Let me start by thanking the European Commission
who is funding this interesting project looking at globalisation and its
consequences on an industry level. My thanks also to the Groningen
University — and here I would like to pay tribute to Professor Angus Maddison, a well known economist-statistician who died in his 80s on 24
April and was the co-founder of the Groningen Growth Centre — who is leading
It might look out of place for a lawyer to deliver
a speech on input-output analysis and its applications to trade, as many of
you are presently wondering. To tell the truth, my wife, who is an economist
and an econometrician, shared your doubts when I told her that the WTO
Director-General, Pascal Lamy, had asked me to substitute for him and open
this conference in his place. I was also feeling uncomfortable with the
assignment: I knew that our DG was enthusiastically promoting the use of
international input-output analysis for understanding modern trade, and that
our statistical department has been active in this field for some time now,
but I saw this field as the domain of economists or statisticians.
But I did my homework. I quickly realised that Input-Output pertained
originally to us, the students of the liberal arts, and not to economists or
statisticians. Indeed, the notion of productive interdependence in an
economy can be traced back to Sir William Petty, an English physician, a
specialist of anatomy in the XVIIth century. And Petty's intuition was later
formalised and developed by another physician, François Quesnay and his
famous Tableau Economique.
Knowing that physicians discovered this subject, I feel more comfortable, as
a lawyer, to say a word or two on the subject. Especially because I am a
trade lawyer, and our two good doctors, Petty and Quesnay, were also linked
to two currents of economic and political thinking that have shaped trade
policies since then, the Mercantilists and the Physiocrats.
Petty was a pupil of the philosopher Thomas Hobbes, and became known as one
of the Mercantilists, favouring active state intervention in the economy,
and trade protectionism to create surplus and accumulate gold reserves. The Physiocrat Quesnay, on the contrary, had more faith on human nature and
called for minimal government interference in the economy, advocating a
policy of “laissez-faire les hommes, laissez passer les merchandises”.
We shall see that this controversy between Mercantilists and Physiocrats is
still relevant today, and that international input-output analysis, promoted
by the World Input-Output Database Project (WIOD), can help us to better
understand their implications for trade, economic growth and development.
We can even link the new development in global economics to theories much
older than Mercantilism and Physiocratism. The new global economy which
emerged in the 1980s resuscitated a theory coming from the Early Middle Age:
according to the American author Tom Freidman, The World is Flat, when we
look at it through the new global concepts.
III. THE FLATTENING OF THE WORLD
To me, the basic idea behind the WIOD project is
very much in tune with this new idea of a flatter world, where traditional
boundaries and distances are collapsing. The exact date when the flattening
of the Earth started is still a subject of controversy. Let me propose a few
dates to define mile-stones.
The “Global Matching” of mass consumer demand in the West with rising
manufacturing capacities in Eastern Asia started in the early 1960s and led
to the emergence of the New Industrialised Economies (Korea, Chinese Taipei)
For the U.S., the imports of goods manufactured in East Asia rapidly became
crucial to American retailers in their mass-market strategy. From the
perspective of Asia's industrial expansion, U.S. bound exports were the
pillar of their industrialization strategy. But these supply networks which
emerged were still limited to a few partners.
From a truly global perspective, we can propose to mark the Flattening of
the Earth to the date of January 1979. It was the historical and ice
breaking visit of Deng Xiaoping to the U.S.A., which marked the beginning of
the end of the post-world war II era of separate blocks, and the return of
China to the international market, through a long process of reform and
Ten years later, in 1989, two highly symbolic facts cemented the new world:
the fall of the Berlin Wall, which put a final touch to the political
process the Xiaoping visit had started, and the Brady Bond initiative, that
closed the international debt crisis of the 1980s which engulfed so many
developing countries, particularly Latin America.
In the meantime, China had been progressively adopting a more open economy,
and was slowly emerging as a world industrial power. This process was
awarded international recognition in 2001, when China joined the WTO, the
successor of the GATT.
Politics or economics alone would have been unable to flatten the world.
This was also the result of changes in transportation and communication
technologies, in particular the informatics revolution that changed the way
people, machines and organizations exchange and communicate.
