Trade in the Current Economic Crisis

Pascal LAMY

We are only one day away from the International Monetary Fund (IMF) meetings in Tokyo, and we are still currently experiencing an economic crisis. We are also aware that it will take an unknown number of years before returning to a pre-crisis growth pattern. This issue adds to the economic transformation challenges which existed prior to the crisis. Previous theories and assumptions which governed the way in which we looked at trade at the beginning of the 20th century now probably need to be recalibrated in order to adjust to the new realities of trade. Research institutes such as RIETI are crucial in helping us all to understand the new patterns of trade in the world.

Last month, the World Trade Organization (WTO) revised its projections for trade growth volumes from its spring forecast of 3.7% growth in trade volumes this year. However, this figure had to be downgraded, larger than expected, to 2.5%. In recent times, there have been signs from the European and U.S. sides that good news may exist for improvement in economic conditions in the future. However, it appears that economic growth is currently slowing down in developing countries as a result of the slowdown of the large export markets of Europe and the United States. Meanwhile, it seems that Japan is still looking for a path back to economic growth which would resemble what existed 10 to 15 years ago.

This confirms what has already been known for some time, which is that we now live in a totally connected and globalized interdependent economic world. It appears that no country or region is immune from a global financial crisis anymore. We also know that, for this same reason, actions taken in one country or region have direct implications on all other countries or regions. This knowledge of interdependence must govern how we collectively craft global trade or economic policies in the future. Our approach to global governance must be better attuned to these intricate economic webs, and we must be more resolute in looking at the economy from a global perspective hereafter.

Looking at the economic and trade side, it is obvious that the rising weight of influence of emerging economies has shifted the balance of power. This clearly implies a number of transitions to which we have not yet adjusted. Certainly, classic concepts of sovereignty are seriously challenged by the realities of interdependence. Although some consider this a problem, it is perhaps better to think of it as an opportunity to look at the real shaping factors of trade. Current political and trade-related public discourse taking place reflects that shaping factors of trade are being discussed and examined seriously. In the early years of the economic crisis, we know that Asian markets reacted with flexibility. It became clear that keeping markets open and goods and services flowing was a good strategy. Even so, countries in Asia have not been exempt from the present global financial turmoil. Numbers on Japanese external trade and exports have been affected quite substantially, and China's merchandise trade flows have also started to slow down, demonstrating this point.

One element which will continue to impact growth in the Asian region is the danger of protectionist policies in Asia's export markets. Since the beginning of the economic crisis, the WTO and the Organisation for Economic Co-operation and Development (OECD) have continued to track trade policy development worldwide. Findings and analytical conclusions are reported to the G20, and the reality is that although there hasn't been a big wave of protectionism, there has been a continued accumulation of small measures in some countries which can represent a potential danger to the flow of world trade. Roughly speaking, 2%-3% of world trade has been affected by these protectionist measures over the last five years. The biggest concern is that very little of the measures that have accumulated during this period have been removed. This is a serious matter, as it is known that in today's world of global value chains, protectionism doesn't protect jobs. In a world where the import content of exports has moved from 20% 20 years ago to 40% today, it is increasingly obvious that the competitiveness of exports depends on those imports. Protecting trade, resulting in slowing imports, is a recipe for deterioration of the competitiveness of one's economy, and therefore is an important issue which must be addressed.

Not only the flows of trade, but also its nature has been changing recently. Technology now allows for a considerable reduction of the cost of distance, which favors value-added. As a result of this, an initiative was taken a few years ago to try to promote measuring trade in value-added rather than cost numbers. This has worked well, and in mid-December, the WTO will unveil the first batch of world trade numbers measured in value-added for about 40-50 countries, representing the bulk of international trade. This will help us better understand the multi-localization of production, and provide a fresh, more accurate look at current world trade trends. The stage which we are now reaching will help us to see the real challenges of trade in the 21st century. The WTO's mission is still to open trade, although achieving this depends on knowing precisely which challenges need to be faced.

If we accept what it takes to form a realistic view of how trade operates in today's world, leaving aside the current economic crisis, we have to derive a system on different levels of importance of the obstacles which need to be overcome. One example is that of tariff and non-tariff barriers. The General Agreement on Tariffs and Trade (GATT) and the WTO have been mostly focusing on eliminating tariff barriers on imports. However, we now know that trading businesses tend to put less importance on tariffs in relative terms and more importance on non-tariff measures. If the WTO agenda has to adjust to a new topography between tariff and non-tariff measures, it will entail a number of significant changes. Another example is export restrictions. It is apparent that access to natural resources is becoming more and more of a problem in some industries, and this needs to be investigated. However, it is clear that at present the WTO and GATT focus more resources on import restrictions. Based on these examples, it is safe to say that the WTO needs to focus more of its attention as a function of the changes which have intervened in the global economy.

Even though it may be important to make changes in the WTO, it shouldn't be necessary to reshape the whole WTO agenda. As the Doha Development Round hasn't been concluded for mostly geopolitical reasons, some academic views are that the WTO should start from the beginning again. However, this academic approach doesn't seem to have much political relevance. The reality is that, at some point in the future, the WTO will likely have to combine issues which were identified as major trade opening ones in relation to the Doha Round with new issues such as government procurement and non-tariff barriers. With this in mind, it is helpful and stimulating to have discussion and debate such as this prior to making definite decisions.

