Lamy to the slaughter?

May 13th 2005
From The Economist Global Agenda

Pascal Lamy, the European candidate, has won the race to be the next director-general of the World Trade Organisation. Now he faces the Herculean task of getting the Doha round of talks back on track before protectionist politics derail them for good

CAN north and south ever be reconciled? These days, this seems to many to be the biggest question facing the World Trade Organisation (WTO). In September 2003, a block of developing nations led by India and Brazil managed to bring the Doha round of world trade talks to a screeching halt in a key meeting in Cancún, Mexico, by demanding that the rich world lower barriers to agricultural trade. Though strenuous effort has put Doha back on track, agriculture remains a sticking point between the rich, mostly northern countries and the poorer, mostly southern ones. Difficulties abound in other areas as well, particularly services.

The race to replace Supachai Panitchpakdi, the outgoing WTO director-general, has reflected this division. By this week, the competition had narrowed to two candidates: Pascal Lamy, a former European Union trade commissioner from France; and Carlos Pérez del Castillo, a former ambassador to the WTO from Uruguay. Unsurprisingly, Europe lined up behind Mr Lamy, while Latin America and the Middle East backed Mr Pérez del Castillo; America remained publicly neutral. Luckily for Mr Lamy, he picked up enough developing-country support to push him over the top and, on Friday May 13th, he got the nod.

Mr Lamy is in many ways the riskier choice. Mr Pérez del Castillo, a former chairman of the WTO’s general council, has a knack for building consensus that, some believe, would help steer the organisation through the tough times ahead. Mr Lamy, on the other hand, is seen as a tough negotiator—a skill that should come in handy during upcoming talks—but also as a risk-taker, taking controversial positions on big questions. He has been an enthusiastic supporter of widening trade talks to include the “Singapore issues”: trade facilitation, transparency in government procurement, investment and competition policy. Though he has shown flexibility on advancing this hotly contested agenda, it could still be a distraction from the core task of widening access to markets for goods and services. He has also advocated allowing governments to outlaw milk or beef from cows treated with growth hormones. While this might go down well with consumers, especially in Europe, it could become a stumbling block to trade liberalisation.

There are also worries that Mr Lamy’s ties to Europe will lead him to side with the richer nations on contentious issues. But those ties may enable him to push Europe to make difficult concessions—for instance, over its subsidy-soaked common agricultural policy—that Mr Pérez del Castillo would have had a hard time securing. Though the head of the WTO has little statutory power to affect agreements, which are hammered out by ministers at meetings, he has strong powers of persuasion.

Tough times for free-traders

Mr Lamy could hardly be taking over at a more trying time. Around the world, enthusiasm for free trade seems to be on the wane. Partly this is due to the success of earlier trade talks—having made substantial progress in freeing up markets for goods, WTO ministers now must reach agreement on tougher areas, such as agricultural commodities and services, that anger powerful domestic constituencies. Unemployment troubles in rich countries—double-digit joblessness in Germany and France, the “jobless recovery” in America—have not helped either. Protectionism and anti-immigration sentiment are the common political response to a weak labour market, and both are on the rise in Europe and America.

In Europe, some of this anxiety is directed internally, to the ten newer, poorer members of the EU. Many original members, with weak growth rates, heavy labour-market regulation and expensive welfare states, have been looking for ways to mitigate competition from central Europe. But the rapid rise of China has also been cause for alarm. After the expiry of a global quota system that had restrained them, China’s textile exports have surged, prompting the European Commission to launch an investigation.

Nor has China’s rise gone unnoticed in America. America’s gargantuan current-account deficit owes much of its size to cheap Chinese imports—made cheap, in part, by China’s currency peg to the dollar, which has kept the yuan undervalued. American politicians have begun pressuring China to revalue its currency, even though the peg is essentially subsidising America’s budget deficit (since it forces the Chinese central bank to buy massive amounts of dollars, which it then funnels into Treasuries). There is also talk of tariffs and other punitive measures against Beijing.
Even Rob Portman, the staunch free-trader who has just become America’s trade representative, has said that something needs to be done about Chinese imports.

All this comes at a very bad time for the WTO. Mr Lamy will take office on September 1st, just in time to get his feet wet before the organisation’s crucial December meeting in Hong Kong. If the Doha round is to produce substantial liberalisation, it will need America to provide leadership, and concessions. But this will be difficult for America to do once Mr Bush’s hard-won fast-track authority—under which Congress can reject trade treaties but may not amend them—expires in July 2007. That is because, in the current protectionist environment, lawmakers are highly unlikely to hand the president an extension of fast-track. Since it takes close to a year to wrap up world-trade negotiations, this means that any big breakthrough must come in Hong Kong. Otherwise, Mr Bush simply won’t have time to push the new agreement through Congress.

The last big American achievements in trade liberalisation came under Mr Bush’s father, whose administration negotiated NAFTA (a free-trade area with Canada and Mexico) and most of the last round of WTO talks, known as the Uruguay round. Many questioned whether the current president was his father’s heir when he signed into law big import tariffs on steel in 2002, but others saw it as a tactical concession to win fast-track authority. In other areas Mr Bush has largely talked the talk of a free-trader, and now he seems prepared to walk the walk too. This week he threw his weight behind the Central America Free-Trade Agreement, a pact between America and six countries to its south, which is under attack (not least from America’s frenzied sugar lobby) despite the relatively small impact it would have on the economy. But the president may be winning the battle only to lose the war, spending valuable political capital that will be sorely needed in Hong Kong.

That said, there is hope on the horizon. America’s trade deficit narrowed unexpectedly in March; if that trend continues, this should relieve some of the protectionist pressure on Mr Bush. And on May 4th America, along with the EU, Brazil, India and Australia, reached an agreement on the calculation of tariffs that should make it easier to strike a deal in Hong Kong on freeing agricultural markets. If this happens—and it is a very big if—it would rob many countries of their excuse to stall negotiations in other areas, such as services and industrial goods. Mr Lamy has his work cut out, and success still seems far off. But at least it is not quite out of sight.

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