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Free Trade Has More Support Than Many Think, Says Pascal Lamy

Weak growth and divisive politics post threats to global trading system, but the former WTO head insists the true picture is brighter.

  • By Craig Mellow

Ever since the end of World War II, trade has been synonymous with growth — until now. A sluggish global economy, stagnation of middle-class incomes, notably in the U.S., and the offshoring of manufacturing jobs to China and other developing countries have eroded support for free trade in many Western countries. The Doha Round of global trade talks is moribund, and the regional deals President Barack Obama sees as his legacy — the 12-nation Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership with the European Union — are hanging by a thread. Both Republican presidential candidate Donald Trump and his Democratic rival, Hillary Clinton, now oppose the TPP. Meanwhile, growth in global trade volume has slowed since the financial crisis, to 3 percent a year from 5 percent.

Leave it to a French Socialist, Pascal Lamy, to give a full-throated defense of free trade. As chief of staff to Jacques Delors, then president of the European Commission, Lamy played a role in brokering the 1993 Uruguay Round agreement that gave birth to the World Trade Organization. He later headed the WTO from 2005 to 2013. Lamy, who insists the outlook for global trade is better than it seems in many Western countries, spoke by telephone from Paris with Contributing Writer Craig Mellow.

Institutional Investor: Your involvement with trade policy goes back to the 1990s, which seems like a golden age now. What happened to shift attitudes against trade?

Lamy: Let’s distinguish between reality and perception. What reality tells us is that trade is more open today than yesterday. Even measuring by volume, which is obsolete, trade keeps moving forward.

We have always known that trade works because it is painful, and it is painful because it works. We do not trade because we believe in trade. We trade to become more efficient. What is true is that the distribution of winners and losers — in the U.S., for instance — has probably changed over time. That is because developing countries are increasing their place on the value-added ladder, and because the U.S. is a place where social systems are weak.

What do you mean, trade is becoming more open? What’s driving that process?

Two factors: the cost of distance and regulatory concerns. Technology is crushing the cost of distance — whether for goods, people or information — and opening up areas that have so far been nontradable, like medical services or even hairdressers in the future.

Then there are regulatory issues. The average worldwide trade-weighted tariff today is 4 percent to 5 percent, and keeps decreasing. It was 40 percent after the Second World War. The challenge for the future is not protection but precaution. My estimate is that meeting safety, quality, traceability and environmental standards comes to 20 percent of the cost of production for an average exporter.

So is today’s political ferment irrelevant?

No, but you find it more in the U.S. than other places. You don’t find it in Africa or China. The real reasons for stagnant incomes may be the costs of health care and, of course, technology. But trade becomes a scapegoat.

Will the U.S. walk away from the TPP agreement?

I do not believe the U.S. is going to walk out of TPP. It may not come back the day after the election, but many trade deals have a long shelf life.

How do you evaluate Brexit?

Brexit has nothing to do with trade. Many Brexiters campaigned in favor of more open trade than the U.K. has now. We have to make a distinction between nationalism, isolationism and protectionism. In France, the National Front is protectionist. In Germany and Austria, the public has turned against TTIP, but this has nothing to do with protectionism. It’s precaution.

But couldn’t trade become collateral damage?

If and when Brexit happens, and that’s not a 100 percent certainty, trade between the U.K. and the continent will be less than it was. And most impacted will be the part of trade that is growing fastest, which is services.

Data show the growth of global trade has slowed since the financial crisis. Is that the real picture?

It’s a reality if you measure trade the medieval way, which is by volume. But that makes no sense in a world of global supply chains. When I was at the WTO, I launched a big campaign to measure trade the way you measure economics in any other area, which is value added.

The growth slowdown in volumes tells you that the integration of global supply chains has slowed down, partly because of the crisis and also because China’s production is shifting toward the domestic market from exports. Relatively slow EU growth also plays a role, because intra-EU trade is counted as international. But growth will reaccelerate at some stage. The moment Indian doctors can fix your problem somewhere in Ohio, trade in services will increase in a big way. With 3-D printing, trade in services will replace trade in goods.

How do trade technocrats address the cost of nontariff barriers?

That’s exactly what TTIP is about, and why it’s a totally different animal from TPP. TPP was the last of the classical trade agreements addressing protectionism. TTIP should be the first trade agreement addressed to precaution.

What is the outlook for TTIP in Europe?

As should have been expected from the beginning, officials were totally wrong on both sides to say this could be done in a few years. It’s a very complex, very touchy, very sensitive way of reaching some sort of regulatory convergence that produces economies of scale for producers of cars, food, chemicals, pharmaceuticals and so on. It’s a very long-haul process.

Do European politicians see the U.S. as a partner or a rival in trade governance?

The signals from U.S. politicians create a situation where maybe the U.S. will be less of a leader in trade than it has been for the past 50 years. In that case, others will have to do the job, starting with Europe, and emerging countries as well.

What do you consider the most important achievement during your years at the WTO?

That during the 2008 crisis, protectionism did not win. We reacted together with the G-20 to set up monitoring of new trade barriers, which put a lot of pressure on members of the WTO.

The Doha Round is not dead. It was not completed because the U.S. and China were not able to agree on a few things. This will look very strange to future historians, that the U.S. and China could not agree on a few percentage points in tariffs on chemicals, but that is diplomatic life.

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