Has international trade come to a standstill with the crisis that started in 2008? Things are not that simple, says Pascal Lamy, the director-general of the World Trade Organization (WTO), during a recent joint interview with ParisTech Review and Knowledge@Wharton. Although protectionist pressures may appear here and there, the real question revolves around the growing complexity of trade and the structural limits that are part of the negotiation process between member states. An edited version of the conversation follows.

ParisTech Review/Knowledge@Wharton: In parallel with the Rio+20 conference [the United Nations Conference on Sustainable Development that took place in Rio de Janeiro, Brazil, in June 2012], the Brazilian Chamber of Commerce evoked the risk of a “green protectionism.” Does this mean that more inconspicuous trade barriers could arise?

Pascal Lamy: I would not put things that way, although some technical regulations may really be intended to protect domestic markets. But in practice, what we are witnessing is, in essence, a complexification of the game. Let us consider, if you will, the example of Asia.

Sixty percent of this area’s international trade is carried out between its own countries, and we are now witnessing a powerful drive toward continental trade openness. Asian countries are opening up to each other. This is a... phenomenon [that] is not unrelated to the more general expansion of international trade in which Asian countries are major players.

But the game gets more complicated if you look at the existing trade agreements: You realize that there are many, and that they cover different scales and different spaces. There are, for instance, ASEAN [the Association of Southeast Asian Nations], ASEAN+3 (with China, South Korea, and Japan), but also the Trans-Pacific Partnership (TPP) launched by the United States and that does not include China. Trade integration, thus, is far from being uniform and is still subject to underlying political issues.

Add to this the proliferation of global production chains, in which the Asian countries are integrated, but also the United States, the European Union, the East Coast of Latin America and, to a lesser extent, other areas as well. This is an even more [fundamental]—yet inconspicuous—phenomenon. On average, the import content of exports has risen from 20 percent to 40 percent in 20 years. This is huge! And above all, looming in the distance of this phenomenon is the dissolution of the very notion of international trade—because the problem will no longer be about crossing a border, but about entering a differentiated regulatory space.

PTR/K@W: Is this a game-changer?

Lamy: Radically so. We are no longer in [the period between] 1980 and 1990, when trade negotiations focused primarily on quotas and tariffs. We live in a world where the stakes behind trade openness have to do with the juxtaposition of different regulations. And it is more difficult to negotiate on these preferences, because regulations are not intended to protect producers as much as consumers. Therefore, it seems to me that it is too early to talk about protectionism or the return of trade barriers. Undoubtedly, some business lobbyists are playing to that end, pushing for the adoption of specific regulations. But the real challenge does not reside there. The real challenge is protecting consumers.

At this point, fundamental questions come in, like: What is risk? Of course, the answer to these questions is also correlated with the developmental level of a given society. But if you take two areas with equivalent development, such as the United States on one side and Europe on the other, the issue of hormone-treated meat, for instance, will be viewed from a quite different perspective in each place. The cultural dimension is essential here, and it is much less easy to negotiate.

These new issues have reinforced the relevance of a sectoral approach, as shown by the Government Procurement Agreement that was signed in December 2011 [providing better regulations for awarding government contracts and using public resources], which should broaden the scope of market access by $80 billion to $100 billion per year in areas such as infrastructure, public transportation, and hospital equipment.

PTR/K@W: Do you think the rising power of bilateral trade agreements is a threat to multilateral agreements?

Lamy: We should first recall why multilateralism is favored by economists. If it is widely considered as an optimum, it is because it offers companies the best conditions in terms of stability and transparency. This is the idea of a “level playing field”: a market environment in which all firms must follow the same rules and where, therefore, they have the same capability to be competitive. The GATT [General Agreement on Tariffs and Trade], and since 1995, the WTO, derive from this vision.

It is true that the negotiations of the Doha round, which should allow [us] to go further in this direction are, for now, in a deadlock. It is in this context that it becomes imperative to question “preferential trade agreements”—in other words, bilateral agreements. For between those that have been [reported] to the WTO, those that have been implemented without having been [reported], those that have been signed but not yet enforced, those that are under negotiation and those still in draft status, we have about 400 bilateral agreements today.

