one.

I understand that many of you would be frustrated by the low pace of the Doha Round and by the fact that the fate of the services negotiations is linked to the other areas under negotiation. But it would disingenuous to believe that services liberalisation would be easier outside the Doha Round.

Any agreement on services outside the Doha Round would in any event need to embrace the major service traders, which today are many emerging economies, to be worthwhile. Would it be easier to convince China or Brazil to further open its financial and environment sectors outside the Doha Round? And on the other hand, would it be easier to convince the EU and the US to further open its temporary entry for professional service providers outside the Doha Round?

This is why I believe that it is worth throwing your weight behind a Doha services deal, a big part of which is already on the table. I understand your desire to see an ambitious package emerge and I cannot but support that since this is what makes eminent economic sense today. But if you share this objective, your voice needs to be heard in the corridors of the WTO, in your Congresses and in the discussions with your negotiators.

We have the tools and means to complete the Round in 2010, what we need now is the leadership to do the deal. I began with Dickens, let me finish with Moliere, “It is not only for what we do that we are held responsible, but also for what we do not do”.

Thank you for your attention.

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