Date: 13/10/2009

Source: World trade Organisation

Title: WTO: Lamy: Speech by the WTO DG to the German Engineering Federation
Summit, Berlin

It gives me great pleasure to be in Berlin to address the German Engineering
Federation. The VDMA is a clear example of why international trade is
important. One of the stated goals of your association is to open the door
to world markets for small and medium businesses, through the implementation
of export-oriented measures.

We are in a country, Germany, that by all standards is very open to
international trade, as testified by a ratio of exports to GDP of more than
three quarters. At the same time, the VDMA operates in sectors such as
transport equipment and machinery, where a combination of comparative
advantages, product quality and know-how contribute to making Germany the
top global exporter.

Speaking to such a group from a sector that exports roughly two thirds of
its output worldwide, it will not be hard for me today to convey the idea
that multilateral trade opening, as supported by the principles of the GATT
and the WTO, is mutually advantageous for the countries that engage in it.
At least since Adam Smith and David Ricardo, economists have shown that - by
allowing countries to allocate their productive resources to the activities
they can do best - international trade brings efficiency gains.
Contributions from the 1980s - including those of Paul Krugman, last year's
Nobel prize winner- have pointed out that international trade, especially
the intra-industry type that is so relevant in high technology industries,
is also likely to produce gains from increased variety and pro-competitive
effects.

Finally, trade opening is associated with an increase in average industry
productivity.

Recognizing the multiple sources of possible gains from trade, European
nations started to reduce trade barriers in the second half of the XIX
century. The process of trade opening was not smooth, and it came to a
sudden and disastrous halt in the interwar period, where the imposition of
prohibitive tariffs and the sirens of economic nationalism contributed to
exacerbate the Great Depression.

The failure of trade cooperation of the interwar period was a hard-learnt
lesson for the policymakers who constructed the global economic architecture
at the end of World War II. In 1947 the GATT was created to foster the
reduction of tariffs in successive rounds of multilateral trade
negotiations. In the eight rounds that took place between 1947 and 1994,
tariffs on industrial products in industrial countries were reduced by
several magnitudes, and averaged 3.1 per cent at the end of the Uruguay
Round in 1994. Importantly, tariff cuts were implemented on a
non-discriminatory basis.

The WTO, created in 1994 at the conclusion of the Uruguay Round,
strengthened the rules-based multilateral trading system in various
respects. It provides a larger forum for developed and developing countries
alike, it brings about more transparency by disseminating information
through Trade Policy Reviews, and it has a Dispute Settlement mechanism
whose decisions bind WTO Members, thereby reducing the scope for the
unjustified adoption of trade-restricting measures.

Between 1950 and 2005, world merchandise trade has grown more than
twenty-seven fold in volume terms. This expansion has been three times
faster than growth in world GDP.

It is therefore no surprise that in November 2001, WTO members agreed to
launch the Doha Round of negotiations. This is an ambitious round of
multilateral negotiations, with a wide set of issues on the table, ranging
from the reduction of tariff and non-tariff barriers in agriculture and
manufactures, to services, trade facilitation and more open markets for
environmental goods and services. I mention this last issue because I
believe it is of particular interest to a number of small and medium
enterprises affiliated with the VDMA that produce and export
climate-friendly technology, such as photovoltaic solar and waste treatment
and recycling technology.

After eight years of negotiations and as we were moving towards the closing
stages, we entered the worst and most global economic crisis of modern
history - a crisis whose consequences will be felt for some time to come.

Although the crisis had its roots in the financial sector, trade has been
affected along with the rest of the real economy. The insecurity created by
the crisis has led households to postpone purchases of manufactured goods
and consumer durables - the goods that are traded most. Secondly, the risk
of bank insolvency dried up trade finance, which is used to fund 90 per cent
of the $16 trillion in world trade. Third, the manufacturing model that
relies on international production chains has contributed to a trade
contraction that is significantly larger than that of output because of the
magnification effects of global supply chains.

