Thanks a lot Bill and thanks to Kemal for your kind words,
The one thing we can say for sure about the future is that it will differ from the present. History has been a good guide to the future and the recent past has brought so many startling changes that the future certainly promises more of the unexpected.
In the last decade alone, China has risen to become the world’s second largest economic power and its biggest exporter of goods. The Arab Spring has swept away long established regimes, with consequences still to be determined.
The global economy has been shaken by a series of cataclysmic events which may have been foretold but for which we were certainly not prepared. US and Japanese debt levels have risen to unprecedented levels. Europe’s experiment in generating serious supranational governance is being severely tested.
Sceptics and optimists alike have been surprised to see important Millennium Development Goals — like halving the global rate of extreme poverty, or slashing by half the proportion of people without access to clean water — achieved five years ahead of the 2015 deadline.
The way we talk to each other is nothing like what it was even 20 years ago. Human interaction has been transformed by social networks, applications software, the mobile telephone and the iPad.
And who could possibly have imagined even two or three years ago that a baseball team from Washington, D.C. would be within striking distance of the World Series for the first time since 1924 when Calvin Coolidge was president.
What is true for geopolitics, for technology and even for baseball is true as well for trade.
Advances in technology and transportation have slashed the expense and uncertainty of distance. The rapid growth of global value chains, the rising use of regulatory-based, non-tariff measures and the shift in trade patterns as South-South trade grows rapidly have transformed trade in the last decade and I believe these activities will continue to expand in the years ahead.
Trade as a share of global GDP has risen from roughly 40% in 1980 to around 60% today. In the United States, a country long considered less dependent on trade than many others, the share has risen from 10% to 25% over the same period of time. US exports of goods and services in the last 10 years have more than doubled to over $2 trillion. One reason for this dramatic expansion is that US exporters have entered new markets in a big way. When China entered the WTO in 2001, US exports to the Middle Kingdom were $20 billion. By 2011 they had increased more than five-fold to over $100 billion.
In addition to China, many new trading powers have emerged — Brazil, India, Mexico and Malaysia are all in the top 25 leading exporters table, and all posted export growth of 15% or better in 2011. Today, developing countries’ share of trade is about 50% compared with a global share of around one-third in 2008.
Probably more important, the nature of trade has also changed. High-tech products used to be made in the US, Japan or Germany. Today they are made in the world, with components and parts fabricated in many countries. The country where the final assembly takes place may contribute only a small fraction of the final value of the product.
Today, nearly 60% of the volume of world merchandise trade is trade in components. In Asia the figure is closer to two-thirds. The import content of the average export is 40%, up from 20% two decades ago.
These value chains have not only changed the way companies trade, they are changing the very nature of the trade debate. When products were made in a single country by a single company the argument that exports were good and imports bad was more easily defended. This mercantilist approach was, for centuries, a driving force in trade policy, as was the concept of reciprocity.
But global value chains have turned all of this on its head. Companies wishing to be globally competitive in a fierce marketplace need access to the best possible inputs — goods and services — at the lowest possible prices. Hindering companies from seeking such imports only renders them less competitive globally. It is self-defeating. This fact, together with strict monitoring by the WTO, explains why governments have largely resisted the wide scale application of trade restrictive measures on imports.
Not everyone has fully understood this important shift, but the debate is evolving, starting with the way we measure trade.
If we were to measure trade in value-added rather than gross statistical terms, bilateral trade balances would look very different. True, the iPhone is assembled in China, but the goods and services leading up to the final assembly came from 15 different companies in many different countries. The value added to the iPhone in China is around 4%, far less than the value added in the United States, Japan, Germany and South Korea. Yet when a $400 iPhone is sold in the United States, standard trade accounting lists it as $400 credit to China’s side of the ledger and $400 debit for the United States. WTO economists believe that China’s $295 billion trade surplus with the United States would be reduced by nearly half if two-way trade were measured in value added terms. Given the tremendous importance of this bilateral relationship for both countries, and for the rest of the world, I believe looking a bit more closely at the numbers makes sense.
The broader trend to more use of global supply chains is likely to grow, as will competition to host production. The cost of labour is by no means the only variable companies consider when deciding where to manufacture or source their components. Sound domestic policies, good education, adequate social services, and quality infrastructure are critical elements in determining where foreign direct investment will flow in the future.
This explains why many companies building everything from aircraft and automobiles to furniture and padlocks have increased investment in US-based production facilities. I don’t wish to enter into the “off-shoring/on-shoring” polemic that I know is rather heated in this country. But the point is that companies from around the world continue to invest billions of dollars in bricks and mortar in the United States.
