Honourable Guests,
Ladies and Gentlemen,

It is an honour for me to be here today at the Japan Institute of International Affairs, a place that has fostered debates and deepened understanding on international affairs for more than fifty years.

My focus today is going to be on how international trade has been changing in quite fundamental ways in recent years and what this means for the way we manage international trade relations. 

I think we need to look at two developments in international trade that are at the core of the changes we are living through.

The first relates to the rise of key emerging economies and the shift in economic realities that this implies. 

The second concerns the internationalization of production processes, leading to increased inter-dependency, expanded trade ties and a more deeply shared interest in a well-functioning trading system.

 

The changing composition of global output, trade and FDI

Whether we look at GDP, trade, or investment, we see relative shares of economic activity shift rapidly away from today’s industrial economies towards the developing and emerging economies. This shift, incidentally, has taken place as the pie has grown ever larger, with world production more than doubling in the last twenty years.

Just in the last ten years, we have seen the share of developing and emerging economies in global GDP rise from 37 to 49 per cent at purchasing power parity.  From the beginning of this century, then, the developing economies’ share of world economic activity has risen from just over one third to nearly half.  By any standard, this is a rapid transformation.

Export volumes have more than quadrupled in the last 30 years.  The value of south-south trade has increased from about one-tenth of total trade to some two-fifths.  The developing country share of global exports has jumped from 33 per cent to 43 per cent over the last decade. China’s exports have been growing at a staggering 20 per cent per annum in value terms

A similar picture of shifting composition arises in respect of foreign direct investment.  While global FDI inflows have stagnated on average over the last decade, the share accounted for by emerging and developing countries has jumped from 19 per cent to 52 per cent.  This is roughly on a par with the share of developed economies in 2010.

 

Understanding the significance of global supply chains in trade

Let me now focus on global supply chains.  This phenomenon has been with us for several decades, but has become increasingly prominent and is consequently capturing more policy attention.  We are seeing the slicing up of production processes internationally.

In this “trade in tasks”, it is no longer meaningful to rely solely on gross trade flows as a measure of international engagement through trade.  The gross figures can tell a very misleading story.  We need to think in terms of where the value is added in products.

And here I would like to acknowledge the early, path-breaking work undertaken by IDE-JETRO in analysing trade in value-added.  We at the WTO have had the privilege to work closely with IDE-JETRO on a joint publication entitled “Trade Patterns and Global Value Chains in East Asia”.  This publication has thrown new light upon and offered fresh insights into the workings of global supply chains and their implications for international trade. 

Let me draw attention to three key aspects of this new trade patterns. 

First is jobs. A casual look at gross trade statistics could easily lead to the impression that an Apple iPhone imported from China is simply made in China, suggesting that all the jobs necessary to produce this good are Chinese jobs.  But this is hugely misleading.  In fact China adds a small fraction of value to such a product — as reflected in the final price — usually at the assembly stage.  China’s share is well below 10 per cent.  Meanwhile, many other countries, including Japan, the United States and Korea will have added value and created jobs through design, component production, branding, marketing and a range of other services that go into the product.  Moreover, for a number of products where after-sales service or after-sales software products can be incorporated, the supply chain lives on after a product has been retailed.  

This reality has enormous implications for the way we think of how nations are affected by trade and it applies to many goods and services in an economy.  So from an economy-wide perspective it is wrong to think uni-dimensionally of imports sucking jobs out of the economy and exports creating them.  The picture is far more complicated than that.

Secondly, measuring bilateral trade flows in value-added terms paints a very different picture to the one we are more accustomed to concerning surplus or a deficits, allowing this to frame the policy debate.  China’s trade surplus with the United States in recent times, for example, is some 40 per cent less than the gross trade figures would have you believe.

My third point flows from the previous two.  Long gone are the days when we should be thinking about trade as a world of “them” and “us” — their exports and our imports, and vice-versa.  We have allowed this way of thinking to miss-specify the true nature of international trade relations for far too long.  It has created an adversarial mind-set, driven by spurious concern for reciprocity, thus missing the true nature of our inter-dependency and the gains from trade among nations.

 

Policy issues arising from supply chain analysis

These developments suggest several questions when we think about how to approach our integrated world of production from a policy perspective. They deserve, in my view, to be further explored.

