THE CHANGING TIMES OF GLOBAL TRADE
Minnesota Economic Club
17 April 2012
It was nearly 50 years ago that one of Minnesota's favourite sons penned a song of protest that quickly evolved into an anthem for a generation.
"As the present now will later be past, the order is rapidly fading," wrote the young Robert Zimmerman.
From St. Paul to St. Germain-des-Pres the voices of young people echoed across college campuses, in the streets and in the squares.
Bob Dylan's words from 49 years ago still ring true today. The Times they are changing. This is true in terms of technology, geopolitics and social norms. It's true as well in terms of world trade. Factors large and small are changing the way we trade in the 21st century. Certainly, trade retains its central place in the global economy. Indeed, even though trade volume expanded rather marginally in 2011, the value of trade reached a record $18 trillion. Moreover, nearly every government in the world takes the view that trade must be on the menu of options to generate growth and jobs.
But in a great many other ways the nature of trade has changed immeasurably. Who would have imagined that China, on entering the WTO in 2001 would emerge just 10 years later as the world's largest exporter with merchandise exports of $1.9 trillion. Who could have foreseen the travails of the Doha round negotiations that brought us to the brink of success before we reached an impasse over an issue as old as trade itself -- the exchange of manufactured goods.
Even the way we trade has changed immensely. In the past, goods were made in Mexico, or Mauritius or Malaysia. Today goods are made in the world. The expansion of global value chains means that most products are assembled with inputs from many countries. Products cross borders frequently during various stages of assembly. Trade in intermediate goods is the most dynamic sector of international trade growing at a rate of 6% per year. And this trade is taking place in high technology sectors which generate well-paying jobs. Twenty years ago, the import content of exports was 20%. Today it is around 40%. More than half of global manufactured exports are components which are inputs to other as yet unfinished goods. In Asia, the figure is more than 70%.
The thousands of companies involved in these global value chains realize that access to imported components at the cheapest prices is vital to retaining a competitive edge in tough global markets. In Minnesota, 58.5% of imported products are used by US workers to manufacture goods in the United States.
Savvy governments are aware that trade policies which encourage enterprises -- particularly small and medium sized enterprises -- to participate in global value chains make it easier to attract foreign investors looking to build local production facilities.
In trade as in all things, change is not only inevitable it is necessary. There are in fact some key aspects of trade very much in need of change. Even as new trading powers have emerged and new trading techniques have been adopted rules governing global trade have remained largely static over last two decades. Another element in need of change is a trade narrative that far too often casts global commerce in a less than flattering light.
Governments acknowledged the need for change when they agreed to launch the Doha round in 2001. Though the WTO had opened its doors only six years before, it was already clear the global rules needed to deliver more for developing countries and needed to be modernized to better reflect how business is conducted in the 21st century.
After ten years of tough negotiations, Ministers conceded at our Ministerial Conference in December that the Doha round, in its current configuration could not be concluded in the near future. The round has foundered for complex political reasons very much linked the seismic geopolitical shifts of the last decade. Developed countries like the United States, the EU and Japan believe that big emerging powers like China, India and Brazil should make a greater effort to open their markets to imports of manufactured products. These emerging countries say in turn, that they are developing countries and that the negotiating guidelines clearly mandate that their contribution to market opening be less than that of the advanced countries.
The WTO is not the only multilateral organization which must address a new paradigm in which countries have had difficulty in adjusting to this shift of power and to the allocation of future responsibilities. To one extent or another the climate change talks, negotiations to reform global finance rules and the reallocation of voting shares at international institutions have been affected by the same geopolitical transformation.
This does not mean that the WTO has ground to a halt. Ministers instructed their negotiators in December to explore new approaches to the negotiations and to seek among the many Doha topics, those which might be ripe for conclusion. For many WTO governments, creating the optimum conditions for today's global trade, particularly globally integrated supply and production chains, is a high priority. They are also examining negotiating formats that might lead to such agreements.
Stripping away red tape at customs points and enhancing transparency and predictability at borders through improved WTO rules on trade facilitation is one area where negotiations could yield agreement.
It's likely that you have not read much about these negotiations in the (Minneapolis) Star Tribune or the (St. Paul) Pioneer Press. "Nations Seek Accord For Better Customs Procedures" is not a headline editors are likely to embrace. But a deal on trade facilitation could deliver a great deal for your business.
You know better than I that time is money. The longer a shipment is held up in port or at customs, the more it costs the exporter and the importer. Every extra day required to ship goods, reduces trade by 1%. On an average sea voyage of 20 days, one extra day at sea results in 4.5% drop in agriculture trade between any two trading partners.
