TEXT | Former WTO Director General Lamy Speaks at CCG and Dialogue with Wang Huiyao
CCG | December 13 , 2023
On 13 December, the Center for China and Globalization (CCG) presented a global dialogue series featuring the visiting former Director-General of WTO Mr. Pascal Lamy. Mr. Lamy, President of CCG Dr. WANG Huiyao and interlocutors who are China’s top international trade experts brought their unique perspectives on the challenges facing the global trading system and their impacts on the world in 2024.
[English]
[Chinese]
The following is the full text of the event:
Part I :Transcript of Pascal Lamy’s speech at CCG
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 saddled 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 too high, which is why their consumption is too low. 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.
Part II: Dialogue of Pascal Lamy with Henry Huiyao Wang at CCG
Huiyao Wang:
Thank you, Pascal, for your excellent speech. You have really highlighted the many key issues and challenges and of course, opportunities that we have to work together.
Of course, we know that economic organization has really faced strong headwinds in recent years, marked by challenges ranging from rapid technology change which you mentioned, to increasing extreme climate events (we see the COP28 just happening), and of course also the supply chain issue—There is a widening inequality in different parts of the world. And of course, the WTO has come under strain in many aspects.
You are a global governance reform champion and I know you have led many groups for that. You said you just came back from COP28 in Dubai, and I understand you chair the Climate Overshoot Commission which is a very interesting initiative. I’ve done a lot of research and you have proposed the CARE reaction, which is to cut emissions, adapt the lifestyles, remove the carbon, and, of course, explore [geoengineering].
Perhaps given you have just come back from COP28, and this trade and climate and were closely related, you can elaborate a bit on your vision of the climate change challenges and give us some updates on that.
What’s your take away from COP28?
Pascal Lamy:
Well, I believe environment, climate change, and biodiversity degradation are our No.1 problem.
When I was 40 years old, I thought social justice was our No.1 problem. And I’m not saying it’s not a problem, but I think now collectively, this is a life-or-death issue for this planet. So it’s our No.1 problem.
Biodiversity is a big problem, but science is more divided on biodiversity, notably because bio systems have an inbuilt capacity to morph or regenerate which physical systems do not have.
So climate change is the problem No.1 and we need to ramp up our game because we are late.
The name of the commission [Climate Overshoot Commission], the Paris Peace Forum created, and I had the privilege to chair with a lot of old monkeys and luminaries of my kind. And I selected a commission with a majority of people coming from the South. It’s the first time ever that a global body looking at climate issues was composed of the majority of people coming from the South. And I can tell you it changes a lot of the discussion and vision. We did it because we believe the risks of overshooting 1.5 are now extremely high. By the way, science tells us that we will overshoot 1.5.
The open question is: for how long will we do it? Do we still have the capacity to decrease this 1.5 augmentation of temperature once we’ve done it? And this is the open question. The open question now is not whether we will overshoot or not. It’s for how long will we overshoot and are we able to regain the necessary trajectory?
The conclusion of these two years of deliberations is that we have to look at all the options, that you mentioned: cut the emissions, adaptation, removing carbon, and explore geoengineering, which is a very controversial topic—I will be dealing with that later tonight with Xue Lan, who is a very famous Chinese professor and who was a member of the Climate Overshoot Commission—including exploring geoengineering in case. And what we recommend is that these options be considered together with the trade-offs they may imply.
And this, of course, is quite a bold proposal. We propose that the North phases out fossil fuels. This is a discussion in Dubai and, you know, at that time they might have found a compromise [but they didn’t]. We propose things like payback obligations, for instance, which is a big innovation in the way we would handle climate change so that not just cutting emissions but also removing carbon. We propose to explore geoengineering technology, including solar radiation modification (SRM) with a moratorium for risky experiments because some of these experiments may be very risky.
