> Pascal Lamy’s speeches
Ladies and gentlemen,
It is an honour to be here with you today to open the 9th Annual Global Commodities Finance Conference. What I would like to do in this opening address is to share with you how I see international trade in commodities from where I sit at the World Trade Organization (WTO).
Is trade in commodities like any other trade? And what are the obstacles to international trade in this area? These are the two main questions that I would like to walk you through, and which I hope will act as appropriate scene-setters for the rest of the conversation that you will be having in these two days. I will come to the issue of commodity (quote unquote) “finance” towards the end of my intervention — since I would be remiss if I were not to touch on the specific focus of this meeting. My intention, however, is to first set out for you the broader landscape.
Trade in commodities is indeed a specimen of its own, if I may say so. It is an area of world trade where distortions remain significant relative to other areas. In fact, what does the term commodities mean? When you say “commodities” amongst the community of commodity traders which you are, to many governments it is the words food, fibre and natural resources that would immediately come to mind. Corn, soya, maize, cotton, timber, minerals, rare earths, fuels and everything else that you may call a commodity are products over which many governments would like to exercise some form of control. In no other area of world trade does the question of national sovereignty take this dimension. I open a specific bracket for food — an area of far greater complexity.
In 2008, the total value of international trade in natural resources was $3.7 trillion, or nearly a quarter of world merchandise trade. This value has increased more than sixfold in the last decade. As far as trade in agricultural products is concerned, it has represented a stable 9 per cent of world trade over the past ten years.
So what are the implications, then, of governments being so sensitive to matters concerning commodities and natural resources? Well, for international trade, the implications are serious. They can mean that governments actively try to take control of foods, fibres and resources through State-Owned Enterprises. Governments can actively encourage their cultivation or extraction through trade-distorting subsidies. They can promote their domestic use and processing through measures that discourage their export; like export taxes, quotas or even complete prohibitions. Or, the opposite, when they run surpluses. They can decide to dispose of them on international markets through export support.
Examples of State Trading Enterprises in the area of commodities are of course numerous. They range from the Grain Boards that are scattered across the globe to energy trading companies that import fuels. Subsidies for agricultural commodities and fisheries also abound, many of which are trade-distorting as well as environmentally harmful. In fact, subsidies to agricultural commodities are only exceeded at the global level by subsidies to fossil fuels. And as far as export taxes go, 11 per cent of world trade in natural resources is covered by these taxes, relative to 5 per cent for the rest of international trade. And of a total of some 7,300 notifications made to the WTO by governments of export-restrictive measures, more broadly, over 2,500 cover natural resources; which amounts to roughly one-third of all notifications.
Now that, of course, is for the country that owns the commodities or the natural resources — the potential exporter so to speak. But what about the countries that buy them, the importers?
Surprisingly, they too have resorted to a whole host of trade-distorting policies in this area. These policies are mostly aimed at promoting their importation of raw material, whilst discouraging their purchase of more value-added products. Policies generally achieved through the phenomenon of what we, in the WTO, call “tariff escalation”. A country, for instance, that lets unprocessed timber in for free, but that imposes high tariffs on imported wooden furniture. In fact, the average worldwide tariff on forestry products in their raw form is about 6 per cent, but rises to 18 per cent for wooden furniture.
Some say that this phenomenon on the side of the importing country is partly responsible for export restrictions on the side of the exporter. How so? Well, if you know that your importer is trying to suck your natural resources dry, you try to discourage that by encouraging your very own domestic processing. This can trigger a whole host of export restrictions that set a vicious spiral of tit-for-tat protectionism in motion. And, I would be remiss if I did not mention that on the side of importing countries, non-tariff barriers, such as standards, can sometimes also unjustifiably restrict commodity trade.
Food is even more complex. There, the political survival of governments can sometimes drive them to think that some degree of food “self-sufficiency” is a must, triggering the same trade barriers that I just described to you. Barriers that lead State-Trading Enterprises to take control of what is considered scarce food, and that can also lead to export restrictions. In fact, export restrictions in the area of food — like rice for instance — are now widely blamed for part of the food price crisis of 2008.
