WTO will go on if US withdraws, official says
Pascal Lamy sees challenges ahead but believes world can avoid descent into protectionism
The World Trade Organization would continue even if the US decides to withdraw, according to a former trade rules chief.
Pascal Lamy, former directorgeneral of the WTO, said whether the US stays in depends on the commitment of the world’s largest economy to a multilateral rulesbased order.
“For the moment, it is the biggest economy in the system, but (staying in) depends on whether you believe at the end of the day that having a collective system, a multilateral cooperation system, is the right way to go. I think the (European Union), Japan, India, China and Africa believe this is so,” he said.
Lamy, who was speaking at the China Europe International Business School in Shanghai, where he has been made a distinguished professor, said the US was breaking WTO rules by imposing tariffs on China and other countries.
“We all know that his tariffs are not WTO compliant,” he said. Lamy added that there is “uncertainty” about whether US President Donald Trump wants to improve the trade system, “or whether he is about getting rid of the trade regime”.
Lamy, who was involved in negotiations for China to join the WTO, said the tariffs would do nothing to reduce the US overall trade deficit because, while it might reduce the deficit with China, it would only serve to increase deficits with other countries.
The decision to impose tariffs, he said, is not a question of the US trade deficit. “Assuming Trump decreases the US-China trade deficit but increases the US-Vietnam or the US-Thailand deficit, that will not change anything seriously,” he said.
Lamy added that having a trade deficit should not be a problem for a country like the US, whose money is used as the global reserve currency.
“The US has had a trade deficit for a very long time, and I think most economies on this planet would agree that this has nothing to do with trade,” he said.
“The US has a trade deficit because US consumers consume more and save less than the rest of the planet. And as long as the US benefits from this formidable privilege of having the dollar (as the reserve currency), they don’t have a problem financing the deficit. If they had a problem financing the deficit, it might be an issue. It is not an issue.”
Lamy also said Trump is wrong to argue that tariffs are a way of bringing back jobs to the US.
“If it is a question of bringing back jobs to the US, it is already near full employment, so it must not be that relevant. It doesn’t make sense,” he said.
Lamy, however, said he supported calls from the G20 Leaders’ Summit in Buenos Aires earlier this month for WTO reform.
“Agreeing on WTO reform is one thing, but agreeing on what you should put in that box called reform is another,” he said.
“China has to compromise in some areas, the US will have to compromise on others. What the EU and to some extent Japan are trying to do for the moment is talk to the US, talk to China, so at the end of the day everybody is around the same table.”
Despite current trade issues, Lamy does not believe the world will descend into 1930s-style protectionism.
“We have reached the stage of globalization which makes deglobalization extremely unlikely. Globalization exists because it is efficient. Deglobalization would be inefficient,” he said.
Pascal Lamy, former director-general of the World Trade Organization, said he believes the reform and opening-up was a major turning point in world history.
The 71-year-old also says there is an increasing understanding of the initiative that was launched by Deng Xiaoping 40 years ago this week at the Third Plenary Session of the 11th Central Committee of the Communist Party of China in Beijing.
“The West regards this as a major shift, and we know that in Chinese history we’ve had periods of opening and periods of closing, and I think that was a real shift,” he said.
Lamy, who helped negotiate China’s entry into the WTO in 2001 — a landmark event in the country’s opening-up journey — was speaking at the China Europe International Business School, or CEIBS, in Shanghai, where he was recently made a distinguished professor.
He said the events in 1978 did not completely register at the time, as he was in his early 30s and not working in international affairs.
“I was a young French civil servant, not connected at all with global and commercial issues,” he said.
Eight years later, Lamy was brought right into the China development story when he made his first visit to the country as chief of staff for Jacques Delors, then president of the European Commission.
On that visit, he met with Deng in Beijing’s Great Hall of the People.
“It created quite an impression for a young guy like myself. He was smoking a lot and very witty,” he said. “He (Delors) was meeting Deng, and I was attending the meeting. It was then I started to take a broader look at the world.”
Lamy, who in the late 1990s and early 2000s served as trade commissioner for the European Commission in Brussels, was to be an important player in the talks that led to China joining the WTO.
He negotiated directly with the country’s premier, Zhu Rongji, and its trade minister, Shi Guangsheng, to set terms for China’s entry.
“It was a very lengthy process because, like with all trade negotiations, they are very complex,” Lamy said, adding that Zhu “had to create a very careful balance” between those whose arms he needed to twist to open up more and those who resisted.
Lamy said there were two key issues to resolve during the lengthy negotiations.
“The biggest questions were market access — China had to open its markets on goods, agriculture, industry and, to some extent, services. Although there was a bit less emphasis on the latter,” he said. “And then there was the issue of China abiding by WTO rules on intellectual property. Market access and IP protection were the two big wins for China’s trade partners.”
Although China’s economic progress after 1978 was already impressive by the time of the negotiations, Lamy said there was no sense that the momentum would continue for the country to become the world’s second-largest economy within a decade of entry.