The trade side of the report is minimal. I did not want to bother my colleagues with my trade issues, although we proposed to create within the WTO, what I mentioned briefly a moment ago, which is a comparability forum where countries have different trajectories, different policies, and different ways to use it, there is some sort of coherence within the way countries address their decarbonization trajectory, which for the moment is not the case.
I think and I believe that WTO should be more affirmative. We all know there are members of the WTO, and that the DG is not running the shop, only partially in some circumstances with some parameters. But I personally believe that developing countries are wrong to resist a discussion on this in WTO, as I believe developed countries are wrong to resist a discussion on this at Paris Agreement COP. I think this is stupid.
The problem is there. And if you refuse to address it for matters of principle in one organization and the others refuse to address it in another organization, it’s typical diplomatic blockage, which makes absolutely no sense.
So the first thing to do, as a concrete answer to your question, Henry, is: let’s discuss this issue around the table, both in WTO, which is a trade-related organization and in COP, which is an environmental-related organization.
Huiyao Wang:
Great.That’s a good explanation. I think you’re absolutely right. I think we need to find a compromise and find a solution to address this issue, which is very urgent in the world agenda. Of course, France was the place where Paris Agreement was reached almost a decade ago, so that’s really important that we continue that.
I know you have also, not only on the climate, you’ve been really also championing on the digital.We were on this digital steering committee of the digital global governance.
Then Europe and the U.S.and China all have some different standards. Now we know that the digital world is already a reality and that’s something WTO wasn’t addressing enough in the past. So how do you see this conversion of the digital world? That’s the driving force of the global economy, and China has become the second largest digital economy with 1 billion smartphone users and 70% of the 5G system in the world.
How do you see the digital world come along and become really not divided, particularly on standards, on governance, you have done a lot of work on that.Maybe you can share a bit of that as well？
Pascal Lamy:
I believe a digital world would be ideologically fragmented, whereas the anatomical world would be much more flat.A bicycle is a bicycle everywhere on this planet; a shirt is a shirt; a shoe is a shoe; and a cow is a cow. There is no ideological big difference.
Data are an issue which people see very differently depending on theirphilosophical or political or moral positions. You don’t have what intellectuals call cognitive dissonances about cars or shoes, but you have cognitive differences between countries and civilizations on data., which is why we have, for the moment, a Chinese system, a U.S. system, and an EU system. And the differences of the systems stem from philosophical differences. We all have good reasons to stick to the values which we believe in and in which we have been educated and shaped.
Now, there is one big question mark in this triangle, which is:where will India go? India is potentially a major digital power. Whether India will go Chinese, I doubt it. Whether India will go Chinese, maybe. Or EU, maybe. Or India—after all, they may all have their domestic market that allows economy of scale and that would make sense.
That’s the difference between the previous world: inevitably,the regulation of the use of data, privacy, storage, accessibility, transport, control—this is different. There will be only limited convergence.
There is convergence.If you look at the way China regulates platforms to avoid excessive market power, we do it exactly the same way in Europe, for exactly the same reasons. Our digital competition attitude is very similar. It is different in the U.S. for the moment, but as you know, it’s changing.
So it doesn’t mean a sort of cluster.In some areas, we will have at least compatible, if not similar, attitudes. In other areas, we have to forget convergence and organize coexistence. In the digital world, coexistence means interoperability, technically. This is true both for software and hardware.
And this is where the WTO comes in.WTO is one of the levers. We will not level the playing field, but we will avoid [a] de-level playing field for the reasons I repeatedly gave—to have too many cost consequences. Inevitably, a divided system in a global market capitalist system, whether you like it or not, is more costly than a level system because of simple reasoning on economies of scale.
The WTO is not the only international organization that can try to make the system interoperable.The ITU has a role to play. I think, by the way, organizations like the Paris Peace Forum, where you have not only sovereigns but also big multinational companies, NGOs, major academic institutions, and think tanks, can also help move this in a compatible direction. But the WTO should intervene, where there is necessary space for facilitation, compatibility, and interoperability. This should be the focus.
