Today’s post from Pascal Lamy, Director General of the WTO, is the first in a series published to coincide with the 2013 Dialogue on Aid for Trade taking place at the OECD on January 16-17, in collaboration with the Government of Sweden and the Overseas Development Institute, with the support of the European Commission.
Aid-for-Trade is as relevant today as it was when the Initiative was launched at the Hong Kong Ministerial Conference in 2005. Developing countries, and in particular Least-Developed Countries (LDCs), have made measurable progress in their participation in the global trading system. But for many, this participation still remains too narrowly focused on a limited range of exports (often primary commodities). And prospects for further integration into the global economy continue to be hampered by a range of supply-side and trade-related infrastructure constraints.
But there have been some bright spots. Annualized over the period 2005-2011, the volume of world merchandise trade grew by some 3.7 per cent – albeit with a sharp downturn in 2009. For many developing countries, growth rates over this period have been much higher. For example, LDCs merchandise exports grew by 4.6% annually. By contributing to mobilise the potential of developing countries to participate into world trade, Aid-for-Trade can reasonably claim to have played a part in this expansion, and in particular for LDCs.
Examples cited at the Third WTO Global Review in July 2011 illustrate how Aid for Trade can be effective in building infrastructure, addressing supply-side constraints and putting in place the necessary regulatory systems that developing countries need to facilitate their participation in the global trading system. The range of activities profiled were substantial across a wide spectrum of countries and sectors.
Successive monitoring exercises since 2007 have also highlighted progress in promoting coherence between trade and development objectives. This has two components: “mainstreaming” trade into the national and sectoral development strategies of developing countries – and galvanizing support from development partners to help address trade-related development objectives identified by countries themselves. The initiative has also sought to highlight the importance of effective monitoring and evaluation of the outputs and impacts of Aid for Trade assistance.
Since the Aid-for-Trade Initiative was launched in 2005, over $200 billion has been mobilized in funding to help developing countries participate in the global trading system. Figures from the OECD highlight that the annual Aid-for-Trade funding envelope has grown by 80% in real terms since 2005. This figure would increase further if the trade- related assistance offered by South-South partners was included.
Particularly gratifying has been that some $60 billion has been directed to the world’s poorest countries. They have been one of the notable beneficiaries of increased Aid for Trade funding. Between 2005-2010, Aid-for-Trade funding to them doubled from $6.8 billion in 2005 to $ 13.6 billion annually.
Yet the job is far from complete. For example, despite their recent impressive growth, the 49 LDCs still only account for 1.12% of global trade. And many other developing countries continue to need assistance to overcome their supply-side constraints; small and landlocked economies are particular cases in point.
We also need to understand how Aid for Trade can best contribute to enhancing developing countries’ growth prospects in a global economy increasingly characterized by complex production networks in which production of goods and services has been unbundled into many different component parts. A global division of labour based on comparative advantage in trade in tasks has complex trade and development policy implications. One such policy consideration is the under-recognized role of services, not just in the global economy, but also in development more generally.
WTO is actively collaborating with the OECD to explore the policy questions raised by value chains. This will be the central theme for the Fourth Global Review of Aid for Trade: Connecting to Value Chains, on 8-10 July 2013. The Fourth Global Review will be informed by research work on value chains and a monitoring exercise that for the first time is being extended to the private sector.
Fiscal pressures are mounting among key donors. The funding outlook for development assistance (of which Aid for Trade is part) is muted. As part of their Multiyear Action Plan on Development, G-20 leaders committed to maintain Aid-for-Trade expenditure at 2006-2008 levels. Notwithstanding this pledge, we need to make the case for continued Aid-for-Trade funding – not just from traditional donors, but also from South-South partners and explore how to bring the private sector into the picture.
The OECD’s Policy Dialogue on 16-17 January is an important opportunity for the Aid for Trade community to gather and discuss the way ahead. To identify how best to address the on-going challenge facing many developing, and in particular LDCs, on how to integrate into the multilateral trading system and to benefit from liberalized trade and increased market access.
