What’s new in world trade policy?

Author: Peter Drysdale, Editor, East Asia Forum

The global financial crisis has put enormous pressure on the open international trading system. The cyclical surge in unemployment in industrial economies has unleashed demands for protection against imports of goods in the production of which a lot of labour is used.

While there has been strong and more or less effective resistance to retreat from obligations under the WTO to keep tariff levels and other explicit trade barriers to their agreed levels — and G20 governments have maintained the rhetoric for keeping the international economy open — a raft of under-the-table buy-national protection schemes and subsidies has begun to infect the international trade regime and the Doha Round of trade negotiations remains stuck after more than a decade.

The impact of the industrial country recession on the political economy of trade policy also sits on top of a huge structural change that has been taking place in world trade since the 1980s. This change has seen enterprises (especially in industrial countries) offshore production to benefit from locational and labour cost advantages in emerging economies, building global production networks and supply chains that are now at the core of industrial competitiveness. The growth of production networks, and the trade in intermediate goods and components upon which they rely, has been at the heart of East Asian trade and externally oriented growth in the past three decades. Other emerging economies are seeking to join in the process. They have become the most dynamic element in global trade and effectively linking into production or supply chains is now a critical factor in capturing the gains from trade in both the manufacturing and the service sectors.

The cross-border flows of goods, investment, services, know-how and people associated with international production networks, which Richard Baldwin calls ‘supply chain trade’ in his essay this week, has transformed world trade.

‘Since the 1990s, globalisation has been associated with a sharp drop in rich nations’ share of world income, world manufacturing and world exports. The big winners are a handful of developing nations who have industrialised by joining, rather than building, supply chains (think Thailand or China versus South Korea). This rapid industrialisation also lifted the boats of a wide range of commodity exporters‘, Baldwin says.

‘The radically different impact of this globalisation is due largely to its very different nature. When firms offshore production stages they must also offshore their managerial and technical know-how. Supply chain trade involves a great deal more ‘technology transfer’ than traditional trade’. It has opened a new route to industrialisation that involves joining a supply chain rather than building one, as the older industrial economies in Europe, North America or Japan had to.

A new data set on world trade in goods and services released by the OECD and the WTO last month shows the complexity of supply chain trade and the importance for policy makers of understanding global value chains. It provides insights into the nature of East Asian trade, where manufacturing is very heavily organised around value chains. Consider the production of your average iPod: the iPod comes from a production line in China and is exported from there, but only about 10 per cent of the product’s value is added in China. The rest comes from other countries, through material inputs or services that facilitate its assembly and are imported into China for this purpose.

Many would agree with Baldwin that the rules that govern world trade don’t deal with some of the factors that have been crucial to the emergence of supply chain trade, and there is a danger that the global trade regime will drift into irrelevance around the growth of this trade. There is less agreement on what to do about this.

Baldwin argues that ‘the most natural means of avoiding this emergent fragmentation and exclusion would be to multilateralise regional supply chain disciplines into the WTO. Yet the WTO does not seem well suited to the task. The WTO seems incapable of getting beyond the Doha negotiations, and until it does, it is incapable of addressing supply chain governance’. The nature of supply chains governance also calls for a differently structured WTO, he says. Supply chains are mostly about making things internationally, while in today’s WTO, the rules are primarily aimed at governing the international selling of things. More controversially, Baldwin suggests a new truncated WTO (WTO2) that would embrace locking in the investment and trade assurances that underpin supply chains. Baldwin and others see bilateral FTAs as having this motivation too, if not necessarily delivering on this purpose.

Philippa Dee argues that ’concerted leadership (by the G20) is required to preserve the primacy of the MFN principle in new post-Doha trade agreements’. She also sees a major role for the WTO in developing new pro-competitive regulatory principles (that are so important to promoting value chain trade and growth).

In fact, the WTO trade regime, complemented by unilateral commitment to open foreign investment regimes and regulatory reform have played the primary roles in the massive growth of value chain trade in East Asia over the past three decades. Bilateral and regional trade agreements have added very little to their development. Reaffirming the importance of the core WTO principles and linking them to international investment in value chain production will be a major interest in international trade economic governance in the years immediately ahead.

Peter Drysdale is Editor of the East Asia Forum.

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