WTO Director-General Pascal Lamy in an early February presentation to the Trade Policy Review Body continued to focus on the need to track members’ policy changes that restrict trade. Policy makers recognize that opening markets to increased international competition is almost impossible in an economic recession, but less attention has been given to how to respond to the economic downturn while maintaining openness in trade.

Lamy noted that a staff task force report on trade policy changes circulated among member countries led South Korea and Ecuador to provide additional information about changes made in each countries. Members have trade policy reporting commitments, but usually provide only a minimal amount of information. It should not be surprising that WTO members do not shout from the rooftops that they are violating or on the edge of violating some WTO commitments. With the WTO task force reporting member actions and encouraging them to respond, additional information will become available. The next report and meeting are targeted for mid-March.

Transparency and urgency are the two watchwords for Lamy. Transparency will be less likely in coming months as governments acknowledge the need for open trade, but also favor local voters. Implementing the words “applied in a manner consistent with United States obligations under international agreements” in the buy American language of the U.S. stimulus legislation will not occur in a transparent manner. It will involve backroom trade-offs as President Obama juggles competing political interests.

Urgency is the more important issue. The financial crisis has been apparent in the U.S. for 18 months and political leaders are still looking for urgent actions. Talking remains the preferred approach. President Obama has been in office for over three weeks and the Senate Finance Committee has not scheduled a hearing on the nomination of Ron Kirk to be the U.S. Trade Representative. The Committee has been preoccupied with the tax and trade details of the stimulus plan. Trade issues have not been “urgent” enough to command sufficient staff time and a one-day hearing.

In his presentation Lamy directly addressed economic stimulus packages and subsidies, “…within the toolbox of stimulus packages there is the tool of subsidies which has been drawn upon…And as often happens, the devil is in the detail here. What we need are precise texts to enable us to be properly appraised of the damage being wrought and the knock-on effect of subsidy programs.” Not all subsidy programs have the same impact. For example, the U.S. has proposed subsidies for the U.S. auto industry that will include plant closing and worker layoffs. French President Sarkozy has offered subsidies for French auto makers with the expressed purpose of not having a single plant close or worker laid off. The U.S. will reduce excess capacity for production while the French plan will maintain present capacity. While both plans will distort trade, the U.S. plan appears to be much less trade distorting long term than the French plan.

Many newer industries like computers, cell phones and other information technologies have had mostly free trade in their short histories, but could be threatened by national legislation. The WTO needs to develop a position statement that major producing and consuming countries could unite behind in support of specialization in production that leads to gains through trade. The economic costs of breaking up these international supply chains are much too large to even consider. Providing WTO trade policy direction before a domestic fight starts is much better than trying to salvage trade policy after one country takes negative actions.

It is now clear that developing countries will be far greater impacted by the economic slowdown that earlier thought likely. Developing countries as producers of raw material and manufactured goods using lower cost wages will suffer just like producers in developed countries. There is little they can do to avoid being impacted, but developing countries must recognize that their economies depend on fully functioning international markets and must support WTO efforts to keep markets open.

The biggest challenge for open trade may be in credit markets. International trade operates on letters of credit that were easy to arrange until last summer. With credit markets in most developed countries now nationalized, traders have seen their credit squeezed. Some bank regulators now favor domestic loans. In measuring capital in banks, Switzerland fully counts foreign loans while giving domestic loans a break. U.S. regulators are expected to measure domestic loans month by month in response to complaints that banks receiving financial assistance are not lending enough. Developing countries have seen currency values decline sharply as the turmoil has continued. Lamy has been pushing on trade financing for months, but each time credit appears to moving again another hot spot develops and credit markets retreat.

Within the current WTO trade policy framework there is room for backsliding. The EU has resorted again to subsidizing exports of dairy products which may not be inconsistent with commitments, but point in the wrong direction. The same is true for re-imposition of vegetable oil import tariffs by India. Egypt has imposed tariffs on sugar. How much backsliding is too much?

The WTO must develop a proactive agenda that sheds some light on what can be done in economic policy within current WTO commitments rather than just complain about the negatives of what members have done. Director-General Lamy will have to work aggressively to prevent further damage to the existing structure of more open trade.