SHF2023｜Pascal Lamy

Pascal Lamy

Former Director-General, World Trade Organization

Ladies and gentlemen, glad to be with you for this shanghai forum once more, although this time again online, I will only be in shanghai at the end of this year for my regular teaching as a professor at the China Europe International Business School.

Let me as agreed with the organizers to offer you a few remarks on the two main topics of what I understand, the focus of the session. And the first one is the big picture on the trade and the other one is this sensitive, but very important: EU-China trading relationship.

Starting with the big picture on international trade, I think it's fair to say that we are seeing the patterns of international trade changing. the recent changes happening is that the forces that shaped trade globalization. Let's say, for the last decades, are changing. Hands are impacting the way companies, countries, trade.

The main reason for that is a change in a relative prices. We all know, the history of trade tells us that trade patterns, trade flows, trade relationship have always moved as a function of relative prices. The price of transport, for instance, but also the price of the energy, the price of the raw material, the cost of labor have when they changed, usually led to major changes in the flows of international trade. And this is what has happened.

The main price that has changed is the price of risk. What we've seen in recent times, and that's what we are seeing today is that the price of risk has shut up, the cost of risk has risen. Hence a series of consequences on international trade and exchange, exchange meaning bowl, by the way, trade, investment, and people.

This results from two major developments. The first one are geopolitical developments, tensions between us and china. And we know that the US- China rivalry is more tense than it used to be, compared to some years ago. Russia invasion in Ukraine is also included, which as created a shock that has rhythm, the cost of risk in a number of areas like energy, like food.

Overall, a situation where countries who are trading with each other now feel more vulnerable than before to each other. This vulnerability is leading to decisions of reducing exposure to trade with partner existed way and to some sort of decoupling. This is a reality. I personally find it unfortunate, but this is a result of this feeling of insecurity, which is now much higher than it was a few decades ago.

The second factor has to do with sensitivities on supply chain resilience, leaving aside the geopolitical tension, we also have an issue that these planning of supply chains on this planet that in turning production system has led to some fragility, and we've seen that quite clearly in some areas during the COVID period. So governments feel more unsecured to each other,hence retraction from the usual rational play of comparative advantage and international division of labor and firms, whether between them said or interfirms, now are addressing this issue of supply chain vulnerability, whether in diversifying supply chains, or in what is called friendshoring ie localizing production in areas which are less sensitive to risk.

This is a reality. How far will it go? Is at this stage, an open question. I look at the numbers that we all find them. And what the numbers tend for the moment is that we do not have a reverse of trade or straight to. We do not have serious signals of deglobalization, meaning globalization moving backward. But we clearly have seen those of globalization changing, morphing, with, for instance, a much slower growth.

The trade to GDP ratio is much smaller than it used to be some years ago. If you look at the recent projection by the world trade organization economies, what they see for 2023, for instance, is a very slow progression of trade, much less than in the past. And we have the same numbers in foreign direct investment. What we see in foreign direct investment is a slowing down of FDI more pronounced in the case of us and china and us than in the case of EU and china or china and EU yet, even in this case, the numbers are decreasing.

And what we also see, which is the sort of the logical consequence of what I mentioned previously, is more foreign direct investment between geopolitically aligned countries, which is an investment version of what is now called a friendshoring, so, not moving backwards, but certainly moving forward more, much more slowly.

Then in the past, and in the case of FDI decreasing floats. So now do you know a lot: These dynamics are not looking good. And the open question is whether this is a moment and that this cost and risk, which has short talk with at some stage, go down, not the case for the moment.

And I can hardly see for the moment in the times to come reasons to believe that this would change, which is the worrying real factor. I believe that the reality is that geopolitics are now stronger than geoeconomics in the way international trade works. And this is a risk for us all, because we will lose efficiencies. International division of labor have been, in my view, remain a big source of efficiency. It's the large expansion of trade in previous decades, which has led growth to poverty reduction. China is a good example of that. If there is less of that, then we will have less efficiencies. And at the end of the day, let's go off. This is not good news. And particularly for countries who are highly dependent on trade, it is the case of the European union. It is the case of China, both cases for different reasons, are highly dependent on trade and will remain highly dependent on trade. China because it needs exports to complement its own domestic growth of consumption, EU because its rate of growth is lower than average on the planet for the moment.

