‘The Bigger Challenges Are Still Ahead’
On January 18th Pascal Lamy, Director-General of the World Trade Organization (WTO), spoke at the HSE. Below is a transcript of his speech.
I would like to thank the National Research University – Higher School of Economics, its president Alexander Shokhin (who was my fellow G-8 sherpa at the end of the last century) and its rector Yaroslav Kuzminov for the kind invitation to meet with you today. I am well aware of the accomplishments of HSE and of the important role this institution has played in modernizing economics and social sciences studies in Russia.
Although I am not a newcomer to Russia, this is my first official trip to Moscow since Russia became the 156th member of the World Trade Organization last year.
Today is therefore a good occasion to discuss the significance of Russia’s accession to the WTO, to review what the WTO is currently doing — and failing to do, and to emphasize how Russia’s participation in the WTO can be of benefit both for the organization, its members, and most importantly for Russia.
Russia joining the WTO corrects an anomaly. Given its economic and political importance, not to have Russia as a member undermined the credibility of the WTO as a World Trade Organization. It undermined the aspiration of having in place a rules-based truly multilateral trading system. Indeed, Russia was the only G-20 and UN Security Council member that was not a WTO member.
Russia’s process of accession to the WTO was long; it extended for more than 19 years. As is customary in this type of negotiations, it was also an often difficult process.
As part of its effort to join the multilateral trading system, the Russian government has undertaken important commitments. In the area of trade in goods, for example, at the end of the implementation period, the average tariff ceiling for all imported products in Russia will be 7.8%, down from the average 10% that was applied before accession. The average tariff ceiling for manufactured products will be 7.3% instead of 9.5% while the average tariff ceiling for agriculture will be 10.8% instead of the earlier average of 13.2%. Apart from these tariff cuts, which are significant but do not represent a big bang, Russia has offered improved market access opportunities in certain areas of goods and in many services sectors.
But what is this organization that Russia has entered into? The first thing to keep in mind is that the WTO was not created to end all restrictions to international trade, nor is it an institution to promote deregulation.
The WTO is successor to the GATT [General Agreement on Tariffs and Trade] agreement signed in 1947, which had the goal of eliminating discrimination in international trade and abolishing arbitrary non-tariff measures. The GATT encouraged parties to use tariffs, as opposed to less-transparent import prohibitions or restrictions, as the favoured means of protecting domestically produced goods. The GATT also encouraged parties to bind those tariffs, to engage in periodical exercises to increase the number of products covered by bound tariffs and to progressively reduce the level of those tariffs.
In the GATT, and now in the WTO, the objective is therefore not a blanket liberalization of trade, but rather to avoid discrimination and distortions in international trade and to make trade more open, more transparent and more predictable.
With the creation of the WTO in 1995, this multilateral system extends beyond trade in goods and includes trade in services and the protection of trade-related intellectual property rights. Under the various WTO agreements, members are allowed the necessary flexibilities in each of those fields to pursue legitimate goals, such as the protection of the life and health of humans, animals and plants, as well as the defence of the environment.
Evidently, with the progressive reduction of tariffs, the attention of traders has turned to non-tariff measures on goods, such as technical regulations or sanitary and phytosanitary requirements.
Unlike tariffs, non-tariff measures (NTMs) are often not primarily designed to protect producers or jobs. They are regulatory in nature and include things like standards, testing and certification procedures. Tariffs are a relatively transparent means of protection, but NTMs are more opaque in terms of their impact on trade. They reflect societal needs and desires and their constant modification and adjustment make both more necessary and more difficult to assess their impact.
These measures are not prohibited by the WTO agreements on the condition that — and I stress that — they should not be applied in an arbitrary or discriminatory manner, and that they should have a technical or scientific justification, and to the extent possible be based on internationally agreed standards.
The challenge for the WTO and other multilateral organizations is therefore not necessarily scaling back these measures, but seeking to harmonize them so that they do not conflict and do not unnecessarily restrict trade.
In other words, WTO members preserve the authority to regulate trade in goods as well as trade in services even in the sectors that they have decided to open to competition.
But WTO members have the obligation to be transparent with respect to their measures affecting international trade. A side benefit of this obligation is that it promotes clarity and accountability in public policy, to the benefit not only of trade partners but of the public at large. Most of this information is posted on the WTO’s website, which has become a major source of data for governments, researchers and practitioners.
The WTO also monitors developments in the international trading environment, with the support and the technical expertise of the Secretariat. Monitoring trade measures has become more important in the current economic crisis. As you know, the global economy is facing strong headwinds that have set back world trade and output growth. Despite the measures implemented in many countries to contain the slowdown in economic growth, production and employment trends have continued to be negative. In the light of these developments, we recently revised downward our forecast for world trade growth in 2012 to 2.5% from the previous 3.7% forecast. We foresee a volume of trade growth of 4.5% in 2013, below the long-term annual average of 5% to 6% that we have enjoyed for the last 20 years.
