WTO NEWS: SPEECHES — DG PASCAL LAMY

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Pascal Lamy’s speeches

  

Mr Chairman,
Distinguished Provost,
Dear Jacques,
Professors,
Students,
Ladies and gentlemen,

My presence here this evening is the result of two factors. The first one is proximity. Though the WTO may be more Genevese than it is “lausannoise”, the aura of the EPFL extends well beyond the Swiss borders, not to mention the cantonal borders. The other factor is Jacques Lévy, whom I met many years ago, long before his impressive university career brought him within your walls.

So, it is a great honour for me to be here with you, in this temple of education, to share a few thoughts on a subject that is particularly dear to me.

I shall broach the subject of geography by talking to you of statistics. Coming from the WTO Director-General, this may appear somewhat surprising.

And a bit of odd, bearing in mind that the Organization that I will be leading for another six months is unquestionably better known for its contribution to international law than to the art of figures and indicators.

But I realized almost five years ago that the WTO trade negotiations — which are seeking to modernize the rules of international trade and bring them into the 21st century — were still based on a 19th century perception of international trade; and that this discrepancy went some way to explain the difficulties encountered in the negotiations to conclude the so-called “Doha Round”.

Not that our negotiators were unaware of the realities of globalization — it is just that they did not have at their disposal the statistical tools that would have enabled them to understand more precisely the extent of the changes under way. The fact is that the statistical measurement of trade had not been adapted to the new realities — and as my statistician colleagues say, “the only thing that really counts is what you can measure; what cannot be counted does not count”.

In other words, if you cannot measure what really counts, you can expect a lot of miscounting.

In the 19th century, when David Ricardo developed what was to become the foundation of the theory of international trade, countries exported what they produced. Ricardo used the now famous example of the exchange of an English manufactured good, cloth, against Port wine. The production of cloth made of wool from English sheep enabled the English to drink good wine, while the Portuguese had clothes to wear thanks to their wine-making skills. For many decades, until well after the first effects of the industrial revolution had been felt, the cloth and wine example continued to be relevant, since all of the inputs and services required for the manufacture of goods came from the same country.

The industrial revolution began in Great Britain, a country which had coal and iron mines as well as a significant urban population ready to work in the factories. If you bought a steam engine in England, you could be sure that all of the parts, from the steel of the wheels to the boiler pressure gauges, came from Great Britain.

A lot has changed since then. Port wine may still be of Portuguese origin, and thanks to the registered designation of origin regulations, an English importer has better guarantees in that respect than his 19th century ancestors; but the country of origin concept for manufactured goods became more and more obsolete as companies began to resort first to local subcontractors, and then to international subcontractors for jobs that they did not consider — or no longer considered — to belong to their “core business”, as they call it in business circles.

This major transformation in the geography of production can largely be explained by technological progress which, from containerization to information technology, considerably reduced the costs and complications associated with distance.

“Ricardo to the power of 5”, so to speak! In fact, to give a better idea of the magnitude and force of this change, I would add “Schumpeter to the power of 3”, such are the parallels between this new international division of labour and the gale of creative destruction that lay at the heart of Schumpeter’s theories.

So today, the various operations, from the design, to the manufacture of the components, assembly, and services relating to the production and marketing of a locomotive or an airplane are scattered across the world, creating global production chains. Fewer and fewer products are actually “Made in the UK” or “Made in Switzerland”, and more and more are “Made in the World”.

Most likely “Made in China”, you might add! This is what many people today mistakenly believe. What we call “Made in China” may indeed be assembled in China, but what makes up the commercial value of the product comes from the numerous countries that preceded China in the global value chain. In fact, only 5% of the commercial value of an iPhone or a Nokia is of purely Chinese origin, while the remaining 95% comes from American, European, Korean, Japanese and other companies.

