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How to Make Globalization and Free Trade Work?

International & European Institute
Mar 16, 2018 6:18 AM 7 min read

Editor’s Comment: Below are excerpts of an exclusive interview with Pascal Lamy, a French political consultant and businessman, and former Director-General of the World Trade Organization (WTO) around the ongoing discourse on anti-globalization, protectionism and rejection of free trade.


Pascal Lamy
Pascal Lamy


Numerous phenomena attest to the disenchantment with free trade: the rise of protectionism and populism in Europe and the United States, the Brexit, the growing anti-globalization discourse among populations... Will the rejection of free trade be increasingly acute in the future? 


First of all, there is no free trade. Nowhere is there free trade, because trade is always constrained by distance, taxes and controls on compliance with standards. It's a false controversy, an intellectual pretentiousness. These fights over free trade are therefore largely fantasized. What exists in reality is a trade openness movement, which has accelerated and slowed down over the course of history. 


Overall, history has shown that there is a growing trend towards more open trade, because, for reasons well explained by David Ricardo and Josef Schumpeter, the international division of labour is quite rational. However, this process of openness can be painful from an economic and social point of view: it is efficient, but at the cost of transformations due to less severe competition for the strong than for the weak.


Returning to the question, there is indeed a rise of anti-globalization and protectionist discourses. The reason for this is simple: the systems for reducing social insecurity, most of which date back to the industrial revolution, have not kept pace with the increasing strength of globalisation. 


This protectionist and isolationist wave is more pronounced in the United States because the American social system is the less performant among developed countries. 60% of Americans are still in favour of trade openness, but a large section of the population blame globalisation for the downward social mobility they are experiencing: this is the section that Donald Trump has managed to rally. He is taking steps towards a return to mercantilism, which is the Middle Ages of commercial thought. It's an absurd and minority view, but it sometimes found an expression in history, and Donald Trump brought it back into fashion, in thought, and increasingly in action. I am one of those who think that if he persists in this approach, it will affect US growth in the long term, even though it is on tax steroids.

Donald Trump - President of America

However, when we look at the figures, this protectionist rhetoric have little or no influence on reality at this stage, since international trade is increasingly opening up. That is why I do not believe in the theory of deglobalisation. The structural factors that are the main drivers of the current phase of globalisation will continue to operate as trade increases. Thanks to technological revolutions, these factors will continue to produce efficiencies. Data flows are growing exponentially: although they are still poorly measured, they are an essential component of globalization. Where there has been de-globalization and re-regulation is in the financial system following the 2008 crisis.


Is this rejection of free trade justified? Has free trade harmed more than it helped? 


The trade openness movement is embraced by almost every country in the world: most countries are WTO members, with a few exceptions, most of which are temporary. The question that arises is under what conditions the efficiencies generated by trade openness bring welfare. But the benefits produced by free trade and their distribution between winners and losers is a highly controversial subject, with different approaches depending on levels of development, collective philosophies and economic theories. This is why opinions on free trade are often correlated with the size of countries and the quality of the social security system (difference between Nordic countries and countries such as Russia or the United States). It all comes down to the issue of fair trade, which is an ambiguous concept because it is subjective. 


The rejection of free trade is stronger today than it has been for a long time, but it has emerged in the past: in the 1990s and 2000s, civil society organizations considered that free trade had negative effects on development. This thesis has been undermined because the reality has shown that developing countries benefit greatly from globalization because they have many comparative advantages. They are the strongest advocates of open trade, even if it means pursuing it with moderation. China is the best example.


The Doha Development Agenda, launched in 2001, has seen little progress since the failures of Seattle, Cancún and Hong Kong. Why are multilateral trade negotiations stalling?


It is true that the Doha Development Agenda has moved at a slower pace than would have been expected. But there has been progress: a very technical but major agreement on trade facilitation was reached in 2013 in Bali to simplify customs procedures. If there have been many bottlenecks, it is mainly because the United States and China do not agree on whether China is a developed country or a developing country, and to which WTO regime it should be subject: the Americans say that China is a rich country with many poor people and China replies that it is a poor country with many rich people. 


This situation is unlikely to improve, especially when we see Trump's attitude on these issues. Obama had already weakened the system by participating in the blocking of negotiations for agricultural reasons. Trump goes further by challenging the WTO disciplinary system and its tribunal, calling them unbalanced against the US.

 World Trade Organization

You have been Director General of the WTO. How can we reform this organisation to make it more efficient and transparent? 


The WTO is much more sophisticated than other international organizations, notably because of the quality and complexity of its implementation, monitoring and dispute settlement processes: the WTO tribunal has no equivalent elsewhere in the world, because it renders binding judgments. But at the same time, the WTO is a medieval organisation: for example, the secretariat is a simple notary at the service of the Member States, it is not allowed to make proposals, which is a Westphalian way of operating. To make the WTO more effective, it must be transformed into an institution, such as the WHO (World Health Organization) or the ILO (International Labour Organization), i. e. it must allow experts, who are more competent than diplomats on certain subjects, to examine the options and make proposals. 


Based on your experience as European Commissioner, what is the EU's place in world trade? 


The European Union “fell” into trade when it was little. From the beginning, it was built on the ideological commitment to trade openness and reducing barriers to trade. The European Community started with the idea of a customs union, which was the outline of the current common market, and was enshrined in 1957 in Article 133 of the Treaty of Rome. Trade policy has logically been federalised, which gives the European Parliament almost the same prerogatives as the Council of Ministers in approving and supervising the trade agreements negotiated by the Commission. The EU has always been at the forefront on these issues, it has been very open and competitive, especially on goods and services, much less on agriculture. It has always pursued an aggressive commercial policy and, thanks to its negotiating skills, has evolved into a mini-multilateral organization.


What about France in a globalised world? 


France has a special coefficient in globalisation, but this potential is little exploited. In my book Quand la France s'éveillera (Odile Jacob, 2014), I explain that the French have always had a problem with trade, except for a short period during the Second Empire, at the time of the free trade agreement between Cobden and Chevalier. Today, nobody in France knows Michel Chevalier, while everyone knows Jules Méline, who is at the origin of the Méline Tariff (protectionist measures on agricultural products). The problem dates back to the French Revolution, which profoundly changed the structure of agricultural production. Yet, we have had thinkers in favour of trade openness, such as Frédéric Bastiat.


How do companies integrate free trade?


It has always been true that trade is regulated by states, but its main operators are companies. 60% of international trade is intra-firm. Within themselves, companies organize free trade: when they have integrated value chains, they localize them according to comparative advantages by reducing the cost of distance.

Free Trade and Globalization

What will be the future developments of trade opening? 


In recent years, there has been a great evolution in the regulation of international trade. In the past, barriers to trade have been designed to protect producers from foreign competition. 


This logic is disappearing, partly because the fragmentation into value chains is increasing: this is a model where specialized skills are the main source of export value. Similarly, barriers to trade are no longer in customs duties, but in the costs of adjusting production or exports to different regulatory systems, norms and standards. We have moved from a logic of producer protection to a logic of consumer protection: the obstacle is no longer one of protection but one of precaution. 


This new precautionary approach justifiably raises very politically sensitive problems, such as data protection, GMOs, hormones and environmental protection. The political economy of trade opening is therefore changing fundamentally. Trade openness will require a much more harmonised treatment of the precautionary principle in the future. 


This article was first published by the International & European InstituteESCP Europe, and is republished with permission. Click here for the original article.