Better data for good trade policies

At the core of globalization in the 21st century is the growth of supply chains. It is a fact that over the last two decades, value chains have changed the old ways of organizing international specialization, of production and of understanding comparative advantages. They have changed the face of trade.

Practically all manufacturing activities and many service industries today are characterized by supply chain production, and nearly all supply chains embody an international dimension.

But up to now we lacked the necessary statistical tools to fully understand this new phenomenon. Traditional statistics, measuring trade in gross numbers, failed to give a clear picture of today's way of trading. They also failed in fully capturing the huge role played by services in manufacturing. Most importantly, they were not good enough in ensuring that trade policy is properly informed by what matters to people: jobs.

This is why in 2007, I asked our statisticians at the WTO to find a way of bridging this statistical gap. We launched the "Made in the World Initiative", and entered into cooperation with the Organization for Economic Cooperation and Development to produce a world trade database taking into consideration the domestic value-added content of trade flows.

We have worked with a large coalition of international organizations, research institutes and statistical offices in Europe, Japan and the United States to name just a few, to join efforts to close this statistical gap. China has been a great partner in this endeavor. The Chinese Academy of Science produced their own estimates of domestic value added in China's exports, which were presented at an international conference in Beijing in September.

Just last week the WTO and OECD released the first set of trade data in value added. This marks a milestone in our long-term co-operation and the endeavors of many stakeholders.

Three specific results from the new data show how the measure of trade in value added changes how we should understand trade policy in the 21st century.

First, the role of services. While services represented about 20 percent of total trade, their share doubles when we consider their contribution to the value added that is traded internationally. The services that are incorporated into the value of the merchandise include most of the new business functions that have made possible the development of value chains themselves, such as research and development, and modern logistics.

Understanding the crucial role of services in the success of value chains is important to understand where a country's competitive advantages may lie and where trade can generate jobs.

The second result is the importance of imports of intermediate goods in improving the competitiveness of exports. Today, in order to be a successful exporter, you need to be an active importer. Put in a simple way: "Imports create exports."

This has important implications for how we should understand today's trade policy. Realizing that imports of a country are good for its exports changes what trade negotiators call "defensive interests" and also how they evaluate the cost/benefit balance of adopting trade remedy measures. Furthermore, they may question the relevance of the good old reciprocity principle.

The third point refers to the re-definition of bilateral trade balances. Using trade in value added, the US trade deficit with China shrinks by more than 30 percent.

Good trade statistics can provide a sound basis for good trade and macroeconomic policies, for good public debates that need to underpin policy choices. It can help put multilateral trade negotiations in the right context. "Beggar your neighbor" policies are bound to have serious negative consequences not only for the neighbors but also for the country taking the measures. Protectionist policies do not protect.

As a product crosses borders several times during its production process, the cost linked with border crossings, including custom tariffs, but equally important, paperwork, logistical costs and time delays also multiply several fold. In the world of supply chains, a country's competitiveness is closely linked with border efficiency. Improved cargo handling, inspection, border control, warehousing would largely increase the efficiency and competitiveness of the industrial sector. This is why a WTO agreement on trade facilitation would be a win-win deal. Delivering this deal at the Ninth WTO Ministerial Conference in Bali, Indonesia in December would be a useful step toward ensuring that global trade rules are attuned to today's realities.

The author is director-general of the World Trade Organization.

(China Daily 01/23/2013 page8)