The most emblematic symbol of the new interconnectivity is certainly the
Internet. The birth of the “modern” Internet can be traced to the early
1990s. Its success was such that in January 1992, the Internet Society was
created to regulate its growth.
Thanks to change in world governance and in technology, the way modern
businesses are run also changed, with huge implications for international
trade. This is where the WTO comes into the picture.
A. FROM RICARDO TO GLOBAL SUPPLY CHAINS AND TRADE
When the world was round, the old way of
understanding international economics was best represented by the Ricardian
theory of comparative advantage. Countries exchanged goods in which they had
comparative advantages. England was producing textiles and exchanging them
for Portuguese wine. With some adaptation, this model governed the way
economists understood international trade up to the late 1990s.
Meanwhile, new business models were appearing, promoted by advances in
technology and also in engineering and business management. The production
of final goods started to be fragmented into several stages, some of them
outsourced to countries far away from the home country. More and more, the
old concept of “country of origin” lost its meaning.
Nowadays, in international trade of manufactures, what you see is no longer
what you get: the label “made in ... ” can be misleading. Let's take for
example the new gadget launched by Apple, the iPad. According to a recent
report, the imported cost of a mid-range iPad imported from China into the
US is about US$ 290. But the Chinese content is only 5 per cent of the
commercial value registered by customs, while most of the electronic content
actually comes from South Korea, Japan and the US while batteries are
manufactured in Honk Kong, China, by a Japanese company.
Consumer electronics is not the sole example of global manufacturing: The
first new jumbo jet Airbus 380 that left the city of Toulouse, France, for
its final export destination in Singapore was flying on wings made in the UK
and Spain, while Germany provided the bulk of cabin and fuselage
manufacturing. Even the “European” origin of the carrier could be contested,
because the engines were from the US and Airbus Industrie has more than
1,500 suppliers in 27 countries.
Even iconic status symbols like “German Cars” are more global than German:
More than 35 per cent of the Porsche Cayenne build in Leipzig comes from
suppliers based abroad.
In this “Post Ricardian” model of international trade, specialization is no
more based on the overall balance of comparative advantage in producing a
final good. England does not trade textiles for Portugal's wine anymore. In
today's flat world the comparative advantages relate to each specific step
of the global value chain that will lead, at the end of the chain, to the
production of the final good.
This change of paradigm from trade in goods to trade in tasks calls for a
change in the analytical and statistical tools we use to measure and
understand the real world.
B. IMPLICATIONS OF GLOBAL SUPPLY CHAINS FOR TRADE
Trade in tasks calls for a new measurement of
international trade: The Value Added Content, or domestic content of trade.
To take one of my examples, if we want to assign to each country of origin
the value added imbedded in an iPad imported by the U.S. we must be able to
measure how much comes from China, Japan or Korea, and, of course, from the
Confronted with the need to adapt the statistical apparatus, national and
international statistical organizations can choose among two options:
The direct approach, by looking into the details of manufacturing and
disentangling the origin and value of the inputs. Case studies, like the iPod or the Porsche Cayenne, do this; they are illustrative but not always
representative. This is also the objective of ambitious programmes at Eurostat and OECD, to link trade statistics and business statistics at firm
level. But this is very intensive in micro-data, and reserved to the most
developed statistical systems.
The WTO chose an indirect approach that can be extended to many
countries, adapting existing trade and national account data usually
produced by official statistics. I do not want to enter into the technical
details that will be discussed during this conference by experts unlike me,
except to say that this method relies on harmonizing a collection of
supply-demand tables for each of the respective trade partners and linking
these national tables through sectoral trade flows.
The WTO embarked last year on a pilot study focusing on Asian economies,
with the cooperation of the Japanese Institute for Developing Economies.
Despite the relevance of the Asian input-output matrices, this pilot project
remains restricted in its scope and we are still waiting for a worldwide
database to generalize our findings. Fortunately, the World Input-Output
Database project is filling this gap,
I am here to support the WIOD initiative, and to signal some of the policy
implications we expect from a better understanding of the international
Before providing some examples of the statistical implications for trade
policy and international economics, I would like to draw a parallel between
the Great Depression of the 1930s that led to the creation of modern
national accounts, and what we are living today, after the economic crisis
National Accounts were instituted in the post World War II period to help
governments to better understand their national economy and avoid
reproducing the disaster of the 1929 crisis. Because the nation-state was
the key actor in those years of reconstruction and most enterprises were
strictly national, the analysts devised the method to identify the
territorial dimension within each nation-state, defining a clear-cut
separation between resident and non-resident, between domestic and the rest
of the world, between “us” and “them”.
