DDG Rugwabiza warns protectionism will hurt global growth

DDG Rugwabiza warns protectionism will hurt global growth

Deputy Director-General Valentine Rugwabiza, in a speech at the University of Hong Kong on 4 November 2011, warned that “to turn to protectionist trade measures in the current circumstances would be a huge mistake triggering a game of lowest common denominator where the loser will ultimately be global growth”. She added that the influence of Hong Kong, China in the WTO “comes from the fact that she leads by example”.

Good Afternoon Ladies and Gentlemen. I am very pleased to be here today and I express my sincere thanks to Professor Lim for his kind introduction and his support in facilitating today’s address before you.

I am speaking to you at a time of stark global economic uncertainty. Recovery from the financial crisis has been uneven and some may say that proclamations of a quick recovery were premature. Persistent unemployment remains and global growth has slowed.

The growth of international trade in 2010 led the initial recovery particularly in emerging and developing economies. World trade grew by a record 14.5% in 2010 and exports and imports of developing countries rose above their pre-crisis highs by July 2010. This faster growth was supported by a strong increase in south-south trade in the first half of 2010. However, the picture has somewhat dimmed.

In October the WTO revised downwards the prospects for world trade in 2011 to 5.8% from the initial prediction of 6.5%. With trade growing more slowly than expected in recent months, rising sovereign debt problems and unsustainable fiscal deficits in many developed economies bruising international confidence, the recovery which we saw at the beginning of the year is being challenged.

And people are reacting. Over the past few weeks we have all seen images of the ’occupy Wall Street’ protests. Feelings of shared frustration and a lack of confidence in the established national and international systems to deliver on growth and sustainable development are leading to what some commentators are calling the ’global winter’. Coming a few months after the ’Arab spring’, it is becoming increasingly obvious that pockets of consternation in one part of the world can multiply into a global movement.

We are living in a complex, and some would say tumultuous economic space. The stark reality of the world is one where multilateralism is in a precarious position. And yet it is precisely in times of crisis that global cooperation becomes imperative.

Trade remains one of the most important engines of national, regional and global growth.

The relevance of trade to global growth has been confirmed by the experiences of many countries, particularly in Asia. In the aftermath of the crisis in 2008 it was, after all, the Asian economies that led global growth by continuing to keep their markets open and using trade as a policy instrument for recovery.

Actions to the contrary — closing markets, erecting barriers and promoting protectionism — could have had a dramatically different impact.

We have now moved from a financial crisis to a growth crisis. Many economies are not growing at a pace sufficient to achieve the fiscal consolidation needed to reduce high unemployment. Protectionism, however, is not the answer to these global growth problems we are collectively experiencing.

1. Protectionism

During his recent visit to Chengdu, capital city of southwest China’s Sichuan province in October, the Director-General of the WTO, Pascal Lamy, stressed the role of the WTO in preventing any strengthening of protectionist trends. In his own words we will have to be ’vigilant’ as ’that is the main task of the WTO.’

Inward looking postures and isolationist tendencies can be the gut reaction to the turbulent period we are experiencing. In a food crisis, countries may look to ensure that only their population is fed. In a labour crisis the first priority may be to ensure limited job losses at home. These are understandable reactions but they are not always the best reactions, both from an economic perspective and from a global partnership perspective.

Although we can be proud of how the existing international trade instruments and transparency processes provided an important insurance against pervasive protectionism, it is clear that we need to build a stronger global trading system to face the challenges ahead. With an increasingly out-dated rule book but with a chest of potentially growth-injecting agreements waiting to be unlocked by the membership, a recommitment to the multilateral negotiations under the DDA must be a sine qua non as we move forward.

The picture of protectionism since the crisis is mixed but showing worrying trends. At the end of 2008, the WTO set up a monitoring system of trade measures taken during the crisis. Although there was some evidence of new tariffs, non-tariff barriers and new trade remedy measures, particularly anti-dumping duties, for the most part members successfully averted protectionist tendencies. And subsequent trade monitoring reports during 2009 and 2010 confirmed this.

