What Multilateral Trading System for the Future?

> Pascal Lamy’s speeches


Many thanks to the Deutsche Bank Research and Klaus Deutsch for having put together this event to look at the multilateral trading system of the future. And what better place to do this than Germany, a country which has firmly anchored the European trade policy in the values and principles of the multilateral trading system embodied by the WTO.

Multilateralism is going through a patchy period. Whether it is on trade, on climate change, on financial regulation or on macroeconomic co-ordination, the family of nations is having trouble defining and implementing common strategies in response to the global challenges facing us.

More than that, it is the concept of “cooperation” that is being questioned. We hear more and more voices proclaiming a return to national solutions, a return to the nation-state, as a recipe to shield themselves from the turbulence around us. We even hear some advocate a return to the D-mark!

Take the example of monetary policies.

Some countries believe that policies on domestic currencies should be determined solely by national interests and that there should be no outside interference.

Other countries believe in using external forces such as trade or other types of sanctions to coerce others to change their monetary policies.

The reality is that neither of these will work. Today’s economies are largely intertwined.  Monetary policies do not operate in a vacuum — they cannot be made to function in the national interest unless they function in the global interest. And the only way to achieve this is through global cooperation.

This is why we need the G-20 to make headway on the issue of reform of the international monetary system, in which Germany and Brazil have taken the lead. Unilateral attempts to change or to retain the status quo will not work. Even worse, unilateral moves could trigger a spiral of tit-for-tat reactions in which every country would lose.

What we need is an international monetary system which facilitates international trade, cross border investment and a better allocation of capital across nations. What we need is a global monetary system which inspires confidence and offers stability. One which provides the means by which global imbalances that risk endangering stability can be addressed. Differently put, we need to do for international monetary relations what we already did for trade: move from the world of Hobbes towards the world of Kant.

I do hope that the G-20 Summit in Cannes takes a step forward in that direction. Without this, we are likely to see trade become the scapegoat for the pitfalls and drawbacks of the international monetary system, or the non-system as Tommaso Padoa-Schioppa would say!

It is clear that WTO rules will not be able to solve macroeconomic issues at the heart of the performance of currencies worldwide. WTO rules will not fix consumption or saving patterns at home, they will not solve competitiveness issues of domestic industries, and they will not be determining domestic interest rates. All these issues require a mix of cooperation in the macroeconomic field and proper domestic policies which lie outside the remit of the WTO.  In the current volatile environment we need to make sure that the WTO system does not crumble under the weight of excessive expectations.

Trade is not immune to this global state of affairs. And here too, unilateral solutions will not work. The financial and economic crisis of 2008 created a fertile ground for protectionism. The WTO set up a monitoring system of trade measures taken during the crisis. To the surprise of many, the picture was not too bad.  Overall, most governments seemed to have successfully kept protectionist pressures under control. 

The situation was kept under control and it remained that way throughout 2010.  But, over the past six months, we have spotted some worrying developments. In a couple of weeks we will be releasing a report to the G-20 noting the trade restrictive measures we have observed in the last six months. At this stage the outlook is pointing in the direction of less restraint in the adoption of new trade restrictive measures and less determination to dismantle existing ones.

It is understandable that at a time of suffering, people want protection. But the irony is that trade protectionism does not protect. One country’s exports are another country’s imports, and vice versa. One country’s protectionism will lead to another country’s protectionism. This is even more true in today’s world of global value chains where protectionism hurts not only consumers but also upstream domestic producers importing low valued-added input to focus on higher technology — oriented tasks — hence endangering highly paid, export-oriented jobs. To turn to protectionist trade measures in the current circumstances would be a huge mistake — one that could send the slowing global economy back into deep recession.

So, given the circumstances, what does the multilateral trading system of the future look like?

The answer to this question lies squarely with the owners of the multilateral trading system — its members. They will have an opportunity to look at this issue when they meet in Geneva for the 8th WTO Ministerial Conference in December. But the answer also lies with all of you who have a big say in the shaping of the trade policies of your governments.

