Date: 24/02/2010
Source: World Trade Organisation
Title: WTO: Lamy: Speech by the WTO DG to the European Policy Centre, Brussels

Thank you very much to the European Policy Centre for organising this
morning's discussion.

I am grateful for the opportunity to present the case for international
trade as an important part of a global solution to the recent economic
downturn. As economies attempt to recover from the crisis, keeping
international markets open is vital.

Turbulent times

These are not easy times. We know that in 2009, growth of real world GDP
was negative, estimated at -2.2 per cent. Furthermore, the global
unemployment rate reached its highest level ever, with the International
Labour Organization estimating the number of jobless worldwide at over
200 million. The adverse impact of the recent financial crisis on the world
economy in terms of output and employment is undeniable.

World trade has also been a casualty of this crisis, contracting in volume
terms by around 12 per cent in 2009 - the sharpest decline since the end of
the Second World War. The main explanation for this freefall in trade has
been the simultaneous reduction in aggregate demand across all major world
economies. The drying up of trade finance during this period has also been
a contributing factor. To a much lesser degree, trade has been adversely
affected by some instances of increased tariffs and domestic subsidies, new
non-tariff measures and more anti-dumping actions.

We started last year with a collapse in trade, a drying up of trade
finance, concerns that donors would reduce funding for "Aid for Trade", and
worries that protectionism would kick in. And yet one year on from the
onset of the crisis, we see that, to this point at least, the multilateral
trading system has proven its sturdiness as a bulwark against runaway
protectionism.

In most developed economies, including the EU, stimulus packages have been
instrumental in preventing further deterioration in output while preparing
the path to recovery. The jury is still out though on whether some of the
measures introduced to stimulate economies contain provisions that favour
domestic goods and services at the expense of imports.

But the positive impact of national stimulus packages is fleeting and
worries are mounting over the huge budget deficits rung up by many
governments. Economies urgently need other sources of growth -- sustainable
engines of growth which will not add to our already seriously indebted
economies. This is where trade can be an important part of the story, both
in the long-run and in the short to medium-term.

Trade as a source of growth and jobs

In the long-run, economic growth is driven very significantly by
technological progress and the quality of domestic institutions. Trade has
an important role in this context.

First, it can enhance technological progress by increasing the incentives
to innovate, facilitating transfer of technology and fostering
"learning-by-doing" effects.

Second, trade reform may directly increase the quality of institutions by
leading to the adoption of certain institutional norms. Moreover, the
preferences that underlie such institutional reforms may be the indirect
consequence of the workings of market forces associated with trade.

In the short-to-medium run, trade allows external demand to provide a
buffer for economies facing low domestic demand during periods of recovery
from the crisis. This is especially important in several developed
economies, where domestic demand is likely to be subdued for a while as
domestic savings are reconstituted and the financial system recovers. Trade
openness vis-à-vis a diverse set of countries is important for mediating
the effect of a shock.

More generally, trade can increase income or output levels through
efficiency gains from specialization based on comparative advantages,
greater competition, access to a larger variety of intermediate inputs,
scale economies and an intra-industry reallocation of resources.

Moreover, exports, in particular, can increase the levels and growth rates
of income or output as they often have a high value-added component. This
is especially true in developed countries, where firms specialise in the
high value-added segment of the global supply chain. Importantly, the
value-added component of exports is likely to have a positive effect on
domestic demand due to backward linkages with several sectors in the
economy.

In fact, evidence suggests that the domestic content of value added by
exports is higher as countries develop. For example, in 2008, 80 per cent
of the value of the goods exported by the US had a domestic content, while
this share was only 42 per cent for Malaysia. In addition to the
value-added argument, there is evidence of "learning-by-exporting", which
increases productivity and hence promotes growth.

As a digression, it is also worth noting trade may help keep prices of
goods down as economies recover from the crisis. This means that prices
will not increase as much in response to an increase in output or a
reduction in unemployment when economies are open to trade because trade
allows countries to source important goods or inputs from the rest of the
world.

An increase in levels of output or income is crucial to the process of
recovery from the recession. But equally crucial is a reduction in rates of
unemployment. Today unemployment is intolerably high. More must be done to
empower our citizens. Trade can be part of the solution. So how does trade
alleviate this concern?