I hope the OECD Policy Dialogue will give renewed impetus; impetus for the Fourth Global Review of Aid for Trade and a strong mandate to continue the Aid-for-Trade Initiative when WTO Ministers meet at the Bali Ministerial on 3-6 December 2013. It should also give renewed impetus to ensure that Aid for Trade continues to positively impact the trade and development prospects of developing countries in the most effective manner.
It’s a big day here today, with French President François Hollande and senior ministers coming to find out what the heads of the OECD, World Bank, IMF, WTO and ILO have to say about the global economic outlook as well as the European and French economies. They’re discussing policies needed to return to growth, redress global imbalances, improve competitiveness and alleviate the social impact of the crisis.
We talked about the OECD’s views here in an article called “Doom and gloom” on the May interim global economic outlook. The main worry was that the euro area crisis is dragging down the rest of the world economy through its impacts on trade and business and consumer confidence. The World Bank agrees. Their Global Economic Prospects says that “resurgence of tensions in the Euro Area is a reminder that the after effects of the 2008/09 crisis have not yet played out fully. Financial market uncertainty and fiscal consolidation associated with the high deficits and debt levels of high-income countries are likely to be recurring sources of volatility for the foreseeable future as it will take years of concerted political and economic effort before debt to GDP levels of the United States, Japan and many Euro Area countries are brought down to sustainable levels.”
The World Bank’s sister organisation, the IMF supports its sibling, and the OECD. The Global Financial Stability Report (GFSR) says that “risks to financial stability have increased since the April 2012 GFSR, as confidence in the global financial system has become very fragile. Although significant new efforts by European policymakers have allayed investors’ biggest fears, the euro area crisis remains the principal source of concern.”
Austerity is among these efforts, but the OECD warned that although this is a medium-term policy designed to help public finances, it acts as a drag on short-term economic activity, and can even start a negative feedback loop whereby activity is weaker than expected when planning the budget, so less tax comes in and there is overspending, and then the need for more consolidation, which acts as a drag…
The ILO calls this the “austerity trap” in the latest World of Work Report, and outlines a similar vicious circle to the one the OECD described: “Austerity has, in fact, resulted in weaker economic growth, increased volatility and a worsening of banks’ balance sheets leading to a further contraction of credit, lower investment and, consequently, more job losses. Ironically, this has adversely affected government budgets, thus increasing the demands for further austerity.”
The ILO estimates that there is still a deficit of around 50 million jobs compared to the pre-crisis situation, and “It is unlikely that the world economy will grow at a sufficient pace over the next couple of years to both close the existing jobs deficit and provide employment for the over 80 million people expected to enter the labour market during this period.”
As you’ve no doubt noticed, there’s a general air of pessimism about these reports, and even the efforts that have been made to address the issues that caused the crisis in the first place don’t generate much enthusiasm. Financial sector reform for instance, leaves a lot to be desired according to the IMF, because although there has been some progress over the past five years, financial systems have not come much closer to being more transparent, less complex, and less leveraged. “They are still overly complex, with strong domestic interbank linkages, and concentrated, with the too-important-to-fail issues unresolved.”
Developing and emerging economies did comparatively better than the more developed economies during the crisis, but even there are worrying signs, with the World bank warning that in a new crisis no developing country would be spared, particularly those with strong reliance on worker remittances, tourism, commodities or those with high levels of short-term debt or medium-term financing requirements. Even without a full-blown crisis, elevated fiscal deficits and debts in high-income countries and their very loose monetary policies mean that the external environment for developing economies is likely to remain characterized by volatile capital flows and heightened investor uncertainty.
But let’s end of a positive note. The WTO’s figures reveal that world merchandise exports increased by 5% in 2011 in volume terms. The United States remains the world’s biggest trader (in value terms), with imports and exports totalling $3,746 billion in 2011. China and Germany rank second and third respectively. Exports of commercial services grew by 11% in value terms. The United States is the world’s largest trader, with $976 billion of services trade in 2011.
See you next year, if President Hollande’s suggestion to make this an annual event is adopted.
In The Third Policeman, Flann O’Brien describes the first All Irish Bicycle, 100% locally sourced and made of cast iron. Including the tyres and pump. Given the state of Ireland’s roads at the time, the riders’ atoms got all mixed up with the saddle’s and they gradually turned half-bike themselves, even having to lean against the wall outside the pub so as not to fall over.
