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OECD Secretary-General

OECD-Keidanren Seminar on Trade and Investment: Strengthening the Third Arrow

 

Speech by Angel Gurría

Secretary-General, OECD

15 April 2015

Tokyo, Japan

(As prepared for delivery)

 

Dear Minister, Vice-Chairman Saito, Ambassador Kodama, ladies and gentlemen,

 

It is a pleasure to be here with you this afternoon, at the 2015 OECD-Keidanren Seminar on Trade and Investment. This event is testament to the excellent cooperation of the OECD with Keidanren and the Business Industry Advisory Council, both of whom I would like to thank for their help in organising it.

 

After several false starts, recovery from the global financial crisis seems to be finally, if tentatively, taking hold. Helped by the fall in oil prices, the outlook has brightened in recent months. While there is still a long distance to travel, the Japanese economy is responding to bold, coordinated policy action. The three arrows of Abenomics are starting to bear fruit.

 

Going forward, we expect GDP growth – which was essentially flat in 2014 – to pick up to about 1% this year, and 1½% in 2016. Cementing strong, sustainable and inclusive growth will require ambitious structural reform – full implementation of the ‘third arrow’, and more. This was the over-arching message of the 2015 OECD Economic Survey of Japan, which I presented this morning alongside Ambassador Kodama.

 

The promotion of trade and investment must be at the heart of Japan’s economic revitalisation strategy. Currently, Japan has the lowest stock of inward FDI in the OECD while it also ranks lowest in terms of international co-patenting. This underlines the scope for boosting growth through integrating more deeply into the world economy.

 

 

Japan needs to do more to seize the opportunities heralded by global value chains (GVCs)

 

Recent decades have seen a profound change in the structure of the global economy with the proliferation of global value chains (GVCs). This phenomenon has increased the interconnectedness of our economies and led to a growing specialisation in specific activities and stages in value chains, rather than in entire industries.

 

This matters a great deal to a Japanese economy that has been experiencing weak productivity and export growth. And this trend has continued despite the 28% decline in the real effective exchange rate since the third quarter of 2012. During the past two decades, Japan’s share of world exports fell from nearly 10% to only 4%, while China’s rose from 2.4% to nearly 12%! Meanwhile, Japan’s share of high-tech exports from OECD countries fell from 22% in 1986 to 11% in 2009, while Korea’s rose from less than 4% to 11%.

 

The ground-breaking OECD-WTO Trade in Value Added (TiVA) database shows the impact that the rise of GVCs has had on Japan’s economy. The total foreign content of Japan’s exports has doubled since 1995, with significant increases seen across a range of industries. But by 2009, Japan’s domestic value added content of its exports was about 85% – still relatively high by OECD standards.

 

TiVA data reveal that while Japan is not as active in importing foreign inputs for further processing for exports, it is one of the so-called global headquarter economies: Japan provides inputs,  knowhow and services to exporting activities in its trading partners, particularly in Asia. In Japan, 28% of exports are used by other countries for their own exporting activities, making Japan one of the top performers among the OECD in this respect.

 


‘Third arrow’ key to unlocking productivity growth and gains from trade

 

Deepening Japan’s integration into the world economy would spur innovation by broadening the scope for cross-border technological transfers. This, in turn, would boost Japan’s labour productivity. Our 2015 Economic Survey shows that to achieve the government’s target of a 2% growth rate in real GDP, Japan needs to double its labour productivity, from its relatively low average rate of 0.9% since 2000, to 2%. Achieving this ambitious target and recapturing Japan’s market share in the global economy will require the realisation of the full potential of structural reforms – of Abenomics’ third arrow.

 

Reforms to the services sector will be particularly crucial. Our TiVA data reveals that in 2009, 40% of Japan’s exports consisted of services inputs. Although this share is lower than the OECD average of 48%, it nevertheless indicates the intensive reliance of Japan’s exports on services inputs. At the same time, services account for 73% of GDP, 77% of employment and  56% of inward FDI in Japan. Efficient, cost effective, state of the art services are not just important contributors to economic growth and jobs in their own right - they also provide critical support to competitive manufacturing sectors. Services are a big, big deal for Japan! And they will get bigger!

 

The FDI Regulatory Restrictiveness Index, developed by the OECD, shows that all remaining FDI restrictions in Japan are in services sectors, and relate to maximum equity requisitions. By adopting a pro-competitive regulatory stance in key infrastructure service sectors, like transport and telecoms sectors, which are central to value chains, Japan could boost both its manufacturing and service sectors economies.

 

Agriculture is another sector where reforms could reap significant benefits. Despite the fact that, among OECD countries, Japan grants one of the highest levels of support and protection to its farmers, the value of agricultural production and the rate of self-sufficiency continue to decline. Around 90% of producer support in Japan is linked to specific commodities, which constrains farmers’ responses to market signals and holds back the allocation of scarce resources to their most productive use in the sector. Many major OECD countries have by now moved away from this type of intervention, while also reducing the level of support.

 

Market-oriented reforms in the agriculture sector would boost productivity, help Japan achieve its ambitious target of doubling food exports by 2020, and facilitate passage of trade agreements with  key partners such as the United States, China and the European Union. If pursued in tandem as part of Abenomics’ ‘third arrow’, reforms to the agriculture and service sectors would be self-reinforcing, adding up to more than the sum of their parts, while boosting Japan’s overall competitiveness as a trading nation.

 

 

Firms have a social duty to trade and invest responsibly

 

The ultimate aim of boosting trade and investment is to promote inclusive growth, more and better jobs, and improving living standards more broadly. To this end, all the benefits derived from increased market share for Japanese exports can be magnified if firms adhere to responsible business standards.

 

Japan has been a leader in this regard, being the first country to be peer-reviewed by the OECD after the update of the Guidelines for Multinational Enterprises. This has paved the way for the strengthening of the overall accountability and performance of the National Contact Points, who tackle cases of alleged non-observance of the Guidelines.

 

As a next step, referring to the MNE Guidelines in the bilateral investment treaties (BITs) and preferential trade agreements (PTAs) currently under discussion can help firmly embed the responsible business agenda within Japan’s global integration strategy. For its part, the OECD is working to broaden adherence to the MNE Guidelines with a view to levelling the playing field for responsible businesses everywhere.

 

 

Ladies and gentlemen,

 

Over the next several hours, we will tease out these issues in more depth under the capable direction of our distinguished moderators and panellists. Going forward, we look forward to making this seminar an annual event, with Keidanren, under the leadership of Chairman Sakakibara and Vice-Chairman Saito.

 

The OECD remains committed to working with you to design, develop and deliver better trade and investment policies for better lives.

 

I wish you a very productive discussion today.

 

Thank you!