The current crisis has also negatively affected global foreign direct
investment, which fell by 15 per cent in 2008 and is projected to drop
further.

This has lead to widespread fears of resurgence of the type of virulent
beggar-thy-neighbour protectionism of the 1930s.

The WTO vigorously stepped in to address the situation. We have set up a
monitoring mechanism - a type of WTO "radar screen" - to help Members fight
against protectionist pressures by ensuring transparency in the measures
taken in response to the crisis.

We have not seen the kind of high intensity protectionism of the past, even
if an accumulation of lower intensity measures can stand in the way of a
more rapid recovery.

Second, together with other institutions we have carefully been monitoring
the trade finance situation, including the implementation of the G20 $250
billion trade finance package, agreed at their London meeting in April.

Ensuring access to trade finance is especially important for small and
medium enterprises, whose funds are limited and who therefore heavily depend
on access to credit to engage in foreign trade.

The effects of the crisis on the real economy has been severe, and is likely
to have social and political repercussions, given the rise in unemployment.
There are some timid "green shoots" that we must consider with caution,
avoiding unwarranted optimism. On the trade side, the contraction appears to
have begun bottoming out. In Germany, after a gloomy 29 per cent reduction
in exports and 23 per cent reduction in imports between April 2008 and April
2009, exports rose for three months in a row, before experiencing a new
slide in August. This is a clear indication that we should be cautious in
interpreting signs of recovery amidst a fragile world economy and an
uncertain economic outlook.

The efforts to stimulates the economies and stabilize the financial sector
have led to the accumulation of government debt experienced by virtually all
nations.

In Germany the government devoted 85 billion euros (around 1.6 per cent of
GDP) to stimulus measures, provided 115 billion euros for company liquidity
and implemented a 500 billion-euro bank-rescue fund to fight the financial
and economic crisis. The goal of balancing the federal budget by 2011 had to
be abandoned. The deficit is now forecast to return to 3 per cent of GDP -
the ceiling of the EU's Stability and Growth Pact - only in 2013, from a
high of 6 per cent in 2010.

All other countries in the Euro Area are also experiencing large deficits
and an increase in government debt ratios. By way of simple arithmetic,
fiscal "exit strategies" aimed at avoiding ballooning public debt must rely
on a combination of fiscal consolidation, that is, running a primary
surplus, and sustained growth in GDP.

Achieving fiscal consolidation in times of economic hardship is not easy.
The presence of automatic stabilizers such as unemployment benefits and the
reduced tax revenues collected by the government automatically push in the
opposite direction.

Achieving sustained economic growth is no easier. Economic growth can only
be maintained by steady productivity increases. As the experience of many
European countries since the mid-1970s suggests, when productivity growth
slows down, so does economic growth.

It has been repeatedly argued that in order to create sustained economic
growth in Europe, structural reforms are needed. I would argue that
international trade can also be an engine of growth. The dynamic gains from
trade can stimulate innovation and better exploitation of economies of
scale. Trade is also a potent vector of direct and indirect knowledge and
technology diffusion. Direct knowledge diffusion happens through hands-on
experience with the best technology. Indirect diffusion works through
communication and information-sharing.

In this context, a successful conclusion of the Doha round can have yield a
double dividend. On the one hand, the Doha round can play the role of a
global stimulus package. On the other hand, the Doha round can effectively
act as a structural reform package. It is the most effective way of further
constraining protectionist pressures and fostering a political economy
dynamics.

Business support for open trade will be vital to a successful conclusion of
the Doha round. Opening up to international markets is a unique opportunity
for the most productive firms operating in sectors of comparative advantage
to expand business and eventually increase profits. This is certainly well
understood by the innovative and technologically advanced firms associated
in the VDMA.

This is why I am confident that the VDMA will throw its weight behind the
Doha Round and the rules-based trading system embodied in the WTO.

Thank you.