Now, if you are a food-importing country, and are in fact dependent as a country on imports for your food security, then you are of course in trouble. And how will you respond? Well, either by pushing more actively for an end to such measures at the international negotiating table of the WTO (the avenue that I would encourage of course) or by toying with other slightly more troublesome possibilities. For example, trying to grow more food in your own country even if your lands are ill-suited (like Saudi Arabia’s experiment in growing wheat, which mercifully has now been abandoned) or by the phenomenon that some NGOs have referred to as “land grabbing”. Buying land abroad, cultivating it with the food you need, and shipping it back home. And, this, based on the assumption that the country “abroad” will not itself resort to export restrictions.
Very unfortunate, aren’t they, these specificities of commodity trade. In fact, these issues trouble us so much that we, in the WTO, decided to dedicate our flagship publication, the World Trade Report of 2010, exclusively to natural resources. If nothing else, I would encourage you to read its Section D, which details the full scope of trade distortions in this area. Many other WTO reports have been dedicated to agricultural commodities, where notorious trade restrictions abound.
So what do we need to do then? We know the problem, what is the solution? The good news is that a solution is not impossible, and nor is it beyond our reach. The rules of the General Agreement on Tariffs and Trade, and now the WTO, which were born out of the ashes of the Second World War, tell us so.
If the world has succeeded in crafting successful rules for international trade, and backed them up with one of the most effective dispute settlement mechanisms worldwide, then surely it can go further. I believe it is time to start tackling these distortions.
As we do so, here is what we should bear in mind. Trade opening in commodities will only succeed if negotiators head to the WTO in the right frame of mind. That frame must consist of telling oneself that international co-operation with respect to natural resources, commodities and indeed food is a far better option than that of a trade conflict. Trade conflicts, which often start with a small restriction taken by one player, that then get topped up and responded to by others, until a retaliatory mountain builds, lead to beggar-thy-neighbour policies. We are all substantially impoverished, and made worse-off, by such policies. As Gandhi used to say: “if an eye for an eye, then we will all end up blind”!
Nowhere is this more visible than in the area of food, where one country suddenly cuts off the food supply of another. The food supposedly kept quote unquote “at home” ends up discouraging local farmers from production because it depresses prices. In the end, less food is produced, and no one's problem is really solved.
If you share my analysis, then it would be up to you, the trading community, to lobby governments to strengthen the WTO rule book, so that greater law and order can prevail in commodities trade. Short-term, you should also be paying attention to the European Union’s Common Agricultural Policy and the US Farm Bill, both of which are now being revised.
And there is, of course, yet another distortion to world trade in commodities which I haven't referred to: the problem of collusion and cartelization. However, as you know, the WTO has no rules to date in the area of competition policy. Is it time, perhaps, that consumers should begin to lobby for such rules? I'll let you reflect on the question.
Let me now come to commodity finance. Trade finance, in the area of commodities, like in all other areas of international trade, struggled during the recent economic crisis. In 2007, I established an advisory group to assess where the trade finance gaps lay exactly, and to see what, if anything, could be done to address the problem. Together with the World Bank President, Bob Zoellick, I raised the matter with the G-20, and it led to a London G-20 package aimed at boosting market liquidity through $250 billion, to be administered by export credit agencies and multilateral banks. My advisory group also tells me that, today, relative to end-2011 expectations, trade finance appears to be holding up better than other segments of global finance. It seems that liquidity is finally beginning to ease.
As the Director-General of the WTO, I am concerned however by the persistence of finance gaps in the most challenging regions of the world. The lower-income countries where many of you often operate. For this reason, the G-20 Summit in Cannes endorsed the WTO’s recommendations for trade finance facilitation programmes for SMEs in developing countries; in particular, in Africa. I believe that continued G-20 involvement, starting with the upcoming G-20 Summit in Los Cabos, Mexico, will be necessary. This will keep the trade and development communities mobilized, but also ensure the support of Finance Ministries, which sit on the Boards of many Multilateral Development Banks.
Without further ado, let me now close and take your questions. I thank you for your attention.