I don’t think the WTO should tell the EU, China, or the U.S.how they should regulate. This is an issue for them to decide. But adjusting the interstices is where the WTO should step in.
Huiyao Wang:
That’s a very good insider’sview. The Paris Peace Forum has done quite a lot in terms of bringing all the players together. You have proposed many good suggestions in terms of how to coexist the different systems where WTO can play a very important role.
Just to change a little bit the direction of our conversation. I noticed that the EU has recently had some new standardsand a new agreement on AI. So what do you think about AI now? It’s become the topic of the summit between President Xi and President Biden in San Francisco. Graham Allison sent me an article he authored with Henry Kissinger, the last piece of Dr. Kissinger, on this AI threat, a possible side effect of which is that human beings may not be able to control it.
What do you think about that and how China, the U.S., the EU can work together on this AI future, whether we can harness it or whether we could be controlled by it? What’s the way to get into that?
Pascal Lamy:
I’m an optimistic, which does not make my life easy in present times.
I believe AI offers huge opportunities in areas like science, medicine, for instance.I also believe AI entails risks, notably because the more these algorithms become sophisticated, and they become more and more sophisticated as they learn, and I’m talking about the part of AI which is about machine learning, there is a risk, and these risks need to be regulated by the sovereign.
I’m not saying they should be regulated forever.Things are changing incredibly rapidly, and I know of people who say it’s absolutely stupid to regulate today a world that’s going to be totally different five years from now.
I don’t buy this argument.I think we can polarize by quarrels and errors. And I think that the public needs to believe that AI is something which is governed, harnessed, in a way that it will not turn against humans or normal political public goods.
So, we need to regulate it, and we do it in different ways.
Now, We all do it.China does it, the U.S. did it with a executive order recently, which is of good quality. The Chinese system is quite sophisticated and very advanced, and the EU just agreed on the legislative package last week in Brussels, which is in a way more precautionary than the U.S. or China. But this is our culture for many reasons. The Europeans have a culture that is more inclined to precaution and less to risk. There are good sides to that, and bad sides to that, by the way.
So, the question comes back to:what do we do with different regulations?
The good thing is that we all in common believe that they are risks.And the nature of the risks, which the Chinese regulation or the EU regulation or the U.S. regulation is meant to address, is quite similar.
What differs is the spectrum of what is very risky and what is not risky.We all recognize that we need to regulate because of risk, but we don’t have [consensus on the spectrum]. And that’s natural. Risk is a scale between good and bad. Whether something is more risky or not is whether it’s worse or better. And good and bad is something that is fundamentally moral or philosophical. It’s not a machine that will tell you whether it’s good or bad.
So, that’s the issue.And then we have to try and make sure that, again, regulating AI does not fragment too much our digital world. For the moment, there are elements of fragmentation. There is a G7 working group and China has launched its own forum to discuss that. And the UK just invented one. The G20 will probably do it at some stage. And it’s, in a way, a bit inevitable.
But long term, again, we need moreconvergence on this. And by the way, I had a long discussion with the UNSG in September when I gave him the Climate Overshoot Commission report. And he is of the view that the UN should create enough muscle expected to have a body that is overseeing the way AI is regulated. And I agree with that. It’s something which, again, we will have in common. We have our differences in the way we handle this. But we need an overarching system that limits divergences and that at least organizes co-existence.
And by the way, the Centre on Regulation in Europe (CERRE), which produced the first report about global digital ecosystems at the Paris Peace Forum in 2022, is now working on a new version, this time with separate briefs.The first of which appeared 10 days ago in Brussels before the legislation was adopted.
Huiyao Wang:
Great.You have given us a lot of food for thought. I think the EU has already started legislative work on that. And also we’ll see how we can really get those different major economies working together and some convergence with possibly WTO.
