“Shifting Economic Landscape: a World in Need of a Compass”

> Pascal Lamy’s speeches


Ladies and gentlemen,
Good morning — Dia Dhíbh.

I am glad to begin my visit to Ireland by coming to the Institute of International and European Affairs. The Institute is a remarkable centre for research and forward thinking on how to address today’s challenges. And frankly we are not short of them!

Let me begin by thanking Director General Dáithí O’Ceallaigh for his kind words of introduction.

In my address today, I would like to touch upon three issues:

    — the tectonic transformations that we are witnessing in our   economies and more specifically in trade

    — the challenges this poses to policy makers

    — and finally, how Ireland and Europe can sail in these turbulent waters


Tectonic shifts in the world economy and world trade

At the beginning of this 21st century, we are witnessing a tectonic shift in the world economy. The year 2012 will mark the first time in world economic history when the GDP of developing countries surpassed that of developed economies. This is the product of the impressive growth registered by developing economies in the last decades. This has been accentuated by the dismal growth rates experienced by advanced economies since the beginning of the crisis. In the years to come, developing countries, starting with Africa, are expected to grow three times faster than advanced economies. We are witnessing a massive “catching up” by developing countries.

In sum, the essence of world growth in the years to come will come from developing countries, whose middle classes will also grow. By 2030, it will more than double in size, from 2 billion today to roughly 5 billion.

The trade forecast for 2013 which we released just last week confirms this point. After a poor 2% growth in world trade last year, the volume of trade in 2013 is expected to grow by a sluggish 3.3%, well below the 20 year average of around 5%. The growth of trade by advanced economies will be around 1%, whereas that of developing economies will be around 5%. The South is pulling trade upwards.

The geography of trade is also changing. Twenty years ago, 60% of world trade was North-North, 30% was North-South and only 10% was South-South. By 2020, we expect South-South trade to reach one-third of world trade.

This change in the actors of world trade owes a lot to advances in technology and transport which have led to the expansion of “value chains”. Through supply chains, developing countries have found an accessible means to insert themselves into the global economy. Trade is no longer about finished products or services. It is about trade in tasks. In fact, 60% of merchandise trade is in intermediates. It is about adding value by contributing to a stage in the production of a finished product or by providing services. This is what motivated my decision five years ago to launch an international effort to look at the facts and figures of trade in value-added in the “Made in the World” initiative.

In January this year, the WTO and the OECD launched a first set of data that measures trade in value-added.  The preliminary results were surprising.

One, services are more internationally traded than goods.

Two, around 40% of what countries export is in fact imported inputs. Protectionism does not protect!

Three, bilateral trade balances, which are often a source of tension among major trading partners, change. Traditional statistics attribute the full commercial value of imports to the last link in the production chain, even where the contribution made by that final link has been minimal. Knowing that the last link is often China and that the leading importer is the United States, the geopolitical implications of using this measurement are immediately plain to see.

Four, this new measure will help identify the employment linked to the value addition and will help focus domestic policies on what really matters: creating jobs.

Let me address a final change in the world trade scene: the increasing weight of non-tariff obstacles to trade. Successive WTO negotiating rounds, bilateral trade agreements and unilateral trade opening have significantly reduced the relative weight of tariffs in global trade. Today, the average tariff applied to international exchanges is around 5%. True, tariff peaks still remain in certain sensitive areas, such as textiles, footwear, steel or agriculture products, and addressing them remains on the to-do list of trade negotiators. But it is becoming clear that creating new trade opportunities and reducing the cost of trading will require addressing non-tariff barriers (NTBs).

Take the announced negotiations for an EU-US Trade and Investment Agreement. According to a recent study by the German Economics Ministry, while the weighted average tariff applied by both partners is below 3%, the estimated impact of NTBs is much higher. The study indicates that European alcohol and tobacco exporters to the United States face additional costs averaging about 14%, while US companies can expect additional costs of more than 50% on their exports to the EU. Similarly, the chemical industry in Europe has NTBs amounting to additional costs of over 100%, more than three times as much as in the United States.

