Keynote Address by WTO Director-General Pascal Lamy
It is a great pleasure for me to welcome you to this event to discuss a recent publication on global value chains and its impact on trade patterns, which is the result of cooperation between IDE-JETRO and the WTO.
Later today you will have the opportunity to listen to the presentation made by the authors of the book and also to benefit from the comments of two distinguished scholars, Dr. Nakatomi, and Dr. Koopman. Allow me to say a few words to frame the discussion to come.
A better understanding of global manufacturing, and the impact it has on measuring trade patterns is part of the landscape of this Organization. In fact, developing adequate statistics to understand correctly the nature of today's world production and trade is essential for proper policy making.
I would like to begin by stressing two issues:
First, the implications of global manufacturing and “trade in tasks” on the way we should be looking at international trade today, and its global regulation in the WTO.
Second, the importance of global manufacturing and the Asian experience, to better understand the relationship between trade and development.
Today's trade realities look different from when the rules governing world trade were originally shaped after the Second World War. The old version of the international division of labour between nations has been radically changed by globalization. Global value chains, or international supply chains, are at the core of this development. With the international fragmentation of production, traditional boundaries and distances are collapsing. Reductions in transport costs, the information technology revolution, and more open economic policies have made it easier to “unbundle” production not only within countries, but across a range of them.
The question of “who produces what for whom”, and “where the value added is accruing” are perhaps as important as the traditional concept of country of origin, which guides not only custom statistics, but the application of the core WTO principle of Most Favoured Nation.
Yet, answering these questions with our current statistical tools is not easy. The concept of country of origin for manufactured goods has gradually become more challenging as the various operations, from the design of the product to the manufacture of the components, assembly and marketing have spread across the world.
In international trade theory, trade in goods is seen as a substitute for the movement of factors of production. Thus, a country's imports of goods from its trade partner are seen as additional suppliers of the partner country's labour and capital, which competes with the importing country's own workers and entrepreneurs. But with the fragmentation of production, the share of value added by factors of production of the origin country in traded products is considerably lower than in the past. This growth in the trade of parts and components means that import statistics will overstate the degree of competition that comes from one’s trade partners.
The book highlights some of the changes a measure of trade in value added would mean to our understanding of trade indicators.
The book present the famous example of an iPod assembled in China by Apple and shows how most of the export value recorded in Chinese trade is attributable to Japan and other Asian countries. The degree to which a given volume of imports implies competition between the origin country’s factors of production and the importing country's factors of production will be overstated if we use today's statistics.
Similarly, by focusing on gross values of exports and imports, traditional trade statistics also gives us a distorted picture of trade imbalances between countries. The picture would be different if we took account of how much domestic valued added is embedded in these flows. The book illustrates this with specific examples.
This does not mean that macroeconomic imbalances should be treated lightly. The report shows that, when the imbalances are structurally high, some of the most important benefits of trade, which are the creation of job opportunities along the lines of comparative advantages, become blurred by the negative macro-economic impacts of such imbalances and the recessive impact of their correction. But correcting macroeconomic imbalances does not pass through correcting bilateral trade deficits, as the use of trade statistics in value added clearly reveals.
When products include many parts made in many other countries, the effect of an isolated exchange rate appreciation or depreciation to the selling price in export markets will be reduced to the domestic content of these exports, to its “value added content”. This may explain why empirical studies about the impact of exchange rate changes on imbalances tend to show they only have limited or ambiguous effects.
But I am sure you will have the opportunity of discussing some of the economic implications during the discussion this morning.
Let me now come to the second point on the implication of the global production chain on development. The book shows how industrial production in Asia is driven by demand from the USA, and how Asian producers have organized themselves to satisfy this demand, specializing on their comparative advantages. It shows a story of mutually beneficial interdependence.
Global manufacturing brought a new dimension to the relationship between trade, investment, industrial production and development. The book presents a good illustration of the new economics of trade and development.
I was particularly interested by the series of graphs showing how developing Asian economies are catching up with Japan as the principal traders with the USA. Contrary with what mercantilists would have expected, this competition did not reduce the importance of Japan as the leading country. The changes reflected in fact a redistribution of roles and tasks within the regional supply chain, most of these changes being initiated by Japanese companies themselves. Far from being the zero-sum game, trade in tasks proved to be a win-win game for the region. In less than 20 years, relatively less advanced economies in Asia were able to become major players in manufacturing industries.
Besides China, which is today dubbed the “World Manufacturer”, we have a series of industrial success stories in Malaysia, Indonesia or Thailand. And this is not limited to manufacturing. Trade in commercial services has been spreading, as global manufacturing demands state-of-the-art logistical, communication and business services to thrive. In the process, as it is well illustrated in the book, Hong Kong and Singapore have become giant trade hubs, while India and the Philippines have developed successful activities of business-services exports.
Today, we see new regional players joining the Asian regional supply chain and making the necessary investments and institutional changes to benefit from their comparative advantages. Some of these new countries, such as Cambodia or Viet Nam, are among the poorest in the world. Their experience, as that of other Asian countries who preceded them on this journey, is of upmost importance if we want to fully understand how least-developed countries can benefit from the new international economy.
There are a number of messages that I took from reading the book:
First, that domestic supply must meet international demand. Contrary to what many people believe, the Asian success story began because a booming US demand for mass volumes and large varieties met suppliers who were able to satisfy this demand. Autarky and isolationism were not options, and it was by opening their economies to trade and foreign investment that “developing Asia” became “emerging Asia”.
Second, that the State, in its central and territorial dimensions, is a key partner in facilitating trade. The book illustrates how governments in the region cooperated with the industrial sectors to lower the cost of doing business, by lowering tariffs on traded goods, streamlining customs procedures and developing an adequate infrastructure of transport and communication services.
Third, a more predictable institutional environment paved the way for large inflows of foreign direct investments, for manufacturing as well as for the provision of business services.
I am sure all of these elements resonate well in this room since many of them are integral parts of the Doha Development Agenda.
I believe this topic is one which merits political attention in capitals and one that Ministers gathering in Geneva in December for the 8th WTO Ministerial Conference would want to address. Let me take this opportunity to invite all of you to pursue this dialogue, including “virtually” through our recently launched website “Made in the World”.
Let me in closing thank Mr. Shiraishi and Mr. Nakatomi and, through them, Japan for their cooperation on this project. Let me also thank the International Chamber of Commerce for their invaluable support to this initiative, and to all the participants for their interest on this subject.
Thank you for your attention.