Made in the World Initiative. Speech by Deputy Director-General Alejandro Jara

WTO, "Made in the World Initiative. Speech by Deputy Director-General Alejandro Jara", Brussels, April 16, 2012

DEPUTY DIRECTORS-GENERAL DDG Jara urges developing further trade statistics on global value chains

Deputy Director-General Alejandro Jara, in a speech at the opening of the World Input-Output Database (WIOD) Seminar in Brussels on 16 April 2012, urged participants to come up with “a vision on how to develop further trade statistics on global value chains”.

Dear Commissioner De Gucht, Ladies and Gentlemen,

It is an honour for me to be here today to talk about the results of the World Input-Output Database (WIOD) project and to discuss the challenges faced by Europe in the evolving reality of world trade, with the emergence of new players and different ways in which production is organized.

I thank the European Commission for its invitation to this seminar that is of relevance to the WTO, in particular for its “Made in the World Initiative”. I am here replacing Pascal Lamy who is on his way to the G-20 meeting in Mexico. I am also personally pleased to see that this project fulfils all the expectations we had raised in one of its first seminars which took place in Vienna two years ago.

I will focus on how international trade has been changing in recent years and what this means for the way we measure and manage trade and international trade relations. I would also like to highlight the relevance of measuring trade in value-added if we want to fully understand the relationship between trade and job creation.

As my boss, Mr Lamy, mentioned recently [16 March] during a visit to Japan, we are more challenged as an international community than we have been for a long time, as nations seek to establish a stable, equitable and relevant basis upon which to conduct their political, economic and trade relations. Nowhere, with perhaps the exception of the negotiations on environmental aspects, is this more obvious than in the difficulties we are experiencing at the WTO in bringing the Doha Round to closure.

To explain the difficulties in re-engineering global governance, and to look into possible solutions, 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 of these 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 WIOD project, by providing the means to measure the strength and complexity of the internationalization of global supply chains, also allows us to better understand the complementarities and rivalries between the worlds of yesterday and today.

Whether we look at GDP, trade or investment, we see the relative shares of economic activity shifting away from today’s industrial economies towards the developing and emerging economies, while the pie has expanded, with world production more than doubling in the last 20 years.

As was made clear last week when the WTO presented its analysis of world trade and its forecasts for 2012 and 2013, the gravity centre of world trade and, more importantly, its dynamism, has shifted from West to East.

In 1995, when the WTO was created, developing countries represented less than 30 per cent of the demand for imports of goods while developed economies absorbed almost 70 per cent. Today, demand from developing economies and ex-CIS countries is a major driver of world trade: their imports represent 43 per cent of world trade, while developed economies, still dominant, attract only 57 per cent of world imports. And we should put this 57 per cent in perspective: about 20 percentage points of this is intra-EU trade.

In addition, the developed economies’ demand is constrained by the sequels of the crisis which started in 2008. While demand for imports from Europe grew by less than 3 per cent in volume last year, the CIS recorded the fastest import growth with an increase of almost 17%, followed by South America at 10 per cent and Asia at 6 per cent. And our forecasts for 2012 and 2013 do not modify this picture: imports from developed economies will grow by less than 2 per cent in volume, while developing and CIS countries’ imports will triple this number and increase by 6 per cent.

Let me turn to growth of supply chains. This phenomenon is not entirely new, but has become increasingly pervasive and prominent, capturing more public policy attention. International supply chains are variously referred to as vertical integration, production sharing, outsourcing and offshoring. All these designations essentially refer to the same thing — the slicing up of production processes internationally. In several regions, more and more manufacturing activities and many services industries today are characterized by supply chain production, and nearly all supply chains embody an international dimension.

In the light of this reality, it is misleading to rely solely on gross trade flows as a measure. Rather we must measure the value-added, and this is why the WIOD project is an important contribution. I want to draw attention to three key aspects of this contribution. These are measuring more effectively the relation between trade and jobs, the implications for trade balances, and the nature of interdependency though trade.