Q1: Non-tariff measures are an area of great concern. In addition to the issue of tariffs, many other issues exist, such as those of innovation, subsidies, technological standards, as well as the transfer of technology. The people involved in establishing trade policies in relation to these issues face major challenges. Given the current situation, the question is if the WTO can deal with these issues well. In my organization (JETRO), the consensus is that this task probably cannot be achieved by the WTO alone. Rather, it is believed that the Trans-Pacific Partnership (TPP) would be in a better position to do so. What is your opinion on this issue?

Pascal LAMY
With regard to rules and discipline in the WTO in areas which matter to trade in the 21st century, this is an important and relevant topic. Using the example of subsidies, there are rules on this in the WTO. A full Agreement on Subsidies and Countervailing Measures (ASCM) agreement is in place, which creates discipline and establishes which subsidies are WTO compliant or not. The level of discipline is what was agreed on approximately 20 years ago, and since then many things may have changed. Therefore, the question remains as to whether such agreements need to be revisited and revised or not. Furthermore, several ongoing disputes within the WTO are in relation to interpretation of the subsidies agreement currently in use. Rules also exist in the WTO in relation to non-tariff measures. Agreements exist which establish the right of members to protect the health and safety of their populations without unduly distorting trade. Disputes regarding non-tariff measures also exist within the WTO. The problem seems to lie less in the growing number of non-tariff measures, but in their discrepancies and whether or not the WTO should have a role in harmonizing standards.

In reference to the TPP, there is not much to comment on as it is still in development. It is seen as something which will either lead to improved multilateralism, or something which will scatter the level playing field in relation to regulatory issues. One of the criteria which will help to decide whether the TPP can really promote trade is whether or not there is new market access as a result of this negotiation. One of the reasons for creating bilateral agreements is meant to be based on the notion that increasing market access is easier in bilateral as opposed to multilateral agreements. It remains to be seen whether increased market access in a TPP will validate this notion or not.

Q2: At present, the IMF-World Bank conference is taking place in Japan in which about 10,000 business people are joining. This type of opportunity takes place once a year. In contrast, in the case of WTO, Ministerial meetings are held once every two years, and it could be inferred that the WTO is keeping its distance from industries. It could also be believed that industrial communities are having serious doubts and concerns in terms of the WTO's quickness in responding to issues and narrow view on issues with which they deal. It is necessary to achieve a closer relationship between the WTO and industries in order to have success in future negotiations and strengthen the role of the WTO. Do you think in the future it would be necessary to create an organization that both works for industries and supports the WTO?

Pascal LAMY
The WTO is an inter-governmental organization. The members of the organization are sovereign nation states, who accept or decline entering into binding legal commitments which take the form of treaties. Furthermore, the WTO is a global organization unlike the OECD for example. This will not change. Governments, diplomats, and negotiators operate within the WTO. However, business components also exist. The WTO has quite permanent working relationships with global businesses and organizations such as the International Chamber of Commerce (ICC) and the World Economic Forum (WEF). The WTO has several relationships of this kind, although they are not institutionalized. The reason is because governments want to keep a monopoly on trade negotiations. In the WTO, there are no business-state disputes as there are in some regional agreements such as the North American Free Trade Agreement (NAFTA). The WTO is both an organization and an institution. When negotiating, the WTO is an organization, and when litigating, the WTO is an institution. An international organization is member-driven, whereas an institution is member-driving.

Q3: Please discuss your evaluation or concerns with regard to dispute resolution mechanisms.

Pascal LAMY
In terms of dispute settlements, it seems that the current system works extremely well. The number of countries participating in the WTO is growing, and discretions which existed in the past now occur at a much lower rate. In fact, half of the cases which we have now involve developing countries litigating against each other. With regard to impact assessment, over 95% of determinations made by panels have been implemented. This is a much higher ratio of implementation than many national systems. The duration of litigation is also on average less than two years from its beginning to final determination. This is much faster than most national litigation systems. The only problem is that litigation initiatives taken by WTO members are gradually increasing in cost. Therefore, the complexity of cases has to be carefully observed. This year, the WTO has had a surge in disputes, which are consuming significant financial resources. Given that the WTO has extreme confidentiality rules and strict deadlines, this issue represents a significant management issue.

Q4: What would be your legacy as the Director-General of the WTO?

Pascal LAMY
It is too soon to make a fair comment at this point. I will leave my current post on August 31 next year. Let us have that discussion next year!

Q5: What is the biggest lesson you have learned from your experience as Director-General of the WTO?

Pascal LAMY
It may be a little too soon to comment accurately on this. However, I have learned much so far and am still continuing to do so. One of the privileges of this job is that, at 65 years old, you can keep learning every day. This has its price in terms of frustration in the difficulty involved in getting things done, but I have had the benefit of working with three major systems in my career. I learned that governing styles differ depending on the environment. I also learned that there is a very important component of what can be done at the international level, which lies in heading international organizations with excellent expertise. That is the real comparative advantage of organizations like the WTO. Also, I learned the extreme viscosity of international decision-making systems. Although it is difficult to have 157 members agree on one point, the WTO generally doesn't have problems with reaching a consensus. The reason why the Doha Round has not concluded has nothing to do with the fact that the WTO has 157 members. In actual fact, if an agreement could be reached between the EU, the United States, China, India, Brazil, Japan, and Australia, it would be possible to reach a consensus for all 157 member states. The reason why the Doha Round has not been concluded is because a consensus is necessary among the aforementioned seven member states. There is still a large gap between the knowledge and necessity to agree on global rules, and the capacity for governments to do so. The reason is because governments are local in nature and responsible for domestic issues. There is no such thing as a global constituency. What I learned is that the issue of how to address this problem is still very much with us at present. This time of economic crisis has not helped mobilize political energy from governments into these international issues, and is likely to remain a significant problem for the future.