Certainly, trade retains its central place in the global economy. Nearly every government in the world takes the view that trade must be on the menu of options to generate growth and jobs. But in a great many other ways, the nature of trade has changed immeasurably. Who would have imagined that China, on entering the WTO in 2001, would emerge as the world’s largest exporter?
Even the way we trade has changed immensely. In the past, goods were made in Mexico, or Mauritius or Malaysia. Today, goods are made in the world. The expansion of global value chains means that most products are assembled with inputs from many countries. Products cross borders frequently during various stages of assembly. Trade in intermediate goods is the most dynamic sector of international trade growing at a rate of 6% per year.
And this trade is taking place in high-technology sectors which generate well-paying jobs. Twenty years ago, the import content of exports was 20%. Today, it is around 40%. More than half of global manufactured exports are components which are inputs to other as yet unfinished goods. In Asia, the figure is more than 70%.
The thousands of companies involved in these global value chains realize that access to imported components at the cheapest prices is vital to retaining a competitive edge in tough global markets. In Minnesota, 58.5% of imported products are used by US workers to manufacture goods in the United States.
Savvy governments are aware that trade policies which encourage enterprises — particularly small and medium-sized enterprises — to participate in global value chains make it easier to attract foreign investors looking to build local production facilities.
In trade as in all things, change is not only inevitable, it is necessary. There are in fact some key aspects of trade very much in need of change. Even as new trading powers have emerged and new trading techniques have been adopted, rules governing global trade have remained largely static over the last two decades. Another element in need of change is a trade narrative that far too often casts global commerce in a less than flattering light.
The WTO is not the only multilateral organization which must address a new paradigm in which countries have had difficulty in adjusting to this shift of power and to the allocation of future responsibilities. To some extent or another, the climate change talks, negotiations to reform global finance rules and the reallocation of voting shares at international institutions have been affected by the same geopolitical transformation.
This does not mean that the WTO has ground to a halt. For many WTO governments, creating the optimum conditions for today’s global trade, particularly globally integrated supply and production chains, is a high priority. They are also examining negotiating formats that might lead to such agreements.
Stripping away red tape at customs points and enhancing transparency and predictability at borders through improved WTO rules on trade facilitation is one area where negotiations could yield agreement. A deal on trade facilitation could deliver a great deal for your business.
The longer a shipment is held up in port or at customs, the more it costs the exporter and the importer. Every extra day required to ship goods reduces trade by 1%. On an average sea voyage of 20 days, one extra day at sea results in a 4.5% drop in agriculture trade between any two trading partners.
Overall, the OECD estimates fees, formalities and clearance procedures constitute roughly 10% of the value of any trade transaction. Globally, that’s about $1.8 trillion. The OECD also estimates that a WTO deal on trade facilitation would reduce those costs from 10% of the value of trade to 5% of its value. That comes to a cool $900 billion gain for businesses globally.
There are all kinds of studies with complex formulas that illustrate this. But as business leaders involved in international trade, you understand that a shipment requiring 34 documents to move through the port and onto a truck will cost you more than one that requires five documents. You know that having to pay a myriad of different agencies to ensure safe passage of your shipment is cause to reconsider doing business in a particular country.
A WTO agreement, backed by the WTO’s dispute settlement system, would harmonize and update the rules on customs fees, documentation and the treatment of goods in transit.
Opening trade in transportation, logistics and information services is another possibility. A group of 16 countries has been exploring the possibility of negotiating and striking a deal on these services and others, but it is not clear how such talks will evolve. Governments are struggling to find other areas of the negotiations on which they can agree.
Plurilateral agreements can be reached in the WTO. We reached an important one in December when 42 countries negotiated a new Government Procurement Agreement. This agreement would expand the sectors covered to include roughly $100 billion in new market opportunities. It would also inject a welcome dose of transparency into many tender processes, thereby helping fight corruption in procurement practices.
Exports are great, of course, but foreign direct investment and imports are also good for the country and for the state. Foreign-owned companies employ nearly 90,000 workers in Minnesota, US and 7% of all manufacturing jobs in the state are with US subsidiaries of foreign companies. These companies pay an average of 32% more than their US-headquartered counterparts.
This good news is not limited to the United States. Around the world, extreme poverty is in retreat. The World Bank estimates that an unprecedented 550 million people escaped abject poverty over the last decade. The percentage of people around the world living on $1.25 per day has fallen from 43% in 1990 to 22% today. For the first time in history, less than half of Africans are below the poverty line. Trade has been an important reason why. Expanded trade in countries like China, Brazil, India, Indonesia and Chile is a major part of government growth and poverty alleviation efforts.
We live today in a society that is changing perhaps more rapidly than any which preceded it. Such rapid change can instill an enormous range of emotions from fear to hope to confidence. We may not know what the future holds for us as nations, companies or individuals but what we do know for sure is that things will be different tomorrow. We will have to adapt to change and we will have to manage it as best we can, and in a global economy that means ensuring our rules and practices fit our circumstances. This is why the WTO and other multilateral organizations are so important.