O’Brien had a wonderful imagination, but you can guess where he got some of his ideas from. In 1932, a few years before he wrote his masterpiece, the Irish government imposed 43 new tariffs on imported goods, including bicycles from Northern Ireland, then as now part of the UK. A reporter from The Irish Times (where O’Brien published a kind of forerunner to blogs) described how people covered their new bikes with mud to make them look old, and as Joe Joyce remarks, the main impact of the measures was to “boost an emerging smuggling industry which proved more durable than many of the protected manufacturers of the day”.
That conclusion is similar to a point made by US Trade Representative Ron Kirk last week when, with several other ministers and WTO chief Pascal Lamy, he was presenting a report just published by the OECD-led International Collaborative Initiative on Trade and Employment (ICITE): protectionism doesn’t protect anybody, it only puts up prices. Those Irish bike buyers didn’t want to pay more for protected bikes, and nobody apart from O’Brien’s mad protagonists would buy a bike on the basis that it contained no imported rubber and metals. Quite the contrary. The site of one manufacturer I looked at when preparing this article boasts that it “sources from the best suppliers around the world”, having just explained a couple of lines higher that it’s “home of some of the UK’s most famous bicycle brands”.
These days, it would in fact be hard to find a manufactured product that was made entirely by local firms from local components in any country. At last week’s meeting, New Zealand trade minister Tim Groser pointed out that in the space of 20 years, the import content of exports (the Japanese gears on those British bikes for instance) had doubled to 40%. So if you want to export, you have to import, and if you want to encourage domestic production, you need access to competitively priced intermediate goods from around the world – microprocessors, steel, cloth, whatever.
That doesn’t just apply to manufacturing. Services form the greatest share of most countries’ GDP and are increasingly being traded internationally. To stick with Ireland, it is the world’s second biggest exporter of business services after India according to the report, but it also has the world’s highest share of imported business services in output (along with Luxemburg).
What about the workers? As the title suggests, Policy Priorities for International Trade and Jobs focuses on employment, looking at the impacts of international trade on employment and working conditions, as well as growth more generally. It says that openness pays. Another minister attending the meeting, Canada’s Ed Fast, said that abolishing 1800 tariffs had helped his country create 12,000 new jobs during his government’s time in office so far. The report itself looks in detail at a dozen OECD and non-OECD countries and also includes results from a broad sample of 30 open and closed economies around the world over a 30-year period.
It concludes that whatever the criterion, trade is beneficial overall, and the effects can be felt quickly. In Africa, for instance, a one percentage point increase in the ratio of trade over GDP is associated with a short-run increase in growth of around 0.5% per year. Some arguments in the report are probably familiar to people interested in globalisation issues, but the scale of the impacts may not be. For example, between 1970 and 2000 workers in the manufacturing sector in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region.
The conclusions concerning offshoring and outsourcing are encouraging too. Studies for the UK, US, Germany and Italy suggest that off-shoring of intermediate goods has either no effect or positive effects on both employment and wages. And with so much talk of sweatshops and other negative impacts, another surprise is that trade tends to improve working conditions whether the measure is injuries on the job, child labour, informality, or effects on female labour.
So, should countries just open up to international influences and all will be well? Pascal Lamy argued that globalisation makes labour markets more volatile and many jobs more precarious. In reply, OECD Chief Economist Pier Carlo Padoan reminded everybody that the benefits of an open trade policy depend on a whole series of other policies, starting with labour market measures to aid those negatively affected, but also covering investment, governance and social protection.
You can find a four-page summary of Policy Priorities for International Trade and Jobs here
How do you open markets world wide, to the benefit of European consumers, companies and jobs? Europe’s answer to that question is equally short: we lead by example. We are the world’s largest single market, and our foreign trade policy is actively focused on further liberalising trade through both multilateral and bilateral negotiations. But what happens if others don’t follow our example? What incentives do our partners have to open their markets to our businesses when their own businesses have full access to ours? As negotiators, that’s a question to which there are no short and simple answers.
Take public procurement, a sector of major economic importance. In the EU, purchases by government correspond to around 19% of GDP and companies whose business directly depends on procurement represent over 30 million jobs. It is also a booming sector in emerging economies and one in which European companies are very competitive.
