Mr. Ishige, Chairman of JETRO
Members of the Research Institute
Ladies and Gentlemen
I am very pleased to be addressing you this morning and I look forward to a healthy debate afterwards.
We are living in a world undergoing profound transformation. The old theories and hypotheses which governed the way we looked at trade in the twentieth century require better calibration with the new reality of trade in the twenty-first century. Research institutes such as the RIETI are crucial in leading and encouraging an evidenced-based debate on the role that trade can play in the global rebalancing effort.
The global economic picture remains one marked by extreme turbulence. Growth rates remain sluggish and global unemployment still remains far too high. New threats to food security are growing and questions about how to effectively address climate change remain. Just last month the WTO revised downwards its projections for trade growth in volumes from the Spring forecast of 3.7 per cent growth to 2.5 per cent which is a larger than expected downgrade.
There have been some recent positive signals regarding measures to reinforce the euro and boost growth in the United States. But the fact remains that the European sovereign debt crisis has not yet retreated and this continues to have implications for fiscal adjustment in the peripheral euro area economies and in the developing country markets, particularly those in Africa, given their strong trade links with Europe. Output and employment data coming out of the United States continues to be below expectation while and industrial production figures in China point to slower growth in that economy. Given that China is the world’s largest exporter this has far reaching implications for the global economic landscape.
Even though based on current information, and holding a number of assumptions to task, the WTO expects trade growth to modestly rebound to 4.5% in 2013 with exports of developed and developing economies increasing by 3.3% and 5.7%, respectively and imports increasing by 3.4% and 6.1%, it is clear that the world is still working its way out of the crisis.
This all confirms what we have intuitively known for some time. We remain caught in the tailwinds of the crisis and it may be many more years before we can safely say that we are in a sustained recovery mode. Global realities also confirm that we have never been more interdependent. Like the mythical butterfly that flaps its wings off the coast of Africa and causes hurricane force winds across the Atlantic — actions taken in one country or region has implications — negative or positive — on all other countries and regions.
This knowledge of our growing interdependence must govern how we, collectively, craft global trade and economic policies going forward. Our approach to global governance must be better attuned to these intricate economic webs which characterise twenty-first century trade and country policies. Instead of being inward looking, we need to be global in outlook.
The topography of the world is changing. It is no longer a simple equation of North and South. The rise in influence and economic weight of the emerging economies has shifted the balance of power — some would say from West to East, others from the West to the rest. We are truly in a twenty first century multi-polar world. Existentialists would call this an ‘age of transition’. Ricardians would see this as a natural progression of comparative advantage while the Westphalian model would see this as a breakdown of the order of the nation state. I see this as the contemporary form of multilateralism with notions of sovereignty being challenged by realities of interdependence. I see this as an opportunity. Opportunities for policy makers and researchers to take a new look at the forces moving trade and politico-economic discourse.
For many years scholars and economists have highlighted the role of ‘factory Asia’. The dexterity which Asian markets showed at the beginning of the crisis cannot be denied. The central role given to trade to energise growth in the global slowdown was successful and proved that keeping markets open and goods and services flowing was the correct recipe. However, this does not make Asia, and indeed Japan, exempt from the continued global turmoil. Japanese exports have been mostly flat since mid-2010, but recorded an 8.5% year-on-year increase in the second quarter of 2012 with imports also holding up relatively well. For China, although there has been year-on-year growth in China’s merchandise trade flows in volume terms, export growth dropped to 2.9% and import growth fell to 2.8% in the first quarter of 2012 before rebounding slightly in the second quarter. Provisional data suggests that third quarter results may be weaker still.
One element, which if not sufficiently arrested, will continue to impact on growth in Asia — protectionist policies in Asia’s export markets. Earlier this year the UNCTAD-WTO-OECD report on trade and investment protectionism by G-20 economies found that governments were continuing to introduce new trade restrictions, without stepping up the removal of older trade-restricting measures. Hence, restrictions have continued to accumulate since October 2008. The danger is that the benefits of trade openness will be slowly and incrementally undermined. Some argue that this resort to protectionism is understandable in an environment where, as reported by the ILO, ‘there is a backlog of global unemployment of 200 million — with an increase of 27 million since the start of the crisis’. But we know from experience that one protectionist move invites others and we also know that protectionism does not protect jobs. The ultimate result would be even weaker overall global demand, exacerbating everyone’s employment problem.
