Emerging economies: ‘shapers and makers’ in changing landscape, Lamy tells Turkish University

Lamy, Pascal, "Emerging Economies: "shapers and makers" in changing landscape", Speech of the WTO Director General at the Bigli University, Istambul, March 14, 2013

Ladies and gentlemen,

It is a pleasure to speak at Bilgi University on the Changing Landscape of International Trade. And where best to speak on this evolving landscape than in the booming Turkish economy, that is itself a key driver of this change. It is countries like Turkey that are changing the nature of international trade relations by forming part of complex global value chains. Turkey is now at the heart of a global production network in which the vast majority of products are “Made in the World“, rather than made in only one country, were truthful and accurate product origin labelling to prevail. These value chains are no longer anchored in traditional North-South relations, but span across South-South lines as well, as Turkey has itself experienced. This constitutes, in its own right, another major change in the international trade picture as we know it today.

Turkey and the emerging developing world are now, more than ever before, making their voice heard at the international negotiating table — whether at the World Trade Organization or in other fora. They no longer wish to be quote-unquote “takers“ of the WTO rulebook, but also “shapers and makers" of it. The days where the developing world could be steamrolled into signing-off on new obligations, which they did not participate in crafting, are long gone.

We are also in a trade world today that is characterised more by Non-Tariff Barriers than by traditional tariffs; in part due to the “Made in the World” phenomenon that I just described. With the very same product manufactured across the globe, tariffs are making less and less sense every day. A tariff on an import is invariably a bullet fired by a country at its own exports of product components — hence the autonomous tariff reductions that we see across the globe. We are increasingly in a world in which Non-Tariff Barriers, such as regulatory discrepencies on safety and quality standards, will be the principal challenge with which we will have to contend.

These issues, ladies and gentlemen, are the topics that I would put on the menu for our conversation today, and on which I will now elaborate with a few facts and figures to stimulate our debate.

Geo-political transformations

First, let me address what I broadly call the “geopolitical transformation.” This is no longer a twentieth century world dominated by the US, the EU and Japan. We are in a twenty-first century multi-polar world. Personally I see this as an opportunity for policy makers to take a new look at the forces moving trade and at political and economic discourse.

At the WTO, the tables have been turned, to the alarm of many of the traditional actors on the international trade landscape. A small country — Antigua and Barbuda, brought a dispute against the US on gambling services back in 2003 and won. Some of the world’s Least-developed Countries, called the Coalition of the “C-4” — a coalition of key African cotton exporters consisting of Burkina Faso, Benin, Mali and Chad, turned its cotton interests into the engine of the trade negotiations taking place at the WTO. The developing world, there is no doubt, has awoken and others have taken note.

The dispute settlement picture at the WTO confirms this new reality. The WTO, as you may know, boasts of one of the few binding dispute settlement mechanisms at the global level, with consequences for non-compliance. It has a mechanism with “teeth” as many like to say, that authorizes countries to take retaliatory action against each other were non-compliance to be opted for.

Today, disputes that do not involve either the US or the EU have risen to nearly 20% of all dispute settled by the organization. And, whereas the ratio of the developed to the developing world acting as a complainant was around 60%-40% back when the WTO was founded, that statistic is now literally on its head. It is at the exact opposite. The developing world is today’s principal complainant. Turkey has itself been both a respondent and plaintiff at the WTO on cases ranging from agricultural products such as rice, all the way to movies, and textiles.

The emergence of some developing countries as real contributors to global economic and trade cooperation is now a fundamental feature of this new geo-political reality. It is essentially also what has led to the formation of the G-20 as we know it today — a group of countries which have an important stake, but also a big responsibility, in the global economic governance architecture. A group to which Turkey belongs.

South-South Trade

We are also, ladies and gentlemen, in a world in which South-South trade is booming. In 2010 South-South exports made up 23% of world trade compared to just 13% in 2000. Developing countries are now the largest market for other developing countries. Turkey knows all about this, with some of its key import and export markets being Iran, Iraq, the UAE, India, South Korea, China and more. In fact, whereas 60% of world trade was North-North, only a third is likey to be North-North in future, a third North-South, and a third South-South.

While this is encouraging, the contribution of developing regions to South-South trade is highly skewed. Asian countries make up more than 80% of this trade, with the shares of Africa and Latin America being just 6% and 10% respectively.

