Assessing the evolution of the international trading system and enhancing its contribution to development and economic recovery
High Level Panel of the Trade and Development Commission, 6th June 2011, Geneva




Trade and development are inextricably linked. The role that trade can play for growth and development has long been recognized. The name of UNCTAD itself, with emphasis on Trade and Development, is testimony to the special contribution that trade can make to development, as is the Doha Development Agenda for trade negotiations at the WTO. 

Trade and trade policy have today become fundamentally important tools for attaining national development objectives and are also seen as crucial elements in the road to achieving the Millennium Development Goals.  As the international trading system has evolved over time, so has the intellectual understanding and insight about the key aspects of how this system contributes to development and to economic recovery.  Countries have moved from import substitution to export promotion, to emphasis on more open internal and external markets leading to greater efficiency, and periodic re-evaluations of their insights. 

Let us consider some key features of the evolution of the international trading system and its contribution to development and economic recovery.  In doing so, we need to look at both the past and the likely future, and identify some important points of emphasis for enhancing the contribution of international trade to development and economic recovery.

Between 1951 and 2010, world GDP has increased about nine times, and the volume of merchandise trade has increased 33 times. Taking a more recent period, say from 1995 till today, the average annual growth in trade volume has been roughly double that of total output. This shows the relatively greater dynamism of international trade, its increasing and much higher share in economic activity, and growing trade inter-linkages among nations.

This growth process has been accompanied by two strong indicators of greater involvement of trade in the growth process.  One is supply chains and the other is emergence of new and additional growth poles and sources of trade demand.

Supply chains involve multiple countries in the production of any traded product. One implication of supply chains is that we cannot assess the effects of any trade measure in a simple manner, the way we could do so with the previous simple model of trade.  The effect of trade restrictions will no longer be the concern of only one or a few nations.  They would much more clearly affect efficiency of operations in the whole chain rather than only the country taking a trade measure.  This could lead to greater possibility of retaliatory actions.  Further, policies which lead to instability or possible shift in parts of the supply chain for any single product could lead to other members of the supply chains reassessing the stability of their existing links.  Thus, the scope of any trade measure has now increased and been more multilateralised than it was in a situation with simpler trade patterns. 

This has led to a desire for greater understanding of these trade patterns, which is reflected for instance in the concept of "made in the world", and the initiative to collect statistics and clarify these developments.  One result of this initiative is a book released this morning with studies on “Trade Patterns and Global Value Chains in East Asia”, prepared by the WTO and the Institute of Developing Economies, Japan External Trade Organization (JETRO).  These supply chains show very clearly a feature which was highlighted by Professor Lerner as long back as 1936, namely that an import tax is also a tax on exports. A supply chain shows the importance of imports in any system for increasing economic performance, in addition to that of exports.

The supply chains have contributed to a faster growth of international trade, and in this process, trade of some nations or regions has increased more rapidly than others. For example, the export share of China, Germany, Middle East, India, and the six East Asian economies has increased relative to others.  These changes have led to the emergence of some new and additional trade and growth poles.  Trade has played a major positive role in the emergence of these additional growth poles, a feature which came as a relief to the world economy when it experienced the largest financial and economic decline in about three generations. Countries that are likely to add to such emerging growth poles, for example the so called Next 11 countries, also recognize the importance of trade in meeting their aspirations. By 2050, according to World Bank estimates, the share of developing countries in global trade is expected to double in comparison to its present share.

Therefore, trade relations will keep changing and new markets will emerge from developing countries.  Since the demand patterns for growing developing countries are different from the high income countries, this will affect the product structure of global trade.  To quote from a recent analysis of the World Bank: “Rapidly industrializing developing countries demand proportionately more industrial raw materials, energy and food products, as opposed to manufactured consumer goods and non-tradeable services.  Hence with the growing importance of developing countries as an engine of growth, this is likely to sustain the high increases in commodity prices that occurred in 2010 over the forecast horizon.”

Combine this with the experience we have had in emerging from the recent economic crisis.  Trade with developing countries has contributed significantly to the recovery from this crisis, through the rapidly growing demand from developing countries, especially for capital goods and commodities. This implies that while manufactures were the source of most dynamic growth experiences and are likely to continue to contribute strongly, the product basket of trade will have relatively greater significance of agriculture and commodities than we have seen in the historical trend.  These sectors will provide important economic opportunities to a number of smaller developing countries. 

