Transcript of Pascal Lamy's speech at CCG

Former Director-General of WTO identifies four key issues in need of urgent attention in the international trading system: environment, digital trade, economic security, and subsidization.

Hi, this is Jia Yuxuan in Beijing. On December 13 afternoon, the Center for China and Globalization (CCG) hosted Mr. Pascal Lamy, the visiting former Director-General of WTO. Mr. Lamy delivered a keynote speech on the shifting landscape of international trade in the era of re-globalization. After that, he engaged in a dialogue with Henry Huiyao Wang, President of CCG, and interacted with Chinese trade experts.

The video of the entire event has been published on the Chinese internet via CCG's official WeChat account, and will be posted on YouTube at a later time. CCG also broadcast the speech via a range of social media channels, including Baidu, Bilibli, Guancha.cn, Kuaishou, and Weibo.

Given the space limit of an email, however, we are only publishing Mr. Lamy's keynote speech today.

Mr. Lamy believes that the three historical drivers of globalization—technology, ideology, and peace—remain influential, albeit in shifting dynamics. Technology continues to drive globalization, but ideological shifts regarding trade's impact on security and the rise of geopolitical tensions, like the U.S.-China rivalry, are reshaping the global landscape.

Mr. Lamy highlights four key areas for reform in the international trade system: environment, digitalization, economic security, and subsidization. He highlights the challenges in aligning trade and climate goals, as trade has norms and no target, and climate has a target and no norms. He also notes that, regarding the issue of subsidization, with the Inflation Reduction Act (IRA), the U.S. has turned Chinese, subsidizing their industry as much as China used to do it.

Mr. Lamy sees limited potential for progress through negotiations alone regarding the 400 billion Euros trade deficit from the EU to China. Nonetheless, he remains hopeful about the prospects for EU-China cooperation in the above four key areas.

Henry Huiyao Wang, Pascal Lamy, and Sun Yongfu, CCG Senior Fellow and former MOFCOM Director-General of European Affairs

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So ladies and gentlemen, good afternoon. Many thanks to my good friend, Henry Wang, and glad to be back in the presence of the CCG, with which I've had a long-standing working relationship, unfortunately, online since December 2019, which is why I'm extremely glad to be back here. But in the meantime, CCG has grown. It's much bigger than it was last time. So congratulations for that.

You've saddened me with an incredibly huge topic for a 15-minute talk, which is “re-imagining the international trade system in times of re-globalization”. But I'll try to remain within my time limit, starting with some nuances I would have on the notion of re-globalization. I know it's an invention of Ngozi Okonjo-Iweala, which I like a lot, so I will not disagree a priori with an excellent DG of WTO. But it might imply that we are de-globalizing and that we should have to re-globalize. And if this is the concept, I don't agree with this concept, because I don't agree that we are de-globalizing.

I agree that globalization is changing and that if re-globalizing means moving to a different kind of globalization, I agree; but not if re-globalization means moving back from globalization and then because of that, back to globalization. We are living in a time of change in globalization, a big inflection that we are witnessing.

The old globalization was powered by three major engines, technology, ideology, and peace. And these three engines were pulling globalization together. They were all aligned to pull the period. We have known roughly from the 1970s or 80s to roughly 2010. We now are in a quite different period in which the three engines do not work the way they worked previously.

Technology keeps pushing globalization. This world is interconnected, and more and more every day. So there is a huge potential for further globalization, notably in services with digitalization. 

Ideology is not today what it was 20 years ago. Today, 20 years ago, there was a sort of ideological consensus that opening trade was the way to go, because of the merits of international division of labor, specialization, multi-localization of production systems, spanning the planet with global supply chains. The consensus at the time was that that was the way to go, and that obstacles to trade, either existing or to come, were to be addressed and reduced. 

This has changed. In today's ideological picture, the relationship to trade is much more mixed. You hear people saying trade should be reduced for reasons of national security. And you hear people saying trade should be reduced for reasons of social security. And you hear people saying trade should be reduced for reasons of environmental security. So the ideological landscape has shifted. 

As far as peace is concerned, I think we don't need a long demonstration to show that this world is not in peace. Not only is it not in peace, it never was really in full peace. But there was no real big fight, battle, war as the one Russia started by invading Ukraine, or as the one which Hamas started in attacking Israel. Although so far, this has not resulted in a full-blown war in the Middle East, we know that the ingredients of that may be there.

So we now are in a world where wars are multiplying and expanding, and this is within a context which has gone worse for the last 20 years, every time—hopefully for the moment stabilized—which is the US-China rivalry. And this of course has a lot of bearing on both the geoeconomics and the geopolitics of this planet.