Let me share with you my defining elements of tomorrow’s multilateral trading system.

One, we will need to keep making the case for trade as an engine of growth, of jobs, of development, of poverty reduction. We need to ensure that trade is not made to bear the responsibility of the absence of robust domestic policies. We need proper accompanying conditions for trade, that would help reduce the resistance of some domestic constituencies to trade opening.  The first of these conditions is proper income distribution policies. More equality. It is inequality at the global level between countries, and within countries, that is breeding resentment to international trade.  Resentment between countries can be addressed though a fairer WTO rule book. But resentment within countries can only be addressed through improved income distribution policies.  The latter, of course, go beyond the remit of the WTO. But absent policies on education, social safety nets or innovation, the WTO’s ability to do its job so to speak, which is to open and regulate markets, is imperilled.

Two, the global trading system of the future will need to keep reducing obstacles to trade, in order to keep generating efficiencies and economies of scale, which remain an essential component of sustainable growth. We will need to complete our current unfinished business — tariff peaks and distorting subsidies — but beyond that we will have to focus more attention on non-tariff barriers. By this I mean obstacles to trade stemming from regulatory differences in areas such as food or product safety, consumer information or environmental protection. Regulations of this kind are legitimate and their purpose is usually to protect the consumer and not the producer. But if different standards proliferate, they come at a cost to trade, as the EU experience in creating the internal market showed. 

More broadly, we will also need to change negotiating mentality. We will need a more integrated approach to obstacles to trade where the borders between goods and services become more porous; where tariffs and non-tariff measures need to be looked at in an integrated way. Where the linkages between trade, investment, competition, competitiveness, sustainability become stronger.

Three, we will need to think about how we multilateralise the numerous trade opening initiatives that are taking place outside the WTO. The 2011 WTO World Trade Report which we have just published shows that, while there is slow convergence on tariffs, the risk of divergences in regulatory frameworks in preferential trade agreements is growing. The challenge is one of market segmentation. We will need to fashion a new framework more applicable to these preferential trade agreements.

Four, the future global trading system will have to take better account of global value chains.  Their geographical fragmentation is leading to a structural change in international trade, moving from the old theory of “trade in goods” to a new “trade in tasks” paradigm.  What we have dubbed “Made in the World”. Old concepts such as “country of origin” or “resident versus non‐resident” are losing some of their analytical relevance in international economics.   Defining and conducting a trade policy in this context calls for a new measurement of trade flows based on value added, which will indicate the domestic content of exports, after subtracting direct and indirect imported inputs. The impact of this methodology is particularly significant when measuring bilateral trade balances.

Five, we will need to work to better integrate developing countries into the global trading system, and in particular the poorest among them. In my view it will be less about exceptions and exclusions, and more about providing the weakest in the global trading system the means to use trade as a tool for economic development. Firmly anchoring the success story of Aid for Trade in the multilateral trading system would go a long way in that direction.

As you can see, the multilateral trading system of the future has plenty on its plate. But all of this requires WTO members to cooperate, starting now. Since ahead of us still lies the challenge of delivering on the objectives of the Doha Round.

To me, the question is not whether Doha Round yes or Doha Round no. Whether it is dead or alive, whether it is a ghost or a zombie. This is a bit of a sterile debate. The question is rather whether WTO members remain committed to the objectives enshrined in the Doha Agenda and in the WTO more broadly.

What are these objectives? I would summarise them in the following way: keep opening trade — the best way to keep trade open; keep updating the rules that govern global trade to ensure they remain relevant to evolving trading patterns; and take measures to facilitate the integration of the world’s poorest countries into the world economy.

The three global objectives stem from one belief that binds all WTO members together: that a more open and rules-based trading system is a useful tool in the hands of countries to generate growth, to help create jobs and ultimately to help countries develop. That there is a collective determination to keep protectionist measures at bay. What we need now are not grand designs. What we need are small but concrete steps to generate trust in the ability of the WTO family to keep multilateral cooperation alive. “Glaubwürdigkeit” as you say in German!

I thank you for your attention.

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