Today, the production of goods and services is “multilocated”: a new “invention of the world” in the words of Jacques Lévy. As a result, the notion of “relocation”, which has people trembling in the Western countries, loses much of its meaning. If I relocate a segment of the production chain for reasons of economies of scale, and others relocate to my area for the same reasons, the impact on my total value‑added, i.e. roughly speaking, my employment, may be neutral, negative or positive. Nowadays, it is this balance that we have to look at very closely. If we continue, in this context, to base our economic policy decisions on incomplete statistics, our analyses could be flawed and lead us to the wrong solutions.

All that is very well, you might say, but what we are seeing is jobs leaving and factories closing, and not the contrary. And this is where the challenge begins for statisticians. It is much easier to count the workshops that close as a result of foreign competition than those that expand their activities thanks to the efficiency linked to subcontracting; and as you know, what cannot be counted does not count…

Statisticians have taken up the challenge and reinvented the national accounting framework to take account of industrial interaction between the different areas of the world. The basic idea is simple, and dates back to Vassili Leontief in the 1960s: you create a giant international input-output matrix to describe all inter-industry trade preceding production and consumption of a final good or service. The idea is a simple one, but putting it into practice is another matter!

Without going into specifics, the implementation of such a tool requires not only proper harmonization of each of the partners’ national accounts but also a detailed analysis of the use of the goods and services traded, either for consumption or for investment purposes, or for further use in a new productive process. The latter case is, of course, the centre of our focus today, because it is indicative of international trade in the context of value chains: you import an intermediate product — whether a good or a service — to which you add value before re-exporting it or using it domestically, whether for consumption or for incorporation in a new productive process.

The pioneer work accomplished by IDE/JETRO (Japan’s MITI research centre) on inter‑industry trade in South-East Asia has been supplemented by what is known as the World Input-Output Database (WIOD) initiative. Thanks to this European project coordinated by the University of Groningen in the Netherlands, major statistical advances have been made. The WTO and the OECD have cooperated with these agencies in their statistical and analytical work. Last year, the methodological apparatus appeared to us to have reached a sufficient level of maturity, and the OECD and the WTO jointly decided to make available to the general public a database of international trade measured in terms of value‑added. Access to the database was given to everyone a month ago.

Knowledge of the value-added content of exports provides a means of avoiding double counting when intermediate components cross several borders before reaching their final destination. It also makes it possible to ascertain the portion of commercial value recorded at each customs crossing point that is attributable to the exporting country — namely the processing of imported inputs — and what constitutes re-exportation of foreign components. Furthermore, this value addition can be further broken down between the own assets of the industry directly responsible for the exports and the indirect value-added contributions attributable to the domestic suppliers of the enterprise concerned.

Lastly, measuring trade in terms of value‑added allows a more analytically accurate calculation of bilateral trade balances. The traditional method ascribes full commercial value to the last link in the production chain, even where its contribution has been minimal. To come back to my iPhone example, 100% of the cost of producing a Smartphone assembled in China and imported by the United States deepens the latter’s trade deficit towards China a little further, whilst the impact on the Chinese economy (or its GDP) is barely 5% of that amount.

What do the new trade figures tell us? First of all, they provide a mapping of international trade that vastly differs from the previous one. This is evidenced by the share of services in international trade. Services are often described as the poor relation of globalization: even agriculture, which accounts for a mere 7% of international trade, receives closer consideration.

And yet, take a look at where value‑added in international trade comes from today and you will frequently find a services provider. In fact, services are at the very heart of value chains, whether national or international, because the provision of industrial or commercial services, such as IT and factoring, marketing, logistics, assembly and distribution, after-sales service and so forth, is often subcontracted.

It is therefore not surprising that the share of services more than doubles when trade is measured in value-added terms. The figures for 2008, immediately before the crisis, show a rise from 23% of total trade, measured in the traditional way, to 45% if one incorporates the direct and indirect value‑added ascribed to services. According to our new figures, services are thus the chief contributors to global trade, while the manufacturing industry’s share of international trade declines in the same proportion (from 65% to 37%).