Today, after the 2008-2009 Great Recession, decision-makers need a similar
tool to link their national economy with the global context. Today's
decision-makers need to have the appropriate tools to do the same in a globalized world where small changes in inventories at some remote point of
the international supply chain may translate into large changes in factory
production back home.
This interconnection of domestic supply and demand schedules across national
borders creates a closely knitted set of productive, commercial, financial
and contractual arrangements. It is changing rapidly the way the
international economy interacts, rendering obsolete or irrelevant many of
the previous analytical classifications, like “country of origin”. Global
manufacturing even changes the post-World-War II distinction between
industrialized and developing economies. This change of paradigm is
blurring, in the end, the national boundaries which were used to distinguish
between “us” and “them”.
Nevertheless, if policy-makers are increasingly concerned by this increased
interconnection of national economies, they still lack the appropriate
statistical tools to measure and monitor accurately this interconnection.
And it is where initiatives like the WIOD project can help them understand
better the new flat world.
The rest of my presentation will signal some of the implications the Global
Trading and Manufacturing network has on our understanding of international
C. IMPLICATION OF GLOBAL SUPPLY CHAINS FOR
UNDERSTANDING INTERNATIONAL ECONOMICS
1. Trade policy revisited
When it becomes difficult to distinguish between
the residents and the rest-of-the-world, to use a national account concept,
it becomes also more much difficult to design a purely national economic
policy, as we have seen in the recent crisis.
I mentioned that the WTO was cooperating with the Institute of Developing
Economies, IDE-Jetro, on the use of input-out matrices for measuring trade
in value added. A recent book on “Asia Beyond the Crisis”, produced by this
Japanese research centre makes clear that in the face of such complex global
production systems, the counter-crisis measures should not be to isolate the
national economies with protectionist measures. The new Global Trading and
Manufacturing Economy calls for devising systemic and cross-national
programmes, coordinated at world level. The leadership taken by the G20 in
organizing a coordinated response to the crisis is an example of such global
answers to global challenges.
In other words, the design of national policies needs also to be adapted.
Old “mercantilist” policies, based on the vision that trade is a competition
between “us” and “them”, becomes not only sub-optimal (which they usually
were even when the world was round) but also a complete anachronism in our
new flatter world.
Understanding that trade is not a zero-sum game between “us” and “them” has
huge implications for trade policy and negotiations. For example, Canada
announced recently that it had become a tariff-free zone for manufacturing
inputs and machinery. Canada said it was doing this not only because it was
committed to maintaining open markets to help the global economy recover
after the crisis, but also because this unilateral action by Canada would
help raise the competitiveness of Canadian companies.
Conversely, the temptation of “buying or hiring national to help national
firms and workers” is self-defeating as it ultimately hurts the productivity
and the competitiveness of the national productive economy. Thus, in the
end, it destroys jobs for the people, particularly the most productive and
But we know that in times of crisis the pressure from public opinion can
push in the wrong direction. In the absence of objective statistics
demonstrating the interconnectivity of the modern production system, it is
to be feared that false and obsolete policies will remain in the panoply of
the most popular remedies.
One of my favourite versions of Murphy's Law is that every complex problem
has a simple solution, easy to understand, easy to explain but totally
wrong. Besides providing experts with the needed statistical tools for
understanding the Global Trading and Manufacturing Economy, I also expect
the WIOD project to counter this Murphy's Law and provide the media and
other opinion-makers with easy to understand but factual information about
2. Macroeconomic implications: Global rebalancing
To illustrate the usefulness of the new global
statistics that can be derived from interconnecting national productive and
financial accounts, let me mention one of the most heated debated issues
among economists nowadays: the rebalancing of the global economy.