The European public procurement sector is the most open in the world. Outside contractors are able, welcome even, to compete on our market, subject to the same conditions as European companies. Between the EU’s 27 member states procurement markets are also liberalised. And rightly so: this has driven down prices, increased the competitiveness of our companies and offered more value for money to authorities and tax payers across Europe.
And yet, we are far ahead of other countries in this approach. Other economies, though they enjoy access to the EU market, are far more reluctant to open their own markets to the EU. While some €352 billion of European public procurement is included in the WTO agreement on government procurement (GPA) and therefore open to bidders from member countries of the GPA, the value of American procurement offered to foreign bidders is just €178 billion, for Japan that figure is only €27 billion. China and India have not yet committed any part of their fast growing procurement markets and currently, EU business wins only a fraction of the Chinese and Indian procurement contracts.
Whatever the overall economic merits and flaws of this situation, this is increasingly hard to explain to our businesses, who see foreign competitors actively engaging on our markets while they are barred from doing the same elsewhere.
This undermines the legitimacy of our open markets. It hampers the pro-active trade policy we want to pursue.
At the end of last year, the EU was at the forefront of efforts to renegotiate the WTO Government Procurement Agreement. We were happy to come to a new deal among the 15 WTO members that are party to the agreement to improve the disciplines for this key sector of the economy and expand the market access coverage with up to 100 billion euros a year. There can be no doubt about our free market credentials. But we cannot accept that imbalances grow ever larger between those that push for market opening and those that refuse to do so to.
For that reason, we have devised an instrument that will, if approved by EU Member States and the European Parliament, allow us to tackle imbalances in international public procurement markets. Through this procedure, contracting authorities in Member States may exclude bidders for large contracts who use goods and services mainly originating in a non-EU country that upholds a high degree of closedness of their procurement markets. They will need a green light from the European Commission to do so, which will only be given if these goods and services are not subject to any agreement the EU has signed up to, or part of serious negotiations on such an agreement.
And we have built in a threshold below which third country bidders cannot be discriminated against so that the new regime puts pressure on foreign companies and governments without leading to unnecessary bureaucracy. In case of serious and repeated discrimination, the Commission may start consultations with the government in question and, if that government continues to bar European companies from its market, the Commission may close a certain sector of the procurement market of the EU as a whole. Naturally, if the EU has taken a legal commitment to the third country in the WTO GPA or a free trade agreement to keep its market open, it will fully honour its commitments.
The measure is designed to be used as a carrot, rather than as a stick, but we should not be afraid to brandish it if need be. In this way we are confident to strengthen our negotiating position when discussing access to third country public procurement markets. Only in this way can we make foreign companies aware that they cannot continue to enjoy the benefits and the opportunities offered by our open markets while their home governments continue to close theirs . Our proposal will also clarify the rules of access to the EU’s public procurement market, and in doing so bring more legal certainty for both international suppliers and public entities that need goods or services. It will confirm that the EU market is basically open, and that we want to keep it that way.
But the door of free trade has to open both ways – otherwise public demands to shut it altogether will gather strength.
Chapter 3 of OECD Insights: International Trade discusses trade in services
Today’s post is from Ian Wood, the UK’s Deputy Permanent Representative to the OECD
The OECD’s latest merchandise trade statistics provide further proof of tough times in the world economy, showing falls of 0.2% in imports to, and of 1.2% in exports from, G7 and BRIC countries in the fourth quarter of 2011.
But the evidence shows that boosting trade is one of the surest drivers of sustainable growth around. Trade allows firms to expand and – through competition – accelerate innovation and productivity growth.
That’s why the UK published its Trade and Investment White Paper in February 2011. One year on, as Trade Minister Stephen Green has underlined, we’re working hard to realise its goals, including through the OECD and its committees.
Trade facilitation – rules to simplify import and export procedures – is one area where we should seek to make early progress. WTO Director-General Pascal Lamy reminded OECD Council that some 50 per cent of potential gains from the Doha Round were to be found in this area.
We are also optimistic about the work-streams launched following the revision of the Government Procurement Agreement in December of last year at the WTO in Geneva – governments are after all among the biggest consumers of products and services.
