The Future of the World Trading System

> Pascal Lamy’s speeches


Dear Vice President Li,
Distinguished guests, Ladies and Gentlemen,

It is a great pleasure for me to be here in Sichuan University, one of the most distinguished universities in China. I am honoured to be awarded the Honorary Ph.D Degree by Sichuan University, which brings me closer to Sichuan and makes me a member of the campus from now on. On this occasion, I would like to thank you all for this great honour, and I thank you all for participating in this important moment of my life.

This year, we celebrate ten years of China’s membership of the World Trade Organization.  China’s entry into the WTO was a momentous event, both for China and for the multilateral trading system.  China was a very welcome addition to the membership of an organization that aspires to inclusiveness and universality.  We are hoping soon to see Russia inside the WTO as well, as we move towards a truly global embrace of international trade relations.  China’s influence in the trading system is significant and growing fast.  China is the largest merchandise trader in the world.  The size of its national economy has more than doubled since China joined the WTO in 2001, with international trade being an important part of that success story.

I would like to focus on some of the current key issues facing the multilateral trading system.  These are issues that governments are going to have to address if they hope to continue to benefit, as in the past, from effective institutional, legal and political arrangements — arrangements nurtured by the GATT and then the WTO — that have helped many millions of people around the world to benefit from trade and to grow out of poverty.  Circumstances are always changing and it is crucial that institutions like the WTO continue to adapt to new realities.

But before we talk about these challenges, let us remind ourselves what it is that the WTO actually seeks to achieve.  In my view we have five major tasks as an institution. 

First, the WTO provides a contractual framework within which governments can open their economies to international competition through trade, on the basis of mutual gain.  A contract through which they have built a set of rules that seek to ensure fairness and predictability in trade relations. This is one of the key objectives that successive rounds of multilateral trade negotiations have pursued over the years.

Second, the WTO offers a mechanism for adjudicating trade disputes among governments.  Disputes are for the most part settled amicably.  Unsurprisingly, many disputes tend to involve the largest trading nations.  China is no exception.

Third, the WTO is a repository for trade policy information.  Governments are committed to provide their trading partners with information on their trade policies through periodic notifications.  The transparency that notifications provide is central to the WTO’s mission of providing its members with as much certainty and predictability as possible in trade, of monitoring the implementation of its members’ obligations, and to enable them to defend their trade rights. 

The WTO is also a provider of trade-related technical assistance and trade capacity-building for developing countries.

Finally, the WTO is a platform for governments to exchange views on important issues relating to trade, to assess whether existing arrangements need to be revisited, and to analyse policy challenges facing the international community.  We might think of this as the WTO’s deliberative function, which falls somewhere in between the legislative role of making rules and the litigation role of enforcing the rules through dispute settlement.  Non-confrontational deliberation can help the WTO meet its other objectives more effectively, and I sometimes feel we do not do enough of it.

Are these objectives easy to attain?  Not really, and certainly not in a rapidly changing world.  I would like to identify three broad areas where I believe we face particular challenges as we seek to attain harmony and mutual benefit in international trade relations. 

The first concerns the continually shifting weight of economic power and influence within the world economy and the implications this has for cooperation and global leadership. 

The relative dynamism of emerging economies over the past several years has meant that these economies, many of them in Asia, have come to play an ever-growing role in the world economy and to account for a larger and larger share of economic activity.  The consequences of shifts in economic power take time to adjust to politically and organizationally.  As we work towards a new equilibrium in international cooperation, new relationships and leadership patterns will inevitably emerge, just as they have throughout history. 

While this transformation is in progress, multilateralism is going through a difficult time.  This is not just about trade.  It is also true for climate change, for financial regulation and for macroeconomic coordination.  Nations are being tested in defining and implementing common strategies in response to all the global challenges facing us.  A core challenge of our time is to manage change in a manner that avoids conflict.  Let us hope that the leaders of today can show the way, as their predecessors had to do in the past. 

In trade matters, we need to address competing views among governments as to what constitutes a fair distribution of rights and obligations within the trading system.  Before the WTO was established in 1995 there was, in broad terms, an arrangement whereby developed countries agreed to open their markets, while more emphasis was placed on special and differential treatment for developing countries.  Developing countries were not called upon to open their markets in a substantial manner.  This arrangement reflected basic differences in development levels and capacities.

Over time, the differences between developed and at least some developing countries have narrowed, and with it the rather simple dichotomy upon which the GATT trading system rested.  As developing-country growth has outstripped developed-country growth and the gap has narrowed, it is becoming harder to find a balance of rights and obligations that is regarded as legitimate and fair in the eyes of all parties concerned.  These tensions had already begun to manifest themselves well before the creation of the WTO and China’s accession, but they have clearly increased since. 

Underlying all this is the question of what constitutes reciprocity.  For some, the emerging economies have attained a level of competitiveness and efficiency in key sectors that warrants treating reciprocity as parity in obligations.  Others emphasize that emerging economies still face formidable development challenges in many areas of their economies and are still far from enjoying the per capita income levels and standard of living of those in industrialized economies.  In this world, it is argued, treating reciprocity as equality of obligations is not appropriate, fails to meet a fairness standard, and handicaps development policies. 

It is not my role as Director-General to take a position on this issue, but in many ways, it is this that has made it impossible for us so far to reach agreement on a big package of new regulations of world trade in the Doha Round.

The second challenge to the trading system relates to the way technology and transport costs, backed by open trade and investment policies, have changed production structures.  A vast and growing amount of international trade involves global supply chains whereby parts and components cross many borders as production is shared in many different locations.  This production sharing is very different from the traditional way of working, where a single country would import the necessary components and parts, add local inputs plus labour and capital, and then export final goods. 

One challenge that these modern arrangements pose is that they make traditional trade statistics misleading.  Later today MOFCOM, Sichuan province and the WTO are hosting a seminar to look at the consequences of global value chains for the ways in which we measure trade, as well as for the definition of trade policy in today’s world.

The third challenge I mentioned at the outset was the explosion of regionalism and its impact on multilateral trade arrangements.  More than 300 preferential trade agreements are active around the world.  In our World Trade Report for 2011, we undertook a detailed study of these agreements and what they mean for the WTO.  The Report argues that a good deal of activity, especially in Asia, is driven by a desire to create conditions favouring supply chain production, where there is a premium on eliminating tariffs and creating a friendly regulatory environment.  This is not problematic as far as it goes. 

But it also highlights that, with regulations and behind-the-border policy regimes becoming so important in preferential agreements, we run the risk of regulatory divergence and a resulting fragmentation of markets.  Segmented markets reduce trading opportunities, hamper economies of scale, tend to exclude some countries and introduce discrimination.  Addressing these potential sources of difficulty in international trade relations is becoming an increasingly important challenge for the WTO.

In conclusion, I should like to say something about the Doha Round of trade negotiations.  It is no secret that governments are finding agreement elusive and in ten years we have not been able to complete the negotiations.  We have a stalemate.  The challenges I have referred to above partly explain this — governments are struggling to agree upon how to balance rights and obligations among dissimilar nations.  I believe I have also said enough about the other challenges facing the multilateral trading system.  We shall be ill-equipped to address these if we cannot break the stalemate.  Not only will the world economy suffer from increased uncertainty and lost economic opportunity, but the WTO will also be weakened as paralysis sets in around an intractable negotiation. 

I do not believe we can afford to add further burdens to the world economy nor undermine the authority of international institutions.  I therefore hope that all WTO members and, in particular, those with greater influence than others, seek out common cause with their trading partners in order to move the trade agenda along.

Thank you very much.

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