Economic Observer Exclusive: Interview with Director-General of the WTO Pascal Lamy

By Paul Pennay, Rose Scobie, Zhang Feifei, Zhang Bin
Published: 2010-06-03

On the occasion of the third Trade Policy Review of China conducted by the WTO, the Economic Observer conducted an e-mail interview with Pascal Lamy,the Director-General of the World Trade Organization, on issues related to the review. We also asked the Director-General about the outloook for China's international trade, recent currency disputes and the potential for reform to the way international trade statistics are collected and analysed.

The Economic Observer: When you became Director General of the WTO in 2005, you pledged to break the impasse over a long-awaited global trade deal, that would cut subsidies, reduce tariffs and give a fairer deal to developing countries - in July 2008 you emotionally declared that the Doha round had broken down. Where does the Doha Development Agenda currently stand? What are your hopes and expectations for any kind of outcome this year?
Pascal Lamy: The negotiations are continuing. Today 80% of the overall package is already on the table. This includes big reductions in trade distorting agricultural subsidies and tariffs and the end of agricultural export subsidies. To these we have to add an important reduction in industrial tariffs that goes well beyond what was achieved during the Uruguay Round. The highest tariffs in developed countries would not surpass 8% with an average well below 3%. And for major developing countries, the average would be around 12%. To this we have to add opening of services, simplification of customs procedures and reduction of fishery subsidies which contribute to overfishing to name a few. This package provide a huge stimulus to the world economy.
But now we still have to agree on the remaining 20% of the package. During a recent meeting in Geneva all countries committed to a successful conclusion of the Round. They see the Doha Round as a key contribution in the form of growth and employment for the recovery. Members are now concentrating on technical issues that do not necessarily make headlines in the newspapers. Now, concerning deadlines, it is difficult to make forecasts. The G-20 leaders have set 2010 as the deadline. WTO members renewed this pledged at our Ministerial Conference in Geneva in December last year. This is technically doable but it remains to be done at the political level. I am convinced that with the necessary political will a final deal can be achieved soon.
The Economic Observer: According to a WTO report, more than 30% of anti-dumping investigations and almost 70% of countervailing investigations conducted under the framework of the WTO were targeted at China.
-Why do you think China is involved in such a large number of investigations?
-Do you agree with the Chinese Ministry of Commerce's description that China is the biggest victim of trade protectionism?
-What moves do you think China should take to decrease the threat of protectionist measures?

