Trade in "Value-Added" is a Better Measurement of World Trade: Pascal Lamy

WTODirector-General Pascal Lamy has said that "by focusing on gross values ofexports and imports, traditional trade statistics give us a distorted pictureof trade imbalances between countries". "The picture would bedifferent if we took account of how much domestic value-added is embedded inthese flows," he said. He says that global manufacturing has brought a newdimension to the relationship between trade, investments, industrial productionand development. "Far from being a zero sum game, trade in tasks proved tobe a win-win game for the Asian region," he said.

A better understanding of global manufacturing, and the impact it has onmeasuring trade patterns is part of important discussion. In fact, developingadequate statistics to understand correctly the nature of today's worldproduction and trade is essential for proper policy making.

I would like to begin by stressing two issues:

First, the implications of global manufacturing and "trade in tasks"on the way we should be looking at international trade today, and its globalregulation in the WTO.

Second, the importance of global manufacturing and the Asian experience, tobetter understand the relationship between trade and development.

Today's trade realities look different from when the rules governing worldtrade were originally shaped after the Second World War. The old version of theinternational division of labour between nations has been radically changed byglobalization. Global value chains, or international supply chains, are at thecore of this development. With the international fragmentation of production,traditional boundaries and distances are collapsing. Reductions in transportcosts, the information technology revolution, and more open economic policieshave made it easier to "unbundle" production not only withincountries, but across a range of them.

The question of "who produces what for whom", and "where thevalue added is accruing" are perhaps as important as the traditionalconcept of country of origin, which guides not only custom statistics, but theapplication of the core WTO principle of Most Favoured Nation.

Yet, answering these questions with our current statistical tools is not easy.The concept of country of origin for manufactured goods has gradually becomemore challenging as the various operations, from the design of the product tothe manufacture of the components, assembly and marketing have spread acrossthe world.

In international trade theory, trade in goods is seen as a substitute for themovement of factors of production. Thus, a country's imports of goods from itstrade partner are seen as additional suppliers of the partner country's labourand capital, which competes with the importing country's own workers andentrepreneurs. But with the fragmentation of production, the share of valueadded by factors of production of the origin country in traded products isconsiderably lower than in the past. This growth in the trade of parts andcomponents means that import statistics will overstate the degree ofcompetition that comes from one's trade partners.

There are some of the changes a measure of trade in value added would mean to our understanding of trade indicators. There is the famous example of an iPod assembled in China by Apple and shows how most of the export value recorded in Chinese trade is attributable to Japan and other Asian countries. The degree to which a given volume of imports implies competition between the origin country's factors of production and the importing country's factors of production will be overstated if we use today's statistics.


Similarly, by focusing on gross values of exports and imports, traditional trade statistics also give us a distorted picture of trade imbalances between countries. The picture would be different if we took account of how much domestic valued added is embedded in these flows.

This does not mean that macroeconomic imbalances should be treated lightly. When the imbalances are structurally high, some of the most important benefits of trade, which are the creation of job opportunities along the lines of comparative advantages, become blurred by the negative macro-economic impacts of such imbalances and the recessive impact of their correction. But correcting macroeconomic imbalances does not pass through correcting bilateral trade deficits, as the use of trade statistics in value added clearly reveals.


Let me now come to the second point on the implication of the global production chain on development. It should be apparent how industrial production in Asia is driven by demand from the US, and how Asian producers have organized themselves to satisfy this demand, specializing on their comparative advantages. It shows a story of mutually beneficial inter-dependence.

Global manufacturing has brought a new dimension to the relationship between trade, investment, industrial production and development.


I have been particularly interested how developing Asian economies are catching up with Japan as the principal traders with the US. Contrary with what mercantilists would have expected, this competition did not reduce the importance of Japan as the leading country. The changes reflected in fact a redistribution of roles and tasks within the regional supply chain, most of these changes being initiated by Japanese companies themselves. Far from being the zero-sum game, trade in tasks proved to be a win-win game for the region. In less than 20 years, relatively less advanced economies in Asia were able to become major players in manufacturing industries.


Besides China, which is today dubbed the "World Manufacturer", we have a series of industrial success stories in Malaysia, Indonesia or Thailand. And this is not limited to manufacturing. Trade in commercial services has been spreading, as global manufacturing demands state-of-the-art logistical, communication and business services to thrive. In the process, Hong Kong and Singapore have become giant trade hubs, while India and the Philippines have developed successful activities of business-services exports.


Today, we see new regional players joining the Asian regional supply chain and making the necessary investments and institutional changes to benefit from their comparative advantages. Some of these new countries, such as Cambodia or Viet Nam, are among the poorest in the world. Their experience, as that of other Asian countries who preceded them on this journey, is of utmost importance if we want to fully understand how least-developed countries can benefit from the new international economy.

There are a number of messages, emanating from the present world scenario:


First, that domestic supply must meet international demand. Contrary to what many people believe, the Asian success story began because a booming US demand for mass volumes and large varieties met suppliers who were able to satisfy this demand. Autarky and isolationism were not options, and it was by opening their economies to trade and foreign investment that "developing Asia" became "emerging Asia".


Second, that the State, in its central and territorial dimensions, is a key partner in facilitating trade. The book illustrates how governments in the region cooperated with the industrial sectors to lower the cost of doing business, by lowering tariffs on traded goods, streamlining customs procedures and developing an adequate infrastructure of transport and communication services.


Third, a more predictable institutional environment paved the way for large inflows of foreign direct investments, for manufacturing as well as for the provision of business services.

I believe this topic is one which merits political attention in capitals and one that Ministers gathering in Geneva in December for the 8th WTO Ministerial Conference would want to address. Let me take this opportunity to invite all of you to pursue this dialogue, including "virtually" through our recently launched website "Made in the World".


Originally Published in The Stitch Times, July-2011