Nonmultilateral agreements have very diverse intentions, geographies, methods, and sectoral compositions. The impact of these agreements on the global trading system has led us to decide collectively that they would be [reported] to the WTO, so as to verify their compliance with WTO rules.

Beyond legal aspects, what should we think of it? From our perspective, anything that goes toward reducing tariffs is heading in the right direction, as ultimately it permits lower trade barriers and promotes convergence. This is the case for many agreements. But things are quite different regarding agreements which, in order to open up trade on a preferential basis, breach regulatory preferences. Because if you start dealing with regulatory stuff in a bilateral context, what you have is a regressive effect. And this is precisely the rub, because nontariff trade barriers are an issue that is more and more central.

PTR/K@W: Under these conditions, do the great rounds of negotiation (the Uruguay Round, the Doha Round) still have relevance?

Lamy: The technology of rounds is a political concept. It is aligned with a Ricardo-Schumpeterian world—Ricardo’s comparative advantages, Schumpeter’s creation/destruction—in which trade liberalization is overall beneficial, but in which there are winners and losers. This is the origin of rounds: The impact of trade liberalization is considered to be a political issue, and attempts are made to balance the loss: I will open this market to you at the risk of upsetting my producers, and in return, you open such and such market to me, in which I have a comparative advantage.

This model has been pushed to its limit by three phenomena: the violence of economic shocks suffered during destruction phases—the magnitude of which neither Ricardo nor Schumpeter could ever have imagined; the sheer number of players involved; and lastly, the political limits that possible concessions are faced with. For example, the United States cannot, politically, stop subsidizing cotton. This is political economy in its fullest sense: What we have here are negotiators who are negotiating with themselves.

These political limits are even more sensitive in a context of crisis, because economies are more fragile and the political capacity of negotiators is thus weakened.

It is within this context that your question on bilateralism could be addressed. Some regional integration processes, easier to carry out, could perhaps help to reduce the number of players and perhaps also to produce players able to negotiate. This was one of the historic breakthroughs of European integration, but presently, the EU is the only example of a customs union that has been granted negotiating ability.

Because in trade, even though the growing complexity of exchanges makes the concept of political borders less relevant, rules remain set by international treaties signed by sovereign players. It’s still a Westphalian world, where states discuss with other states. Economics and politics no longer share the same geography.

PTR/K@W: Are there no discussions in parallel, conducted between field players, bypassing states’ filters?

Lamy: Of course, discussions are taking place upstream or in parallel to those carried out by governments with civil society—NGOs [nongovernmental organizations], trade unions, [and] producer organizations. But today, these can be heard mostly at the national level, even though, as director-general of the WTO, I spend a lot of time meeting with NGOs and other pressure groups. The issues they address, the interests embodied by nonstate actors, are not absent from the debate, even if they have a hard time finding their way into already very tough discussions.

PTR/K@W: Is a fair representation of relevant interests possible?

Lamy: It is, by definition, very difficult, for at least two reasons. Today, the first reason is technical, or more precisely, it stems from the technicality of the issues discussed. This technicality poses the problem of regulation capture by special interests. Transparency is essential; it is, in a sense, prophylactic. But on highly technical subjects where a simple detail can make a difference, it is not enough. This is where the work of civil society is crucial. It requires expertise, decryption capabilities, and political will to inform and educate the public. Much remains to be done on this subject.

The second reason, and this raises a fundamental problem of trade negotiations, [is that] in this game, the losing parties know precisely why they lose and are able to form coalitions to support their causes, while the winning parties are often unaware they won. The T-shirt you are buying cheaper today doesn’t come with a “Thank You, WTO” sign on it! I have been working on international trade for 20 years, and unsurprisingly, it turns out that in emerging countries, public opinion is more and more open to trade liberalization, while in developed countries, it is less and less favorable to it—not in the name of the poor in the South anymore, as was the case in radical circles in the 1990s, but on behalf of the poor in the North. The positive impact is obscured by the difficulties associated with the restructuring of Western economies—by the crisis, of course—but also by the great shift from industrialized countries to emerging countries, which may lead [some] to think that unemployment is due to relocation. Under these conditions, negotiators from developed countries now have less room to maneuver.