Pascal Lamy: Since joining the WTO, China has nearly doubled its share of world exports, and has emerged as the largest exporting country in the world.  The increase in trade remedy measures vis-a-vis Chinese products has coincided with this. It is not unlike what we have seen in the past, for example with the rise of Japan in the 80's. During the same period, China also has been one of the major users of trade remedy measures, accounting for roughly 10% of all anti-dumping cases initiated since 2002, and recently beginning to use (CVD) Countervailing Duties measures as well. Periods of economic crisis often coincide with an increase in the number of these cases. The use of trade remedies is subject to detailed multilateral rules under the relevant Agreements on AD, CVD and safeguards. These agreements are part of the Doha negotiations where Members have agreed to improve these disciplines. The conclusion of the Round could therefore contribute to strengthening these provisions.
Protectionism is a danger for the recovery. This is why at the outset of this crisis we put in place a mechanism to monitor measures taken by WTO members during the crisis. The multilateral trading system has been effective in preventing high intensity protectionism which would have harmed seriously Chinese exports. But we should remain vigilant because as long as unemployment remains high, the risk of protectionism remains.
The Economic Observer: In testimony to a U.S. Senate enquiry earlier this year, C. Fred Bergsten, head of the Peterson Institute for International Economic, said that existing WTO rules can be used to pressure China to re-valuate the renminbi. What role could WTO rules play in any future dispute between the US and China over the valuation of the RMB?
Pascal Lamy: Currency issues are essentially a matter for the IMF. The only WTO provision touching upon the issue of currencies is Article XV of the GATT which says that WTO Members shall not frustrate the intent of the WTO agreement through a exchange action. This article has never been tested, nor has any WTO member brought any case on this matter. It is certainly not for the WTO DG to provide any public advice on this sensitive topic.
The Economic Observer: Do you think that the emergence of a low-carbon economy will have a large impact on global trade patterns? What will it mean in relation to China's foreign trade?
Pascal Lamy: Trade can be synergetic with protection of the environment, as well as achieving a low-carbon economy. These are not contradictory. For example, better access to green goods and services can help the transition to a low-carbon economy. This is part of the Doha Development Agenda where WTO members are negotiating the reduction of tariff and non tariff barriers to environmental goods and services. Lowering trade barriers on goods such as wind and hydropower turbines, solar water heaters, photovoltaic cells, tanks for the production of bio-gas, landfill liners for methane collection, as well as the equipment necessary for the operation of renewable energy plants and technologies can directly contribute to climate change mitigation.
China is one of the top exporters with respect to a number of products currently on the table, in particular in the renewable energy category. In fact, in 2007, about 2 per cent of China’s exported goods figured in renewable energy product lines. So China has a big potential of becoming a world leading actor in clean technology and environmental-friendly goods.
The Economic Observer: In a speech to the Paris School of Economics last month, you said:
"Relying on conventional trade statistics also gives us a distorted picture of trade imbalances between countries. What counts is not the imbalances as measured by gross values of exports and imports, but how much value added is embedded in these flows." Is the WTO currently researching the establishment of a new measure that will provide a clearer picture of world trade?
Pascal Lamy: We are working with other agencies to explore the prospects of measuring trade in value-added terms. Today national income (GDP) is measured in value-added terms, that is, the amount of value (or in this case income or production) that factors of production generate in the economy.  This is a "net" concept of value.  The conventional measure of trade is "gross" flows - the total value of goods and services entering the imports or exports of a country.  If trade is measured only in terms of gross flows, it gives a picture that does not entirely reflect where goods are actually produced, given today's fragmentation of production. Take the example of an iPod assembled in China by Apple Co. According to a recent study, it has an export value of $150 per unit in Chinese trade statistics but the value added attributable to processing in China is small, compared to the value of components from Japan, the United States (including patent royalties) or from other Asian countries.  Using value-added to measure trade flows would give us a more accurate picture of how production and trade are undertaken in today's globalized world. It will be essential for good trade policy making in the future. I hope Chinese experts and scholars could also join in this collective effort in the near future. 
The Economic Observer: Over the past 20 years, foreign trade has played a pivotal role in China's economic development. Currently, the Chinese government is attempting to transform its model of economic development, and promoting the expansion of domestic consumption. Over the coming 20 years or even longer, what role do you think foreign trade will play in the development of China's economy? In your analysis can you provide us with an estimate on both the size and nature of foreign trade and it's contribution to China's economic development in the future?
Pascal Lamy: The report that we have prepared for the Trade Policy Review explains that the Chinese Government recognizes that temporary measures alone are not sufficient to correct imbalances in China's pattern of economic growth and development, which are essentially macroeconomic and structural in nature. Achieving a better balance between external and domestic demand to drive its growth, and further opening of its import and export policies multilaterally will reinforce China's leadership role in helping to manage periodic trade and economic imbalances of international importance in ways that minimize the risk to global growth and prosperity.
Our experts have noted that China's heavy reliance on manufacturing has resulted in over-investment and hence excess capacity in certain industries, which became obvious when external demand declined. The current economic and financial crisis has reinforced China's intention to undertake more longer-term structural reforms that are needed to strengthen its social safety net, reduce precautionary saving by households, diversify its economic structure, and improve its underdeveloped capital market. China expanding its domestic consumption in the future would increase its imports, hence reducing its trade surplus.
The Economic Observer: China flouts IPR protections in many areas (films, technology) how will the WTO address this issue in the future?
Pascal Lamy: If any WTO member feels that China is not respecting its commitments under the TRIPS agreement or is violating any of its provisions, then that member can take China to the Dispute Settlement.
The Economic Observer: This year, the China-ASEAN FTA, the world’s largest free trade agreement in terms of population, was finally brought into effect.
- Against the background of rising protectionist pressures and falling global trade, how do you view the establishment of this FTA and are you optimistic that it will be successful?
- How do regional agreements such as the CAFTA relate to the WTO's goal of being the global body responsible for administrating international trade? 
- Given the stalled Doha talks - are countries choosing to set up regional agreements instead?