Naturally, an increase in incomes creates jobs in different sectors by
increasing demand in the domestic economy, which has subsequent multiplier
effects. This resulting increase in jobs is what may be termed the
"second-round" effects.

But trade, in general, and exports, in particular, are also likely to
contribute directly to the reduction of unemployment in the recovery phase
following the financial crisis. These "first-round effects" relate to the
experience of a number of countries where the share of employment which
depends on exports is typically large.

For example, it is estimated that in 2008, 22 per cent of total employment
in Germany depended on exports. Similarly, in the United States, two out of
every ten manufacturing jobs in 2006 were related to exports of
manufactured goods. There are also a large number of workers involved on
the import side of trade. In Australia, for instance, 1 in 10 workers were
involved in import related activity in 2008.

Going forward, preliminary estimates suggest that exports could contribute
to about 40 million jobs in China and manufacturing exports could create
about 160,000 jobs in the United States in 2010.

These findings appear to be particularly relevant in the current situation
as trade has the potential to pick up strongly and lead to new hiring,
particularly in export-oriented sectors.

Of course, one must remember that not all the jobs created in
export-oriented sectors will go to previously unemployed workers. Some will
go to previously employed workers who are transferring to the export sector
because of better opportunities.

Even so, this re-allocation is economically valuable. It means that workers
are moving from sectors where their marginal product is lower to those
where it is higher. This results in productivity gains to the economy and
hence increased output and unemployment. But given the current high rates
of unemployment the world over, it is likely that many of those getting
these jobs in the export sector will be from the ranks of the unemployed.

It must also be acknowledged that with import competition and outsourcing,
trade may lead to job loss in certain sectors of the economy. This is where
domestic programmes to train workers and foster greater mobility in labour
markets can enable those displaced to find jobs in the more efficient,
expanding sectors of the economy. And this is also where social safety nets
can help them bear the burden of transition in the short-run.

So what can we say in terms of the role of trade policy during this period
of recession? The key point is that trade can have a positive impact on
incomes or output and job creation during this economic downturn. But for
this, international markets must remain open and countries must continue to
trade on the basis of comparative advantage.

Keep trade open and keep opening trade

Specialization of production and export structures on the basis of
comparative advantage is at the very heart of European economic
integration. A free-trade area enables countries in the region to reap the
efficiency gains of trade opening that arise from comparative advantage,
scale economies, increased competition, access to a variety of intermediate
inputs and intra-industry resource allocation. Furthermore, given that the
EU represents an even deeper form of integration with free movement of
factors across its constituent countries, it can facilitate adjustment in
the face of an asymmetric country-specific economic shock.

We must therefore ensure that trade remains open. But we must also work to
keep opening trade through the conclusion of the Doha Round. A Doha deal
would provide new market opportunities through the reduction of tariff
barriers and domestic subsidies. But it would also reduce the fixed costs
of trading by addressing, for example, customs procedures and red-tape in
the part of the negotiations devoted to "trade facilitation".

Finally, and very importantly, the DDA [Doha Development Agenda] will
provide for more certainty in trading arrangements by securing binding
commitments from member countries. This is especially important for
economic growth to create jobs, as experience from past recessions suggests
that employment growth will be sluggish in the aftermath of the crisis even
though output expansion may have resumed.

During the "dotcom" crisis, for example, the US economy stopped contracting
in November 2001 and began growing again, in terms of output. But the US
unemployment rate continued to climb until June 2003, a full 19 months
later.

One reason commonly advanced to explain this "jobless recovery" is the
uncertainty faced by employers about whether the economic expansion they
are witnessing is sustainable. Only if they are convinced that demand
growth is durable will they be willing to commit to new hiring. A
successful Doha Round will greatly reduce uncertainty relating to
protectionism, the spectre of which may hinder new hiring, especially in
the export sector, since it is the most vulnerable to trade restrictions.

Of course, opening markets may expose countries and individuals within
countries to greater volatility. But the response cannot be to turn away
from openness. It must be to ensure that market opening is accompanied by
international rules and international and domestic policies, such as Aid
for Trade, that ease any potential adverse impacts during the transition
period.

If there was a geopolitical sense in launching the Doha Development Round
in 2001, another year when the world was put to the test, it is today
economically imperative to conclude it.

Thank you very much for your attention.