However, over the past six months, some worrying trends have emerged, especially amongst G-20 actors. The recent WTO report on G-20 Trade Measures (October 2011) showed there was less restraint in the adoption of new trade restrictive measures and less determination to dismantle existing ones.

The report notes that ’there is a growing perception that trade protectionism is gaining ground in some parts of the world as a political reaction to current local economic difficulties’. These difficulties often include the fall-out from currency fluctuations and macroeconomic imbalances — issues that trade restrictions are not (necessarily) equipped to resolve. Protectionism will hurt global growth and will perpetuate uncompetitive industries. It is clear that any upswing in protectionism must be addressed, especially as it is behind-the-border measures which are becoming instruments of choice.

What is worrying here is that the multilateral rules in these areas are less developed than those regulating border practices, creating a slightly more ’opaque transparency’. Traditional border restrictions must also continue to be monitored. With 40% of world trade being intra-firm, with different parts of a product made and assembled in many different countries, restrictions in one country can affect the efficiency costs of the entire supply chain.

What is needed is coordinated action to address these structural problems which underpin the persistent unemployment, static growth and unstable financial markets. Protectionism is a short-term remedy to a more long-term problem.

This is where the WTO has traditionally provided countries with a commitment device and an insurance policy for locking in policy reform and arresting protectionist tendencies. The WTO provides the rules that help countries reduce beggar-thy-neighbour policies and a mechanism, in the Dispute Settlement Body, to enforce co-operation. One of the best ways to support this role is to ensure an updating of the WTO rule book. Sixteen years after the conclusion of the Uruguay Round these global rules badly need updating.

2. WTO/DDA

We are all aware of the current impasse in which the DDA has been in for some time. The reasons for this are many but it reaffirms two issues: that trade is certainly not immune from the changing geo-political realities of the past 10 years; and that this paralysis in the negotiating function of the WTO constrains its ability to adapt and adjust to emerging global trade priorities that countries cannot, and in some cases should not, seek to solve through bilateral or regional arrangements. With every day that members fail to find a way forward in the negotiations to create new market access, improve existing rules and establish new regulations, protectionist pressures may flourish.

The WTO is certainly more than just the negotiations but protracted gridlock in the legislative and rule-making function of the WTO will ultimately affect the efficiency of the surveillance and litigation systems: two aspects of the WTO’s work which are critical inputs to arresting protectionism. The ingredients of the debate have also changed over time. Successive negotiating rounds have consistently led to a reduction in the roles of tariffs and quotas as restrictions to free and fair trade. Discussions are increasingly focused on the regulatory environment.

These issues and more will form the nucleus of the debate by Ministers at the 8th Ministerial Conference in Geneva in December. The theme of the Ministerial will be “The WTO — an organization that delivers”. It is important that the WTO be seen as moving forward even if with small incremental steps. As the Director-General recently stated at an event in Delhi in September this year, ’if we are clear that the issues in the Doha Agenda need to be fixed, the challenge before us is to find the political courage and the pragmatic steps which will lead our members to have an honest negotiation’. The way forward is to advance negotiations in those areas where progress can be achieved and deliver on them one at a time and to have a clear roadmap for addressing outstanding issues. There is an emerging consensus that any further work should be done on the basis of progress achieved to date and that development should remain central to any outcome.

Members are not giving up on the negotiations. They are not giving up on multilateralism. Autarky cannot be an option. However, there are a number of observations which I would make on how, collectively, we can continue to take these small, but important steps forward.

The first is a reaffirmation of our purpose. Development must remain at the centre of our work. Using trade as a platform to promote greater sustainable development, poverty reduction and better integration of developing countries in the multilateral trading system is an absolute. For developing countries this should be less about exceptions and exclusions, and more about being provided with the means to use trade as a tool for economic development. Anchoring Aid for Trade within the multilateral trading system will help to achieve this.

Second, within our recommitment must be a spirit of pragmatism and compromise. Flexibility does not connote weakness; on the contrary it shows leadership and support for the global benefits of sealing a deal. However, there may also need to be some tweaking of the way we have been pursuing a Doha deal. While respecting the single undertaking, there are smaller steps that we can take which will show demonstrable progress such as the recent progress in the negotiations on Government Procurement (of which Hong Kong is an important player). Progress, no matter how small, inspires confidence. The issues under Doha — lowering tariffs, removing trade-distorting fisheries subsidies, improving the process and cost of doing business through trade facilitation, expanding services opportunities and many others — remain relevant today. Ignoring these issues will not make them disappear from the international agenda.

