When we think about international trade, we traditionally think
about a person or company producing all elements of a product in their
home country and then exporting a final product to a consumer in a
different country.
This type of trade,
however, only represents about 30% of goods and services trade today;
the majority of trade (70%) is actually in intermediate parts,
components, and services that form segments of global value
chains (GVCs). The process of producing goods is often spilt across
countries, with different elements carried out wherever the necessary
skills and materials are available at competitive cost and quality.
For
example, a T-Shirt may be manufactured in Viet Nam using fabric
imported from the United States, and then exported to Canada to sell in
local retail markets. At the other end of the technology spectrum,
producing a smart phone requires many complex components sourced from
all over the world, including for example, computer code from France,
silion chips from Singapore, precious metals from Bolivia, and graphic
design from the United States. While the final product may be assembled
in China and then shipped to consumers all around the world, this
example reveals that many products we think of today as being made
“somewhere” are in fact the result of efforts by firms and individuals
in many countries.
Traditional trade statistics do not capture
this reality, which is why the OECD launched an initiative to measure
trade in “value added” (TiVA) terms, deepening our understanding of how
trade actually works. Using TiVA, we can better identify how much value
each country and industry adds to a final product along the global
supply chain. This approach provides a much more accurate picture of
trade balances between countries and the contribution of trade to income
and employment. Taking the example of the smart phone, traditional
trade statistics would attribute 100% of a final Apple iPhone assembled
in China to Chinese exports, whereas a value-added approach shows that
China actually only retains around 4% of the total value of the iPhone –
the rest of the value is attributed to other countries that provide
inputs all along the supply chain.
This new sharing of production
across countries has enabled many more countries to participate in
global trade, with developing countries increasing their share of global
exports and imports. While the new environment for trade creates new
opportunities, it also increases the costs of trade barriers.
When
goods and components cross borders many times in GVCs, even small
tariffs can add up, and the costs of inefficient border procedures are
multiplied. Trade facilitation –the transparent, predictable and
straightforward procedures that expedite the movement of goods across
borders – is becoming ever more important, and is especially critical
for trade in perishable agricultural products or high-tech manufacturing
components, both of which are highly sensitive to delays. Trade
facilitation is becoming even more important in the digital era.
TiVA
data also highlight how important services are to global trade.
Services represent more than 50% of total global exports, and over 30%
of manufactured goods exports and around 25% of agri-food exports in
value added terms. This means that efficient services sectors are not
just important in their own right – services contribute to as much as
80% of GDP in some countries – but they are also essential to a
country’s competitiveness in other sectors as well.
Even though
services generate more than two-thirds of global GDP, employ the most
workers in major economies, create more new jobs than any other sector,
and are critical to competitiveness, obstacles to trade in services
remain pervasive. Regulatory reforms and liberalisation of trade and
investment in services are needed to enhance competition and increase
the productivity and quality of services.
Indeed, international
trade can be strongly impacted by non-tariff barriers that originate
from domestic regulations, or from limitations to foreign investment.
The challenge is to meet policy objectives in ways that maintain the
gains from trade.
Digital techonologies and related new business
models are also now changing the way we trade. Digitalisation reduces
the cost of engaging in international trade, connects a greater number
of businesses and consumers globally, helps diffuse ideas and
technologies, and facilitates the co-ordination of GVCs.
But even
though it has never been easier to engage in trade, the complexity of
international trade transactions has increased dramatically, posing new
challenges for firms, individuals and governments. Emerging technologies
like 3D printing are poised to further change how we trade in the
future.
In this fast-evolving environment, challenges involve
ensuring that the opportunities and benefits from trade can be realised
and shared more inclusively. How countries trade with each other
matters.
Rules of the road: the international trading system
Today’s
multilateral trading sytem can be traced to the aftermath of World War
II, when the desire for peace led governments to establish mechanisms
for deeper economic co-operation. The General Agreement on Tariffs and
Trade (GATT) was signed by 23 founding members in 1948.
Over the
years, successive rounds of multilateral negotiations further reduced
tariffs and new members joined the GATT. The Uruguay Round of trade
negotiations concluded in 1993, establishing the World Trade
Organization (WTO) to replace the GATT as a governing structure for
global trade. The birth of the WTO in 1995 established new procedures
for settling disputes and marked the first time global rules were set
for agriculture, trade in services, and intellectual property.
WTO
members launched the Doha Development Agenda (DDA) in 2001 with a goal
of advancing trade rules and market opening, notably in agriculture,
non-agriculture market access, and services. Following more than a
decade of impasse, in 2013, WTO members reached agreement on the Trade
Facilitation Agreement (TFA).
Notwithstanding this slow progress,
the multilateral trading system remains critical to global prosperity.
WTO rules helped to prevent a slide into a 1930s-style trade war that
would have greatly exacerbated the global economic crisis a decade ago.
Changes in the global economy and the slowdown in trade call for
strengthening the WTO. There are a number of ongoing efforts to
strengthen and modernise the WTO, in particular with respect to its
monitoring and surveillance functions, its dispute settlement function,
and negotiations to ensure that firms in all countries are competing on a
level playing field.
Today, the WTO still sets the basic rules of
the game for cross-border trade in over 160 countries, and is
complemented by a growing number of bilateral and regional trade
agreements (RTAs) that tend to include deeper and wider commitments to
integrate markets. In fact, more than 290 RTAs notified to the WTO are
in force today (figure), and more than 30 new agreements are under
negotiation.
Although
RTAs operate alongside global multilateral agreements under the WTO,
many are developing in ways that go beyond existing WTO multilateral
rules, and have created a “spaghetti bowl” of preferential agreements.
Areas covered by many new RTAs – from investment, to the movement of
capital and persons, to competition, to e-commerce – are essential
policy issues that must be addressed in today’s more interconnected
markets. To the extent that they go beyond commitments made in the WTO
and remain open to additional participation by countries committed to
meeting their standards, RTAs can complement the multilateral trading
system.
Governments have put a lot of effort into establishing and
maintaining a global trading rulebook over the past 70 years;
progressively opening markets and deepening economic integration. Learn
more about why open markets matter to better understand their
motivation.
