Making policies work

GREAT insights Magazine

International trade and development nexus

01-11-2013

Kituyi, M. 2013. International trade and development nexus. GREAT Insights, Volume 2, Issue 8. November 2013.

The year 2014 will be significant in a number of respects. It will mark the penultimate year of the United Nations (UN) Millennium Development Goals and possibly the launch of a new set of development goals to guide and shape national and international approaches to promoting more inclusive and sustainable growth and development.

2014 will also mark the 50th anniversary of United Nations Conference on Trade and Development (UNCTAD) as an organization dedicated to making trade work for development. It may usher in new dispensations on trade rules depending on the outcome of the Bali World Trade Organization (WTO) Ministerial Conference. Against this backdrop, I wish to discuss how the contribution international trade to sustainable development and poverty reduction can be enhanced, taking into account recent trends that affect the conduct of international trade.

International trade in goods and services is important for poverty eradication and sustainable development. By fostering economic growth through trade growth, international trade contributes to addressing poverty reduction, food security, job creation, gender equality and environmental sustainability. Emerging economies such as China and India are notable recent examples of countries that have mobilised participation in international trade, mainly exports, to enhance economic growth. Dependence on trade for wealth creation is evident. About 32% of global GDP is accounted for by global exports of goods and services in 2011, with the share being 28% for developed countries, and 38% for developing countries. In many developing countries and least developed countries (LDCs), this share is much higher such as 90% in Bhutan, 136% in Cambodia, 118% in Republic of Congo, 102% in Swaziland and 112% in Vietnam.

Despite the substantial contribution of trade to GDP, some countries are more integrated into international trade and thus derive greater benefits than others. Global trade in goods and services rose dynamically from US$7.9 trillion in 2000 (in current terms) to around US$22.6 trillion presently, notwithstanding a slump during the recession of 2008 and weak recovery since then. Developing countries as a group experience faster export growth than developed countries and saw their share of world merchandise exports, for example, increasing from 24% to 44% over the last two decades. Such dynamic growth is however experienced by a few developing countries especially emerging economies and South-East Asian countries. African countries, LDCs, Island Developing States, small and vulnerable economies and middle-income countries continue to have a marginal participation in global trade flows. This is illustrated, for example, by Africa’s share in global merchandise exports which is presently about 3% (as compared to 5% in 1971) and that of LDCs at about 1% (as compared to 2% in 1971). Basically over four decades the share of Africa and LDCs in international trade has remained static or even declined.

The varying performance indicates that the actual impact of international trade can be both positive and negative, with the net effect being determined not only by trade policies but even more so by the existence of strong supportive and complementary policies, regulations and institutional frameworks. For example, by participating in multilateral, regional and bilateral trade agreements to liberalise trade conditions within national borders and in other countries via negotiations, countries hope to widen their market base for their exports and imports, and harmonise or coordinate trade-related rules and disciplines to avoid unfair trading conditions. In the process, uncompetitive industries may disappear with attendant job losses, while more competitive industries may flourish and create new, decent and better paying jobs and economic opportunities. For all countries, large and small, economically strong or weak, the domestic market (national and/or regional) is important but cannot be the sole platform for marketing of goods and services produced nationally. Both domestic demand and international trade are required to provide the opportunities for expanding and widening trade and benefiting from its dynamic impact. Hence the importance of joining the WTO, concluding trade agreements under its sphere including the current Doha Round and the negotiating issues facing WTO members at the Bali Ministerial Conference, effectively implementing the agreements and setting out national and regional strategies to take advantage of the opportunities for trade and for modernisation of trade disciplines.

It is important to note in this context that substantial tariff liberalisation has occurred. By 2012, three-quarters of international trade was fully liberalised under the most favoured nation (MFN) clause or preferential tariff regimes. However, we are yet to achieve full free trade. Tariffs remain relatively high in some sensitive sectors, such as agriculture, and in inter-regional South-South trade. Also tariff escalation is evident in the tariff structure of many countries, both developed and developing.

But, it is now well established that trade liberalisation alone is a necessary, but not a sufficient, condition for trade growth and related economic growth. Trade policies by governments create the opportunities for trade to occur and for trade flows to be facilitated, but not the complementary productive capacities and competitive conditions which is the prerogative of the private sector to assess and invest to capture the commercial opportunities. It is thus an essential corollary to trade policies including trade liberalisation that such policies are accompanied by coherent economic, industrial, social and environmental policies, and supported by an enabling institutional and regulatory environment such as good business policies, anti-competitive and consumer protection laws, and the rule of law and governance.

In this 21st century, approaches to international trade and the international trading system cannot be business as usual. Major systemic changes and trends have emerged that affect the way in which international trade is conducted and call for new generation trade policies, disciplines and institutional framework adapted to the realities of today to address long-standing and emerging development challenges and take advantage of opportunities. I wish to point out some of these changes that challenge us to think outside of the box in crafting trade and complementary policies to enhance the participation of countries, especially the most marginalised, in international trade and to realise inclusive and sustainable development gains.