Overall, the OECD estimates fees, formalities and clearance procedures constitute roughly 10% of the value of any trade transaction. Globally, that's about $1.8 trillion. The OECD also estimates that a WTO deal on trade facilitation would reduce those costs from 10% of the value of trade, to 5% of its value. That comes to a cool $900 billion gain for businesses globally.
There are all kinds of studies with complex formulas that illustrate this. But as business leaders involved in international trade you understand that a shipment requiring 34 documents to move through the port and onto a truck will cost you more than one that requires five documents. You know that having to pay a myriad of different agencies to ensure safe passage of your shipment, is cause to reconsider doing business in a particular country. A WTO agreement, backed by the WTO's dispute settlement system, would harmonize and update the rules on customs fees, documentation and the treatment of goods in transit.
Opening trade in transportation, logistics and information services is another possibility. A group of 16 countries has been exploring the possibility of negotiating a striking a deal on these services and others, but it is not clear how such talks will evolve.
Governments are struggling to find other areas of the negotiations on which they can agree. I am confident that something more can and will be done to help our poorest members, the Least-developed countries. Although, I fear what we will agree will not be enough. Opening markets more for trade in environmental goods and services or curbing subsidies that lead to overfishing are also possibilities, though we have tried to strike deals on each before without success and future endeavours will not be easy.
Governments are also exploring the possibility of negotiating plurilateral deals on services or in other sectors which may or may not be open to other countries under our Most Favoured Nation principle of non-discrimination. The United States and some others believe countries that do not themselves make market opening commitments should not benefit as free riders from great market access elsewhere. But striking a closed plurilateral deal on Doha issues inside the WTO is something facing fierce resistance from many emerging countries, who believe such plurilateral agreements would weaken support for concluding the round.
Plurilateral agreements can be reached in the WTO. We reached an important one in December when 42 countries negotiated a new Government Procurement Agreement. This agreement would expand the sectors covered to include roughly $100 billion in new market opportunities. It would also inject a welcome dose of transparency into many tender processes thereby helping fight corruption in procurement practices. Greater competition in the bidding would also enable national and sub-national governments to shop around for the best prices, delivering better value for money for taxpayers and keeping tighter rein on spending. This agreement is also likely to attract new signatories. WTO Secretariat officials forecast that expansion of the terms of the GPA under negotiation to the so-called BRICS countries (Brazil, Russia, India, China and South Africa) would add value in the range of $233 billion-$596 billion to the value of market access commitments under the agreement.
Finding ways to change our rules for the better -- and the right format in which such improvements could be negotiated -- is a huge challenge. But if the trading system is to remain fully relevant to companies which operate globally, these issues cannot be swept under the carpet.
There is another important part of the trade agenda for which change is urgently required -- how we tell the story of trade. In the communication age, you cannot persuade people without a compelling narrative. One can build a very strong case for trade. We know as well that closing trade down is economically destructive and that instead of protecting jobs protectionism actually destroys them. Yet, the political discourse on trade in the United States, and in many other countries, is cause for deep concern. Foreign companies and countries seemingly do not "play by the rules." Imports are demonized. Most worrisome of all, trade is seen as a catalyst for job loss rather than job creation. Yet, the irony is that trade has been and continues to be an important American success story.
The link between trade and jobs is complex and when making the case for trade we need to acknowledge that there are those who are hurt by trade. We need to support programmes that help get such people back on their feet. But equally, we know that those countries practicing open trade policies grow faster than those with closed policies. The World Bank tells us that they grow three times faster. Our joint study with the ILO said that the efficiency gains from trade lead to positive overall employment effects in numbers of jobs and the level of wages. We also know that jobs tied to exports pay better, 6% better on average in the United States and 18% better in Minnesota. The OECD points out that any link between unemployment and important penetration is tenuous. A survey of 23 OECD countries reveals that in 1970 the average unemployment rate in those countries was 3% and the import penetration rate was just over 10%. Today the import penetration average has jumped to 45% while unemployment, though elevated in this post-crisis economy, is at 8%.
What is clearly true is that open trade is very closely correlated with economic expansion and today in the United States this is more true than ever. The contribution of exports to U.S. GDP growth during 2010-2011 (1.08%) is nearly triple the average rate from 1949-2008 of 0.42%. President Obama in his 2009 State of the Union address, challenged Americans to double exports by 2014 as a means of offsetting sluggish domestic demand. I don't know if the United States can hit the target the President has set, but I do know that US exports rose $525 billion in the last two years and that exports of goods and services in 2011 reached, for the first time, more than $2 trillion.
