Political economy of international trade..

An amazing interview of Pascal Lamy, chief of WTO. If this blog was launched around 2000, WTO would have captured much of the attention. Now, WTO is hardly discussed barring a few pieces here and there. Doha development round just does not get over.

Anyways, Lamy points to several interesting things going in trade economics:

in practice, what we are witnessing is, in essence, a complexification of the game. Let us consider, if you will, the example of Asia.

Sixty percent of this area’s international trade is carried out between its own countries, and we are now witnessing a powerful drive towards continental trade openness. Asian countries are opening up to each other. This is a … phenomenon [that] is not unrelated to the more general expansion of international trade in which Asian countries are major players.

But the game gets more complicated if you look at the existing trade agreements: You realize that there are many, and that they cover different scales and different spaces. There are, for instance, ASEAN [the Association of Southeast Asian Nations], ASEAN+3 (with China, South Korea and Japan), but also the Trans-Pacific Partnership (TPP) launched by the United States and which does not include China. Trade integration, thus, is far from being uniform and is still subject to underlying political issues.

Add to this the proliferation of global production chains, in which the Asian countries are integrated, but also the United States, the European Union, the East Coast of Latin America and, to a lesser extent, other areas as well. This is an even more [fundamental] — yet inconspicuous — phenomenon. On average, the import content of exports has risen from 20% to 40% in 20 years. This is huge! And above all, looming in the distance of this phenomenon is the dissolution of the very notion of international trade — because the problem will no longer be about crossing a border, but about entering a differentiated regulatory space.

On how the trade rounds are different from the 1980s and Importance of culture:

We are no longer in [the period between] 1980 and 1990, when trade negotiations focused primarily on quotas and tariffs. We live in a world where the stakes behind trade openness have to do with the juxtaposition of different regulations. And it is more difficult to negotiate on these preferences, because regulations are not intended to protect producers as much as consumers. Therefore, it seems to me that it is too early to talk about protectionism or the return of trade barriers. Undoubtedly, some business lobbyists are playing to that end, pushing for the adoption of specific regulations. But the real challenge does not reside there. The real challenge is protecting consumers.

At this point, fundamental questions come in, like: What is risk? Of course, the answer to these questions is also correlated with the developmental level of a given society. But if you take two areas with equivalent development, such as the United States on one side and Europe on the other, the issue of hormone-treated meat, for instance, will be viewed from a quite different perspective in each place. The cultural dimension is essential here, and it is much less easy to negotiate.

These new issues have reinforced the relevance of a sectoral approach, as shown by the Government Procurement Agreement that was signed in December 2011 [providing better regulations for awarding government contracts and using public resources], which should broaden the scope of market access by $80 billion to $100 billion per year in areas such as infrastructure, public transportation and hospital equipment.

Why exchange rate is not part of WTO rounds?

Indeed. The issue of exchange rates had never been addressed within the framework of the WTO, but the issue reappeared last year, although not about the yuan, but at the initiative of Brazilians and about issues involving the rate of the Brazilian real against the dollar.

The least we can say is that the subject is very complicated. Article 15 of GATT, which is reported to have been written by Keynes himself, essentially says that you cannot manipulate your exchange rate to escape the disciplines of trade openness you subscribed to. It is a central principle. Yet it has never been invoked in litigation, so there is no real legal doctrine on these matters. The issue has certainly been raised in the course of 20 years in the public debate. But during these 20 years, everyone, including myself, felt that it was not an issue for the WTO: Geneva is about trade, and Washington (IMF Headquarters) is about exchange rates. We have now broken the silence … but we’re no further forward today than we were then!

The IMF [International Monetary Fund], the institution best able to address these issues, has recently revised its diagnosis: According to it, the yuan is only “moderately” undervalued, while it was “substantially” undervalued two years ago.

There are both economic and legal aspects

There are several elements I take from ongoing discussions. Some are economic; the others [are] legal.

First, one cannot deny that exchange rate fluctuations have a short-term impact on exchanges. But these effects are less noticeable in the long run. Their impact depends on one parameter: the added value of your participation in world trade. It is obvious that an undervalued currency will promote exports, but as I said earlier, there are more and more imports contained within exports. Also, the currency diversity of imports and exports baskets must be taken into account. Finally, if we consider the special case of the yuan, the gradual rebalancing of China’s trade tends to iron out the problem. Assuming that it could be demonstrated that, at some point, China benefited from an unfair competitive advantage by undervaluing its currency, this advantage was only temporary.

Therefore, we are lacking legal arguments and tools to address these issues. Even if it were found that the Chinese exchange rate actually is not free, nothing obliges them formally to do otherwise. U.S. legislation had attempted to … legitimize anti-dumping offsets on the grounds that such compensation was retaliating against disguised subsidies. But this law was rejected by one of the Houses [of the U.S. Congress].

One must understand that the nets of international regulation are heterogeneous, making it more or less easy to slip through. Some institutions have very close-knit meshes, like the World Organization for Animal Health (OIE). Others — even though they deal with a major topic [related to] the course of trade, such as corruption — have very large meshes. And states do not join international regulations unless they have an interest in going there. In 1947, when the GATT was signed, there was a very strong impulse, for we were just emerging from the 1930s crisis and doing our best to address the aftermath of World War II. At that time, we proved we were capable of going a little beyond the Westphalian game. Today’s crisis raises the very same issue — again. Will we be able to respond in time? This is the great question of our age.

Superb stuff..

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