Third, political leadership is an important element here. Trade agreements are negotiated in Geneva but implemented at home. A process of continued education and information on the impacts and benefits of trade agreements is needed. Leaders and trade officials have the responsibility to spend political capital to make that happen.

Fourth, the global trading system needs to expand its remit. The unfinished business of tariff peaks and distorting subsidies, amongst other issues, needs to be completed, but we have to turn our attention to non-tariff barriers and the regulatory environment of trade. International standards are indispensible instruments of promoting safety and generating efficiencies but with the growing proliferation of standards there is a potential loss to trade, especially to the business community. A related issue which I will address shortly is the risk of regulatory divergences and market segmentation which is already occurring given the proliferation of regulatory frameworks in the PTAs taking place beyond the borders of the WTO. This is an issue that was highlighted in the 2011 WTO World Trade Report.

Fifth, we need to mature our trade discourse to take better account of the role of global value chains. Similar to the shift from Smith’s mercantilism to Ricardo’s comparative advantage to Krugman’s economies of scale model, addressing the new dimensions of geographically fragmented and multi-stakeholder global supply chains requires moving from a “trade in goods” theory to a new “trade in tasks” paradigm. We have termed this “Made in the World” and I will address this in more detail shortly.

Sixth, what about the ’new issues’ and their impact on the trade policies of countries? How can these be addressed under WTO rules? Here I am referring to exchange rate policies, climate change policies, environmental concerns, food security issues. Failing an update and adjustment of the rules and disciplines to new trade realities, the efficiency of the system runs the risk of being eroded.

How then can the upcoming Ministerial Conference address some of these elements? It must identify areas where members are ready to continue and conclude negotiations, and identify the areas where resolution remains elusive and chart a path forward.

3. PTAs

There is no better place to talk about PTAs than Hong Kong, China and this region. A critical issue which warrants closer attention is the role of Preferential Trade Agreements in the international system. The WTO’s World Trade Report 2011 very much focused on the role and impact of these frameworks. The old debate centred on whether PTAs were trade-inducing or trade-diverging: the building or stumbling blocks argument. However, a new approach based on complementarity and consistency needs to be developed which encapsulates the different angles of what is essentially a parallel system of new international trade rules being developed outside the WTO.

The WTO, in its examination of the coverage of trade within and outside of PTAs, concluded that only 16% of total trade was conducted on a preferential basis.

The real diversionary element of these PTAs, however, is the ’grid effect’ of overlapping regulatory commitments, which for the most part, goes beyond WTO rules, and the market segmentation this causes. Competition policy, technical barriers to trade, services, and intellectual property, investment measures — in many of these areas the PTA rules are deeper and wider than what exists in the WTO legal architecture. The effect on business, especially 21st century business, which is increasingly characterised by cross-border global production and supply chains, is a complex chain of different rules, regulations, standards and commitments. Harmonizing these various regulatory agendas will be necessary to avoid a regulatory noodle bowl.

This brings into play the question of coherence between multilateral and preferential trade rules and whether some of the rules agreed at bilateral or regional level can be incorporated in the MTS. A number of different arguments have been put forward to improve this coherence, such as increased transparency, accelerating multilateral trade openings through a more ambitious regulatory agenda, clarifying the substantive rules on PTAs and RTAs in the WTO legal framework and multilateralising regionalism through extending existing preferential arrangements, in a non-discriminatory manner, to additional parties.

Effective transparency and identification of best practices may result in a better alignment between PTAs and the MTS, allowing PTAs to effectively contribute and support the international trade agenda.

4. Trade in Tasks and Global Supply Chains

One area where PTAs do have an increasing value-added is in developing regional global chains based on the idea of ’trade in tasks’. Trade in tasks and outsourcing — the development of comparative advantages in tasks and production inputs rather than in sectors — is revolutionising the structure of world trade through engendering international production networks which foster deeper integration.