The presence of such opportunities will imply a greater concern about policy regimes that tilt the level playing field through their distortionary effects.  Since the international trading system is getting more and more important for growth and development, countries would like to get reliable information on the trade policies of other countries to adequately assess their market situation and the implications of each other's policies.  Transparency and notification will therefore become much more important in the future.  It is noteworthy that the trade policy monitoring reports of the WTO played a big role in keeping the world markets relatively open even during the sharp reduction in output and employment during 2009.  The Trade and Investment Reports which are now provided by OECD, UNCTAD and WTO to the G-20 meetings are another evidence of the significance of keeping track of the relevant experience and policy developments in the trade and investment areas.  Such monitoring will enable the private sector also in their decision-making by assisting them to better understand the environment in which they operate.

Transparency and monitoring will become a major tool for developing and maintaining appropriate systems even with respect to Regional Trade Agreements, which have shown an increasing trend towards proliferation.  These RTAs normally cover only a part of the total supply chains that I mentioned earlier. Furthermore, they are likely to create concerns unless they meet the conditions specified under the WTO disciplines.  Monitoring will also indicate the likely difficulties that will need to be addressed on account of the existence of several different rules of origin and areas such as agriculture subsidies and anti-dumping etc. which will not be adequately covered by these Agreements.

Another recent experience in the international trading system has been the relative resilience of services during the crisis.  Services are important for raising the efficiency of economic operations and delivery of social goals.  Following major technological changes in information technologies and the experience of countries such as India in using the service sector as a launching sector for greater economic growth, a number of countries recognize the potential of this sector for their development process. Changes in technology have also provided opportunities to distribute the tasks in the supply chain, thus creating additional trade opportunities.  Countries also recognize the importance of infrastructure in promoting economic growth and through it trade within the region and beyond.  This too is boosted through international trade in goods and services.

Thus, the likely trends over time which show an increasing importance of developing countries in world trade and output also imply an increase in the importance of services in global trade.  Moreover, international trade will get more complex because trade in goods will more and more require trade in services as part of the package which enables the transactions to be effectively completed.  This will add a new dimension to the supply chains, a dimension which will span across not just countries but also product categories.  This implies that countries would increasingly focus on the international policy environment for multiple product categories far wider than the present concerns, covering all product areas.  Since trade will be an important factor in providing greater economic opportunities, nations will see more clearly the efficiency benefits of trade facilitation or simplification of policy regimes.  Since supply chains will be linking different countries and product categories, this focus on facilitating trade will similarly encompass concerns across nations and product categories. 

While trade has provided major opportunities of growth, and has contributed significantly to emergence from the recent crisis, we do have evidence of a large number of poorer countries not being able to benefit from the opportunities provided by the international trading system.  They face supply side constraints which need to be addressed together by the international community.  Furthermore, to enhance their trade opportunities, their market access conditions should be made much easier.  This is important for another very important reason in the on-going evolution of international economic relations.

In an age of communication, technology has not only changed the content and pattern of trade, but also makes it easier for people to perceive asymmetries or inequities in international relations. It also makes the participation of NGOs more effective in monitoring the features and developments within international political and economic systems. Combine with this the changing economic power structures and coalitions of interests, we see an increasing focus among a larger number of countries for getting a fair and equitable international system. There will thus continue to be a strong push for making the international trading system more fair and equitable.  The ongoing Doha Round is an effort to make such changes, but is at present facing difficulties.  Members are seriously considering the way ahead, giving the highest priority to development issues and within it for the concerns of least-developed countries.  The points I have raised here show that if these issues are not properly addressed, we will only face a greater pressure for improving the regime in line with the Doha Round objectives.

The less developed countries are not the only ones which will emphasize a further evolution of the international trading system.  When there is a major shift in global economic and political balance such as at present, many new factors become a focus of attention.  This change in perspective would be further affected due to the several crises and concerns during the past few years, such as food crisis, financial crisis, economic crisis, macroeconomic concerns, health related concerns, and climate change concerns.  The evolving international trading system will be a part of the different systems considered to address such concerns.  The rules of the WTO, with its open markets and regulatory regime, have in general been seen to be robust for these concerns.  Of course, the WTO members will consider the way ahead in these contexts also. 

The WTO regime provides the possibility of achieving domestic objectives through a set of domestic policies, subject to certain disciplines.  It has been clarified repeatedly by experience and explanations, including statements by the WTO Director-General Pascal Lamy, that countries need to achieve their objectives through a package of domestic and trade policies, including capacity enhancement.  The WTO regime specifically provides for this, within a framework of good governance when formulating and implementing these policies.

After emerging from the economic crisis one suggestion has been that countries with a large positive trade balance should focus more on the domestic economy.  Some have taken this change in emphasis to reflect a reduced importance of the international trading system.  This is not at all the case, because all countries, including those which want to encourage domestic demand, continue to recognize the major importance of the international trading system and the multilateral trade regime under the WTO.  The ongoing developments which I have just described, and the large participation of all countries in the international trading system, makes it imperative for them to co-operatively keep strong the multilateral trading system to deal with the various likely developments.  This important fact is emphasized by all concerned. 