So before I open for our discussantsand of course, our media friends, my final question is that I cannot let you go without asking a question about WTO. You are one of the key architects of global governance in many ways, like climate and digital and AI. But what about the WTO?
We havethe 13th Ministerial Conference coming up in Dubai early next year. And WTO seems to be the driving force, a very important driving force of globalization. And China probably is the largest beneficiary of the WTO and of course, many other countries are.
So now WTO has many challenges.Its Appellate Body has been basically paralyzed to some extent, and it’s difficult to reach new consensus, even though we did something on fisheries and trade liberalization.
But what do you see the WTO ahead and what can we, China, the EU and the U.S., and the Secretariat of the WTO, do? And how can we really enhance the WTO? I think in the end, people have to come back to the reality. We have so many different divisions, and so many new things coming up. We don’t have a strong organization like WTO, which in the past 70 some years has greatly changed the world. And so we still have to work together. And you have been eight years as a DG of the WTO. What’s your vision and reform advice for WTO and how we can, China, U.S., the EU and you can work together as the three largest economies in the world?
Pascal Lamy:
So, rapidly, we have three problems.
The first one is credibility,because of the way the dispute settlement system has been paralyzed by the U.S. This stems from a wrong interpretation, in my view, of the WTO statute. It was interpreted in a way that the nomination of judges to their appellate body needs to be done by consensus. This is not what the charter of WTO says, but for a variety of reasons, it was accepted that they should interpret it this way and nobody else made enough of the case that that was not the right interpretation of the WTO statute.
This is a procedural matter.Nominating seven judges in a body is not something for a consensus or unanimity. But let me put that aside. So we have a problem in that, for the moment, the enforcement mechanism, which is the distinctive feature of the WTO, is paralyzed. This needs to be fixed. And it’s going to be fixed in two possible scenarios: either the U.S. re-accept what they have accepted in signing the WTO agreement in 1994, that the dispute settlement is binding on the members. A losing party has to comply, otherwise, there will be measures. This is what the U.S. signed in 1994.
Do they still stand to this commitment?Yes or no? If yes, you lock ten WTO negotiators in a room during two days and you tell them they will only go out when they have an agreement and they will have an agreement. It’s perfectly doable. The issues at stake are perfectly negotiable. If the U.S. do not accept to go back to their commitment, then we are in a totally different world. We will need a binding dispute settlement with all the members of the U.S. This will mean de facto that the U.S. are stepping out of WTO.
This is problem number one.
Problem number twois the way the WTO works and the balance between the authority of the Secretariat and the DG and the authority of the members. This notion that the WTO is a member-driven organization does not make sense. Of course, it’s driven by its members like any international organization. It’s created and agreed and framed by the members. But that any sort of decision that is a serious one has to go through the consensus of the members, and that the DG or the Secretariat has zero authority to table a proposal to fix a trade problem that exists, that has been identified—These people are incredibly good experts. They know the countries, they know their position, they know the problems—exiting them from the negotiating system is an absurdity. You lose an enormous capacity to do things properly, quickly, scientifically, expertly, and politically. It’s stupid.
And this rebalancing is not in the cards.And the reason why it’s not in the cards is that the members want to stick to the notion that they decide everything. I often quoted an anecdote, which is that when I became DG of WTO, I was given by a former DG who was an Australian [sic], a very witty guy and very good caricaturist. I was given a cartoon with a tree, very nice tree, well-drawn with a nice big trunk, nice leaves, and a car had crashed into the street. The car is all over the place, totally broken. The legend of the cartoon is “member-driven car.” I had this cartoon in my office in the WTO.
So this is a bad system.It needs to be fixed and rebalanced if you want the WTO to work like a normal organization where there is a division between political authority and technical proposal. But this really needs to be fixed.
Third,we need the WTO to address the few issues which I mentioned, like trade and environment, like digitalization, like economic security, like subsidization which has been there for a long time but which is now a bigger problem than before because before, only China was heavily subsidized. Now the US is subsidizing as much as China. So it becomes an enormous problem for many poorer developing countries. In a subsidy war, they will be the losers.
