Has international trade reached a deadlock? An interview with Pascal Lamy

Photo Pascal Lamy / Director-General of the World Trade Organisation / September 5th, 2012

Has international trade come to a standstill with the crisis that started in 2008? Things are not that simple, says the Director-General of the WTO. While protectionist pressures may appear here and there, the real question revolves around the growing complexity of trade and the structural limits inherent to the technique of negotiation rounds undertaken by member states.

ParisTech Review. In parallel with the Rio +20 conference, the Brazilian Chamber of Commerce evoked the risk of a “green protectionism”. Does this mean more inconspicuous trade barriers could arise?

Pascal Lamy. I would not put things that way, although some technical regulations may really be intended to protect domestic markets. But what we are witnessing is actually a complexification of the game. Let us consider, if you will, the example of Asia.

60% of this area’s international trade is carried out between its own countries, and we are now witnessing a powerful drive towards a continental trade liberalization. Asian countries are opening up to each other. This is a first phenomenon, which is not unrelated to the more general expansion of international trade in which Asian countries are major players.

But the game gets more complicated if you look at the existing trade agreements: you realize that there are many and more especially, that they cover different scales and different spaces. There is for instance ASEAN, ASEAN + 3 (with China, South Korea and Japan), but also the Trans-Pacific Partnership (TPP) launched by the United States but that does not include China. Trade integration, thus, is far from being uniform, and is still subject to underlying political issues.

Add to this the proliferation of global production chains, in which the Asian countries are integrated, but also the United States, the European Union, the East Coast of Latin America and, to a lesser extent, other areas as well. This is an even more structuring – yet inconspicuous – phenomenon. On average, the import content of exports has risen from 20 to 40% in twenty years. This is huge! And above all, looming in the distance of this phenomenon is the dissolution of the very notion of international trade. Because the problem will no longer be about crossing a border, but about entering a differentiated regulatory space.

Is this a game-changer?

Radically so. We are no longer in 1980-1990, when trade negotiations focused primarily on quotas and tariffs. We live in a world where the stakes behind trade openness have to do with the juxtaposition of different regulations. And it is more difficult to negotiate on these preferences, because regulations are not intended to protect producers as much as consumers. Therefore it seems to me that it is too early to talk about protectionism, or of the return of trade barriers. Undoubtedly some business lobbyists are playing to that end, pushing for the adoption of specific regulations. But the real challenge does not reside there. The real challenge is protecting consumers.

At this point, fundamental questions come in, like: what is risk? Of course, the answer to these questions is also correlated with the developmental level of a given society. But if you take two areas with equivalent development, such as the United States on one side and Europe on the other, the issue of hormone-treated meat, for instance, will be viewed in a quite different perspective in each place. The cultural dimension is essential here, and it is much less easy to negotiate.

These new issues have reinforced the relevance of sectoral approach, as shown by the Government Procurement Agreement that was signed in December 2011, which should broaden the scope of market access by 80 to 100 billion dollars per year in areas such as infrastructure, public transportation or hospital equipment.

Do you think the rising power of bilateral trade agreements is a threat to multilateral agreements?

We should first recall why multilateralism is favored by economists. If it is widely considered an as an optimum, it is because it offers companies the best conditions in terms of stability and transparency. This is the idea of a “level playing field”: a market environment in which all firms must follow the same rules, and where, therefore, they have the same capability to be competitive. The GATT and since 1995 the WTO derive from this vision.

It is true that the negotiations of the Doha round, which should allow to go further in this direction are, for now, in a deadlock. It is in this context that it becomes imperative to question “preferential trade agreements” – in other words, bilateral agreements. For between those which have been notified to the WTO, those which have been implemented without having been notified, those which have been signed but not yet enforced, those which are under negotiation and those still in draft status, we have about 400 bilateral agreements today.

Nonmultilateral agreements have very diverse intentions, geographies, methods, and sectoral compositions. The impact of these agreements on the global trading system has led us to decide collectively that they would be notified to the WTO, so as to verify their compliance with WTO rules.

Beyond legal aspects, what should we think of it? From our perspective, anything that goes towards reducing tariffs is heading in the right direction, as ultimately it permits to lower trade barriers and to promote convergence. This is the case for many agreements. But things are quite different regarding agreements which, in order to open up trade on a preferential basis, breach regulatory preferences. Because if you start dealing with regulatory stuff in a bilateral context, what you have is a regressive effect. And this is precisely the rub. Because non-tariff trade barriers are an issue that is more and more central.

Under these conditions, do the great rounds of negotiation (the Uruguay Round yesterday, the Doha Round today) still have relevance?

The technology of rounds is a political concept. It is aligned with a Ricardo-Schumpeterian world – Ricardo’s comparative advantages, Schumpeter’s creation/destruction – in which trade liberalization is overall beneficial, but in which there are winners and losers. This is the origin of rounds: the impact of trade liberalization is considered to be a political issue, and attempts are made to balance the loss: I will open this market to you at the risk of upsetting my producers, and in return you open such and such market to me, in which I have a comparative advantage.

This model has been pushed to its limit by three phenomena: the violence of economic shocks suffered during destruction phases – the magnitude of which neither Ricardo nor Schumpeter could ever have imagined; the sheer number of players involved; and lastly, the political limits that possible concessions are faced with. For example, the United States cannot, politically, stop subsidizing cotton. This is political economy in its fullest sense: what we have here are negotiators who are negotiating with themselves.

These political limits are even more sensitive in a context of crisis, because economies are more fragile and the political capacity of negotiators is thus weakened.