Free Trade Areas provide another opportunity, with the EU-South Korea deal alone set to increase UK GDP by £500m, and other agreements are in the pipeline. The OECD is doing valuable work in exploring the potential to take provisions from such regional deals and make them global.
Services is another key area. Within the EU we are pushing hard for a genuine digital and services single market. We look forward to the OECD’s Internet Economy Outlook and the Economic Survey of the EU in the next few months, as well as the upcoming Services Trade Restrictiveness Index, which will all help reinforce the case for rapid progress.
We want trade to take place in fair conditions. The OECD’s Investment Round Table and Working Group on Bribery are both important in this regard. The UK is committed to ensuring that British firms abide by the rules of our new, state of the art bribery legislation. We expect others to commit to equally vigorous enforcement.
At the same time, we want to make sure regulation is not burdensome, and are working hard with the OECD’s Regulatory Policy Committee on this. In all of these areas, we look forward to future OECD work, and the contribution it can make to strengthening the case for trade.
Trade and investment should work for developing countries as well as for developed ones. The UK is committed to the African Free Trade initiative, and we look forward to seeing a Continental Free Trade Agreement by 2017. And drawing on the lessons of the OECD’s excellent Aid for Trade work, we invest around £1bn a year in helping developing countries help themselves, including by providing assistance in preparations for key trade negotiations.
So, while figures are pointing down for this quarter, there’s plenty of potential to turn this around. We’re proud to be working with the OECD to achieve this.
International trade and balance of payment statistics from the OECD
It’s Valentine’s Day (wasn’t it Saint Valentine’s Day at one time?) and here at this most romantic of international organisations we’re happy to see lovers the world over celebrating causes so close to our red velvet heart as trade and innovation (or flowers and chocolate, to use the technical terms). On this special day, let’s leave the cynics to their grumbling and enjoy being nice to somebody by sharing the fruits of technology transfer, competition, economies of scale and opportunities for learning, as described by Nobuo Kiriyama in the latest OECD Trade Policy Working Paper.
History provides some vivid illustrations of what Nobua is talking about. In the era of the Silk Road, China’s competition policy regarding the silk trade was simple: anyone caught trying to export silkworms, cocoons or eggs was executed. This crude but effective barrier protected Chinese manufacturers until around 200 BCE when Chinese immigrants to Korea started production there too. A hundred years later, a princess smuggled eggs to India in her hair. A hundred years after that two monks smuggled eggs on the orders of the Byzantine emperor and the industry gradually became established in the West.
Silk shows that new technology doesn’t have to be imported readymade, and that knowledge transfer can be more important (it also raises questions about whether and by how much the economy as a whole benefits from protecting intellectual property).
Chocolate is another interesting case. The link to international trade is obvious – cacao beans can’t grow in most places and have to be imported by manufacturers. But there’s a link to migration too. Spain was the first European country to develop a chocolate industry, but the persecution and expulsion of the Jews in the late 15th and 16th century forced many Jewish chocolate makers to flee, with some of them setting up business around Bayonne in southern France or in Belgium and Switzerland, still famous for high-quality products today, while Spain was left behind. (Another OECD report on entrepreneurship and migrants argues that modern migrants may be a source of job creation provided they have adequate support to gain access to capital, learn the language and deal with regulation.)
The flowers you offer your sweetheart tell a whole story too (including about you if you bought them at the last minute from a service station as you were filling up the car). Chances are they came from Kenya, India or another developing country. Exporting firms in these countries are usually more productive than non-exporting ones, and have to innovate for a number of reasons, for example to meet hygiene or other standards in potential markets or to make sure the products get to the market in a saleable condition. In doing so they learn from their clients as well as their partners.
You may have noticed that none of these examples actually talks about inventing a new product. Innovation covers this too of course, but these days it more frequently means something else – for example crossing a hard drive and a music player to create an MP3 device or crossing different genetic traits to try to produce angora chickens. Coca Cola for instance has been highly innovative throughout the company’s history without inventing a new drink. Removing the cocaine was an example of product innovation while selling it in cans or from machines were marketing innovations.