So these issues need to be addressed.And if you tick these three boxes, you will go back to the normal situation where global market capitalism needs a properly regulated multilateral trade system with obstacles to trade that appear being addressed and reduced in a negotiated, fair way.
Part III: Dialogue of Pascal Lamy with Chinese experts at CCG
Yongfu Sun:
Thank you very much. Thank you, Mr Lamy. We have known each other for many years because I was 12 years as the DG of the European Department in MOFCOM, and with our leaders and with our ministers, we had very serious discussions concerning China-EU trade-related matters.
And I have two questions for you.
One is that, from January to October this year, the China-EU trade decreased by 7.5%. This hasn’t been seen for many years, at least I think 30 years. In my term as a DG for the European Department, we had very good economic and trade relations and the EU has been our number one trading partner for 16 consecutive years. So we haven’t seen this decrease in our bilateral trade.
What is your idea of this phenomenon? Is it a kind of a short-term situation because of the shrinking of the demand from both sides and the not-so-rosy economic situations in the EU and also in China? Or is this because of the three definitions of the EU for China as a partner, competitor, and systemic rival? Does it make some sense that because of that rivalry that EU-China economic relations have decreased?
The other question concerns the investment. We have the so-called Comprehensive Agreement on Investment (CAI). The conclusion was finalized in 2020. And our leader Xi Jinping and the leaders from the EU announced that we have concluded our discussion concerning the CAI. But because of the Xinjiang’s so-called human rights issues, the geopolitical issues, and this CAI is dead in some way.
Do you see any possibilities to revitalize this CAI, to put it forward in a realistic way? Or in a short term, you don’t believe that CAI will be in the right track in five or ten years even? So that’s my two questions to you. Thank you very much.
Pascal Lamy:
So on the first question, I mean, I think this decrease in bilateral trade stems from three factors.
One is weaker investment in the previous years. The EU investment in China has decreased consistently for the last four or five years. In a nutshell, big companies remain in China and keep investing, notably German companies. But the inflow of mid-sized companies’ investment has dropped. And the reason behind that is the perception in European public opinion that China is less secure than it used to be. And of course, politics is a big one. So I think there is an inevitable trade consequence of the slowing down of investment flows.
The second is that there still are serious obstacles to trade and investment in China. I created, when I was European Trade Commissioner, the EU Chamber of Commerce in China. If you read the report of the EU Chamber, and I know the Chinese administration does that because seriously, there are still too many obstacles to trade and investment from the EU into China, including, by the way, areas where the investment regime for EU is less favorable than for the U.S., which is a bit of an oddity, at least in my view.
And then there is the weak economy on both sides, which, of course, matters.
So that would be how much for each of these. I probably do not know, and I should look seriously at the numbers to say it’s 30% and 40% and 30%—that’s my sense.
Now, on the CAI, on the investment agreement, I will be very candid. China overreacted to a resolution voted by some members of the European Parliament [sic], as sometimes China does. China overreacted with Australia when Australia asked for a body investigating the origins of COVID. China overreacted when Lithuania did something that could have called the “one country, two systems” into question.
This is…and I will not say more because we all know that within the Chinese system, in this sort of cases, some say take it easy and others say no, and “pong.” There is a problem with Chinese, which is about frightening chicken to make sure the monkey understands it. But that’s how it works.
Wenhua Ji:
Thank you very much. And first, I thank President Wang for inviting me here. Also, I would like to thank Your Excellency, Mr. Pascal Lamy, for your very enlightening and informative presentation and the answers to the questions.
Indeed, before President Wang addressed the last question to you, I think I would have raised a question about the dispute settlement because you missed this issue in your previous presentation. And I remember that the reform of the dispute settlement system is a priority of the WTO reform. Since you raised the question, I will go a little bit further. Because I met you when I worked at the Chinese admission to the WTO, you were frequently requested by us to nominate the chair of the panel. So I think I will continue my dialogue with you on this issue.
