Mr Lee Yi Shyan at the Warwick Commission Roundtable

SPEECH BY MR LEE YI SHYAN, MINISTER OF STATE FOR TRADE AND INDUSTRY AT THE WARWICK COMMISSION ROUNDTABLE ON 4 APRIL 2008, 1.10PM AT THE STRAIT ROOM, LEVEL 4, FULLERTON HOTEL

Her Excellency Amanda Brooks, Deputy High Commissioner,

Professor Richard Higgott, Pro Vice-Chancellor, University of Warwick and Director of Studies, The Warwick Commission.

Mr See Chak Mun, Senior Advisor, MFA

Ladies and Gentlemen,

Introduction

Thank you very much for inviting me to be part of this very important roundtable on world trade, and the ways to move forward.

Sub-Prime Crisis

Since February last year, media reports on the US sub-prime crisis[1] have been hitting the headlines in newspapers around the world. Every other day, we read about massive write-downs by various banks. As much as US$38 billion were written down by UBS – that was more than the GDP of developing countries like Sudan and Kenya[2]. Billions of dollars were lost. These losses sent tremors reverberating throughout the world. Questions linger in minds of many people – “How many more financial institutions are sitting on worthless assets? Is the US going into a prolonged recession?”Some analysts even raised the prospect of the world sliding into a severe recession similar to the Great Depression of the 1930s[3].

The current meltdown highlighted two lessons we must pay heed to. First, the financial world is increasingly interconnected. This was why the Federal Reserve had to intervene as a lender of last resort to rescue the ailing Bear Sterns, and others - as much more was at stake. The repercussions of not doing so would be far and wide. Second, sentiment spreads like wildfire, which explains why confidence in the financial world is so fragile. As firms continue to disclose deeper losses, it is not surprising that investor sentiment plunge to an all-time low.

The greatest fear of course, is that low confidence in the financial world would impact the consumption and production level of the “real economy”. Already, the IMF has cut its forecast for global growth this year to 3.7 per cent, the slowest in six years. It predicted that there is a 25 per cent chance of a world recession, citing the current sub-prime crisis as the worst financial crisis in the US since the Great Depression of 1929. World recession is defined as global growth below the rate of 3 per cent per annum.

So far, the growth in the emerging economies have been holding up as a countervailing force to ailing Western financial institutions. But given the inter-connectedness of the global trading system, even the fast growing developing economies cannot escape the impact of the confidence crisis in the Wall Street. ADB says that the main economic powerhouses of China and India are estimated to grow moderately, at 10 per cent and 8 per cent respectively this year. It says that China, being more open to trade than India, will have a more pronounced impact due to the slowdown in US, European Union and Japan. South Asian economic growth is projected to lose some of its steam in 2008 due to moderation in Indian GDP growth. Pakistan, Bangladesh and Sri Lanka would also experience deceleration as exports are expected to suffer.

What role, then, does trade liberalization play against this backdrop? What we must recognize is that the very presence of the WTO brought about the opening of these emerging markets. The WTO is the foundation upon which today’s global economy is built on, and is crucial in determining the stability and viability of tomorrow’s world.

The World Wars

The basis for today’s highly-advanced global economy and the wealth created can be easily taken for granted. If we go back to just 100 years, we had a very different and much less integrated world then. In 1911, following its Xinhai revolution, China fell into warlordism with regional conflicts and revolts. India then was under British colonial rule, exporting its spices back to England. Germany and Japan, faced with rapidly-expanding populations, were aggressively seeking resources to support their political ambitions. Countries were resorting to force to secure coveted resources.

Without a fair trading system to share and allocate resources in a peaceful and mutually-beneficial manner, the world was inherently unstable.Since the 15th century, successive maritime powers such as the Spanish, Portuguese, Dutch and British all embarked on extra-territorial expansions to secure resources not available to them.

Winston Churchill famously said, “The farther backward you can look, the farther forward you are likely to see.” History has shown us that when economic resources are denied, violence and war can take place.

The Post-War Era

The world after World War II was vastly different. Economic growth and a rule-based international order became the new order. 50 years of relative peace ensued. The world saw a sharp rise of living standards in North America, Europe and Japan. A stable, rule-based international system of trade was the core of this growth. The General Agreement on Tariffs and Trade (GATT), forged in 1973, gave rise to the WTO in 1995. Tariff barriers were dropped, GDP grew, and poverty was alleviated. Various indicators place the World GDP at about US$6 trillion in 1960.Last year, the CIA’s World Factbook estimated that World GDP at purchasing power parity rates stood at US$65.82 trillion. This means that the global economy grew by 10 times in four decades.

