Remarks on Trade by Angel Gurría
Berlin, Germany, 30 November 2017
(As prepared for delivery)
Minister Zypries, Ministers, Colleagues,
Thank you for inviting me to share with you some thoughts on trade during this lunch.
The global economy is now growing at its fastest pace since 2010, with the upturn becoming increasingly synchronised across countries. This long awaited lift to global growth, supported by policy stimulus, is being accompanied by solid employment gains, a moderate upturn in investment and a pick-up in trade growth. Our latest Economic Outlook, which we released this Tuesday, indeed projects global growth to increase to around 3.6% in 2017 and 3.7% in 2018, up from 3.1% in 2016.
Well, it cannot be taken for granted – as yet. Wages aren’t picking up: real wages have only grown by 0.2% per year since 2008 on average in OECD countries. Projected investment rates remain too low to sustain the acceleration of activity over the medium-term and sluggish productivity gains continue to undermine the capacity of the economy to engender sustainable growth. Recent signs suggest that the global IT market has regained momentum. But while firms at the global frontier have done well, raising their productivity by about 3% per year over the last 15 years, the rest of the economy has not followed suit, barely registering any productivity gains
We are also faced with vulnerabilities from rapid credit growth in many emerging economies. In China, non-financial sector credit exceeds 200% of GDP, and in Russia and India non-performing loans represent over 9% of gross loans.
The other concerning trend is that the benefits of growth have been far from evenly spread domestically. First, on a per capita basis, growth is set to improve but fall short of pre-crisis norms in the majority of advanced and emerging economies. Second, the poorest 10% of households in OECD countries have not yet regained the purchasing power they had back in 2007. And, the average income of the richest 10% across the OECD area now represents more than nine times that of the poorest 10%.
Global trade growth has rebounded since the first half of 2016 and become increasingly broad-based across economies - global trade growth is projected to average around 4% per annum through 2017-18. Key factors underlying this positive trend include the recovery in Europe - a relatively trade intensive part of the world economy - the strong pick-up in electronics trade in Asia, and a shift in the composition of demand towards investment, which is more import intensive. Nonetheless, trade intensity is set to remain mild by pre-crisis standards. In part, this reflects structural factors, including a slowdown, or possibly even a reversal in the deepening of global value chains. The number of new trade restrictions in the major economies has also built up over the past decade, though the rate of increase is now easing.
This subdued trend in global trade trends could be due, also, to a rebalancing of the Chinese growth model toward domestic demand and toward services. More consumption-driven growth will mean rebalancing from external to internal demand, and from manufacturing to services. The transition is already under way: while services accounted for only a third of GDP 20 years ago, they now represent over half of the economy.
In this context, it is critical to re-boost trade. This is essential for productivity. OECD estimates show that if collective trade policy helped global trade intensity to rise at the average pace observed over the two decades prior to the crisis, instead of remaining broadly unchanged, total factor productivity growth could be boosted by 0.2 percentage point per annum in the medium term, i.e. by around one-third. This is far from anecdotal!
The most immediate opportunity to kick-start trade will be the Eleventh Session of the WTO Ministerial Conference (MC11) in Buenos Aires in just two weeks’ time. I know that my good friend Roberto Azevedo and his team are working hard to get the best outcomes possible.
But we also need to look beyond MC11 and look at deep, structural, underlying trends that are reshaping global trade! We are notably seeing a shift in geographical patterns of trade and the different growth rates of goods vs. services.
Goods trade is larger, but growing more slowly than services trade, and has shifted away from OECD economies toward China and Dynamic Asia.
China and Dynamic Asia represented 11% and OECD countries 80% of world goods exports in 1995 while they represent now 24% and 59% respectively. But global trade has vastly expanded over the same period, as has the volume of exports by OECD countries: the larger and more integrated global market has brought opportunities to advanced as well as emerging economies.
And of course, new technologies and digitalisation may be a game changer, not only for production but also for trade. It may make it cheaper to engage in GVCs thanks to steadily faster and cheaper communication tools and by making it easier to operate longer and more complex GVCs.
But, it could also reduce the international fragmentation of production: Thanks to information technologies such as robotics, artificial intelligence or 3D printing, companies may bring more production home and rely less on long and complex GVCs.
Steel is increasingly becoming part of GVCs as steel production and trade is more and more about value added, rather than simply about volumes and tonnes. Moreover, the generation of value along the steel value chain is progressively linked with the quality of goods produced.
This ultimately depend on firms investments in innovative production processes and new and higher quality products. Evidence from patent data indicates that the steel sector is far from dormant, with significant innovation in terms of both production processes and product characteristics.
Digitalisation can play a key role. We are already seeing smart production systems being adopted at steel mills: for example, automatic control of steel furnaces and mills are fostering reductions in fuel requirements and boosting productivity. Digitalisation can also help enhance the safety of steel workers, the biggest priority for all steel companies today.
And all of this pays off: Steel firms that have focused on quality and less on volume have typically weathered downturns more effectively than other firms. But most importantly perhaps, measures to re-boost trade shouldn’t lose sight of the ultimate goal; we do not champion trade for trade's sake, we champion trade because of its positive impact on productivity, but even productivity is not an end in itself. We would like it to be a conduit for improving people's lives.
We need an integrated approach – a comprehensive policy package.
> One that will ensure trade benefits all: looking at lifelong learning and skills, social protection systems that get people back on their feet and prevent lasting hardship, investment in infrastructure and people.
> One that features domestic policies conducive to enhanced opportunities, increased innovation and stronger competition. We need to make it easier for SMEs to strive and integrate in GVCs. Cut the tariffs, make trading cheaper. Remove the barriers to services that raise costs for all sectors. Regulate efficiently and fairly to promote competition. Keep credit flowing.
And for the sectors characterized by excess capacity – a situation not unique to steel – we need to ensure that the right framework conditions are in place so that companies invest in productivity growth in response to sustainable market opportunities.
> And finally we need to make sure everyone plays by the rules!
- This will require more transparency and accountability in the implementation of policies that have global spill-overs. In particular, we need collective responses to forces such as excess capacities that can destabilise sectors, firms and workers. And this is precisely the discussion we had earlier today!
- This will also involve that key players in globalisation, in particular multinational corporations, are conducting their operation in a responsible manner. We are proud that more and more countries join the OECD Guidelines for multinational enterprises. By the way, these Guidelines are relevant for the global steel industry as they help companies to respect human rights and to avoid contributing to conflict through their mineral or metal purchasing decisions and practices.
- This will imply that fair and effective “rules of the game” be defined. This is possible. With the support of the OECD, the G20 successfully demonstrated it in the area of tax with the move towards Automatic Exchange of Tax Information and with the continuous advancement of the G20/OECD BEPS agenda. More needs to be done however, for instance, in the area of anticorruption, where all countries should consider the OECD anti-bribery convention as a powerful instrument against foreign bribery.
Let me conclude with a simple and direct message: We, at the OECD, are convinced that international cooperation is the most promising way to address these challenges. This is the way to go if we want to revive trade and growth and more importantly head towards a more inclusive globalisation that can truly work for all.