Now, we all know the problem: the U.S. blocked the nomination of the Appellate Body, so the body was paralyzed. There is no incumbent member. You mentioned two possible solutions. One is that the U.S. rejoin the consensus, which means, OK, you accept the binding nature [of the WTO agreement]. Another one is that, OK, the U.S. was ousted. I think, well, of course, the latter situation is not the optimal one. It will cause a huge damage to the multilateral system, not only to the dispute settlement system.
So I personally made the proposal, a compromised proposal, because at least at this stage, from the proposal tabled by the U.S. in the negotiations, the U.S. has no intention to leave the system. It just wanted to not help the re-establishment of the Appellate Body. So at least the U.S. wishes to accept the binding nature. Of course, whether this is their real intention is to be seen during the MC 13.
My question is that, the intention of the U.S. is important, so what’s the real intention or what’s the role that the EU would like to play?
Because China’s position is very clear. In bilateral forums and multilateral forums, the China voice said consistently that we wish to have a two-tier binding system. The EU is also a proponent of the binding system and a main proponent of the MPIA [Multi-Party Interim Appeal Arbitration Arrangement]. However, as the G7 trade ministers declared recently, the G7 members only repeated the language in MC 12. There’s no further explanation.
So from my perspective, I didn’t see the EU as a main player who wished to exercise further pressure on the U.S. to make a further compromise or make its intention clear. So I am a little bit concerned with the possible position of the EU on this issue.
To put my question more clearly, if we cannot make any progress at the MC 13 on the dispute segment issue, will the EU leave the question as it is, or will the EU coordinate with China and other members to put more pressure on the U.S.? Thank you.
Pascal Lamy:
I think we have to go back to the essential. The essential is whether the U.S. or not accept the binding nature of the DSM (dispute settlement mechanism).
And this is unclear. This is unclear. And this is the defining line between an acceptable solution and a non-acceptable solution for the others, including the EU.
I was chief of staff of the president of the EU Commission when the Uruguay Round concluded with the Marrakesh agreement. And the binding nature of the dispute settlement was a last-minute, very last-minute, addition, which was negotiated between my predecessor, Leon Brittan, and Mickey Kantor, who was then a USTR [U.S. Trade Representative], on an instruction of Mr. Delors, who said we needed a binding dispute settlement. And Leon Brittan, I mean, did what he was told to do, but he’s a British, so the notion that we would export to the WTO a sort of supranational authority was not very familiar to him. But he accepted it, and he convinced Mickey Kantor, who was a very shrewd guy, to accept it.
Then Mickey Kantor went to the U.S. Congress at the moment of ratification and said, “well, don’t you worry, look at the wording. It says that determinations must be adopted by the members.” And he didn’t insist on the fact that there is a footnote, which was added, which makes the whole difference, which says the losing party cannot oppose the consensus. And of course, if the losing party cannot oppose the consensus, the decision is taken against the losing party, and then it has to comply. So Mickey Kantor was very clever.
But the fundamental issue behind all this is whether the United States of America accepts or not what they have never accepted before, which is the binding authority of a supranational body. Now, I would never put things in this way in Washington, because they would be terrified at what they did. But this is the real issue.
Now, the reason why Mickey Kantor convinced Congress is that he said, “we need a system that will make the others abide.” And this will be good for the U.S., which by the way is absolutely true. This is absolutely true—it’s good for the U.S. that the others abide, but of course, it’s good for the others that the U.S. abide.
So this is the key question. And it’s a major political problem for the U.S. And if I was trying to convince Congress, I would say, if the system does not oblige China to comply, then it’s a bad system. And they would say, oh yes, that’s absolutely true.