While the international trading system will remain highly relevant, there will be one important implication of the several inter-related issues which the world community is trying to address simultaneously.  Nations would need to clearly ascertain the appropriate fora for addressing each issue through global governance, and the extent and nature of co-operation among different international agencies to make progress in this context.

In this background, we need to bear in mind that the relationship between trade and development is not necessarily a simple one, and needs to be addressed from many angles in order for benefits to truly flow to developing countries. Developing countries themselves must take on an important responsibility in identifying their trade-related priorities, and their trading partners must continue to work with them in turning these priorities into achievable outcomes.

It should be said that much has been already been done in the past decades in the context of the WTO and its predecessor the GATT to make the international trading system more participatory for developing countries. Trade barriers in many sectors have been significantly reduced, and trade openness has contributed considerably to enhancing developing countries’ participation in the global economy.

However, as I have mentioned earlier, not all developing countries participate equally in international trade, and further work certainly needs to be undertaken to ensure a wider participation of all developing countries in international trade. It was in fulfillment of this desire to further facilitate development through international trade and to address the concerns of developing countries that the Doha Round was launched.  The development dimension permeates all negotiating areas, including addressing several existing imbalances, and providing greater market opportunities.

Added to this is the Aid for Trade initiative, which is about providing financial and technical assistance to developing countries — and in particular LDCs — to help them build up their supply-side capacity and strengthen their trade-related infrastructure. The Aid-for-Trade Initiative has successfully placed the spotlight on trade as a centre-piece of development.  Recently-released figures from the OECD Creditor Reporting System database show that resources for Aid for Trade reached US$ 40 billion in 2009, a 60 per cent increase from the base line period of 2002-2005. 

It is critical that commitments to Aid for Trade are sustained and increased.  Preparations are now underway in the WTO for the organization of the Third Global Review of Aid for Trade which will be held in Geneva on 18 and 19 July. The key objective of this year's Global Review is to show that Aid for Trade is showing results and that it is having an impact on the ground. There is a wealth of information in the 146 questionnaires and the 269 case stories which the WTO and the OECD are now examining.

Let me now summarize some of the main points I have made today:

  • Trade restrictions can no longer be seen in terms of narrow, isolated effects.  Countries need to take account of the likely steps that will be considered by others, including businesses involved in supply chains, as a follow-up to any such restrictive policy.
  • The fact that a wide range of products are important for various nations implies that we would need improved trade policy disciplines across the board.  This is precisely the kind of coverage which the Doha Round is aiming at.
  • The increasingly interactive and deepening trade relationships show that the rules in any multilateral trade regime need to address the concerns of all, with emphasis on the concerns of less developed countries for having a fairer and equitable trading system.
  • In this context, the Doha Round negotiations incorporate the desirable principles mentioned by other speakers, such as less than full reciprocity, gradual introduction of reform, balancing market opening with methods to address preference erosion, flexibility for developing countries through special and differential treatment augmented by the fact that bound levels are being reduced and not the applied levels.  In fact, for Least-Developed Countries, there is no requirement to reduce their bound levels.
  • The multilateral trading system needs to be kept strong also to deal with the several gaps and remaining concerns in RTAs, as well as other ongoing developments.  A successful result in the Doha Round would keep the system strong.
  • Monitoring and transparency will play an increasingly important role for the international trading system.
  • Capacity augmentation of developing countries, in particular least-developed countries, will continue to be important for these countries to benefit from the international trading system.
  • To adequately address the new concerns such as the food crisis, energy crisis, climate change etc., we need multilateral efforts and agreements.  The Doha Round is relatively more advanced in its negotiations, and if countries are unable to reach a positive conclusion in this Round, then the indications would be for continued difficulties in other areas also.  WTO members are looking at the way ahead in the Doha Round, and it is very important to have positive results through these efforts.
  • To emerge quickly from economic sharp declines, it is important to keep markets open, within a system which provides stability and predictability for stimulating steps which help to quickly emerge from economic declines.  This shows the importance of both the WTO and the need to have a successful conclusion of the Doha Round.
  • The several new issues that have emerged in recent years would involve greater co-ordination and co-operation among different international agencies.

With the help of growth in international trade and keeping markets open, we have emerged from the economic decline of 2009.  We are still in a difficult situation, and need to continue to be vigilant.  International trade is performing well.  For instance, recent estimates by the WTO show that international trade has grown by 22 per cent in the first quarter of this year.  Our actions should sustain this positive momentum. We should be careful to keep markets open and maintain the conditions which stimulate trade, so that countries can use the opportunities from the international trading system to achieve both growth and development.

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