In the last decade, further progress was made to advance collaboration. China became a member of the WTO and the Doha Development Agenda (DDA) was launched. While the GATT only covered trade in goods, the WTO and its agreements now cover trade in services and intellectual property. To date, there are 151 members in the WTO.Together, they account for over 97% of world trade. Indeed, the world has become a better place in the last 60 years because of an open trading system and fairer trade practices. The World Bank estimates that the global gains from trade liberalization are nearly US$300 billion every year.

Global integration: winners and losers?

We are where we are in terms of global integration, because of the multilateral trading system. The multilateral framework of the WTO provides access to multiple markets. It is the only guarantor of a rules-based global trading system. This is of paramount importance to small countries like Singapore. We believe that the benefits of an open trading system far exceed the shortcomings it may bring. While not every country benefits from the world trade in the same way, everyone gains from the system.

The question that lies before us is: do we maintain status-quo or do we improve the multilateral trading system? Should we stay where we are or should we strive to create more economic benefits for everyone by seeking further collaboration in a systemic manner?

WTO: time for a makeover?

In this respect, I am encouraged that the Warwick Commission has taken the initiative to give more thought to the challenges facing the multilateral trading system today. The Commission’s first report “The Multilateral Trade Regime: Which Way Forward?” contains an analysis of the multilateral trade system.I have found the five challenges identified in the report, both insightful and challenging.Let me share my thoughts with you:

(i) First, there is a growing opposition from industrialised countries to further multilateral trade liberalisation; this is a worrying trend which must be addressed.

(ii) Second, a multi-polar global trade regime is forming, with a group of nations emerging as significant players, notably Brazil, China, India and Russia; these countries must play a greater and more constructive role as they have much to gain from global trade deals.

(iii) Third, there is increased difficulty in forging broad-based agreement among the WTO Members; some practical solutions would be needed for breakthroughs.

(iv) Fourth, there is a pertinent need to ensure benefits for the weakest WTO Members; the question is how.

(v) Finally, we are witnessing a rise in the number of preferential trading agreements; the question here is how these agreements can be better harmonised with the multilateral regime.

All these challenges require a reconsideration of the principles and practices that guide the multilateral trade regime today. All countries have a role to play.

Developed countries must strengthen access to education and training, and put into place adequate social safety nets to cushion the process of change.They have to ensure that their people and industries are equipped to face the challenges of an increasingly open economy.

Developing countries, on the other hand, must recognise that there are many benefits to be reaped from opening up their economies.A common thread exists among those developing countries that have been successful at generating greater growth - they had opened up their economies. Indeed, trade liberalisation has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30% to 10% over the past 20 years.In the same period, the GDPs of Singapore, Hong Kong and South Korea grew by an average of 700%.Indeed, since the early days of our independence in 1965, Singapore has adopted an export-oriented model based on free trade principles. This has contributed to our rapid economic growth.Today, Singapore’s trade to GDP ratio[4] is the highest in the world at more than 450%.

The WTO, too, has a role to play. In Paul Collier’s recent book, The Bottom Billion, he made a simple but profound point.All societies used to be poor.Most of us are being lifted out of it. Now, we also need to help countries that are still stuck in the development traps.

Every WTO member should be in the position to enjoy the potential benefits of trade liberalisation.That is why initiatives such as Aid for Trade are important for trade capacity building.Aid for Trade provides these countries with the much-needed rope to hoist themselves out of the development traps. At a time when the Doha Round faces serious challenges, it is a timely reminder of the wider institutional relevance of the WTO and its impact on the development of its member states, especially the weaker ones.

Conclusion

In closing, I would like to emphasize that the establishment of the multilateral trading regime is one of the hallmarks of the last century, and it remains just as relevant today. Trade liberalization and a stable, rules-based WTO are both critical for the global economy, now and in future.

With trade protectionism on the rise, we must push on to maintain the momentum of global trade liberalization and conclude the Doha Round. The Doha deal would send a positive signal about the health of the global economy and would have a psychological impact on financial markets.

A robust, rules-based trading system is the best way to maintain world order. We need to ensure a peaceful environment within which all countries can pursue economic growth, social development and poverty reduction measures. Much is at stake and much needs to be done.

I therefore think that today’s roundtable discussion is a timely and immensely useful one. I wish you all a fruitful session ahead.

Thank you.

[1]For world's bankers, trust is now a rare commodity --- Rumors roil stocks in wake of Bear deal; UBS walks tightrope - The Wall Street Journal Europe, 18 March 2008, 1119 words, (English) IMF cites US crisis as it reduces global growth forecast again – Financial Times, 3 April 2008
MARKETS: Banks swallow bitter pill of subprime losses – Financial Times, 16 February 2008

[2] http://www.answers.com/topic/list-of-african-countries-by-gdp?cat=travel

[3]http://news.bbc.co.uk/2/hi/business/6958091.stm

[4] Source : WTO Trade Profiles (2004 – 2006 statistics) http://www.wto.org/english/res_e/booksp_e/anrep_e/trade_profiles07_e.pdf2004 – 2006.