So we are in a different phase of globalization. Trade keeps growing. We've had record volumes of trade in 2022 by the statistics. 

True, there are some elements of fragmentation. You can see that in investment flows. Way before the war in Ukraine, the U.S. investment in China had dropped, when roughly from 20 billion a year in 2010 to 8 billion in 2020. So in 10 years, it moved down same for EU investment in China, and the same for Chinese investment in the U.S. or EU. 

So if investment is a precursor of trade, there were signals that already before this major tectonic geopolitical development that the war in Ukraine triggered, some elements were there. But these elements coexist with an increase of trade. 

So we have both the volumes of trade growing, which is an element of globalization and some elements of fragmentation. What this will mean for the future, in my view, is unclear, although overall, if I look at these three engines, technology, ideology, and peace or geopolitical tensions or conflicts, I still believe that these engines will keep pushing for globalization. 

Now, what does this mean for the international trading system?

Agreements are becoming much more difficult because of this polarization. Not just East-West between the U.S. and China, but also North-South. If you look at the votes at the General Assembly of the UN about Ukraine, or about Palestine and Israel, you can see that this world is now emotionally divided into two camps, in the case of Ukraine: those who buy the narrative of Putin, that NATO was strangling Russia, and that Russia had to intervene in order to be not strangled in the future, which in my view is total nuts. But some people believe this, and I have to recognize this. These people believe this, and it's exactly the same with Hamas and Israel. A lot of people on this planet believe Israel is a colonizer. This is not my view, but I have to recognize that emotionally a lot of people see things very differently than we Europeans.

So this ambiance is not conducive to proper international cooperative arrangements. And there are many reasons for that. The legacy of colonization is visioned by many emerging countries that the international system is not fit for purpose. According to today's relative power distribution and the way we handled COVID, which in my way, and I coined this phrase, was a sort of vaccine apartheid, which I deeply regret. And many other issues are creating a sort of frustration, which Ukraine or Palestine are inflating. 

This being said, we need the international trading system to address a few issues, most of them it has not properly addressed in recent times, and some of them being new. And I will mention four of these issues, which in my view, are the correct answers to Henry Wang's question. The first one is trade and environment. The second one is trade and digital. The third one is economic security. And the fourth one is subsidization.

Now, on trade and climate, I have to remain short. I spent a week in Dubai last week talking about this and other topics. We have a big problem in that the world trading system and the world climate systems are totally different. On trade, we have norms and no target, and on climate, we have a target and no norms.

In the WTO, nobody says trade should be open 60% or 80%, or even 100%. No, we just have rules of behavior that slowly reduce obstacles to trade in a fairly negotiated way. The fact that it is fairly negotiated is proven by the fact that countries agree to it.

On the climate side, it's exactly the other way around. We have a target, which is zero carbon, which is great. I'm all in favor of that because I’ve chaired the Climate Overshoot Commission for two years and I now know what global warming really means and what we should do in order to address it. But the way we do it is left to nationally determined contributions. 

So WTO works with multilaterally determined contributions and climate works with nationally determined contributions. As a result, you have a mess in trade. We Europeans price carbon, big way. But the moment you price carbon seriously, trading with countries where the price of carbon is extremely low is a big problem. If you do that, you just incentivize carbon leakage. Producers within your constituency will move outside and emit carbon elsewhere. So the more you fight carbon in your constituency, the more you trigger more leakage and more carbon emissions elsewhere. So it makes no sense, which is why the EU now needs the CBAM. 

The U.S. doesn't like pricing carbon, so they do it with subsidization, so they can print a dollar as much as they want. And in doing this, we Europeans create a trade obstacle at our border, with our Carbon Border Adjustment Mechanism, and the US creates a trade obstacle in totally delivering the playing field with their massive subsidization system to green their economy. And this has trade consequences which need to be addressed.

So we need the WTO to intervene. We need WTO members to sit around the table and discuss: I'm doing it this way, you are doing it that way, let me understand why you do it this way, I will explain why I do it this way, and at some stage, we will have to find something which is reasonably compatible. And in order for it to be compatible, it has to be comparable. And just the way of making these climate-related trade measures compatible is a big thing that I think needs to be done urgently. Otherwise, it will slow decarbonization. These trade frictions, if we don't address them, will slow something that we are already way too slow to address. 

Digital trade is in a bit of a better shape. There has been a negotiation for now quite a number of years. There is a digital trade facilitation package on the table, and my view is that the next ministerial conference should pocket what's on the table and stop discussing maybe we could do this, plus this, plus this. There is a good base on the table in present circumstances. If you have a good base on the table, pocket it and then move from there. And this, in my view, is something which is relatively doable now.