The large imbalances accumulated during the 2000s are often blamed for the
2008-2009 crisis. And most analysts highlight the large bilateral imbalance
between the existing super-power, the US, and the new world manufacturer,
But relying on conventional trade statistics gives a distorted picture of
trade imbalances between countries. As we saw when looking at the Chinese
content of the iPad, what counts is not the imbalances as measured by gross
values of exports and imports, but how much valued added is embedded in
these flows. The WTO estimate, based on IDE-Jetro data, estimates that 80
per cent of the value of the goods exported by the US had a domestic
content. The comparable figure was 77 per cent in the case of Japan, 56 per
cent for Korea. It was about 50 per cent for Malaysia and Chinese Taipei,
meaning that half the value exported by these countries originated from
Using conventional trade statistics would overestimate the US bilateral
deficit vis-à-vis China by around 30 per cent as compared to measuring in
value added content based on input-out matrices. The official figures for
the bilateral deficit would be cut by 50 per cent when the activity of
export processing zones in China and Hong Kong, China, re-exports are fully
taken into account. By the same token, measured in domestic value added
content, the bilateral deficit of the US with Korea or Japan, the main
providers of electronic parts in our iPad example, would increase in
proportion to the reduction of the US — China deficit.
This implies also that traditional exchange rate policies won't fully help
in rebalancing apparent bilateral imbalances. If the Chinese value added in
US imports from China is just half its commercial value, a revaluation of
the Chinese Yuan will increase the costs of Chinese goods by only half the
rate of the revaluation. In the case of consumer electronics, the impact
will be even less than that, and only 20 per cent of the variation in the
exchange rate will pass through the price paid by importers.
This shows that, as DG Pascal Lamy said recently at the Paris School of
Economics, it is time to start measuring trade in value added rather than on
gross value as is the case today!
Each crisis reveals new issues and calls for new
policy instruments. The 1929 depression led to the creation of the modern
version of National Accounts, as our Mercantilist and Physiocrat precursors
had imagined them centuries before.
National accounts were built on the resident/non-resident vision of the
world. But today's world of industrial production is dominated by global
manufacturing, where international trade plays the role that inter-city
connections played in the XIX and early XX centuries. This interconnection
of domestic supply and demand schedules transcends national borders to
create a closely knit network of supply and use contractual arrangements.
Global manufacturing is changing rapidly the way the international economy
interacts, blurring the differences between the resident/non-resident
visions of the world that presided to the design of national accounts.
The objectives of the WIOD project are ambitious but provide an answer to
the urgent need of offering an international version of the national
accounts promoted by the Physiocrat pioneers of the XVIII century. We at the
WTO are waiting for the results of this project to improve our knowledge of
the national value added content embodied in international trade. Our
ambition, by providing new and more accurate statistics on international
trade, is to help policy-makers and trade negotiators in designing
factual-based strategies in the best interests of their citizens.
And because the OECD, for whom the project has been originally designed, is
by far the largest trader in the world economy, the benefit of this project
will extend far beyond the club of the rich and wealthy nations, recently
joined by my own country, Chile. As I mentioned in my presentation, not only
global manufacturing has blurred the distinction between “us” and “them”,
between “residents” and “rest of the world”, it has also blurred the
post-World-War II distinction between industrialised economies and
developing countries, between “Centre and Periphery”. Prebish is dead, would
lament a structuralist economist, and the old North-South divide dear to
many radical development economists is moving into a new East-West
bipolarization, where new modes of international production are translating
into new international political institutions.
Let's face this new challenge with new visions. The governance of this new
institutional order we are contemplating today calls for a change in the
functioning of national and international organizations. It calls also for
revamping the existing statistical system and providing the decision-makers
with the statistics they need to face their new responsibilities. I know
that the ambition of the WIOD project is, ultimately, to provide support for
the analysis of some global issues linked to global manufacturing, such as
the environment. I mentioned that it will also help the WTO to understand
better the relationship between international trade and national value
content, and ultimately, with job creation. Let's hope that this project
will help the North, South, East and West realise that they are part of the
same compass and condemned to share the same planet.
Let me conclude by wishing all the participants a fruitful seminar in this
beautiful city of Vienna.
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