One often overlooked area of policy which has a growing impact on competitiveness as global value chains disseminate production is customs procedures. The longer a producer has to wait for the needed imported component, the less competitive she or he becomes. Trade facilitation also happens to be one area of international rule making where we may be able to reach a WTO deal. Customs procedures, paper work and border delays today comprise roughly 10% of the value of world trade, or around $1.4 trillion. A trade facilitation deal in the WTO to curtail fees and paperwork, create greater transparency and reduce obstacles to goods in transit would cut those costs in half.
In this new world of trade, tariffs are less of a problem when doing business in foreign markets. Tariffs have not disappeared. They remain high on certain products. Recent increases in applied tariffs by certain WTO members have again brought to the forefront the value of slashing tariff ceilings in the WTO.
But in the meantime governments are implementing a variety of non-tariff measures which impact trade flows, sometimes profoundly.
These measures are regulatory in nature and are aimed at protecting consumers’ health and safety, culture or certain lifestyles. They include things like standards, testing and certification procedures.
But removing these types of regulations is often neither desirable nor politically feasible. The challenge for the WTO and other multilateral organizations is therefore not necessarily scaling back these measures but seeking to reduce the discrepancies between them so that they do not conflict and do not unnecessarily restrict trade — a different way of levelling the playing field.
As regional or bilateral preferential trading arrangements multiply, the risk of disharmony between NTMs threatens to grow. These trading arrangements may include elements not covered by the WTO agreements such as social and environmental standards, recognition of standards or qualifications. There is a danger that the regulatory elements of each accord may not only differ but clash, creating perhaps unintended but very real barriers to trade.
Global co-operation is needed to address these measures. And yet the international economic crisis has drained much of the political energy from the multilateral system.
It is now clear the goal of achieving a Doha package encompassing 20 topics among the WTO’s 157 members is out of reach in the short term. But in this difficult environment the possibility still exists of advancing in smaller steps.
We saw this happening with the successful negotiations on expanding the Government Procurement Agreement and with the deal to simplify the accession of least-developed countries to the WTO. WTO members are negotiating the expansion of the Information Technology Agreement, which has been a win-win deal and I am confident we will see progress here in the coming months.
A group of WTO members have also embarked on a plurilateral negotiation to reach a deal to further open trade in services. Services are a key component of our economies and a driver of the competitiveness of industries. This is why I believe efforts should be made to negotiate in an open manner, encompassing as many WTO members as possible and with ambition. We need as well to consider how to multilateralize the recently struck APEC deal on environmental goods and services.
If the WTO’s negotiating function has been disappointing, our organization has become more effective in other areas. In monitoring and reporting on trade developments, our role has grown through the monitoring of trade restrictive measures since the beginning of the crisis.
The WTO’s Dispute Settlement System continues to be the most effective mechanism of its kind. I know that some lawyers in Washington have not always been happy with the outcomes produced in Geneva but the fact that the United States is the most active participant in the system indicates the degree of confidence that the US Government and US companies have in our ability to resolve disputes effectively.
In an atmosphere of escalating trade tensions, the Dispute Settlement Mechanism has taken the heat out of disputes through a process which is rules-based, predictable and respected. It is no accident that we have already had nearly three times as many cases filed this year as in all of 2011.
In other ways too, the WTO has become more effective. Our coherence work with the United Nations, the Bretton Woods Institutions and regional development banks has never been better. The Aid for Trade programme is evidence of the global partnership to build productive capacity in developing countries. We have, together, helped avert a shutdown in trade finance to businesses, banks and countries in the developing world.
So what of the future? How will the WTO adapt to the rapidly changing circumstances that the future will inevitably bring?
To help provide answers to these questions I have assembled a panel of 12 experts – with the great contribution of Tom Donahue from the US Chamber of Commerce — to report on their findings by the beginning of next year.
Of one thing we can be certain, the role of emerging countries, in trade as elsewhere, will continue to grow. We are in a multipolar world. Harbouring many centres of influence lends greater legitimacy to the work of the WTO, but it also brings greater complexity to global decision-making. A global consensus is needed on the role of trade for growth, for development, for job creation, for poverty alleviation.
This debate will not succeed without political will. And it can be built. Fifty years ago President Kennedy signed the Trade Expansion Act. October 1962 was a time of uncertainty. The world was gripped by the Cuban Missile Crisis. The US was looking with some perplexity at the consolidation of the European Common Market. Yet, President Kennedy noted it was no time to stagnate behind tariff walls, but to promote increased economic activity through increased trade.
As in 1962 we face an uncertain future, but we know it will bring unexpected events with unpredictable consequences. There is something else we know: the challenges of the future will be no less complex or challenging than those we face today. In fact, there is every reason to believe that the economic, environmental and social conditions we have created today will make those challenges even more difficult to meet. But what is for sure is that more openness is needed, openness of trade and openness of minds. I look forward to Brookings leading this debate.
Thank you for your attention.