Pascal Lamy: "I have never seen such low co-ordination within the international system"

Covid-19 is not just a public health crisis, but also an economic one. Countries the world over are experiencing downturns to rival the Great Depression and there is no knowing when the world economy will be back to full health. Trade is a vital component of that, and it has already taken a knock as logistical chains have broken down and countries have imposed some export restrictions on essential supplies. Will global exports rebound, and what challenges lie ahead for the UK specifically?

Among the best-qualified people to answer these questions is Pascal Lamy, who was director of the World Trade Organisation from 2005 to 2013 and before that, trade commissioner in Brussels. Now 73, the Frenchman has made UK headlines in recent times for frank interventions on Brexit. When we spoke over the phone last week, I asked if he had ever seen the global economy in such a state, and how countries might manage their way out of the crisis.

“I’ve been involved in these international issues since roughly 1985, when I became a G7 sherpa,” Lamy said, “and I’ve never seen such low coordination within the international system in coping with the impact of this crisis, or in coping with the economic impact.”

Countries “rapidly decided that lockdowns were the way to go, but this was not the result of deliberation at the WHO, G7, G20, UN, UN Security Council—where is the UN Security Council in this crisis?—and that’s also true on the economic side. There was very, very little coordination.”

With good reason, national governments unveiled their own huge stimulus packages to support struggling industry. But “subsidisation is happening all over the place with no coordination criteria, no common conditionality, and inevitably this will distort trade… not only during but after the crisis.”

Lamy continued, speaking energetically: these “understandable” but “highly trade-distorting measures taken by sovereign states… will lead to friction and impact international exchange of goods, services and people,” hitting the developed world but also having “a huge impact on developing countries.”

This alone will “of course have an impact on the future… not to speak about the US attitude to the World Health Organisation” and other challenges.

Does our multilateral framework still have the power to facilitate a recovery? The WTO was already dealing with a trade war and facing sabotage from Trump, and must now recover from the surprise resignation of its director general Roberto Azevêdo.

“It’s weaker than it has been,” admitted Lamy—and is now confronting historic challenges. “People thought that very long-term, China and the US would learn how to coexist—if not converge—in a global market capitalist system.” Then came the 2008 crisis… then came Xi Jinping, who is very different from his predecessor, then came Trump, and the WTO got weakened by a US-China rivalry.”

The question is “how much is China prepared to shrink its state-owned sector… and how much is the US prepared go back to the multilateral table, assuming Trump’s ideology on ‘America First’ and distancing from any multilateral governance system is a short parenthesis—which we don’t know.”

Given an already fraught global backdrop, and now the pandemic, is this a dangerous time for the UK to be outside the EU? “It has always been a dangerous time,” Lamy said, laughing, “to move from the nirvana of open trade, which is the internal market, which the UK contributed to pushing for and building... to move to something which is less open.”

It has been made worse by “major voices in the government” pushing a “pompous, nationalistic narrative, which is a common feature of populism.”

There is still hope a negotiating compromise can be found between the UK and the EU, but “the spirit of the UK side is, summed up, ‘This negotiation is something we have to run in an aggressive way in order to keep mobilising our political constituency, whatever the cost is—and by the way, we pretend the cost will be little.’” In reality, “The more [the two sides] diverge, the thicker any border will be, because the more controls there will be.”

There is an opportunity to wake up and realise “we will pay a terrible price for this stupidity, so let’s be reasonable.” Only time will tell if this will happen, and “the odds of a ‘no deal’ are relatively high.” While such an abrupt severance would make “absolutely no sense, the counter argument would be that it makes absolutely no sense, sure, but people want it, so you have to do things which make absolutely no sense from an economic perspective!”

Brexit aside, in the world economy “there will be, for a number of years, lots of disturbances. After some time, this will ease out and go back to normal, under the assumption that this [difficult period] is not going to be weaponised one way or another in geopolitical rivalries.”

Even without hard line protectionism, Lamy worries about long-term “precautionism,” “which is measures sovereign states take, the purpose of which is not to protect producers from foreign competition, but to protect the people from risks—linked to what trade academics usually call ‘non-tariff measures,’ as opposed to a direct tariff measures.” National governments may not erect tariffs, but as appetites for risk dwindle, “goods and services will be subject to more precautionary standards that are in line with local collective preferences, and this is much more difficult to address than protectionism.”

Rearranging supply chains is “more easily said than done,” but some of them have “revealed their fragility and how much they should be made more resilient. This could imply some ‘reshoring’ [of production], some reconfiguration.” If countries go their own way, with their own standards, then more and more firms will have to “segregate their production” to supply to them.

Are there any bright spots for global trade? For Lamy, “digital… exchange of services, exchange of data, telemedicine. The world has been projected five years, maybe ten years into the future of digitalisation with the virus.” That “is a big potential contribution to more international exchange.”

All told, “it’s a difficult period… which will be turbulent trade wise, and developing countries at the end of the day will be the ones most disproportionately hit on the economic side, and will need open trade to recover more than in the past.” That means the WTO is “absolutely necessary—and it will be only more necessary over the coming years.”