November 2011Click the links on the left for archived newsletters by month.

Despite the turmoil in global economic markets, world economies continue to move toward more open markets and a stronger flow of free trade. This month INSIGHTS focuses on a recent speech by Pascal Lemy, Director-General of the World Trade Organization, in which he lays out a future vision for an international monetary system to support global trade. In a short sidebar, we highlight Lamy's call for greater vigilance as continued economic uncertainty is leading to calls for more protectionism.

A Multilateral Trading System Needed for the Future

Calling for changes to international monetary relations on par with the changes that have already occurred in global trade—moving "from the world of Hobbes towards the world of Kant"—Pascal Lamy, Director-General of the World Trade Organization (WTO), outlined the key elements of a future multilateral trading system. The ultimate goal is to create an international monetary system that facilitates international trade, cross border investment and a better allocation of capital across nations, while also inspiring confidence and offering stability. Lamy made these remarks during a speech at a Deutsche Bank meeting in Berlin on October 6th.

In Lamy's view, neither national solutions in areas like currency policies nor coercion through trade sanctions or other punitive measures are effective in today's economically intertwined world. "Monetary policies do not operate in a vacuum," he said. "They cannot be made to function in the national interest unless they function in the global interest."

Instead, countries need to invest in a more open and rules-based trading system as a way to generate growth, to create jobs and to spur development. That means ensuring that the rules governing global trade are up-to-date and relevant to evolving trading patterns and integrating the world's poorest countries into the world economy.

Here are the five elements of Lamy's envisaged multilateral trading system.

1. An ongoing case for trade

Stating what global trade can and cannot do is essential. Trade can reduce poverty and drive growth, job creation and development. However, trade cannot make up for a lack of robust domestic policies in specific countries. For example, Lamy noted that trade requires certain conditions, including income distribution policies that lead to more equality. "It is inequality at the global level between countries, and within countries, that is breeding resentment to international trade," he said. "Absent policies on education, social safety nets or innovation, the WTO's ability to.. open and regulate markets is imperiled."

2. Fewer obstacles to trade

Efficiencies and economies of scale remain essential components of sustainable growth. As the WTO deals with tariff peaks and distorting subsidies, it must also turn its attention to non-tariff barriers, such as regulatory differences in areas like food or product safety, consumer information or environmental protection, that can create obstacles to trade. Lamy called for a balance between the need to protect the consumer and the need to prevent the proliferation of different standards that can come at a cost to trade. A new negotiating mentality that allows for an integrated view of tariffs and non-tariff measures can help forge stronger links between trade, investment, competition, competitiveness, and sustainability. At the same time, this more integrated approach to trade obstacles can lead to a situation "where the borders between goods and services become more porous," said Lamy.

3. Multilateral trade opening initiatives

A growing number of trade opening initiatives in specific countries and regions have the potential to segment markets and create new challenges. "While there is slow convergence on tariffs, the risk of divergences in regulatory frameworks and preferential trade agreements is growing," said Lamy. "We will need to fashion a new framework more applicable to these preferential trade agreements."

4. New accounting for global value chains

In this future system, old concepts like "country of origin" or "resident versus non-resident" lose analytical relevance in international economics and, instead, are likely to yield to the "Made in the World" concept. As businesses increasingly trade in tasks rather than goods, the resulting geographical fragmentation is leading to structural change in international trade. From a trade policy standpoint, this shift requires new measurement of trade flows based on value added—i.e., the domestic content of exports minus direct and indirect imported inputs—which is particularly significant when measuring bilateral trade balances, said Lamy.

5. Developing countries that are integrated into the global trading system

Lamy sees this multilateral trading system as having as few exceptions and exclusions as possible. Instead, the system would focus on helping the weakest countries to use trade as a tool for economic development. For example, programs like Aid for Trade (which helps developing countries to build the skills and infrastructure necessary to implement WTO agreements and to expand trade) could be important features in this multilateral trading system.

WTO Calls for Continued Vigilance Against Protectionism

The World Trade Organization (WTO) calls for continued vigilance against protectionism as it prepares to report to the G-20 on the trade restrictive measures it has observed in recent months.

According to the WTO's monitoring system to track new trade measures, most governments have successfully kept protectionist pressures under control, even though "the economic crisis of 2008 created a fertile ground for protectionism," said Pascal Lamy, WTO Director-General, during his remarks at a recent meeting hosted by Deutsche Bank. Although this economic turmoil has not led to increased protectionism, the danger is not over.

"In today's world of global value chains, protectionism hurts not only consumers but also upstream domestic producers importing low value-added input to focus on higher technology-oriented tasks — hence endangering highly paid, export-oriented jobs," said Lamy. "To turn to protectionist trade measures in the current circumstances would be a huge mistake — one that could send the slowing global economy back into deep recession."

Let us know what you think!

This issue is just the beginning of IIG Trade Finance Insights and we want to make sure we are providing useful information on the most important topics affecting our clients. We welcome your input on topics of interest, so please contact us at insights@iigcapital.com with your comments and ideas for future editions of Insights.

IIG Capital LLC, © 2012. All rights reserved.