It is imperative that the barriers to South-South trade be knocked down. In fact, I consider it significant that the only two disputes that Turkey ever brought to the WTO as a complainant were against other developing countries. A case against Egypt on steel in 2000, and another against South Africa on blanketing in 2003.

Trade in Tasks and Global Value Chains

And now I come to “Trade in Tasks” or the “Global Value Chains” we just spoke about. In addition to the reconfiguration of the actors in the multilateral trading system and the changing direction of trade, we are also seeing new trends in the way that goods and services are produced and traded. In essence there is a new narrative developing on trade which governments and businesses have to take notice of, and align their policies and priorities to.

In WTO jargon, we have termed this ’Made in the World’. Increasingly, countries are trading in intermediates not final products. The concept of “Made in Country X” is becoming obsolete. The old mercantalist adage of ‘imports are bad and exports are good’ is made irrelevant when we look at the evidence — today almost 60% of trade in goods is in intermediates and the average import content of exports is around 40%.

The iPhone is a powerful example. The legend inscribed on the back of an iPhone declares “Designed by Apple in California. Assembled in China”. This does not do justice to parts made in all of China, Korea, Japan, Germany, and the US. These parts are then assembled in Shenzhen, China — by a company that happens to be based in Chinese Taipei. The iPhone, like more and more products, defies identification by a single country of origin. To deal with this phenomenon, the WTO together with other partner institutions, such as the OECD, is now revisiting the very way in which trade statistics are generated. In fact, only last month we released the first batch of trade-in-value-added statistics and, surprise surprise, we discovered that services are more internationally traded than goods!

But let us move closer to home. Turkey is the fifth largest global apparel supplier and the second largest exporter to the EU, and clothing represents a very significant percentage of your total exports. The t-shirts, sweatshirts, sleeping wear, socks and pants — which are your principal apparel exports — are linked to global buyers who subcontract assembly operations to local firms in your country. You are, of course, rising up the textiles and apparel value chain yourselves by creating your own brands, but you are nevertheless part of the complex global production network that defines this sector.

Non-Tariff Barriers

And now I turn to Non-Tariff Barriers. Ensuring that greater regulatory convergence takes place is particularly critical given the increase in Non-Tariff Measures (NTMs) which we have seen over the past decade.

Last year’s edition of the World Trade Report, the WTO’s flagship publication, examined the evolving landscape of Non-Tariff Measures. One of its most important findings was that the nature of Non-Tariff Measures has shifted: the traditional protection-motivated quotas and safeguards have increasingly given way to a precaution-oriented emphasis on health, safety, environmental quality, and other social considerations. Tariffs protect the producer, Non-Tariff Measures invariably protect the consumer — a big change!

These considerations are wholly legitimate, and cannot — indeed, should not — be blindly trumped by a desire to keep trade completely unobstructed. That said, the nature of the measures taken to pursue public policy objectives, and the way those measures are administered, can have widely varying effects on trade, both positive and negative.

Regulations should ideally not increase trade costs more than the minimum necessary to achieve their objective; and they should not constitute disguised restrictions to trade.

In the WTO, Turkey has argued that it has suffered from certain Non-Tariff Barriers, such the European REACH directive on chemicals, or the tobacco regulations of Canada, Australia and Brazil, or certain interpretations of the Halal requirements for meat slaughter of other Moslem nations. But others have challenged some of Turkey’s regulations too, such as its documentation requirements for imported medical devices, or product-tracking systems for tobacco or alcohol products. What is clear is that whether country sits on the importing or an exporting side of a product regulation, the regulation can come at a cost to trade. Not all that cost must be eliminated, since it could negate the pursuit of higher public policy goals, but if we can reduce it through greater harmonization, the world gains.

Other Transformations?

Now clearly, there may be a number of other issues that you may point to as transformations of the global trade landscape; and I am thinking particularly of preferential trade agreements (the so called free trade agreements). I do not view these as transformational, but as a cyclical phenomenon in how trade negotiations and market opening is conducted. It is an issue that I have sometimes called “the technology of trade opening;” it is a software issue and not issue of hardware.

I only envision one course going forward: that of an eventual return to, and emphasis on, the “multilateral” negotiating table. But for that return to take place in full force, the new actors, new patterns of trade, and new types of barriers that I have pointed to, will have to be acknowledged. The WTO too may require some adjustments to its negotiating software to deal with these changes, but I leave the software discussion for another time and another day.

I thank you for your attention, and now open the floor for what I hope will be an active debate.