“Strengthening the multilateral trading system”

> Pascal Lamy’s speeches


It gives me great pleasure to be here today to talk to the Singapore-based European business community to discuss trends in trade and trade policy. 


The global economy

Before I do so, let me just place trade in the broader developments in the global economy. We have been overshadowed for some months by a second wave of concern about the robustness of the global economy, following the recovery from the great recession after 2008. 

This part of the world had much to do with the rapid comeback, as many Asian economies re-established vigorous growth rates in the face of sharp contractions in Europe, Japan and the United States. The road to recovery for the latter economies entailed an expansionary macroeconomic stance, with both fiscal and monetary policy contributing subsequently and significantly to what they have to confront today in terms of fiscal deficits and both public and private indebtedness.

I would not like this to be interpreted as neglect of the adjustment challenges facing many economies, which are very real and urgent.

Growth is slowing almost everywhere this time around, proving, in case there was any doubt, that there has been no decoupling in the world economy between the East and the West, or the North and the South. 

The Eurozone has undergone some difficult and rather divisive times, raising quite fundamental questions about the future vision for Europe and the role of the common currency. Recent developments can be interpreted as the first credible steps towards a roadmap that would point to Europe exiting the crisis in the years to come. Success will be measured by the degree to which this crisis deepens integration, as a tool for growth creating structural reforms.   

Although GDP growth is negative in Europe at present, and relatively sluggish or slowing in most of the rest of the world, we can reasonably expect to see a better situation in the years to come, barring any significant setback. The recovery is going to be slow, however, and will require continued policy discipline in those countries facing the largest economic sustainability challenges.


The trade policy scene

Global trade growth is going to be slower this year than we had forecast at the end of the first quarter of 2012. Just today the WTO has downgraded its forecast of trade growth in volume in constant prices from 3.7 per cent to 2.5 per cent. 

These are historically low numbers on average and it is not great news, but the numbers essentially reflect the global slowdown and cannot be sourced to a separate set of circumstances afflicting trade.

This implies that trade policy has remained stable and economies have remained open. This is largely true, although there have been some cases where governments have introduced restrictive trade measures. And there is no room for complacency. The pressures on governments for protectionist actions are more intense today than they were in the aftermath of 2008. This is worrying and we see it through our regular monitoring exercises in the WTO. 

We are at a stage in trade relations where we really do need to see a practical reaffirmation from governments of their commitment to international trade cooperation, and the institutional arrangements that support the multilateral trading system. If we do not reaffirm this commitment with more than words, especially when the going gets tough, we risk letting things get to a point where it becomes harder to pull back from a path of continuing deterioration.

The undisputed contribution that market opening and the maintenance of open markets – on the basis of global rules – have made to growth and greater prosperity in so many countries in the post-war period should be sufficient to convince governments and the public of the need for continuing trade cooperation. But we all know that things are not that simple. Governments feel short-term pressures to take what seem like expedient actions in favour of domestic production, forgetting not only the domestic consequences of such actions for efficiency and productivity in the domestic economy, but also the likelihood of being repaid in kind by trading partners.

I do not believe this audience of international business interests will find much to quarrel about when I talk of the benefits of a well-functioning and open international economy. But perhaps you can use your influence in your contacts with governments.


The rise of regionalism and the multilateral trading system

An issue I was billed to talk about this evening is the relationship between regional trade agreements and the multilateral trading system. I appreciate that this is a current topic in Singapore and elsewhere in Asia, with active discussions going on in various formats, whether APEC, the Trans-Pacific Partnership (TPP), ASEAN and ASEAN +. ASEAN with its long standing track record on regional integration is a major player in many of these configurations. 

On average, each member of the WTO belongs to no fewer than 13 separate preferential trade agreements. This means that in addition to their multilateral commitments, WTO members on average have to manage an additional 13 separate trade regimes. I do not think you will disagree with me that this cannot be the most efficient way to trade and to do business across national frontiers. 

Several problems arise.