One is precisely how to decompose the complex elements of supply chain production into their component parts, especially in respect of services.  Some services are embedded in physical components and counted as goods.  Others are part of the pre- and post-manufacturing stages of production.  Together they are a large part of total production costs.  Understanding services inputs better not only makes it possible for governments to think about how producers can capture more value-added along supply chains, but also how to set the best possible policy framework for services.

Another challenge concerns assessing and managing risks along supply chains.  Cost minimization may entail risks that need to be addressed.

A third challenge is how to facilitate trade in ways that can encourage the participation of small and medium sized enterprises in supply chain production, bearing in mind that it is the SMEs that have proven to be among the most successful creators of jobs. We are already tackling part of these issues in the Trade Facilitation Agreement negotiations. But probably more could be done in increasing transparency, through proper data bases.

A fourth challenge is how to balance the generation of economic value with social, environmental and employment imperatives.  This is the challenge of shaping an appropriate model of “constrained optimization”. 

These are all key elements of a comprehensive analysis of how we should manage international production networks.  Many of them carry implications for the nature and design of instruments of international policy co-operation.

 

How does international production sharing affect multilateral and regional trade co-operation?

Trade-opening orchestrated over the years in multilateral and regional settings, together with a good deal of unilateral action to lower trade barriers have significantly diminished the importance of tariffs. At the same time, rules on trade have become much more prominent. We worry a good deal more today than in the past about regulations and standards, and about administrative obstacles to trade.  Not all of these factors are necessarily designed purposefully to reduce or complicate trade.  Some are just a matter of seeking out greater efficiency and improving governance. 

In a world where preferential trade agreements (PTAs) have become so prominent, we may be faced with a mixed blessing.  On the one hand, many of these agreements have contributed significantly to increasing trading opportunities, going beyond what has been attainable in a multilateral setting.  They have also created an “MFN dividend” in areas where reform and facilitation have created benefits that are not limited only to PTA members.  

But on the other hand, there are two particular issues that arise.  One is that the multiple, criss-crossing rules of origin put in place to protect preferences within Preferential Trade Agreements can prove a veritable barrier to trade in their own right.

A second threat arising from closer integration within select groupings is that regulatory approaches within Preferential Trade Agreements may diverge, storing up trouble later for fuller integration scenarios.

Where supply chains are concerned, it is important to remember that the impact of unnecessary obstacles to trade, especially when these arise at an early, upstream stage in the chain, will have an augmented impact every time affected components or services cross a frontier.  Obstacles become multiplicative in vertical integration structures.

This, I would argue, calls for serious attention to the possibility of multilateralizing some of these divergent but ultimately compatible approaches to seeking the gains from trade.

 

Should we be re-thinking our approach to negotiations on key elements of the trade agenda?

An obvious question that arises from the way politics, technologies and business practices have transformed production internationally is whether we need to update our approach to negotiating greater co-operation among nations.  I believe we have an emerging research agenda here, and at this stage allow me only to raise a number of questions for reflection.  Let me mention a few questions on what is by no means a comprehensive list, and I do not mention them in an order that confers priorities.

First, does it make sense to negotiate goods and service along separate tracks, under separate agreements, as we do now?  We have learnt enough of the operation of supply chains, in particular, to appreciate how intimately linked policies are in the fields of goods and services. 

Second, could we develop innovative ways of managing rules of origin, in cases where these are deemed necessary, so as to reduce or eliminate their inhibiting and cost-augmenting effects on trade? 

Third, now that non-tariff measures have become such a prominent part of the trade policy tool box, how should we address the necessary convergence of regulatory regimes? Harmonization? Mutual recognition? What is the proper forum to address such as convergence?

Fourth, given the organic links between trade and investment, should we continue to compartmentalize these two ways of accessing markets? 

Fifth, does it make sense to separate trade policy and competition policy?  Sometimes these can seem to be substitutes, but there are many synergies between them that are relevant to conditions in the market place. 

Sixth, considering the nature of inter-dependency among countries along supply chains, should we rethink the motivation and utility of trade remedies such as antidumping or countervailing duties?  A re-consideration could make sense in some product areas, where imports and exports are intimately linked. 

As I said, I merely offer these questions as fodder for further thought. I hope to have given the Japan Institute of International Affairs enough appetite to help us find answers to all these questions!

Let me in closing pay tribute to Japan’s invaluable contribution over many years to building a stable and well-functioning multilateral trading system. I count on Japan to help us deepen global trade co-operation in the future.

Thank you for your attention.