It is within this context that your question on bilateralism could be addressed. Some regional integration processes, easier to carry out, could perhaps help to reduce the number of players and perhaps also to produce players able to negotiate. This was one of the historic breakthroughs of European integration but presently the EU is the only example of a customs union which has been granted delegated negotiating ability.

Because in trade, even though the growing complexity of exchanges makes the concept of political border less relevant, rules remain set by international treaties signed by sovereign players. It’s still a Westphalian world, where states discuss with other states. Economics and politics no longer share the same geography.

Are there no discussions in parallel, conducted between field players, bypassing States’ filters?

Of course, discussions are taking place upstream or in parallel to those carried out by governments with civil society (NGOs, trade unions, producer organizations). But today these can be heard mostly at the national level. Even though, as Director General of the WTO, I spend much time meeting with NGOs and other pressure groups. The issues they address, the interests embodied by non-state actors, are not absent from the debate, even if they have a hard time finding their way into already very tough discussions.

Is a fair representation of relevant interests possible?

It is, by definition, very difficult, for at least two reasons. Today the first reason is technical, or more precisely, it stems from the technicality of the issues discussed. This technicality poses the problem of regulation capture by special interests. Transparency is essential, it is, in a sense, prophylactic. But on highly technical subjects where a simple detail can make a difference, it is not enough. This is where the work of civil society is crucial: it requires expertise, decryption capabilities, and political will to inform and educate the public. Much remains to be done on this subject.

Second reason, and this raises a fundamental problem of trade negotiations, in this game the losing parties know precisely why they lose and are able to form coalitions to support their causes, while the winning parties are often unaware they won. The T-shirt you are buying cheaper today doesn’t come with a “Thank you WTO” sign on it! I have been working on international trade for twenty years, and unsurprisingly, it turns out that in emerging countries, public opinion is more and more open to trade liberalization, while in developed countries it is less and less favorable to it. Not in the name of the poor in the South anymore, as was the case in radical circles in the 1990s, but on behalf of the poor in the North. The positive impact is obscured by the difficulties associated with the restructuring of Western economies, by the crisis, of course, but also by the great shift from industrialzed countries to emerging countries, which may lead to think that unemployment is due to relocation. Under these conditions negotiators from developed countries now have less room to maneuver.

As a matter of fact, some emerging countries, notably India and China, have recently protested against the European carbon tax proposal, suggesting that the sustainable development objective was actually hiding a protectionist agenda. What should we think of it?

In terms of the objectives pursued, national rules are obviously less effective in the fight against climate change than a global regime… which compatibility with open trading rules would obviously be more fitting.

From a legal perspective and the WTO’s point of view, there is no objection in principle to the establishment of a carbon tax that would seek to internalize environmental externalities, as our statutes put trade and all exchanges at the service of sustainable development. The question arises, however, to verify whether the tools put in place comply with the rules.

There are four chief tools: regulation, subsidies, taxes, and permits. Each of these approaches can be tested in terms of WTO agreements (e.g. the agreement on subsidies), and there is a precise body of case law, which allows to work on a case by case basis. Some Nordic countries have had a working carbon tax for thirty years already, without this having ever been a problem.

Among the sensitive subjects, there is also the exchange rate regime.

Indeed: the issue of exchange rates had never been addressed within the framework of the WTO, but the issue reappeared last year, although not about the Yuan, but at the initiative of Brazilians and about issues involving the rate of the Brazilian Real against the Dollar.

The least we can say is that the subject is very complicated. Article 15 of GATT, which is reported to have been written by Keynes himself, essentially says that you cannot manipulate your exchange rate to escape the disciplines of trade openness you subscribed to. It is a central principle… yet it has never been invoked in litigation, so there is no real legal doctrine on these matters. The issue has certainly been raised in the course of twenty years in the public debate, but during these twenty years everyone, including myself, felt that it was not an issue for the WTO: Geneva is about trade, and Washington (IMF Headquarters) is about exchange rates. We have now broken the silence… but we’re no further forward today than we were then!

The IMF, the institution best able to address these issues, has recently revised its diagnosis: according to it, the Yuan is only “moderately” undervalued while it was “substantially” undervalued, two years ago.

There are several elements I take from ongoing discussions; some are economic, the others legal.

Firstly one cannot deny that exchange rate fluctuations have a short-term impact on exchanges. But these effects are less noticeable in the long run. And their impact depends on one parameter: the added value of your participation in world trade. It is obvious that an undervalued currency will promote exports, but as I said earlier there are more and more imports contained within exports. Also, the currency diversity of imports and exports baskets must be taken into account. Finally, if we consider the special case of the Yuan, the gradual rebalancing of China’s trade tends to iron out the problem. Assuming that it could be demonstrated that at some point China benefited from an unfair competitive advantage by undervaluing its currency, this advantage was only temporary.

Therefore, we are lacking legal arguments and tools to address these issues. Even if it were found that the Chinese exchange rate actually is not free, nothing obliges them formally to do otherwise. U.S. legislation had attempted a parade, by legitimizing anti-dumping offsets on the grounds that such compensation was retaliating against disguised subsidies. But this law was rejected by one of the Houses.

One must understand that the nets of international regulation are heterogeneous, making it more or less easy to slip through. Some institutions have very close-knit meshes, like the World Organization for Animal Health (OIE), others, even though they deal with a major topic for the course of trade such as corruption, have very large meshes. And states do not join international regulations unless they have an interest in going there. In 1947, when the GATT was signed, there was a very strong impulse, for we were just emerging from the 1930s crisis and doing our best to address the aftermath of World War II. At that time, we proved we were capable of going a little beyond the Westphalian game. Today’s crisis raises the very same issue – again. Will we be able to respond in time? This is the great question of our age.

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