In times of hardship, governments are subject to protectionist pressures. But let me emphasize this: in the present economic situation, trade opening is not part of the problem. I believe that, in fact, trade could be part of the solution to recovering economic growth, promoting competitiveness, and creating jobs. But protectionist pressures are still there and the collective vigilance exercised by WTO members is an important asset to contain them.
Another active area of work for the WTO is the settlement of trade disputes between its members. The WTO has become the most effective system of dispute resolution in international law. If trade tensions escalate, the WTO dispute settlement mechanism takes the heat out of these disputes through consultations or a litigation process which is rules-based, predictable and respected.
Since 1995, members have brought to the WTO a total of 455 disputes. Most of those disputes have been resolved by the parties through bilateral consultations. But what makes the WTO system strong is that parties know that, if consultations cannot resolve a trade dispute, the complainant can activate a binding mechanism through which a panel of experts will examine any challenged measures and determine whether those measures are in violation of the WTO agreements. Any party dissatisfied with a panel ruling has the right to appeal. To this date, we have had more than 150 WTO rulings. Members take seriously their WTO commitments and normally comply with any adverse rulings within a reasonable period of time. Only very few disputes have remained unresolved after the reasonable period and have resulted in the WTO-approved imposition of proportional trade sanctions. The level of compliance of the WTO system is therefore high, particularly for an international system.
But not everything is good news. The WTO is not yet delivering in one crucial aspect and that is in its ability to update its rule-book in order to make it more responsive to current realities and to facilitate the way in which trade can promote development to the benefit of all its members.
In November 2001 in Doha, we launched multilateral negotiations under a broad agenda of topics to modernize the WTO rules. More than 11 years later, this process remains deadlocked. The goal of achieving a Doha package encompassing all of its 20 topics among the WTO’s 157 members remains elusive and will not be available in the short term.
In hindsight, we may have been too optimistic in believing that these complex negotiations would be wrapped up rapidly. We probably under-estimated the tectonic geopolitical shifts under way. We also could not have foreseen the time and extent of the world financial crisis, nor the way in which this crisis has pushed governments into timidity and detracted energy towards multilateral endeavours.
Regrettable as it is, the present deadlock in the Doha Round does not mean that we cannot advance in smaller steps in some areas of trade negotiations. Indeed, there are different subjects in which it is possible to build agreement to the mutual benefit of all WTO members.
To cite one area, WTO members are negotiating the expansion of the Information Technology Agreement, originally crafted in 1996 among 20 members and now encompassing 97% of trade in IT products. It has been a win-win deal and I am confident that we may see progress on this topic in the coming months.
Another obvious area that we could advance in is trade facilitation, the effort of finding a more efficient and effective way to process trade, or in other words to reduce the thickness of borders. This is one area of policy that is sometimes overlooked, but which has a profound impact on competitiveness. The longer a producer has to wait for a needed imported component, the less competitive it becomes.
At its core, trade facilitation is about making trade easier and less costly. In a world increasingly focused on value chains and trade in intermediate products, effective trade facilitation is not just a choice - it is an essential element for any country or business policy decision if the aim is to grow and attract investment and increase competitiveness.
The evidence is clear. The OECD estimates that for its members, customs procedures, paper work and border delays constitute roughly 10% of the value of any trade transaction. This is almost double the worldwide average trade-weighted tariff. Globally, these costs are close to US$ 2 trillion. A WTO deal on trade facilitation to curtail fees and paperwork, create greater transparency and reduce obstacles to goods in transit would cut those transaction costs in half, from 10% of the value of trade to 5%.
In today’s fast-changing environment, we can say, like the Red Queen in Lewis Carroll’s book, that “it takes all the running you can do to stay in the same place”.
Trade today is unlike what it was a few decades ago. World growth has become more dependent on trade: as a share of global GDP, trade has risen from 38% in 1980 to around 55% now.
The evolution of technology and transportation has greatly reduced the costs and uncertainty of distance. The rapid growth of global value chains, the preponderance of new regulatory-based, non-tariff measures and the shift in trade patterns as South-South trade grows rapidly are all elements that have accelerated since the turn of this century and which, if current trends are maintained, will continue to expand in the years ahead.
China has become the world’s second-largest economic power and the biggest exporter of goods. Many other trading powers have emerged — Brazil, India, Mexico and Malaysia are all now in the top 25 leading exporters table, and all posted export growth of 15% or better in 2011. Developing countries’ share of trade is 47% today compared with a global share of around one-third in 2008.