First, gross trade statistics can be misleading and give the impression that a Nokia smartphone imported from China is made in China, suggesting that all the jobs necessary to produce this good are Chinese jobs. But this is hugely misleading, if we look at research carried out in Finland.1

Only 2 per cent of the final price refers to assembly costs, while 33 per cent of the cost relates to intermediate goods and 31 per cent are Nokia’s own value-added. Many other countries, in Europe, the United States, Japan 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.

This reality has enormous implications for the way we think of trade impacts; 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, how bilateral trade flows are measured impacts profoundly the policy debate. When measured in value-added, 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 arises from the previous two. We still think as early 19th century mercantilists: I must try to reduce my imports and increase my exports. This has created an adversarial mind-set, thus missing the true nature of our inter-dependency and the gains from trade among nations. It has also a very important relation with the subject of the first panel of this meeting, on competitiveness; in a world of global value chains, my imports become a key component of my exports. Without access to competitive imports for my industries, they lose international competitiveness and market share.

 A key challenge, of course, is measurement, and it is here that the results of the WIOD project are important. It is more difficult to measure trade in value-added terms than in gross terms. We are forced to work with aggregates that conceal much detail — details that can only be appreciated by looking at product-specific supply chains. I would like, incidentally, to commend also the European Commission for the work that EUROSTAT has been doing in linking trade statistics and business registers, an initiative at micro level that will complement the macroeconomic approach used by WIOD or the WTO and OECD.

The results obtained by WIOD add to the increasing stock of knowledge of several national and international initiatives. As often happens with statistics, new data answer old questions, but also raise new questions. And these new questions are not only important for researchers, but also for policy-makers: the G-20 meeting taking place in Mexico this week will look into the consequences of international supply chains and trade in value-added on the way that the international community looks at global governance.

Several research questions suggest themselves when we think from a policy perspective. One is precisely how to decompose the complex elements of supply chain production into their component parts, especially in respect of services. Understanding services inputs better makes it possible for governments to think about how to facilitate trade and boost competitiveness. This is particularly important for so called “industrialised countries”, where “services” are in fact the main source of competitive advantages and the main provider of jobs.

When jobs are concerned, another challenge is how to encourage the participation of small and medium-sized enterprises (SMEs) in supply chain production, bearing in mind that the SMEs are among the most successful creators of jobs. A US-ITC research, based on very similar methodologies to the WIOD project, showed that when indirect value-added is considered SMEs create a large share of US export value. Traditional statistics show that less than 30 per cent of exports is due to small and medium firms, while for large firms it is 70 per cent; but if calculated in in value-added terms, SMEs contribute more than 40 per cent of the total (direct and indirect) domestic value of US exports, supporting 4 million jobs.

Thus, better data show that SMEs are more active than what was believed. And the amount of jobs generated by international trade is greater than was initially thought.

Let me conclude with a few words on the implications of the new measures of trade in value-added for understanding competitiveness and devising pro-trade policies. Where supply chains are concerned, 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 affects not only trade facilitation, in the usual sense of the concept, but also domestic regulations, norms and standards. It could be tempting to increase the complexity of these regulations, as a way to protect the domestic market from foreign competition. But the story global supply chains tell us is that offshore production facilities belonging to large multinational firms can easily adapt to these norms, while the domestic small and medium-sized firms struggle with the additional costs and complexity, losing competitiveness and market share, with the consequent impact on jobs.

Europe has made a priority of investing in new technologies and innovation. This effort is to be commended, as it is a source of competitiveness for this region, and a public good for the rest of the world. But removing unnecessary normative and administrative hurdles should also be a priority to improve competitiveness and facilitate the participation of small firms in international supply chains. By the way, it is also cost-free, an attractive feature when most European countries face tremendous budgetary challenges.

While renewing my thanks to the Commission for the kind invitation, I would like to wish this seminar lively discussions and a successful outcome with a vision on how to develop further trade statistics on global value chains that are able to respond to a changing societal and economic environment – providing numbers that count are crucial for a proper analysis of our future as a global village.

Notes

1. Ali-Yrkkö, Rouvinen, Seppälä and Ylä-Anttila, published in September 2011, “Who captures value in global supply chains? Case Nokia N95 Smartphone”, Journal of Industry, Competition and Trade, Vol. 11