Innovation can also mean applying a technology in a new way. The introduction of mobile phones to ﬁshers in India led to an increase of 8% in the proﬁts for the ﬁshers and a decline of 4% in consumer prices as the ﬁshers could use their phones to call several nearby markets from their boats to establish where their catch would fetch the highest price. Fish, phones and innovation seem to go together. The ﬁrst call ever placed on a commercial GSM phone was on 1 July 1991 when Harri Holkeri, governor of the Bank of Finland, telephoned the mayor of Helsinki to talk about the price of Baltic herring.
So if you’re tongue-tied when you call your Valentine tonight, try discussing the price of kippers. For more policy advice, see below.
Apart from the OECD and the Bobby Darin Dream Car, this year marks two other major anniversaries, both linked to books: the publication of the King James Bible in 1611 and DH Lawrence’s Lady Chatterley in 1961.
By the time you get to the end of this article, I hope to have thought of an OECD link for the KJB, but for the torrid tale of her ladyship and the hired help, there are a couple of possibilities, the first and most obvious being the Smoot-Hawley Tariff Act.
In 1930, this raised import duties on thousands of items coming into the US and is now widely condemned as having made the Great Depression worse, since America’s trading partners retaliated. President Hoover said that the Smoot-Hawley Act was “vicious, extortionate, and obnoxious”. Today of course, what you’d be more likely to get is something like: “While we share the concerns of Senators Smoot and Hawley, we feel more discussion is required on certain aspects of their proposed solution”.
That said, OECD Secretary-General Angel Gurría was less mealy-mouthed the other day at the OECD Global Forum on Trade when he talked about the “phantom of protectionism again showing its ugly face”. Smoot himself could actually be quite entertainingly odious. He opposed an amendment to his Act that would have stopped US customs from censoring “obscene” books using Lady Chatterley as an example, explaining that it had been written by a “man with a diseased mind and a soul so black that he would obscure even the darkness of hell”.
Lawrence’s book was published in 1928 in Italy, but the first unexpurgated version was not openly published in the UK until 1960, and in November it was prosecuted under the Obscene Publications Act (as it would be in similar trials in many other countries). The defence was based on the literary merits of the work, but the turning point for many people was when chief prosecutor Mervyn Griffith-Jones asked the jury if “they would let their wife or servants read” this kind of book. Apparently they would, and the book was published again without a problem early in 1961.
Griffith-Jones’ question was outrageous even by the standards of 50 years ago, so has much changed since? Attitudes to sex and sexism have certainly evolved, and women have improved their lives in some respects. According to the World Economic Forum’s Global Gender Gap Report 2010, the 134 countries covered, representing over 90% of the world’s population, have closed almost 96% of the gap regarding health between women and men and almost 93% of the gap regarding education. However, only 59% of the economic gap has been closed and the figure for political rights and representation is even worse, at only 18%. A report on the OECD Gender Initiative also talks about “persistent inequalities”.
How about your staff? For much of the 19th and part of the 20th century, domestic service was the main job in the urban areas of advanced economies. Manufacturing employment rose and fell, and now services are once again the main sector in OECD countries and elsewhere. The gap between masters and servants (or their modern equivalents) hasn’t closed much though, and in fact it’s been widening.
Movements like Occupy Wall Street in the US or the Indignados in Spain are one manifestation of the sentiment that even when there is progress, the rich get more than their fair share. To return to Gurría’s speech to the trade conference, he pointed out that thanks to NAFTA, his home country Mexico has annual exports “close to 300 billion dollars a year, becoming one of the top exporters in the world. But the benefits of NAFTA need to be better distributed.” According to this OECD report on the two decades before the crisis, “In a large majority of OECD countries, household incomes of the top 10% grew faster than those of the poorest 10%, leading to widening income inequality.”
So, it’s still dream cars for some and increasingly overcrowded buses for the rest.
How about that link between the King James Bible and the OECD I promised you? Well, the best I can do is that it the King James translation was actually done by a (seriously underfunded) committee and when we were preparing our booklet on the OECD 50th Anniversary, one of the invited contributions started: ”One of the most exciting things about the OECD is the impressive range of its committees”. I think some thrill-averse subeditor deleted that bit though, so if you can think of anything better, let us know.