But none of this new to you. Minnesota is home to a multitude of world class companies that compete across the globe. In 2011, Minnesota enterprises exported more than $20 billion worth of merchandise, to more than 200 countries and territories -- everything from civilian aircraft parts, to integrated circuits to medical supplies and lots of corn, wheat and soybeans as well. Exports were up more than 7% and sales to China, the state's second largest export market, grew by 23% last year. Three quarter of a million jobs in the state depend on trade and the percentage of trade dependent jobs is growing quickly. More than 20% of the jobs in the state depend on trade which is twice the 1992 share.
Exports are great, of course, but foreign direct investment and imports are also good for the country and for the state. Foreign-owned companies employ nearly 90,000 workers in Minnesota and 7% of all manufacturing jobs in the state are with U.S. subsidiaries of foreign companies. These companies pay an average of 32% more than their US headquartered counterparts.
This good news is not limited to the United States. Around the world, extreme poverty is in retreat. The World Bank estimates that an unprecedented 550 million people escaped abject poverty over the last decade. The percentage of people around the world living on $1.25 per day has fallen from 43% in 1990 to 22% today. For the first time in history less than half of Africans are below the poverty line. Trade has been an important reason why. Expanded trade in countries like China, Brazil, India, Indonesia and Chile, is a major part of government growth and poverty alleviation efforts.
So why is this story not getting out. We at the WTO accept our share of the blame: We can and will do better at explaining how trade improves the lives of most people around the world. Governments and universities need to do more as well. And, frankly, businesses need to lift their play as well. It is companies, after all, which engage in trade, which seek new markets and which benefit from access gained to those markets.
We in the WTO Secretariat have been working hard to establish closer contacts with the business community. We have been hosting seminars at which we explain how we work and why things sometimes don't work. We have increasingly offered businesses the chance to tell us how we can do better and we plan to do more on this front in the future.
True, we are a member driven organization and decisions are taken by consensus. But there are things that we in the Secretariat can do to help as well. One of these things is to provide you with better data. Our Made in the World Initiative, for example, has brought to light a great deal of information on how global supply chains work and the impact they have on trade, growth and development. This sort of information can lead to more informed debate and better policy decisions. Take the case of China. When you look at the US bilateral trade deficit with China you are looking a nominal figure which fails to explain the value-added trade between the two countries. If trade were measured in value added terms, the Chinese bilateral surplus with the US would be reduced by 40%. Nominal trade data does not explain why China runs a $1.9 billion trade surplus with the United States on the iPhone, while only 4% of the value of this product is added in China, a figure smaller that the value added in the United States. More data of this kind is on its way because last month we signed with the OECD an agreement to develop value added trade statistics and to produce a publicly available data base which measures trade flows in value added terms.
Ensuring factual clarity is essential when talking about trade because there is a great deal of mist surrounding the topic, some of it deliberately generated by those with an anti-trade agenda. The stakes are high because as countries struggle to lift themselves to real recovery, fierce pressures to restrict trade remain very much in place. Protectionism itself has largely been kept at bay, and some governments have actually pared back trade barriers. But these pressures will linger as long as unemployment remains so unacceptably high.
This is not to say that governments have been perfect. Since the advent of the crisis, we have been carefully monitoring trade measures taken by governments. At no point have government measures affected more than 1% of global imports. But there has been a cumulative impact and today more than 2% of imports are under some form of restriction. We will produce an updated report in the coming weeks, but I can tell you now that a variety of new import restrictions are being implemented and that more than 100 such measures have been put in place since mid-October 2011.
The way to forestall further such measures is persuade governments to provide clear and firm commitments to open trade. In many cases this has been difficult, as we have seen. Even so, the WTO's monitoring, particularly of the G-20, has had a deterrent effect on bad trade policy. So too has fear of being dragged into the WTO's dispute court.
The good news in all of this is that governments have retained their faith in the system they created. Simply put, the WTO's system of rules and disciplines has held: A sophisticated system of rules for trade prevented an outbreak of protectionism. Can there be any doubt that in an increasingly tumultuous world, the stabilizing power of WTO rules has proven to be a much needed international public good?
We live today in a society that is changing perhaps more rapidly than any which preceded it. Such rapid change can instil an enormous range of emotions from fear to hope to confidence. We may not know what the future holds for us as nations, companies or individuals but what we do know for sure is that things will be different tomorrow. We will have to adapt to change and we will have to manage it as best we can, and in a global economy that means ensuring our rules and practices fit our circumstances. This is why the WTO and other multilateral organizations are so important.
I began my remarks with quotation from one famous poet and I'd like to end with one another poet who spoke for another generation on the cusp of great change.
"Because things are the way they are," said Bertolt Brecht, "things will not stay the way they are.
Thank you for your attention.