These results have far-reaching implications for all international trade analysts, and hence for negotiators. The first lesson is that performance of the export sector, which is often reduced to a few mega-industries in key sectors such as the pharmaceutical, aeronautical and automotive sectors, in fact involves a great many more actors than might be imagined, through the network of these mega-firms’ suppliers and subcontractors. This network serves a large number of small and medium-size enterprises in all sectors of activity.

The contribution of services to value‑added in industrial exports is particularly significant in the developed countries. This is good news for employment, because, as we all know, nowadays the greatest number of jobs is generated by these services sectors. This is also an important signal for the industrialized countries as regards their comparative advantages in relation to emerging countries. It is the excellence and the competitiveness of the services supplied by the industrialized countries that enable the latter to maintain a competitive advantage over the emerging countries — and here I naturally include research and development as well as management, logistics and distribution activities.

The second lesson is that to be able to export, you must know how to import. When an industry’s competitiveness relies on the cost effectiveness of the components and intermediate goods and services making up the production chain, strong performance in all segments of the value chain is essential.

Indeed, there is a positive correlation between the buoyancy of a country’s exports and its integration in value chains through imports of intermediate goods. This is especially true of the emerging economies and the Eastern European countries — as indeed it is of industrial giants like Germany. Importing competitive components where necessary enables developed-country firms to generate margins for investing in those segments where their real comparative advantages lie. Far from killing jobs, this enables Europe, the United States and Japan to maintain industrial activities linked in particular to research and development, industrial engineering and high value-added services.  These are the activities that generate the best-paid jobs.

I would even go a step further. Agreeing to import a part of the value chain from the emerging countries promotes the development of a new middle class in these countries that will provide a new market for European or American exports. Trade must, of course, be conducted in compliance with the rules governing international trade, and in this as well the WTO has an important role to play. But I am convinced that the new statistics we published last month will allow a better appreciation of this global interdependence, which in its turn will foster a more cooperative — I would say less mercantilist — approach to the trade negotiations.

Lastly, measuring trade in terms of value‑added makes it possible to reassess the problem of trade imbalances, which has been a source of tension since the 2008-2009 crisis. As I said at the beginning of my address, traditional statistics attribute the full commercial value of imports to the last link in the production chain, even where the contribution made by that final link has been minimal. Knowing that the last link is often China and the leading importer is the United States, the geopolitical implications of this measurement error are immediately plain to see.

In fact, the trade imbalance between China and the United States is reduced by more than 25% when trade is measured on the basis of the actual contribution of each country to its exports. The difference is transferred to the United States’ bilateral deficit with Korea or Japan, which export components to China for assembly. This is often the case of consumer electronics such as the Smartphones mentioned earlier. These changes are not limited to the United States alone. Germany and France, for example, export more to the United States than their traditional trade balance appears to show. This means that a part of European exports transit through other countries (China, Canada or Mexico) for processing and are then re-exported to the United States.

This example usefully shows how the statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counter-productive, decisions. It was important to reformulate traditional statistics, largely based on the 19th century models, and to adapt them to 21st century needs. I am confident that this innovation — the outcome of a global cooperative endeavour — will be a milestone. AND I am happy that the WTO has been the driving force behind this breakthrough. All regulators know that their greatest asset is in-depth understanding of the activities they are called upon to regulate.

However, this is but the first step along a lengthy road. On the one hand, we need to include a larger number of countries — especially developing countries — in the new database. Moreover, I assume that this new information will spark the curiosity and imagination of economists and negotiators. Thanks to this work, analysts now have better statistical tools for testing their theories and coming up with new theories. If statistical progress corrects and alters our perception of international relations, theory will put forward new interpretations which, in their turn, will give rise to new requests for statistical data.

We know that there is no absolute scientific truth, especially in the economic and social spheres. However, taking the old saying about the cup being half full or half empty, if there is no absolute truth there are no big lies either. Quoting Disraeli, Mark Twain said “there are three types of lie: lies, damn lies, and statistics”. Today, we have ensured that trade statistics are somewhat less of a lie. Thanks to international cooperation, we can harbour the hope that they will lie even less in the future.

 

Thank you.

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