World trade contracted 12% last year – its biggest collapse since World War II – says the head of the World Trade Organisation (WTO).

Director-general Pascal Lamy, in his speech to the European Policy Centre in Brussels on February 24, attributes the contraction in trade to the reduction in aggregate demand across all major world economies, as well as to the decreasing availability of trade finance, and – to a lesser degree – instances of increased tariffs and domestic subsidies.

“World trade has also been a casualty of this crisis, contracting in volume terms by around 12% in 2009 — the sharpest decline since the end of the Second World War,” Lamy said.

But he added, on a more positive note, that one year on from the onset of the crisis, “the multilateral trading system has proven its sturdiness as a bulwark against runaway protectionism”.

Lamy noted that in most developed economies, stimulus packages have been instrumental in preventing further deterioration in output while preparing the path to recovery. “But the positive impact of national stimulus packages is fleeting and worries are mounting over the huge budget deficits rung up by many governments,” he added.

“Economies urgently need other sources of growth -- sustainable engines of growth which will not add to our already seriously indebted economies. This is where trade can be an important part of the story, both in the long-run and in the short to medium-term.”

Lamy reiterated the fact that trade can have a positive impact on incomes or output and job creation during the economic downturn. In order to achieve this, he advised that “international markets must remain open and countries must continue to trade on the basis of comparative advantage”.

He also spoke about the importance of the conclusion of the Doha Round for ensuring that trade remains open, and for boosting the global economy after recession. “A Doha deal would provide new market opportunities through the reduction of tariff barriers and domestic subsidies. But it would also reduce the fixed costs of trading by addressing, for example, customs procedures and red-tape in the part of the negotiations devoted to ‘trade facilitation’.