Secretary-General

G20: Understanding Global Value Chains

 

Intervention by Angel Gurría, OECD Secretary-General, delivered at the G20 Trade ministers meeting


Puerto Vallarta, México

19 April 2012

Good morning ladies and gentlemen, it is an honour to join you today. I would like to thank Bruno Ferrari, Minister of the Economy of Mexico, for inviting the OECD to be a part of this important gathering.

This is the first-ever meeting of trade ministers under the auspices of the G20. I congratulate the Mexican Presidency and Minister Ferrari for your great insight and efforts in convening us here at a critical time in multilateral trade diplomacy. The world economy is in desperate need for the kind of stimulus and confidence building measures that more open trade will bring.

Ladies and gentlemen, we need to make a better and more compelling case for open markets. What better way to achieve this than to start our meeting with a discussion on the evolving landscape in world trade as evidenced by the emergence of global value chains?

We need to have a clearer picture of the dramatic changes in the amount and structure of world trade that have taken place over the last decades;

We must deconstruct some myths and misperceptions that are preventing us from appropriately capturing the new reality of international trade, its costs and its benefits;

We have to recognize that while multilateral negotiations are at an impasse, business is moving on and is looking for policy initiatives that would further cut red tape and facilitate its global reach and operations.

Trade ratios have risen and developing countries, including many G20 economies, have become more important players in the global market. South-south trade, in particular, has more than quadrupled over the past fifteen years.

At the same time, changes in how firms organize production through regional and global value chains – that is, the segmentation of production through off-shoring and global outsourcing in services – have exposed whole sectors to new trade competition and interdependencies. Today, intermediate inputs represent 56 percent of world goods trade and 73 percent of global services trade.

Regional and global value chains locate production of goods and services where it is most advantageous to do so and in the process, they provide much needed technology and know-how. The final results for consumers are lower cost, better quality and a greater variety of products and services

As goods and services cross borders several times at different stages of processing, conventional trade statistics may not tell the whole story. There can be “multiple counting” that distorts our view of the economic importance of trade; some exports may only contribute marginally to value-added if account is taken of imported intermediate inputs, while the significance of some imports in domestic firm productivity may not be evident. So: when talking about trade, we should talk imports, not just exports.

Our knowledge of international trade must catch up with the evolving and increasingly complex reality of trade in goods and services. Policy making, including trade negotiations, must be based on hard evidence. We should avoid policy-based evidence and focus on evidence-based policy. While facts and figures may not be sufficient to unlock multilateral trade negotiations, they nonetheless are a prerequisite.

For this reason, we are working with the World Trade Organisation to measure the actual value-added of trade. 

Disentangling trade flows in value added terms is complicated work; it involves a lot of number-crunching using bilateral trade data and input-output tables. At the OECD, we are well equipped to do this: we have been working on harmonising national input-output tables for over 15 years.

At the end of this year, we expect to release a database of value-added trade statistics for both goods and services, involving 56 economies – including all G20 countries covering more than 95% of world output. These measures should more precisely reflect the value of both goods and services trade in all G20 economies, among others. 

By identifying where value is being added, it will be possible to pinpoint where income and jobs are created. For example, our preliminary estimates show that a computer exported by China contains 16 percent of value-added by Japan, 9 percent from other Asian economies, and 8.5 percent from the EU. A typical German-made car contains 17.5 percent of value-added from other EU economies; cars exported by Korea incorporate 7.5 percent of Japanese value-added, 5.5 percent from NAFTA countries, and 4.5 percent from the EU. And in the US, on average more than 8% of US value-added of all US imports is returned home.

These changing realities of trade have critical policy implications:

First, in a world of vertically-integrated and fragmented supply chains with complex ownership structures, policies that restrict access to foreign sources of intermediate goods and services negatively impact a country’s position in regional and global supply chains. Because tariffs on intermediate inputs increase the cost of production and reduce overall competitiveness, firms will be discouraged from investing, or even from maintaining existing investments, in a country. Moreover, tariffs on intermediate inputs, together with protective measures downstream, add up and impose punitive costs on all producers and consumers. Trade restrictive policies are thus likely to induce firm closings and job losses – the very outcomes they are designed to prevent.

A better understanding based on robust data like the one we are trying to build up can potentially change the way countries negotiate trade agreements and understand and talk about the benefits of trade. Indeed, we expect OECD analysis to show empirically how many domestic inputs have gone into the production of imported “foreign” products and illustrate again the self defeating force of protectionism. Productivity and success in international markets now depend as much on the capacity to import efficient inputs as on the capacity to export.

Second, a value-added perspective on trade will paint a different picture of bilateral trade deficits among trading partners. Already back in 2004, a study suggested that the US-China trade deficit would be significantly different if measured in value added terms, due to the high content in Chinese exports of imported components, including from the US.

Third, global value chains underscore the importance of services even in our manufacturing sectors. There would be no international production networks without transport services, logistics services, financial and other services; in fact, more than one quarter of output in manufacturing industries is services value added. Trade in services, and trade in goods, are intertwined. But barriers to services trade, impact goods trade.

Fourth, global value chains highlight the critical role emerging economies have come to play in the imports and exports of developed countries, and vice versa. Today, developed, developing and emerging economies are more integrated than ever before. There is mutual interest and benefit in opening markets. Trade negotiations should catch up with the reality of business and put to rest mercantilist approaches that are based on the old “made in” assumption; as opposed to the “made in the world” made.

If we focus on the jobs lost in one industry and we do not link this to gains in other parts of the value chain (including in the domestic economy), we will fail to understand the benefits of trade.

This is not a simple matter. In the process of integrating national economies into the global market place, there are costs as well as benefits. Some employers, firms and even industries will need to adjust, and some businesses will close. This underscores the importance of complementary policies to facilitate necessary structural adjustment: active labour market and social protection policies, for example. But more about that this afternoon.

Colleagues, multilateral efforts to open markets in agriculture, manufacturing and services are at an impasse. There is increasing evidence that comprehensive market opening benefits all of us, wherever we are. But simply saying this is not enough. And that is why we need the kind of data, the information, the analysis and the policy advice that the OECD and WTO are investing in.

We are not naïve: Hard evidence will not be enough to unlock discussions and negotiations in Geneva. But it is a useful place to start. The OECD pledges to continue to support your efforts to design and promote better trade policies for better lives.


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