In a world where interdependence is the norm and no longer the exception and where Global and Regional Value Chains are increasing in breadth and in depth, restricting the flow of goods and services is counter-productive and with limited economic rationale in the medium to long-term.
It is not just the flows of trade which are changing, but it is also the very nature of trade which is transforming. The world is increasingly trading in tasks and in value-added and the way that goods and services are produced and traded has implications for the policies that we develop to best maximise trade’s contribution to growth and development. The WTO has been working closely with academics, research institutes and policy makers, including in Japan, and with other organisations such as the OECD to better present the true picture of trade in the twenty-first century. With trade in intermediate products accounting for more than half of world merchandise exports, with the import content of exported goods at 40 per cent — double the level from twenty years ago — and with decreasing transport and communication costs, and with greater fragmentation of production across the globe — our narrative on trade must change.
Japan has also been at the forefront of this new narrative. Global value chains and trade in tasks has underpinned your automobile industry for decades. In fact, trade in tasks has certainly enabled the emergence of “Factory Asia.” There is now limited utility and questionable accuracy in declaring many things ‘made in country X or in country Y’. For many products, value addition occurs in several countries, not just one or two and these can only accurately be described as “Made in the World.”
This replacement of “trade in goods” with “trade in tasks” has concrete implications for how we think about trade and offers important opportunities for research and analysis by institutes such as RIETI. To provide you with an example, traditional measurements would assign the total commercial value of an import to a single country of origin. But when applied to the new ‘made in the world’ platform, this methodology can unduly exaggerate bilateral trade balances and under-state where value addition occurs. This incongruence has two main impacts: one, inflated bilateral trade numbers which can inflame anti-trade sentiment and two, lead to policies which are not aligned with the pace, direction and reality of world production and trade.
What can policy makers and you as policy researchers do to address some of these challenges?
Of particular interest to countries at all levels of development and also to the business community, is Trade Facilitation. The broad consensus is that trade facilitation is a crucial element in helping countries to trade cheaper and faster and to allow developing countries in particular, to become more attractive destinations for investment and for accessing value chains. For business, effective trade facilitation and behind the border procedures are non-negotiable. A research focus on the linkages between trade facilitation, FDI and global value chains in the Asia-Pacific region would be a concrete deliverable from RIETI to the international dialogue on this subject.
Japan, and in fact many countries in the region, have created the blueprint for effectively using value chains. The knowledge and expertise that you have developed in this region needs to be shared with countries in Africa, Latin America and the Caribbean and in the Pacific. Asia can be a leading knowledge provider in this area and I urge institutes such as yours to broaden this form of cross regional knowledge sharing.
Research and policies must work together. One often informs the other. Sometimes research comes after policies are already in place but as one of the issues that I know is of particular interest to you is how to get businesses more interested in trade policy, I suggest that your research must remain ahead of the curve and should inform policy. Providing evidence-based research on value chains, non-tariff measures, regulatory frameworks, and developing business friendly analyses of the opportunities and challenges in global and regional trade agreements are important to ensure research remains fresh and relevant.
At the multilateral level we must ensure that protectionism is held in check. At the global policy level, Governments need to continue to give due attention to the Doha Development Agenda. Completing these negotiations would be an important stimulus to spreading the spoils of Global Value Chains while ironing out some of the distortions in global farm trade would set the stage for greater investment in value chains in agriculture. We have had incremental success with issues outside of the DDA such Aid for Trade, the Government Procurement Agreement and the continued discussion on the ITA2 — and I commend Japan for its role in these processes — but there are many other issues related to market access, services, and rules which also necessitate collective attention and energy.
I hope that these brief words today would have provided you with some insight into the current global environment that we are operating under, but also the opportunities there for policy makers and researchers to contribute to broadening and deepening the comprehension of this new colloquium of international trade.
I look forward to hearing your views.