So this is the issue. If this is solved, I think the rest will follow. I think the EU for the moment is holding a sort of tactical position. And if the U.S. make it clear that it remains binding, they will flexibilize their position. And by the way, I also believe that if China was publicly more outspoken on the fact that the system has to remain binding, this would be good for the negotiation and good for China.
Siqi Li:
Thanks for having me in this roundtable discussion. I have two questions.
The first question is regarding the power transformation in the WTO. We all know that there is a leadership deficit in the WTO due to the shifting position of the U.S. But actually, this power transformation has already taken place since China’s accession to the WTO upon the Doha Round. So what’s your perspective on China’s current role in the reform agenda? Is it possible for China and other emerging economies or also some developing countries to form a collective leadership role in this reform agenda?
My second question is regarding the prospect of the WTO. We all know that we are facing a consensus-based deadlock in multilateral negotiations. So some countries have a feasible alternative to turn to the JSI [Joint Statement Initiative] negotiations. But it is opposed by certain developing members like India and Africa who question this dual-track negotiation approach in the WTO. So what is your perspective on this JSI approach? Could that be the mainstream negotiation model in the WTO? Thank you.
Pascal Lamy:
On the first one, I think the political reality is that the feeling prevailed until now, for the last 20 years in China, that accession ticket was overpaid. This is the feeling on average. And I negotiated the final, final, final deal with Premier Zhu Hongji himself. And I can understand why in the Chinese system there is a remnant view that accession was paid here. And it is absolutely true that if you compare the level of development of China in 2000 to Brazil or India or other similar countries at the time, their trade regime is less open than the Chinese one. So as a consequence of that, China never was very forthcoming to move to a further round of liberalization.
And by the way, the best evidence of that is that each time during the negotiation of the Doha round, we would reach a stage where there might be an agreement, China would say, “Uh-uh. I’m a recently acceded country, so I need a rebate.” So that’s the reality.
Given that the areas where WTO rules are weak and do not constrain China enough, in my view, which is also the view of many countries on this planet who are not as rich as China to subsidize their production system; given that China knew that if there was to be a new trade opening package, subsidies would come in the discussion, China made sure that they would not be exposed. So if you add these two elements, this explains a certain passivity.
Not that China did not abide by its commitment. It did. And I’ve always said that publicly when I was EU Trade Commissioner, when I was DG of WTO, this notion that China cheated the accession and did not properly abide is not [true]. China did abide by its obligations.
But in the sector of subsidization, the obligations of China were not strong enough. And the ones who are responsible for that are people like me and the USTR and the Japanese trade negotiator at the time [who] were the big shots that negotiated China’s accession. We, at the time, overestimated the value of market access and underestimated the value of binding rules on subsidization because we were appetized by the opening of the Chinese market, and rightly so.
And the pressure on my back as a negotiator was not about subsidies. The pressure on my back was on opening this and this and this and this, which was not opened enough, like telecoms. But we did not pay enough attention to subsidies. And we thought that the course which had been initiated by Deng Xiaoping, which is reform, opening, and privatization, would be pursued. And we got it wrong.
From 2010 on, China changed course and the state-owned sector re-augmented its proportion in the economy and the subsidization, as a consequence of that, re-augmented. So we did an error in not properly forecasting what China would be 20 years from then.
And by the way, each time, and I wrote this in a piece that was published a few months ago, when the US trade negotiator and myself discussed the issue of subsidies, both of us were in favor of moving more aggressively on subsidies. But in both of our teams, the lawyers told us, “Uh-uh. Be careful if you start shrinking the stitches of the net of subsidies, our subsidies will be caught. Airbus and Boeing, for instance.” And so we wrongly listened to our lawyers when they told us, “Be prudent, be careful, we will be caught.” So that’s the basic explanation of this situation where China abided, but really did not ask for more.
Now, on your second question, given the implications of removing trade obstacles for countries, you cannot impose a decision on the U.S., China, Europe, or India, etc. Inevitably, you need a consensus where big trade influences, U.S., EU, China, and India, are in agreement.