Modern trade is about goods, services and tasks. Revolutionary progress in communication and information technology and a rethinking of traditional economic concepts such as ’country of origin’ have led to a fragmentation of the production process and the accession of the global chain as one of the major platforms for integrating developing countries into the MTS. We are witnessing the phenomenon of global production.

Today, manufacturing processes are broken down into separate parts and spread across different countries before the finished product is assembled for export into one of those countries. Therefore, attributing the full value of the product to the country from which it is exported to its final consumer destination can give an exaggerated idea of the importance of trade within that country.

This geographical fragmentation of the value chain is behind what the WTO has termed ’Made in the World’. There are many examples of this notion of ’Made in the World’ — from the ipods which are assembled in factories all around the world to the jeans whose components are manufactured all over the globe. The Airbus Consortium, for example, is jointly owned by companies from four countries — France, Germany, Britain, Spain. The wings are from the UK, the fuselage and tail from Germany, the doors from Spain, and the cockpit and assembly in France. This is more than 1,500 suppliers in 27 countries.

On a smaller scale, let’s look at the Barbie doll. The design and moulds are completed in the US, the oil refined into ethylene in Chinese Taipei, the hair manufactured in Japan, the clothing made in China, and the assembly in Indonesia and Malaysia. And what about what we commonly term an ’American’ car. Thirty per cent of the value is to Korea for assembly, 17.5% to Japan for components, 7.5% to Germany for design, 4% to Chinese Taipei and Singapore for minor parts, 2.5% to the UK for marketing services and 1.5% to Ireland and Barbados for data processing. For an ’American’ car, 37% of the production value is generated in the US.

International trade today is inseparable from global production networks and in this new context of trade in tasks and Made in the World, the WTO is spearheading the development of a new measurement of trade flows based on value added. We are actively cooperating with other partners to build the required data sets and define the methodologies. Having a more accurate measurement of the value of trade transactions and trade flows will be an important element of a more evidence-based national and international dialogue on the role of trade in growth and development.

The recent collaboration between the WTO and the Institute of Developing Economies — Japan External Trade Organization (IDE-JETRO) on the publication ’Trade Patterns and Global Value Chains in East Asia: From Trade in Goods to Trade in Tasks’ focused on the role of these regional and global value chains and trade in tasks on the growth of ’Factory Asia’.

The development and evolution of these production networks have promoted economic growth and employment in Asia and we have deduced that these value chains and global manufacturing have created growth opportunities, with important spillovers within national territories and across regions. The trade in intermediate goods and services has encouraged firm specialization within and across economies, leading to ’trade in tasks’.

Factory Asia is premised on each partner along the production chain specialising in specific operations and skills according to comparative advantage. And it has borne fruit. Individual economies are more interlinked and the redistribution of roles and tasks within the regional supply chain in Asia has meant that in less than 20 years some emerging economies, such as Viet Nam, and LDCs, such as Cambodia, have become major manufacturers.

5. Aid for Trade

Unfortunately, historically, not all countries have been able to benefit from these opportunities which international trade can provide for growth and development. Aid for Trade, a WTO-led global initiative, was launched here in Hong Kong at the 6th WTO Ministerial in 2005 to help developing countries, particularly LDCs, build the supply-side capacity and trade-related infrastructure needed to assist them to implement and benefit from WTO Agreements and more broadly to expand their trade.

One of the key functions of the Aid for Trade Initiative is to act as a bridge between demand and supply of trade related capacity building. The WTO’s role is to place a spotlight on the debate and to monitor how Aid for Trade is being implemented. The Global Reviews are the focal point for our monitoring and three have been held since the 2005 launch.

The third Global Review was held in July this year and benefitted from contributions from the United Nations Secretary General, the Presidents of the World Bank and the Regional Development Banks and a wide cross section of developed and developing country Ministers, private sector CEOs and civil society.

The focus was on impacts and results — the need to show how Aid for Trade was working and could work better in promoting growth, development and poverty alleviation. A work programme for the next biennium is being concluded in Geneva and will focus on ’deepening coherence’ between Aid for Trade capacity and other sectoral policies for which trade is an important component, such as food security, intellectual property, regional integration, and climate change policies.