The nature of trade has also changed. High-tech products used to be made in the US, Japan or Germany. Today, they are “made in the world”, with components and parts fabricated in many countries. The country where the final assembly takes place may contribute only a small fraction of the final value of the product. Currently, roughly 60% of the volume of world merchandise trade is trade in components. In Asia, the figure is closer to two-thirds. The import content of the average export is 40%, up from 20% two decades ago, and will keep growing in the future as multi-location supply chains keep extending.
These value chains have not only changed the way companies trade, they are also changing the nature of the trade debate. When products were made in a single country, the argument that exports were good and imports bad was more easily defended. This mercantilist approach was, for centuries, a driving force in trade policy.
Value chains have turned all of this on its head. Companies that wish to be competitive in the global marketplace need access to the best possible inputs — goods and services — at the lowest possible prices. To hinder companies seeking such imports is to render them less competitive globally. It is self-defeating. This factor, together with strict monitoring by the WTO, may explain why countries have by and large avoided taking massive trade-restrictive measures during the crisis.
But if we are to change attitudes about value chains and about trade itself, we have to start by getting our numbers right.
Take the example of an iPhone. It may be assembled in China, but the goods and services leading up to the final assembly can come from companies in 15 different countries. The value added to the iPhone in China is around 4%, far less than the value added in the United States, Japan, Germany and South Korea. Yet when a US$ 400 iPhone is exported to the United States, standard trade accounting lists it as US$ 400 credit to China and a US$ 400 debit for the United States. Trade statistics would be very different if we start measuring trade in value-added terms.
Just two days ago, the WTO and the OECD released the first batch of trade data in value-added. When using value-added, we found that services represent not 23% of world trade, but closer to 45%. We also found that around one-third of intermediate imports are in fact destined for export markets. We also learnt that the US-China trade deficit may be 25% lower than originally thought. One thing is clear: we need good data if we are to develop good policies.
The structure of supply chains will continue to evolve in the years to come. Imported services are likely to comprise a larger share of the value of many goods. As labour costs continue to rise and research and design techniques improve, developing countries will want to move up the value-added ladder. As a result of the evolution of technology and transportation, more countries will be able to enter the production mix and specialization will become more prevalent.
Competition to host production links in these global supply chains will grow more intense. The cost of labour and the availability of natural resources are not the only variables that companies consider when deciding where to produce or source their components, whether goods or services. Sound domestic policies, good education, adequate social services, functioning infrastructure, predictable rules, proper business environment, these will all remain critical to attracting the necessary investment.
In this dynamic context, Russia’s decision to join the WTO acquires additional significance, particularly if it becomes part of a broader strategy to undertake the reforms that are necessary to modernize the Russian economy, diversify production and improve competitiveness. For all the difficulties of the accession process, it would be wrong to assume that the hard work is over. In fact, the main challenges lie ahead. WTO membership is an enabler; it puts Russia in a better position to address these challenges.
So, all in all, having become a WTO member opens opportunities for Russia. It does not mandate a specific course of development, but it allows a wide range of options. To begin with, it allows Russia to become part of the process where multilateral trading rules are crafted. The other side of the coin is that it means that Russia has, like other members, the obligation to abide by the multilateral rules that have been adopted. Whether those opportunities are fully used depends on the country itself. It is up to Russia to decide how it will use its participation in the WTO to promote its own economic goals, within the broad range of options that are allowed under WTO rules. Russia is, of course, in a privileged position. It has an abundance of natural resources and, as I can confirm today in this auditorium, does not lack talent. The question is how it will use these resources in the future, and how it will build on those resources, to integrate successfully into the global economy, if this is the option privileged by Russia, as I understand it is.
Tolstoy famously said that “happy families are all alike, but every unhappy family is unhappy in its own way”. Paraphrasing Tolstoy, we could say that every country that has been successful in modernizing its economy and addressing poverty has done it in its own way. But sadly, the stories of countries that have missed the opportunity of diversifying their economies and progressing beyond dependence on natural resources are all very much alike.
Russia has displayed significant courage, commitment and efforts to join the WTO. I trust that it will demonstrate the same level of courage, commitment and efforts to fully engage in the WTO system and to become an important and constructive player in the multilateral trading system. And that it will use the opportunity of WTO accession as part of a wider strategy to improve the competitiveness of the Russian economy and to successfully integrate into the global marketplace in order to increase welfare for the Russian people.
Thank you for your attention.
In terms of activity in lodging complaints with the WTO Court (the agency through which WTO members resolve their disputes), Russia has not advanced beyond South Africa. The United States and EU countries are currently the leaders in terms of WTO disputes. The low level of activity on Russia’s side is primarily due to its relatively recent membership in the organization.
On April 22 2013, the Higher School of Economics hosted an international workshop conference entitled 'The Development Outlook for Russia and Germany as Members of the WTO'. Alexander Khodachek, the president of Saint-Petersburg HSE campus commented on the conference.