Consensus is not unanimity. There is a big difference between consensus and unanimity. Consensus is something you build, and the chair says, “I believe there is a consensus.” And if somebody objects, then somebody says, “Oh, no, no, no, no, I disagree.”
Unanimity is totally different. Unanimity is, “Are you all in agreement? Please raise your country’s tax.” And this is a totally different group dynamic. So consensus is something you can build, and roughly speaking, if you have an agreement between these major elephants, a deal is done. So it’s consensus among the major players and leaders.
Now, I’m sure Uruguay or Thailand would not agree with me. But the experience shows that if this group agrees, it’s a balance, basically. If U.S., EU, I could add Japan, because Japan would have to be in the [list]. And then you look at the composition of the Green Room, which is a sort of bureau of WTO, or executive whatever. That’s how it works. So dwelling on consensus or majority is not the right issue.
Part IV: Q&A
People’s Daily Overseas Edition:
Thank you, Mr.Lamy. One question, very simple. I’m a reporter from People’s Daily overseas website. You mentioned that Chinese economy was not in good shape before.
My question is that despite the challenges, China has achieved success in some areas such as electric vehicles. So in your opinion, which sector is the highlight of China’s economy this year and why? Thank you very much.
Pascal Lamy:
On EVs, China has massively invested with public subsidization in production of EVs. They’ve reached a formidable level of cost-to-quality ratio, notably thanks to these public subsidies.
Now, the domestic demand in China for EVs is lower than the capacity which has been made. So China is producing very good price-to-quality EVs, too much for the internal market, way too much for the internal market, and has to export it.
Now, where can China export? Where are the big markets? U.S., Japan, EU, Turkey? Three of them are closed to exports of Chinese good quality-price ratio EVs. Only one is open, which is Europe. And this is not sustainable. Europe will not absorb only in Europe the overcapacity of the Chinese production system. This has to be either shrunk or shared. It’s as simple as that.
I’m the first to recognize that China did extremely well. But if others close, the EU cannot remain open. If we do that, we’ll have a huge political problem with our constituencies. They will have to close their propulsion factories. They will have to keep building their own EV capacity, which they do, but at a slower rate than China. Notably, the necessary CapEx is not subsidized or less subsidized, although it has now to be subsidized. But that’s the situation.
Huiyao Wang:
We have to conclude there, but I just want to add a comment, Pascal. I think that the subsidy, of course, needs to be discussed. I know that the U.S. is starting to have a lot of inflation reduction acts and chips acts, a lot of subsidies. But on the other hand, you talked about the U.S. closing their EV car market, but Tesla makes half of their EV cars in China. And then they export to Europe, too. And also, for all those German and many European automakers in China, they are also developing EV cars here. Here is the state-of-the-art technology and R&D center.
So probably we need to work on that and to collectively find a way to solve that so that we can meet the targets of carbon peak and carbon neutrality. Otherwise, if we start another trade friction or trade war, that’s probably going to slow down the overall objective of achieving carbon neutrality, which all the countries are trying to do so.
Pascal Lamy:
You’re absolutely right, Henry. Tesla sells cars everywhere, but it’s a totally different market segment from what the Chinese sell. It’s extremely good quality and terribly expensive, whereas the Chinese cars are good quality and very cheap.
Huiyao Wang:
OK, we need to increase the price probably. Again, I think we had a very good discussion. You’ve been traveling around, you’ve been involved in many rounds of global negotiations. Of course, you are still leading on the climate, digital, and AI front.
It’s great that we have your back to hear your views and to have a good, candid, and constructive discussion. So I really appreciate you coming and also our fellows, our experts, our media friends, and also, of course, people from embassies, from different think tanks. So on behalf of CCG, I would like to thank Pascal, our speaker today, very much, and also to all the audiences coming here today.
Note: The above text is the output of transcribing from an audio recording. It is posted as a reference for the discussion.