In sum, companies will not be able to speed if the trade highway is full of NTB potholes!


Challenges for policy makers

So, what can policy makers do about these tectonic changes?  

A better global economic governance remains a priority. Cooperation instead of unilateralism. Cooperation in repairing and reforming the financial sector. Cooperation in ensuring a more balanced demand. The G-20 has already identified a substantive programme of work. The key now is to implement it.

But the key for policy makers today is to restore growth. For it is growth that will help generate much needed jobs.

As Ireland knows only too well, trade can be a useful tool for growth, one that is fiscally sustainable. The trade opening agenda remains, therefore, even more relevant today than it did in the pre-crisis period. And the most effective way to do this is through the multilateral route.

I see four key ingredients for a successful global trade opening agenda.

The first ingredient is to recognize that mercantilism is dead. Trade negotiators should change their trade narrative. Imports are an essential ingredient of a country’s export competitiveness. So the key is not how to export more but how to add more value, and to use trade to grow your economy better and faster.

The second ingredient is to launch a global effort to rethink how to level the playing field on non-tariff barriers. Aiming at uniformity may be too intrusive, as these NTBs often reflect different societal values. Instead the challenge will lie in achieving regulatory cooperation and avoiding the use of NTBs for discriminatory purposes.

Thirdly, investments have become the twin engine to trade. But its regulation remains fragmented at bilateral level. A global effort to develop a common framework for investment is therefore long overdue.

Finally, for many poor countries, trade opening cannot translate into growth, development and jobs without trade capacity building. Countries like Ireland have strongly supported poor countries in this endeavour through development aid. And I want to recognize publicly the solidarity that was shown by the Irish people, and I want to thank Taoiseach Enda Kenny especially as this country has been so harshly hit by the crisis. Moving forward, we have to see how to better leverage the contribution of the private sector to trade capacity building. This issue will feature prominently at the Global Aid for Trade Conference that the WTO will host in July.


Ireland and Europe sailing through the crisis

So how can Europe and Ireland sail in these turbulent waters?

I will have an opportunity to discuss this later today with the European Trade Ministers who have been convened by the Presidency under the leadership of Minister Richard Bruton. 

The contribution of external demand to economic growth is on the rise, as 90% of global economic growth in the next 10-15 years is expected to be generated outside Europe, a third of it in China alone. External markets are therefore key for Europe’s growth. And it is therefore in this light that Europe should re-look at where its offensive and defensive interests lie.

Overall, Europe is favourably positioned in world trade. It has managed to retain around 20% of world exports while the United States and Japan have seen their shares decline. Its trade balance is overall positive and it has multiplied by a factor of five since 2005. The EU’s single market has helped enlarge and deepen European value chains.

But behind these aggregate numbers lie serious national disparities. So where is the answer to these divergences? The answer lies in the quality of domestic policies.

A successful trade policy needs to be anchored in a set of robust domestic policies.

Let me start with competitiveness and its price and non-price factors. Services is an area which holds significant potential for the EU member states. It is an area where the EU Single Market can still be “perfected”, to say the least. 

The second area is that of qualifications, skills, education and innovation. A skilled labour force is an essential ingredient to moving up the value chain. If there is an area of public spending which should be preserved from the severe austerity drive, it is investment in human capital and in innovation. 

The third is that of social safety nets. We need strong social safety nets to ensure fairness in the inevitable process of adjustment triggered by the crisis, but more broadly by the constant change in the game of comparative advantage.

To conclude, the best way to sail through the crisis is to use a good compass. The name of the European compass must be “confidence”. Confidence that the structural efforts that are being undertaken will lead to a more balanced economy. Confidence that, in the on-going reforms, no European would be left behind. Confidence that Europe has the strength to sail in an ever more globalized world. Confidence that the European crew realizes that the only way to preserve European values in the sea of globalization is to remain aboard the same vessel.

Thank you for your attention.

Go raibh maith agaibh as bhur aird.

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