Pascal Lamy: WTO rules allow the establishment of bilateral or regional trade agreements among members. Their aim is to ensure that these agreements are complementary – and not a stumbling block – to multilateral trade opening. They have to be notified to the WTO who will then examine whether they fit the criteria and disciplines established in our rules. But these agreements have a discriminatory effect on third countries and hence they can divert trade and distort the allocation of resources. Often these regional agreements do not deal with issues like agriculture subsidies, or anti-dumping which can only be tackled at the WTO level. The multiplicity of rules of origin and certification procedures can also complicate the operations of business. This is probably why preferential agreements are often not used by business, as evidenced by recent work by the research institute of the Asian Development Bank.  My own sense is that now the priority must be to conclude the Doha Round so that it can prove a strong foundation on which further trade opening at the regional level.

The Economic Observer: The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO.
- How transparent has China been?
- What steps can the Chinese government take to make its trade regime more predictable and transparent?

Pascal Lamy: China has been an active participant in the Trade Policy Review exercise, which itself is a transparency exercise. Since its accession to the WTO in 2001, the transparency of China's policy regime has improved importantly and WTO Members have recognized the positive changes in China.
On the other hand, like all other WTO Members, there is still room for improvement. Concerns and questions regarding some of China's industry- specific policies were raised in the Trade policy review this week and it will be good for China to engage in a frank dialogue with those trading partners to address them. Transparency and predictability would give confidence to both Chinese and foreign business communities.
The Economic Observer: Recent reforms of both the IMF and World Bank have led to an increase in the voting rights of China and other developing and emerging nations. Have similar changes in the influence of China and other developing countries also taken place within the WTO?
Pascal Lamy: The WTO is different from the IMF and the World Bank. We don't have voting rights, quotas or boards. We work on the basis of one Member one voice and our decisions are made on the basis of "consensus". This structure has allowed the organization to adapt to geopolitical changes in the world. It is no coincidence that this round was dubbed "the Doha Development Round". Today developing countries make up two thirds of our membership; Their participation in the negotiations and at all levels of WTO work has increased enormously in the last few years. They have built alliances in groups representing various sensitivities and forcefully defend their interests. This shows the WTO is a living organism with a capacity to adapt to changes.
The Economic Observer: In March it was reported that the Obama administration was weighing the merits of taking China’s censorship of Google Inc. to the World Trade Organization as an unfair barrier to trade. How would the current rules of the international organization deal with such a case?
Pascal Lamy: As Director General I must remain neutral and cannot speculate on possible disputes nor can I provide interpretations on specific WTO provisions. It is up to Members to bring matters to the dispute settlement when they believe that WTO rules are being breached. 
The Economic Observer: China is still not a signatory to the WTO Agreement on Government Procurement (GPA) when do you think it likely that China will accede to the GPA? What barriers lie in the way?
Pascal Lamy: As part of its accession to the WTO in 2001, China undertook to become a member of the WTO Government Procurement Agreement. China has undertaken initial steps in that regard by submitting an initial market opening offer to its trading partners and has promised to provide a revised coverage offer before July. Undoubtedly, given the size of China's public procurement market, this will be an important step.

Links and Sources
WTO: Trade Policy Review: China - Restructuring and further trade liberalization are keys to sustaining growth
WTO: Pascal Lamy Biography
Financial Times: WTO criticises China’s export restraints
AFP: WTO members want more transparency from China
Xinhua: China's restrictions on resource exports consistent with WTO rules: experts
Reuters: China to submit new procurement proposal to WTO

Image provided by the WTO