At the same time, we have a very close co-operation with our colleagues on the other side of the Atlantic, which proved to be useful precisely in the times we are living. The international meetings, in particular the global economy meeting of central bank governors and the G20, provide regular forum for a thorough and open discussion between the participating  2  BIS Review 18/2009  Governors, particularly with Governor Zhou, who plays a very important role in these meetings. China Finance: To what extent do you see the need to reform the international monetary system and the global financial regulatory system in the light of lessons learned so far from the ongoing financial crisis? Trichet: The current crisis stands out because it affects the heart of the global financial system. Its root cause was a wide-spread underassessment of the quantity of risks and marked an undervaluation of the price of risks in the global financial system, especially in the most advanced economies. One of the reasons why this could happen was the widely held view that regulation should not stifle financial innovation and that markets knew best and could – for the most part – regulate themselves adequately. The turmoil has shown that this attitude was deeply misleading. When the turmoil set in, many financial institutions realised that their risk management systems were not as reliable and robust as they had believed them to be and, indeed, should have been.
Bilateral trade balances that are not in equilibrium are not a problem per se, and are instead much more an expression of the respective parties focusing on their own strengths. A country’s deficit with one trading partner can be financed through its surplus with another. That said, I do not want to paint too rosy a picture of the current trading system. This brings me to the second facet of the concept of ‘fairness’. The accusation that not all countries play by the rules of global trade is not without justification. Chart 3 shows that the number of tariff and non-tariff barriers to trade has increased again of late – with the latter often opaque and thus potentially even more damaging than customs duty. Examples include not taking due account of the principle of reciprocal market access or the protection of intellectual property, or distorting the free exchange of goods and services by way of subsidies. From this perspective, there is a valid point in calling for fairness. After all, international trade is in fact only fair if everyone plays by the rules of the global trading system. I will come back to this point later. No country wins a trade war The import duties recently imposed or increased by the US on certain goods have already prompted the first counteractions from the trading partners concerned. Were the spiral of protectionist measures and retaliation to continue, this could develop into an all-out trade war, which would have drastic consequences for the global economy.