“Those who had the long view knew that China was developing fast; the growth performance was already impressive. Probably few thought it was sustainable, but it has proved to be so,” he said. “This is the major achievement of the Chinese system. China growing at 6 to 6.5 percent now (given the size of the economy), means much more than it growing at double-digit rates at the time (of entry).”
In addition to taking part in the negotiations for China’s entry into the WTO, Lamy served as the organization’s director-general from 2005 to 2013.
The WTO and China now face a number of challenges, with United States President Donald Trump bypassing the organization’s rules-based framework by imposing tariffs on China and other countries.
“We all know that his tariffs are not WTO compliant,” Lamy said. “There is uncertainty on whether Trump is after improving the trade regime or whether he is about getting rid of the trade regime. If he’s about getting rid of the WTO and about removing multilateralism and moving to bilateralism, then I am quite convinced the European Union, Japan and China will not play his game.”
Lamy is a fervent believer in preserving the rules-based order for all.
“This is why plan A is to keep everyone within the tent because there is a common interest in subscribing to this collective insurance policy against protectionism,” he said. “If the US believe they can do without a collective insurance policy, then the others will have to move to plan B, which is to look at how a system without the US could work.”
He said it is not inconceivable that the WTO could operate without the world’s largest economy.
“For the moment, it is the big economy in the system, but it depends on whether you believe at the end of the day that having a collective system, a multilateral cooperation system is the right way to go. I think the EU, Japan, India, China and Africa believe this is so,” he said.
Lamy also said that the US side’s claims that its trade deficit with China is depriving American workers of jobs does not hold water.
“If it is a question of bringing back jobs to the US, it is already near full employment, so it must not be that relevant. It doesn’t make sense. The US have had a trade deficit for a very long time, and I think most economies on this planet would agree that this has nothing to do with trade,” he said.
“The US have a trade deficit because US consumers consume more and save less than the rest of the planet. And as long as the US benefit from this formidable privilege of having the dollar, they don’t have a problem financing the deficit. If they had a problem financing the deficit, it might be an issue. It is not an issue.”
Lamy insisted that if the US tried to somehow remove China from its global supply chain, so as to reduce its trade deficit with the country, it would just create new deficits with other countries.
“(All this) is not a question of a US-China trade deficit. Assuming Trump reduces the US-China trade deficit, but increases the US-Vietnam or the US-Thailand deficit, that will not change anything seriously,” he said.
The G20 summit which concluded this month in Buenos Aires, however, called for reform of the multilateral system because it was “falling short of its objectives”.
Lamy has consistently called for WTO reform, even while head of the organization, but he argues that the central issues are complex.
“Agreeing on WTO reform is one thing, but agreeing on what you should put in that box called reform is another,” he said. “China has to compromise in some areas, the US will have to compromise on others. What the EU and, to some extent, Japan are trying to do for the moment is talk to the US, talk to China, so at the end of the day everybody is around the same table.”
Despite the current trade turbulence, Lamy said he does not believe the world will descend into 1930s style protectionism.
“We have reached the stage of globalization which makes deglobalization extremely unlikely. Globalization exists because it is efficient. Deglobalization would be inefficient. Part of the Western population believes globalization hasn’t worked for them. Does this mean that deglobalization is the way? I don’t think so,” he said.
Lamy, who makes three or four trips to China each year, said he was delighted to take up his role as distinguished professor at CEIBS, where he will work on projects fostering greater understanding between China and Europe during his three-year tenure. Other holders of the title include former French prime ministers Jean-Pierre Raffarin and Dominique de Villepin, and renowned economist Wu Jinglian.
“This was one of the reasons I accepted the role,” Lamy said. “I am also not too arrogant to think that as well as teaching young students and the faculty I can still learn something every day. Teaching is a good way to learn and interact with these Chinese people. So it is a good trade-off for me.”
As for reform and opening-up, Lamy said he believes China still faces challenges, particularly in the opening of its financial sector, which was particularly problematic for other Asian countries during the financial crisis of the late ’90s.
“A financial system is very fragile and something which needs a lot of care. You have only got to look back to the global financial crisis in the US, which contaminated the rest of the world,” he said. “China can’t manipulate its financial system like it was socks or soy. There are some fragilities in the system that need a cautious approach.”
After 40 years of change, Lamy sometimes finds it hard to reconcile the China he first visited in 1986 with the one today.
“It’s more than a contrast. It is a totally different country. Each time I come here, I find it’s a different country. There is no doubt the main asset of the Chinese success is to do with growth. No other country on this planet has been successful in growing its economy at such speed for such a long time. This is something that is atypical to China.”
Lamy acknowledged that there remains ongoing debate as to what particular aspects of reform and opening-up have delivered success.
“Whether it is because China borrowed Western recipes, as some say, or whether it is because China has remained China with its Chinese characteristics, is an extremely interesting but very open question,” he said. “Even in China.”