PTR/K@W: As a matter of fact, some emerging countries, notably India and China, have recently protested against the European carbon tax proposal, suggesting that the sustainable development objective was actually hiding a protectionist agenda. What is your opinion?

Lamy: In terms of the objectives pursued, national rules are obviously less effective in the fight against climate change than a global regime.... Compatibility with open trading rules would obviously be more fitting.

From a legal perspective and the WTO’s point of view, there is no objection, in principle, to the establishment of a carbon tax that would seek to internalize environmental externalities, as our statutes put trade and all exchanges at the service of sustainable development. The [issue is how] to verify whether the tools put in place comply with the rules.

There are four chief tools: regulation, subsidies, taxes, and permits. Each of these approaches can be tested in terms of WTO agreements (e.g., the agreement on subsidies), and there is a precise body of case law that allows work on a case-by-case basis. Some Nordic countries have had a working carbon tax for 30 years already, without this having ever been a problem.

PTR/K@W: Among the sensitive subjects, there is also the exchange rate regime.

Lamy: Indeed. The issue of exchange rates had never been addressed within the framework of the WTO, but the issue reappeared last year, although not about the yuan, but at the initiative of Brazilians and about issues involving the rate of the Brazilian real against the dollar.

The least we can say is that the subject is very complicated. Article 15 of GATT, which is reported to have been written by [economist Maynard] Keynes himself, essentially says that you cannot manipulate your exchange rate to escape the disciplines of trade openness you subscribed to. It is a central principle. Yet it has never been invoked in litigation, so there is no real legal doctrine on these matters. The issue has certainly been raised in the course of 20 years in the public debate. But during these 20 years, everyone, including myself, felt that it was not an issue for the WTO: Geneva is about trade, and Washington (International Monetary Fund Headquarters) is about exchange rates. We have now broken the silence... but we’re no further forward today than we were then.

The IMF [International Monetary Fund], the institution best able to address these issues, has recently revised its diagnosis: According to it, the yuan is only “moderately” undervalued, while it was “substantially” undervalued two years ago.

There are several elements I take from ongoing discussions. Some are economic; the others [are] legal.

First, one cannot deny that exchange rate fluctuations have a short-term impact on exchanges. But these effects are less noticeable in the long run. Their impact depends on one parameter: the added value of your participation in world trade. It is obvious that an undervalued currency will promote exports, but as I said earlier, there are more and more imports contained within exports. Also, the currency diversity of imports and exports baskets must be taken into account. Finally, if we consider the special case of the yuan, the gradual rebalancing of China’s trade tends to iron out the problem. Assuming that it could be demonstrated that, at some point, China benefited from an unfair competitive advantage by undervaluing its currency, this advantage was only temporary.

Therefore, we are lacking legal arguments and tools to address these issues. Even if it were found that the Chinese exchange rate actually is not free, nothing obliges them formally to do otherwise. U.S. legislation had attempted to... legitimize anti-dumping offsets on the grounds that such compensation was retaliating against disguised subsidies. But this law was rejected by one of the Houses [of the U.S. Congress].

One must understand that the nets of international regulation are heterogeneous, making it more or less easy to slip through. Some institutions have very close-knit meshes, like the World Organization for Animal Health (OIE). Others—even though they deal with a major topic [related to] the course of trade, such as corruption—have very large meshes. And states do not join international regulations unless they have an interest in going there. In 1947, when the GATT was signed, there was a very strong impulse, for we were just emerging from the 1930s crisis and doing our best to address the aftermath of World War II. At that time, we proved we were capable of going a little beyond the Westphalian game. Today’s crisis raises the very same issue—again. Will we be able to respond in time? This is the great question of our age.

This article first appeared in the Sept. 12, 2012 edition of Knowledge@Wharton.