Economic security is of course in this context which I briefly described, also a big problem. Mr. Trump pretends that exports of steel from Europe to the U.S. are a threat to U.S. security. Nuts. Total nuts. But for a variety of reasons, the EU decided, and I disagree with that, that this case should not be brought to the WTO. 

Whether EU or U.S. export restrictions to China on the grounds of national security are or are not justified is an open question. We know that there is a security exception in the charter of WTO. We know that this has already been litigated. So the WTO can adjudicate a dispute about economic security.

But I believe that even when the dispute settlement of WTO is...given that the U.S. are on strike, something should be done by the members of the WTO to give some sort of guiding interpretation of what economic security can do. I totally agree that sovereigns need a margin of manoeuvre which is their sovereignty and does not have to be appreciated by whatever judge in WTO on grounds of national security. But this, on the other side, cannot be a blanket exemption. You cannot do anything just by waving your flag of national security. This would destroy the multilateral trading system. So we have an issue there which I think necessitates better attention. 

And finally, subsidization, which is not a new issue. China knows that full well. The problem is that with the IRA, the U.S. have turned Chinese. They now subsidize their industry as much as China used to do it, after having, by the way, complained in the past that China was too heavily subsidizing its industry, which is absolutely true, hence the level of capacities that we now have in the Chinese economic system.

So that would be my sort of four priorities--trade priorities, of course, related to other issues. And finally, for my few last minutes, what could the EU and China do to move this forward?

I think the overall answer is not much, given the state of relationship between the EU and China, which has seriously deteriorated. The main reason why it has deteriorated is the war in Ukraine. We Europeans do not understand why China sides with Russia. China did not recognize the annexation of Crimea by Russia in 2014. So China probably does not like a country invading or seizing the territory of another country.

So why is China siding with Mr. Putin? The interpretation can only be that Mr. Putin is against the U.S. and Europe, so China is moving with Mr. Putin because it is against the U.S. and Europe, which then in Europe creates a conception that China does not like us and is against the U.S. and Europe. And by the way, putting the US and Europe in the same bag, which in my view, is a large over-interpretation of the situation. So the politics for the moment are bad and it’s very difficult to have proper economic discussions in such a political context. 

And the economics are not good either. The growth in Europe is low, too low, for Europe (in the) medium term to adorn its Soziale Marktwirtschaft system. And the Chinese economy is not, in my view, in good shape. And the structural characteristics of the Chinese economy—which is the over-presence of the state-owned system—that leads to a number of production capacities not abiding to market rules, hence these over capacities with the sub-consumption in China. If you compare China to other developing countries of the same range, the saving rate of the Chinese people is way too low, which is why their consumption is way too high. And this structural problem is at the origin of our trade problem. 

A 400 billion trade deficit is not a trade problem. It's a macroeconomic problem that needs to be addressed macroeconomically. It's not in twisting...I mean, of course, trade negotiators can do their job. They will do their job. If they do properly their job on these 400 billion deficits, maybe, at their best, they will address 100 billion. China would open more its services market and the EU would re-balance part of the problems she has in a number of respects. But this will not shrink the 400 billion. The 400 billion are there for other reasons, as, by the way, the U.S. massive and permanent trade deficit is there for macroeconomic reasons, which is that the U.S. consume too much and save not enough.

So this is a difficult situation, which I think we need to recognize. And on this side, the EU is not yet seen by China as a proper geopolitical interlocutor. China still is unsure whether in the future, EU will remain a proper economic integration process or whether at some stage, the dreams of Europeans that they will become a sort of full-fledged both geoeconomic and geopolitical power will be fulfilled or not. So China is very careful about this, carefully playing some of its cards with the member states, and some of its cards with the EU institution. 

And as long as we Europeans remain in this situation, I can understand why China will be cautious and why some in China still will believe that the EU is an American poodle and that in these conditions we'd better be careful with what we do. We have a problem also on our side which we need to address.

This being said, and that's my final point, there is ample room for the EU and China looking, for instance, at the four topics I suggested—environment, digitalization, economic security, and subsidization—and in moving more together in moving these issues into the trading system. So there is room for that.

The context is not propitious, but state men and state women are there to address including negotiation or discussion in a context which is not favorable. What would be my recommendation is that on both sides, these issues are taken, recognizing that the environment for the moment is not right, but that sometimes it's the deal you make when the environment is not right that contributes to change the environment and that's what I wish.

Many thanks for your attention.

Mr. Lamy's dialogue with Henry Huiyao Wang, President of CCG, and interaction with Chinese trade experts will be posted later.