Dear Assistant Minister Yu,
Ambassador Yi, Vice Chairman Xie, Ladies and Gentlemen,
It is a great pleasure for me to open this workshop in Chengdu. And what better place to celebrate the 10th anniversary of China’s accession to the WTO than here in Chengdu.
Over the last 30 years, globalization has been a key feature in our societal developments. It is often considered the key driver of an economic integration of unprecedented scope resulting in a changing geography of the world economy. Globalisation was generated by the spread of new technologies and resulted in growth in wealth, and poverty alleviation in developing countries, while providing consumers with more affordable and more diversified products.
But the globalization of opportunities has also gone hand in hand with the globalization of challenges. We saw it with the spread of financial instability around the world, the growth of macroeconomic imbalances between economies, serious environmental challenges faced by societies and the displacement of workers. And these globalized challenges now demand the globalization of solutions.
The ever increasing integration of the world economy has been triggered by many factors such as improvements in transportation, in communications and by technological progress. Improved infrastructures and logistics have helped to reduce trade costs and keep them low, thus contributing to the creation of global production networks where countries or industries specialize in tasks. The change from trade in goods to trade in tasks is a key feature of the changing trade patterns in the world economy. It has been examined through joint research of IDE-JETRO and WTO, and the results published in June in Geneva and will be published tomorrow in Tokyo. A Chinese version of this book is now available.
This book highlights the increasing internationalization of production through global networks. With improved logistics and infrastructure, supply chains now span several countries challenging not only the interpretation of traditional trade statistics but also increasingly questioning trade policies.
The question is whether the complexity of the economic environment is well covered by traditional trade numbers and existing trade policies. Do changing trade patterns require new approaches for both aspects?
We are here at the heart of what has become known as the “Factory Asia”. This phenomenon could only develop because global demand structures required a greater production variety. It could only happen due to the public-private policies which helped develop the necessary infrastructure for accommodating outsourcing and offshoring strategies of multinational companies. In fact Asia’s structural diversity and the high degree of complementarity in production systems provided the ideal level-playing field.
Today, more than 80 per cent of Asia’s total exports to the world are manufactured products. But it is interesting to look at the other side of the coin — imports. 65 per cent of Asia’s imports are manufactured products too.
These statistics are based on customs records of international transactions in merchandise. Economically speaking, it is interesting to split these flows into intermediates — that is, goods that are further used in the production process — and into goods for final consumption.
When adjusting for fuels, world exports of intermediates account for more than 50 per cent, with Asia’s share of 53 per cent slightly above world average. However, on the imports side, Asia’s share with 64 per cent is well above the world average of 52 per cent, and its share of intermediates in intra-Asian trade is in the same area. This proves that Asia was integrated in global production networks.
To understand this reality it is important that international trade statistics reflect adequately the complexity of international transactions, since these numbers are used by politicians in decision-making.
It is important to know the exact size and magnitude of outsourcing, offshoring and intra-firm trade. But, beyond this, it is also important to question the underlying principles for establishing these statistics.
With supply chains in place, many production steps are carried out across different countries, with semi-finished products or parts — in statistical terminology intermediate products — travelling along the production chain between these countries. Each time these products criss-cross national borders, international transactions are recorded at the full or gross value of the product which leads to multiple counts. At the end of the supply chain, often in an Asian country, the parts are assembled for final consumption and then either consumed domestically or exported.
For example, the iPhone is assembled in China with parts or intermediates imported by China from other countries such as Japan or Korea. A substantial part of the iPhone is even imported from the US.
Applying the country of origin principle, shipments of these iPhones from China to the US enter China’s conventional merchandise trade statistics as exports to the US, thus contributing to the huge trade deficit between the two countries. But China assembles only the parts that it imports from Other Countries. Thus, China itself adds only limited value to what is actually produced outside China.
If we look at the national origin of the added value incorporated in the final product, we realize that significant shares of the value come from countries other than those of origin as ascribed by customs, sometimes even from the importing country itself! This is the challenge that conventional trade statistics face and it illustrates the importance of developing complementary statistical tools that allow analysis of where value added is actually accruing in international trade flows.
While it is important to have the right numbers for decision making, it is also important to look at the proper functioning of trade rules which the World Trade Organization deals with, to ensure that trade flows as smoothly, predictably and freely as possible.
Some people may say that supply chain production is not a new phenomenon. This is indeed correct, but what is new is the intensity with which global production networks have grown and determine today’s economic reality. With global production networks growing in size, international trade today looks very different from when the first rules of GATT governing world trade were shaped after the Second World War. Business models and strategies have changed. Some people even say that we all live now in the same village, and others claim that our world is flat.
It is clear that the words “made in” mean something very different from what they meant a few decades ago. Today, many products ranging from electronics, machinery, automobiles, aircraft — also clothing — are increasingly made in many countries. This has implications on trade policy. And this also increases the importance of domestic policies, whether industrial policies or social policies, or education and training policies, to support companies’ integration into global production networks.
A company’s competitiveness depends not only on its own productivity but also on the competitiveness of its suppliers, access to services and efficient infrastructure, and the competitiveness of its imported inputs. As a consequence, trade policy is no more a zero-sum game between “us” and “them”, and protectionist measures now have all the probability to back-fire and damage your own firms.
Global supply chains have also shown that the boundaries between goods and services, between tariffs and non-tariffs, between trade and investment are becoming more blurred. The importance of trade facilitation measures cutting red tape and streamlining customs procedures — for the efficient functioning of global supply chains — is paramount. Can trade policymakers continue to address these issues in silos? Or do we need to start thinking about addressing them in a more integrated manner? What is the cost in lost opportuniies of not concluding a trade facilitation deal in the WTO? There is clearly a need to reflect on all these issues, starting at the upcoming 8th WTO Ministerial Conference.
In closing, let me thank MOFCOM, the Expo Bureau of Sichuan Province, and the WTO Secretariat team who have put in a lot of resources, time and effort in organizing this workshop. The MOFCOM team helped to translate our publication into Chinese, so that is accessible to Chinese readers. I would like to take the opportunity to thank Minister Chen Deming for his personal support for this project. Minister Yu, please convey my thanks to him.
I wish you every success in your deliberations. Thank you for your attention.