First, arrangements such as these impose trade costs. I know that some of the business community are frustrated with multiple sets of rules of origin when they are engaged in supply chain production involving several countries. 

Second, the continual addition of new preferential trade agreements to the existing stock has a direct effect on the value of the stock. Existing agreements become less preferential and imparts an instability factor on trading conditions.

Third, while most preferential agreements do not appear to be built with the explicit intention of excluding or penalizing third parties, they can still embed geopolitical tensions and carry an exclusiveness that makes such arrangements a poor second to a genuinely multilateral framework for trade relations. 

Fourth, topics which matter for many smaller and weaker members of the multilateral trading system are left unaddressed, such as trade-distorting agriculture subsidies, fishery subsidies or even trade defence. 

Fifth, whatever the political or trade policy intent of preferential trade agreements, they can create undesirable divergences in policy approaches that make it harder to build broader, more multilaterally based trading arrangements.  This risk of policy divergence becomes more acute in today’s world, where tariffs are increasingly an instrument of the past and non-tariff measures are the cutting edge of trade policy. I should like to say more about this in a minute.

Lest you think I am mounting a campaign against regional trade initiatives, let me say a little about why I believe preferential trade agreements have exploded in recent years.

One reason is that it has not proved easy for the multilateral trading system to make progress, either in opening markets or improving the trade rules. Relying on preferential agreements as a substitute reflects the reluctance of some governments to use this format for doing trade business, and the frustration of other governments at their lack of success in carrying forward multilateral initiatives

Second, preferential trade agreements can fulfil other needs to which the WTO cannot respond, ranging from generic neighbourliness interests to explicit shared non-trade concerns that can be more effectively addressed through closer economic integration, including through trade. Moreover, where countries have more closely knit economic interests with their neighbours, including through global value chain relationships, they may be seeking deeper and more far-reaching trade relationships than those they can hope to forge in a multilateral context. 

But we have to be careful to imagine that preferential trade agreements are the “easy route” to create a global level playing field.


The growing importance of non-tariff measures

The first difficulty arises from the rise in importance of non-tariff measures. They are quite different in nature and scope than more traditional instruments of policy aimed at or affecting trade.

They are more difficult to identify and to measure. They often serve important public policy objectives, rather than just being administrative instruments or outright instruments of protection. What this means is that we do not necessarily want to eliminate them. We therefore need to manage the challenge of distinguishing between legitimate public policy design and disguised protectionism.  

Where a non-tariff measure reflects a public policy objective, even the cleanest policy design may add to the cost of doing business if countries espouse different values and standards. This is not something that should simply be eliminated by searching for culture-blind uniformity, but it is something to examine in terms of least-trade-cost approaches.    

In practice, the way a non-tariff measure is administered, perhaps even on a day-to-day basis, can be much more important than policy design issues. The possibility of hijacking process for protectionist ends may be even more troubling from a trade policy perspective. 


Multilateralism and global governance

My short detour into the world of non-tariff measures illustrates, I believe, that a number of important trade policy issues cannot be solved easily outside a multilateral context. I could have talked about subsidies to make exactly the same point.

We therefore have a challenge in global governance, and that is how to ensure that the benefits of a multilateral trading system are not forgotten and eroded away through neglect. I have heard no government gainsay the value and importance of a multilateral dimension to international trade cooperation. I would venture to make the broader point that this brand of cooperation is crucial in many other policy domains as well. 

I would argue, therefore, that it is to the global community’s benefit that decision-makers find ways of reviving cooperation at the multilateral level and move the WTO negotiations from its current state into an active mode where it can contribute more effectively to our shared need for international cooperation, which is both urgent and continuing. We all know that the WTO is more than the Doha Development Agenda. There is the dispute settlement system, the monitoring and surveillance and the Aid for Trade functions. But the impasse in the negotiations is political and must be addressed at the political level if we want the multilateral trading system to contribute to exiting the crisis, sooner rather than later.

Thank you for your attention.               


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