Bank bail-outs promote "deglobalization": WTO chief

In this file photo Pascal Lamy, Director-General of the World Trade Organization (WTO), attends the European Business Summit in Brussels March 26, 2009.

LONDON (Reuters) - Government bail-outs of the world's big banks pose a threat to free trade, Pascal Lamy, head of the World Trade Organization (WTO), told the Financial Times newspaper in an interview on Monday.

"There is a danger that the finance industry will be on the side of the forces of deglobalization," he said.

Lamy said the bail-outs had "constrained risk-taking" outside the familiar territories of national markets and this was already affecting Foreign Direct Investment, now forecast to fall 50 per cent this year.

"If there is less FDI there will be less trade," Lamy told the paper, speaking from the annual conference of France's Cercle des Economistes in Aix-en-Provence.

The WTO head warned that free trade faced its severest test, with protectionist pressures poised to rise.

"I am convinced the worst is yet to come," he said. "The real stress test is for the future when the shrinking of economies translates into unemployment and social hardship and that translates into a political reaction that could influence trade policy. The toolbox for protection is a wide one," he told the paper.

He said he planned to attend this week's G8 summit of world leaders in Italy to urge governments to resist protectionist policies and to keep the channels of trade open in finance as well as industry.

He said governments had to commit themselves to completing the Doha round of trade talks, already eight years in the making.

The arrival of new administrations in India and the United States -- which have clashed over the special safeguard mechanism to protect poor farmers -- had given a difficult process new impetus, he said.

"Getting the final agreement may be complex but in both cases they have given the feeling that they are back at the negotiating table," he said.

An agreement could be reached within the next year, Lamy said.

(Reporting by Stefano Ambrogi; editing by Matthew Lewis)