A new narrative for world trade
World trade is changing, and so too must the way policymakers approach it, says Pascal Lamy. We asked him to explain.
OECD Observer: The financial and economic crisis of the last few years has led to calls from world leaders, the OECD and other international organisations for new growth models, and to avoid returning to business-as-usual. You have also urged change, and just recently stated that “yesterday’s solutions simply cannot be applied to the problems we face today.” In the context of world trade, what you think can no longer be applied?
We can no longer think about world trade in the same terms as 20 years ago. International trade has profoundly changed over the past decades. Production chains have become global, with production stages located in various countries. World trade is no longer exclusively about trading final products, as per David Ricardo’s theory. It is increasingly about trading intermediary goods. The import content of exports has roughly doubled in 20 years (from 20% to 40% on average). This means that protectionism in the classical sense of the term, i.e. customs tariff increases or quantitative restrictions on imports, does not protect anymore: in today’s world, taxing your imports means taxing your exports, and hence damaging your competitiveness. In other words, applying the classical recipes of protectionism doesn’t do the trick anymore. It won’t pull us out of the current crisis, to the contrary.
Real protection lies in my view in the quality of economic policies and social safety nets. Look at Europe: it has a common trade policy but social policies differ from one country to another. The difference in competitiveness between France and Germany, for example, stems largely from differences in the way economic and social policies are designed and implemented. In today’s globalised world and in the current context of financial and economic crisis, social policies are more important than ever. They are the key to competitiveness and sustained growth.
The WTO traditionally favours trade opening and is against trade protectionism. Have these definitions evolved in any way in light of the crisis or shifts in globalisation?
Yes, they have evolved dramatically. I just referred to the profound changes that have affected world trade in recent decades and what this means for protectionism. Raising tariffs does not protect anymore; real protectionism is about putting in place the right economic and social policies to accompany those impacted by globalisation.
As for trade opening, for decades it took the form of tariff reductions. In 1947, before the GATT began operations, average tariffs in the industrial world were comprised between 20 and 30%. Eight successive rounds of trade negotiations under the GATT succeeded in reducing average MFN tariffs* on imports of manufactures to 4% in industrial countries. With the lowering of tariffs, the nature of obstacles to trade has evolved.
In many regards, today non-tariff barriers matter more than tariffs. This is what we now have to focus on, and this is what this year’s WTO World Trade Report will be about. This evolution has an impact on the way trade opening can be achieved.
By trade opening, I do not mean deregulation; I mean opening trade within a framework of global rules. What the current crisis has demonstrated is that regulation is essential to harness globalisation. How can this be best achieved? Regional and bilateral trade agreements have a positive impact on trade opening as far as tariffs are concerned. But regulatory issues may not be necessarily best addressed through these agreements. The multiplication of regulatory frameworks that stems from regional and bilateral agreements may indeed create divergences with costly impact on business. Today, given the changing nature of obstacles to trade and global production chains, greater trade opening is best achieved through multilateral agreements.
You have recently named a panel to identify 21st century trade challenges. Why have you taken this initiative and what would you like to see come from it?
I have noted above, the nature of trade and of obstacles to trade has changed dramatically over the past decades. We need a new trade narrative. We need to analyse these changes to identify what are the real obstacles to trade in today’s globalised world and how best to respond to them. I have decided to appoint this panel to shed light on the new challenges facing world trade and the WTO, to assess the medium-to long-term trends in multilateral trade relations, and to reflect on the future direction of the WTO. The panel–with strong presence of business, civil society and prominent stakeholders of global trade–has been tasked with identifying what are today’s and tomorrow’s obstacles to trade, as well as the potential opportunities for the Multilateral Trading System; and explore how trade is contributing to development and what actions can be taken to ensure that the trading system continues to support growth, job creation, poverty alleviation and improved standards of living.
*MFN: “Most-favoured nation” status.
©OECD Observer No 290-291, Q1-Q2 2012
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