Hence the need to absorb growth coming from other markets and more international trade. So they worry a serious risk of moving from where we were, which was rules based international trade system, not that it was perfect. It was imperfect, but it remained rules based through something which is much more power based where trade relations are weapon eyes, which is bad news.

Now, if we agree with this rather somber diagnosis, what should we do? This is the last part of my remarks today. For you. I have a few general recommendations. Sure, won't be a surprise for most of you. And then a few remarks more focused on the US-EU relationship. General remarks, I think we should all resist the portraits of economic nationalism. My country first is not a recipe for win-win. It is a recipe for mercantilism. It is a recipe for protectionism. It is a recipe for less efficiencies of production systems. This will be detrimental.

First and foremost, for poorer countries, I understand why states are stepping in the economy. And this is the case in china as well as in Europe as well as in the Eu I understand why economists, which is still the economic bible of this planet, could this homeland economy or even question mark, the end of the free market period? I don't think we are yet there, but we must resist this temptation.

Second, I think we have to avoid deviating the playing field, which matters a lot so that competition and should remain reasonably fair. Paris subsidies, export restrictions have grown in recent times. This is not the way to go.

Again, I can understand why seen from country a or b or c it may look the rational way to go, but at the end of the day, this is not a collective optimum. So these temptations should be resisted and third, maybe more importantly, start addressing new obstacle to trade, which have appeared as a result of developments which were not there before.

And I'm thinking, especially to a realize one is the environment and the other is the digital economy. On the environment. We all know we have to decarbonize as quickly as possible. Our economy to address the problem of climate change and global warming. This is leading to a series of policy measures at which all the moments are not properly coordinated worldwide. Nationally, determined contribution do not lead to a collective optimum. And on the contrary, they lead to frictions or differences. The EU is, as we all know, putting in place a carbon border adjustment mechanism, which stems from the fact that the price of carbon in the EU is much higher than in other markets, then leading to risks of the leakage. The US have decided on a huge splash of public money and subsidies with this IRA legislation which delivered the playing field. And, by the way, is as a component which is not of you to compliant in conditioning subsidies to local content.

So this is an issue which we really need to start addressing collectively. And on the digital side, I think it's now pretty clear that digital systems are not as common as previous systems that were determining the speed and the distribution of production systems, whether goods or services.

And here again, we probably are to better align, if possible or if not possible as much as well. Issues like a trans-border, data flows, issues like privacy, protection, issues like that are accessibility or storage, which matter more and more in international trade. Let me finish these a few remarks with a specific focus on the china, EU and EU-China trade relationship, which stems from a combination, multilateral, trilateral, or bilateral brains. I understand why in china, this issue of joining the CPTPP which is pluraltrism frame for regulating international trade, is discussed.

To be very frank. It is not discussed in the European union. The reason why it is not discussed in the European union is that a large part of the trade software of the CPTPP dates from the times when the US where a vibrant promoter of this agreement, although on the trunk, they stepped out of it and seen from the EU side, a lot of components in areas like services, regulation, like digitalization, like subsidies are very much US determined.

We in the EU have on these issues, a different stance. So that's the reason why for the moment, at least, this issue is not open to reflection in the European union. This leaves us with two avenues. One is the multilateral to one, the WTO, the other one is a bilateral one. In the WTO, I think EU and china should partner more than they do in trying to address precisely these issues of a trade, climate related measure, all of a digital convergence or coexistence, a number of European think tanks, including the ones I work with whether it's the as teachers like that are in Brussels, Paris, and Berlin, all the European trend for European center for regulation are working on this. And I believe these efforts are needed to be supported. The bilateral relationship is also very important.

We know that for the momentum, it's heavily influenced by the notion on the EU side, that the EU-China trade imbalance is now massive, that quite a part of that stems from the over competitiveness of china because of its subsidization system, whether with so ease or with private firms.

These are issues which need to be discussed very openly. And the recent decision, EU on e-visa subsidization, I think, is an occasion to open vividly a dialogue, which, in my view, remains absolutely necessary. This is the reason why I personally remain to be committed to trying and limit the negative consequences of these global dynamics I have described.

I hope that we can find within China, a counterpart for these series of reflections and discussions. As far as I'm concerned, I remain open to that.

Many thanks for your attention.