Lamy cautions over protectionism

Pascal Lamy Speech about protectionism, Bangkok, Mai 30, 2012 Ingresar al Link

Lamy cautions over protectionism

Director-General Pascal Lamy, in a speech to the Thai Chamber of Commerce in Bangkok on 30 May 2012, said: “Protectionism is like cholesterol: the slow accumulation of trade restrictive measures since 2008 — now covering almost 3% of world merchandise trade, and almost 4% of G20 trade — can lead to the clogging of trade flows.” This is what he said:

Ladies and Gentlemen,

It is a real pleasure to be with you today and to share some views on the state of international trade and the challenges facing both the world economy and the WTO.

Businesses — big and small — are the engine of international trade and the actors for whom the WTO rules are crafted. So, it is important that you share with us your hopes, your concerns and your expectations for the WTO.

Let me begin by giving you the outlook for world trade. A number of post 2008 after-shocks — the European debt crisis, the turmoil in the Arab countries, the earthquake and tsunami in Japan and, not least, the floods that hit this country at the end of last year — have all caused trade growth to shrink in 2011, recording a growth rate of 5 per cent, compared to an average of 6 per cent in the past 15 years. Projections for 2012 are even more modest. World trade is expected to grow slower than in the past, with a forecast for this year set below 4 per cent in volume.

This slowdown is largely a consequence of sluggish growth in advanced economies, particularly in the Euro-zone, with repercussions for exports from emerging and developing countries, where the contribution of trade to growth is also decreasing.

Against this background, one might ask, what is the added value of the multilateral trading system? And what is the role the WTO should play in such a difficult context?

By overseeing the rules that govern international trade, the WTO guarantees the openness, transparency and predictability you need to conduct business across borders. In an increasingly globalized and inter-related world economy, a rules-based global trading system ensures a stable environment to conduct your business. The WTO is, to a large extent, a guarantee against bad surprises.

There is general agreement that the multilateral trading system has proved its value in the context of the most recent global financial crisis. And this is not the first time. The 1997 Asian financial crisis also tested the solidity and integrity of the WTO rules and provided governments in the region with much needed support in the face of protectionist demands by powerful domestic lobbies. In other words, through its monitoring and surveillance function, the WTO has successfully kept the worst protectionist pressures at bay and assisted governments in keeping markets open. But this is not the time to be complacent. The crisis is still with us. With unemployment rates remaining high, we cannot allow a resurgence of protectionism that would cause a further deterioration of the current economic environment.

And yet, we have seen recent worrying developments which will appear in the report the WTO will publish at the end of the week. There are dark and shining spots. But the shining spots are getting dimmer and the dark spots are getting darker.

A shining spot in this region is the progressive normalization of trade between India and Pakistan which political leaders on both sides have fostered.

Darker spots are, unfortunately, more numerous: a clear revival of protectionist rhetoric, statements in favour of import substitution policies, more or less transparent administrative measures, tax concessions, subsidies, domestic preferences in government procurement.

Protectionism is like cholesterol: the slow accumulation of trade restrictive measures since 2008 — now covering almost 3 per cent of world merchandise trade, and almost 4 per cent of G20 trade — can lead to the clogging of trade flows.

The global trade landscape is also changing and it now looks very different from only 15 years ago. New players have emerged on the world scene such as China, India, Brazil, Indonesia and many others.

Asian economies have particularly contributed to this shift of balance and have become drivers of economic growth, with China overtaking Germany as the world’s leading merchandise exporter in 2009.

The emergence of new players has led to a change in trade patterns. In the past ten years, developing countries’ share of world merchandise exports has increased considerably, gaining around 10 percentage points. With declining growth in demand in developed countries, companies are increasingly exploring new opportunities in developing countries. This is also true for Thailand where exports to developed countries have increased at a slower pace compared to those to other Asian countries and where China has overtaken the United States as the main export destination.

As developing countries become more integrated in international trade, the importance of South-South trade is growing rapidly: today over half of developing country trade is South-South. Developing countries are also increasingly becoming leading export destinations for least-developed countries (LDCs). Today, China is the number one destination for exports from LDCs, ahead of the EU and the US, and Thailand itself is the fifth top export destination for LDC products.

At the 2005 WTO Ministerial Conference in Hong Kong, Ministers made a commitment to integrate LDCs into the multilateral trading system and agreed that developed-country members, and developing-country members in a position to do so, would provide duty-free and quota-free market access for products originating from LDCs. In view of the already high share of trade between your country and the LDCs, I would like to encourage Thailand to offer further market opening for this group of countries through the voluntary implementation of a duty-free, quota-free scheme. This would undoubtedly benefit LDCs, but would also benefit the Thai economy, as your firms would be able to access more resources at lower prices and further increase their competitiveness.

This leads me to another aspect of the changing trade landscape: the expansion of globally integrated production chains. And nowhere is this phenomenon more evident than in the Asian region. Most Asian economies have been able to adapt quickly to a changing demand structure that requires firms to locate various stages of their production process in the most cost-efficient markets. The high degree of complementarity between the economies in this region has provided an ideal basis for the rise of what has come to be known as “Factory Asia”, where parts and components move through cross-border production networks before being assembled and exported for final consumption. This has opened market opportunities for countries with a narrow export base. Products are no longer “Made in China” or “Made in Japan”; more and more products are now “Made in the World”.