6. The Private Sector

A central focus of Aid for Trade is on the private sector: the private sector as both a provider of trade-related capacity building and as a beneficiary of Aid for Trade. The spread of global supply chains creates even greater opportunities for the private sector to make real and sustainable impacts on development.

It is clear that the private sector is moving beyond corporate philanthropy as an element of its corporate social responsibility agenda. Increasingly CSR has a profit motive and a profit deliverable. This is not something to shy away from. There are a number of important medium and long-term opportunities for the business community to get involved in trade and trade policy and make a difference both to growth and to the bottom line.

At the Third Global Review, we profiled a number of companies who were conducting capacity building efforts as part of their investments in new value chains. Walmart for example expressed an interest is working better with development agencies to help scale-up the important work in developing new suppliers in new markets; Danone introduced its special “Ecosystem” fund to improve its operations by connecting better with local economic and social fabrics; and Sae-A Trading Co., Ltd. elaborated on the infrastructure investments they are undertaking in Haiti.

But why should a multinational enterprise get involved in partnerships with governments on trade-related capacity building? How can this help support global growth?

The importance of galvanising private actors all along the value chain to broaden their network of suppliers by investing in the capacity and competitiveness of producers is an important input into supporting global growth and the development of expertise right along this supply chain. The private sector, especially the multinationals, has scale of market size and penetration which are impossible for many small producers to attract. Partnering with these producers and traders in developing countries, helping them to develop better production techniques, market knowledge and transferring know-how are key to helping them rise up the value chain.

In the long run, sustained economic growth requires technological progress. Technology and knowledge transfer allows companies to produce more efficient and environmentally friendly goods and services, provides a platform for moving from primary production to more value-added processes and leads to the development of intellectual and social capital in an industry. Established private sector firms with their research and development divisions and their technological innovations can play a role in raising productivity in developing countries. Increased productivity leads to increased income and increased demand for goods and services. There is an important profit motive for business to get involved in this, creating new customers and new opportunities.

In addition to the role that the business community can play in transferring technological know-how, trade is also a crucial element in the equation. Transfer of technology can be embedded in imports. Import competition can drive domestic innovation and technology upgrading and many firms can learn by exporting. The externalities from this ’learning by doing’ will include knowledge spillovers across firms and the human capital externalities such as skill development.

When the WTO engages with the private sector there is always a cross section of issues which are raised as priorities, irrespective of the size, scope and bank balance of the organization. More transparent and predictable rules and regulations, effective and efficient infrastructure within countries and across regions to allow goods and services to be traded, reliable energy and communication facilities, streamlined customs and trade facilitation procedures.

All of these are indispensible if a business is to trade competitively and that goods and services can reach consumers at a reasonable price, within a reasonable time and of a reasonable quality. The price of a good for consumers or an input into a production cycle can increase ten-fold between the border and the destination as a result of burdensome trade facilitation procedures, overlapping standards, excessive fees and charges and unreliable transportation infrastructure.

Governments and businesses must collaborate on these elements to lower the cost of doing business. Partnerships between manufacturing, business services, international logistics and government can go a long way to improving competitiveness.

Conclusion

Today I hope I have provided some insight into the challenging issues which are on the international trading agenda today, but also some of the solutions which can address these realities. What role can Hong Kong, China play in addressing some of these elements?

Hong Kong has always been a staunch supporter of the multilateral trading system. Hong Kong’s influence in the system comes from the fact that she leads by example. Hong Kong’s contribution to the Government Procurement negotiations, the trade facilitation discussions and the services talks has been indispensible to the progress we have seen.

Integration into global value chains is an important aspect of Hong Kong, China’s development. The WTO ’Made in the World’ initiative will help you to better monitor and measure Hong Kong’s contribution to value addition and competitiveness and I hope we can find opportunities to work with the University to continue to fine-tune and concretise this methodology.

In conclusion, Multilateralism is facing some challenging times. We have identified the pressure points. The next step is to confront them with a common purpose.

Thank you for your kind attention.

ENDS

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