3 July 2012

Africa: Pascal Lamy, Director-General, World Trade Organisation

History has cast a long shadow over Africa's trade performance, argues Pascal Lamy, director-general of the World Trade Organisation. Colonial patterns of trade prevented colonised countries benefiting from their comparative advantage in low cost labour. Africa's trade profile has not changed much over the last half century - it remains dominated by fuel and minerals, and mostly flows along North-South channels rather than regionally.

Neither implies chronic poor performance. Brazil's trade is also commodity-driven, and the rise of the Brics suggests the predominance of North-South trade is not likely to be the prevailing model going forward. What matters for Africa's share of global trade are the choices of today's political and business elites. Mr Lamy claims political energy is key.

"Where there is more energy, there are more results," he argues, describing the East African Community as "ahead of the curve" with leaders who - while not agreeing on all trade issues - share a common conviction that deepening trade is a regional priority. "If I take central Africa and ECOWAS (The Economic Community of West African States), for the moment there is less political energy."

Fixing the leaks

Trade liberalisation is a political hot potato, as domestic businesses fear being undercut by more efficient foreign producers. Mr Lamy believes businesses in Africa tend not to lobby for trade openness with the same intensity as those in Europe and the US, as well as Asia and Latin America. The reason, he argues, is that entrepreneurship is in a "pre-emergence" phase in Africa, and people running businesses have enormous day to day challenges, meaning they "have other fish to fry" rather than shaping policy or producing research advocacy in favour of trade changes. However, he points to the existence of a new generation of business leaders with a totally different mindset to the older generation of rent-seekers. While younger business people do appear more economically liberal than their predecessors, the claim that business communities in the West are pro-openness could be contested, of course. The agricultural lobbies in the EU and US, for example, are among the most powerful pro-protectionist blocs anywhere.

Trade reform need not only entail confronting politically difficult changes such as tariff levels or import restrictions. Much trade facilitation can be enabled by doing away with pointless and cumbersome bureaucracy. Even as mundane a tweak as ensuring customs offices in neighbouring countries are open during the same hours can improve process efficiency. Good choices on regulations and standards can also engender real results. "Where has Brazil been most successful?" asks Mr Lamy. "It is in areas like poultry. Does Brazil have a big comparative advantage in poultry? Not especially. The determining factor was when they adopted proper sanitary and phytosanitary standards from the beginning. That is what has driven it. Africa can do that."

At the World Economic Forum on Africa 2012 in Addis Ababa, Africa's potential to become a major food exporter was frequently cited, with some delegates predicting this could happen within a decade. "I am convinced Africa will become a net food exporter," Mr Lamy says. "First, Africa was a net food exporter 30 years ago. There are reasons why it has changed, including rapid growth of the population - because intake per head is what matters."

Today, changing dynamics in the global economy are working in Africa's favour. "We know that for 20 years to come we have this structural imbalance between supply and demand. Demand is growing more rapidly than supply, mainly because of nutritional transition. Protein intake grows with your level of revenue and inevitably this creates more demand on protein output. And there are a number of reasons why supply only adjusts very, very slowly. There is not as much land available elsewhere as in Africa. So I am convinced it will happen." He adds that Africa's domestic agricultural market is huge, and will probably see the fastest growth.

New models

Structural change in the global economy may also necessitate new tools for measuring trade flows, argues Mr Lamy. The rise of "multi-localisation" - where a given export contains more and more inputs from other locales - means bilateral trade flows are now a misleading indicator of trade intensity.

"The way we measure trade in gross volumes is becoming more and more detached from reality because to produce the same thing today you have three times more trade than in the past, just because production is multi-localised. Each time something crosses the border the full value of the product is attributed to the country."

Statistically, this makes it look as though a country has a higher trade intensity than is the case. "They are trading a lot, but what matters is not how much they trade, but how much value addition they create through participation in global value chains, because that is what jobs are about."

Bilateral measures of trade flows can lead to a view of imports as bad, and exports as good "which is economically nonsense", he argues. A new measure would posit the more interesting question: "How much do I need to import in order to leverage my comparative advantage on the global market?" To provide the data, the WTO is partnering with universities, other international organisations and statistical institutes. The task is long and technically complicated, but it is vital, says Mr Lamy.

"I think it is an important potential contribution to a proper public debate about trade which, when it is focused on bilateral balances, has absolutely no meaning. The US-China trade imbalance is divided by two if you measure it in value added. This is mostly because the import content of Chinese exports to the US is much bigger than the import content the US exports to China. It is half as imbalanced as it looks, if you weigh the trade of value addition on both sides instead of these volumes of trade. That seriously impacts the public debate."

This new approach does not change the fact that China has an overall trade surplus and the US has a trade deficit, but it will "focus the debate on what really matters for public opinion, which is jobs", he says. "Take the famous European debate - Germany imports much more than France, but Germany exports much more than France. The reason Germany exports much more than France is because it imports much more than France. And the moment you start looking at things this way, this will lead to a better, more informed debate about trade policy and the impact of international trade on your economic and social fabric."

Direction on Doha

As head of one of the most important global economic institutions, Mr Lamy is tasked with driving forward a long-stalling worldwide trade deal, now in its 11th year. The 'Doha Round' is bedevilled by arduous debate and dispute, endless textual cul-de-sacs and more than occasional public denouncements. With India, the US and China all entering elections or political transitions, willingness to concede ground may be weaker this year and next than previously. Mr Lamy believes a deal can be signed, but acknowledges that trade rounds may need to be pursued differently in future.

"Eighty percent of the job is on the table, that hasn't changed, but the problem is that the 20 remaining percent block the remaining 80 percent, because of the principle that 'nothing is agreed until everything is agreed'. That is where we got stalled, which everybody recognises now," he explains. "There is a strategy we [have been] testing since the end of last year which involves unpacking some of the issues - notably trade facilitation which is a very complex technical agreement treaty, which has a priority and which doesn't normally entail this big geopolitical conundrum between countries such as the US and China."

Issues such as pre-shipment inspection and customs procedure - "huge and incredibly technical issues" - have to be standardised at an international level, he claims, and the benefits from doing so could be huge. "The cost of moving trade today worldwide is roughly 10 percent [of trade value]. The purpose of this agreement is to bring this down to 5 percent. The economic impact of this sort of streamlining of red tape and standardisation is roughly 5 percent of the value of trade, which is an enormous amount of money."

When asked if the next trade round will be structured differently, he is in no doubt: "Yes, I think so. The sort of method we are taking, where you bundle together twenty topics, is the one used in the Uruguay Round. But the number of countries who are now active in the negotiation to promote defensive and offensive interests is such that it is probably too complex. We probably have to consider going back to more sectoral agreements, although the virtue of a single undertaking is 'give and take' whereas if you have a sectoral agreement it is difficult to get balanced results of give and take."

It remains to be seen whether Mr Lamy himself will see the deal conclude. His term of office ends next year, and there are rumours he may be in line for a post in French politics.

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