Economies are ever more interconnected through global value chains. This was evident during the floods that struck your country in November 2011. The disaster caused the death of hundreds of people and severely damaged Thailand’s infrastructure and production, taking a toll on your economy. But the impact of the floods was also felt globally, with the impact on supply chains worldwide, especially for hard-disk drives and car components.

The value addition that occurs along internationally integrated value chains has a number of implications for the design of trade policies. But it also affects “trade politics” and it requires that we adjust our trade narrative.

A company’s competitiveness depends today not only on its own productivity, but also on the competitiveness of its suppliers, access to services and efficient infrastructures. This implies that competitiveness in goods is more closely linked to competitiveness in the services sector. It also means that imports matter as much as exports, contrary to good old mercantilism according to which “exports are good and imports are bad”. Under this scenario, it is clear that protectionist measures — in whatever disguise they may appear — have the potential to do even more serious harm than in the past.

Finally, with a significant part of international trade in intermediate goods and services, it becomes important for trade policy to look at the conditions that make cross-border transactions run smoothly. Trade facilitation measures that cut red tape and streamline customs procedures are of great systemic value for the well-functioning of regional and global value chains. Transport, logistics and regional connectivity are also important.

Thailand, as a highly market-oriented economy, has made impressive progress in this area, with the adoption of paperless import procedures and the expressed intention to move to a single-window service. Thailand also enjoys a sound infrastructure network as well as participation in larger connectivity programmes in the region. However, the efficiency in customs procedures and infrastructure of your trading partners is also relevant for your firms’ competitiveness. It is for this reason that multilateral co-operation is important. It is for this reason that a WTO deal on trade facilitation will clearly be a win-win for all WTO members. It is for this reason that a business, whether large or small, stands to benefit from a WTO trade facilitation deal.

The expansion of global value chains has benefited from another important development: the advance in information technologies. In mid-May, the WTO celebrated the 15th anniversary of the Information Technology Agreement and looked at how elimination of tariffs in the IT sector has played a crucial role in spurring innovation, providing affordable access to technologies and contributing to the functioning of other sectors of the economy.

With 97 per cent coverage of world trade in IT products and 74 participants — including Thailand — the Agreement demonstrates how trade opening can generate win-win results and work as a boomerang for growth. I want to commend Thailand for its active engagement in this area and look forward to Thailand supporting a further expansion of the ITA.

The new trends in international trade show that, despite the global economic slow-down, trade remains a vibrant sector that offers numerous opportunities for growth, job creation and poverty reduction. These opportunities are out there, but businesses, especially SMEs, face difficulties in seizing them. The question then is how we can assist them. Part of the answer lies in the availability and accessibility of trade finance. As I have said on various occasions, trade finance is the oil that keeps the wheels of global trade running. It is one of the safest forms of finance, and it has the advantage of directly promoting development through trade.

Unfortunately, the financial crisis has had adverse effects on the availability and cost of trade finance, especially for small businesses. Despite the return of liquidity, the problem remains that of risk aversion. It is important that measures are taken to facilitate SMEs’ access to credit, so that they become the engines of the economic turn-around. For progress in this area, we rely greatly on multilateral cooperation, in particular through the involvement of the regional development bank — in this region, the Asian Development Bank — and the World Bank’s International Finance Corporation, whose engagements in filling market failures in trade finance deserves to be commended.

On the WTO’s part, we can further contribute to economic stability by updating the Organization’s rule-book. In 2001, WTO members launched a negotiating round to review the WTO rules and ensure that they reflected the reality of international trade. Today, despite the fact that the negotiations currently are at an impasse, members continue to recognize the need for renewed impetus in multilateral cooperation. To find new momentum, they have decided to explore new negotiating approaches that might open the way to results, starting with those areas of negotiations that might be ready for early conclusion.

Although not part of the Doha negotiations, an important contribution to international trade was made in December 2011, when a group of WTO members reached consensus to review the Plurilateral Agreement on Government Procurement. The result of this work will mean greater and more transparent competition for the government procurement processes of the 42 parties to the Agreement and substantial gains in market access opportunities for businesses, estimated at around $100 billion annually. By promoting better disciplines and transparency for awarding government contracts, the WTO deal has important economic and systemic benefits as it helps ensure good governance and a more efficient use of public resources. It also provides an economic stimulus because of its impact on many sectors of the economy, including suppliers of infrastructure, public transport and other government services.

The accession of new members to the Agreement is likely to deepen the benefits that the new agreement could provide. A number of countries, including China, are currently in the process of acceding, and I would like to take this opportunity to encourage Thailand to become an Observer to the Committee on Government Procurement in order to become familiar with its work and the opportunities available.

The developments that I just illustrated, as well as other issues that are now calling for the WTO’s attention — such as climate change, food security (including the sensitive issue of food export restrictions) and trade and investment — generate both new challenges and new opportunities for the WTO, but also for economic agents worldwide. I believe that it is important to analyse and better understand these new trends. For this reason, earlier this year, I convened a “WTO Panel on Defining the Future of Trade” to analyse the drivers of today’s and tomorrow’s world trade and take a fresh look at what opening trade means in the 21st century. The participation of the business sector will provide the Panel with the sort of experience and practical input that only real traders can provide. For this reason, I seek your perspective and your involvement in shaping and guiding the multilateral trading system forward.

I look forward to hearing your views on international trade and the WTO. Thank you for your attention.