The 2008 recession highlighted the fundamental point that with globalisation, countries and economies have become more closely intertwined or integrated. Thus when global trade and economy grow, all countries benefit. The reverse is also true as evinced by this recession. So with greatly increased interdependence, countries need to take measures to boost their resilience to fall-outs from global economic crises. Such measures include building competitive and diversified productive capacities in goods and in services, enhancing value addition, and diversifying markets including in the South.

The engine behind the growth of the global economy in recent years has been the dynamic performance of developing countries, especially emerging economies, and of trade among developing countries. Today developing countries account for nearly half of global merchandise exports, as compared to 25% in 1990; moreover this shift is largely attributable to South-South trade. While rising, South-South trade is largely related to trade to/from and within East Asian countries. For the vast majority of developing countries, trade with intra-regional partners is of a smaller magnitude than their trade with East Asian countries. This trend is both due to difficulties related to regional integration in many developing countries and to integration of East Asia into global supply or value chains. Thus enhancing trade within regional groupings within developing regions must be a priority, including as part of enhancing domestic demand, and drawing upon lessons learnt in South-East Asia.

The intensification of global and regional value chains (GVCs) is serving as a conduit for industrial transformation of countries in the higher value chain production and trade, and the associated benefits of skill jobs, higher wages, good working conditions etc. The unbundling and delocalisation of production processes across countries by Transnational Corporations (TNCs) has opened opportunities for developing countries to beneficially integrate into regional and global trade by specialising in a discrete production process, or “tasks”, without having to develop a whole range of productive capabilities. UNCTAD’s research, including collaborative work with the Organisation for Economic Cooperation and Development (OECD) and the WTO, show that gains from GVCs are not automatic. Many developing countries continue to remain outside the margins of GVCs. Also, the type of the production process countries specialise in and the amount of value-added they extract matters. Thus, attention should be paid to helping developing countries move to more value-added segments of GVCs away from simple assembly (“screwdriver”) operations.

Advances in new technologies and the rise of the digital economy have opened new possibilities to widen the scope of production and trade between what can traditionally said to be the sphere of comparative advantage of any country. Creative industries, for example, are among the most dynamic sectors in the world economy providing new opportunities for developing countries to leapfrog into high-growth areas of the world economy by harnessing the interface between creativity, culture, economics and technology in a contemporary world dominated by images, sounds, texts and symbols. Such industries are also typically produced by small and medium sizes enterprises (SMEs) and hence provide wider benefits to local communities. The value of exports of creative goods grew at an annual growth rate of 8.8% from 2002 to 2011 to reach US$454 billion in 2011, and the value of creative services exports rose grew by 12.7% during the period 2002-2011 to reach US$177 billion. Harnessing the seemly conflicting goals of protecting and promoting biodiversity on the one hand, and creating economic opportunities for rural communities is another area for further development. This was highlighted at the Rio+20 Summit in terms of a transition to various models of green economy. Areas where potential positive trade-offs can be realised for the environment, for local communities and for trade (and thus consumers abroad) include bio-trade, organic agriculture, renewable energy, and sustainable forest and fisheries. Trade can contribute to enabling sustainable development locally and spreading it globally. The services economy is also an area with huge potential for developing countries including in tourism, movement of persons, supply services and as information and communication technologies (ICT) and logistics services.

These changing conditions governing international trade call for an adjustment, adaptation and/or modernisation, as well as disciplining of trade policies, measures, regulations and institutions, to better deal with existing problems, harness the new opportunities and address the new threats. It also calls for greater coherence among trade and development policies at the national level and international level. In particular, trade policies need to be accompanied by coherent economic, industrial, social, employment and environmental policies, supported by an enabling institutional framework. It needs institutional adaptation such as an updating of the existing 1947-era and 1995 Uruguay Round WTO disciplines. It can also be argued that the phenomenal rise of regional trade agreements to over 500, presently underlines a clear need for strengthening of multilateralism in trade which offers the best global public good in terms of trade architecture for all countries, especially the economically weak, small and marginalised. Moreover, while there has been a general decline in the use of tariffs, international trade is increasingly regulated and hindered by non-tariff measures (NTMs), including sanitary and phyto-sanitary measures, technical barriers, quantity-price measures, export measures and pre-shipment inspects. In addition to these mainly governmental measures, private standards have proliferated rendering it more difficult for developing country producers and exporters to have their products access foreign markets. UNCTAD and other agencies working on identifying, classifying and quantifying NTMs and in promoting international cooperation on voluntary sustainable standards will help.

Taking into consideration the above, there is clear need for continuous monitoring of the evolving trading system and trade policy to inform Member States and help them to shape national and international policies. UNCTAD – being the focal point of the UN system on international trade – has a seminal role in shaping the post-2015 development agenda by analysing, identifying and helping countries design and implement trade and related policies that would maximise development gains, and by providing a platform for deeper discussions at the international level on how to ensure a positive and catalysing impact of international trade.

Dr. Mukhisa Kituyi is the Secretary-General of United Nations Conference on Trade and Development.

This article was published in GREAT Insights Volume 2, Issue 8 (November 2013).

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Mukhisa Kituyi