We already know trade works for our businesses—but trade also fosters growth, development, and poverty reduction around the world while integrating the global economy to promote security, investment, and innovation. From September 30-October 2, the World Trade Organization (WTO) showcased how trade makes the world a better place at the annual public forum, titled, appropriately, Trade Works! This year, the WTO also took the opportunity to celebrate its 20th anniversary, as well as make a concerted effort to reach out to the business community.
This year’s event brought more than 9,000 stakeholders to Geneva from industries ranging from apparel to agriculture to pharmaceuticals to services—plus the international governments and organizations involved in creating trade policy. Most everyone agreed that trade does work. After all, as Carsten Dannöhl, the EU Government Affairs Manager for Caterpillar, explained during a session discussing the question, trade is tied to more than 30 percent of the U.S. GDP, and supports 1 in 5 U.S. jobs.
USFIA members know global value chains are critical to making trade work for brands, retailers, and consumers, and this year’s event placed a special focus on the role of GVCs in fostering growth. In fact, the entire event kicked off with a video showcasing the value chain to produce an athletic shoe—from the shoe designer to the final consumer.
In a session hosted by the Foreign Trade Association (FTA) of Brussels, who we’ve collaborated with on Transatlantic Trade & Investment Partnership (TTIP) advocacy, several speakers from government and industry described GVC success stories and how the globalization of manufacturing has many winners, including those in poverty. However, mushrooming agreements and standards and the high level of complexity of rules hinder the full potential of trade. What do policymakers, and specifically the WTO, need to do?
Marc Vanheukelen, EU Ambassador to the WTO, said that global trade policy needs to create an environment that’s attractive to investors, with open economies, reduced tariff and non-tariff barriers, and transparent rules. The WTO negotiating arm is in poor condition, as evidenced by the Doha Round, but we’re seeing a shift with the Trade Facilitation Agreement (TFA)—and in fact, on the second day of the forum, the European Union ratified the agreement, bringing 28 more members to the tally towards implementation. (The TFA will be implemented when 2/3 of WTO members ratify the agreement.) In this era of GVCs, services and facilitation account for as much as 50 percent of the final cost of a good, so the European Union is pushing hard to liberalize services, which will also help developed countries trade more with least-developed countries.
To illustrate the importance of GVCs, Katarina Maaskant, Head of Public Affairs for IKEA Group, showed the audience a model of an IKEA wardrobe from Germany and purchased in Belgium. The wardrobe has 30 different materials components from 11 countries; the IKEA Group’s wood alone comes from 24 countries. Even a “simple” product like a wooden wardrobe is manufactured with the help of a complex value chain.
GVCs not only help companies, but entire countries, too. Shin-Yuan Lai, Ambassador of Taiwan, Penghu, Kinmen and Matsu to the WTO, explained that trade accounts for 73 percent of Taiwan’s GDP. By promoting growth through export expansion, Taiwan has accumulated foreign exchange reserves up to USD $426 billion, and experienced an average growth rate of 6.3 percent from 1970 to today while inflation remained at average of 2.5 percent over the same period. Additionally, the country has a high per capita GDP of USD $22,000, nearly 100 percent literacy rate, and the second-highest gender equality ranking only after the Netherlands. Taiwan’s success in transforming from a rural agricultural economy to a modern industrial one, she said, is attributed to smooth integration in GVCs.
The discussions on GVCs led to discussions on rules of origin—and why rules of origin matter for companies manufacturing apparel and consumer products.
In a session titled “Why Rules of Origin Matter,” featuring speakers from Nike and Puma, Stefano Inama of the United Nations Conference for Trade & Development explained that when every country can make its own rules of origin, it’s difficult for businesses to expand globally—and furthermore, today’s rules of origin do not reflect the reality of GVCs, where most of the cost of producing the good is related to design, distribution, and marketing. However, lenient rules of origin that match value chains create trade—as seen with the EU’s Generalized System of Preferences (GSP) allowing duty-free imports on bicycles from Cambodia leading to an increase in bicycle imports from the country.
Jeff Whalen, Senior Counsel for Customs & International Trade for Nike, said that some rules of origin drive economic activity to LDCs, regulate fair trade, or promote information to consumers, but there is also a dark, punitive nature to others that promote protectionist agendas and stop certain products from being imported. Furthermore, rules of origin don’t drive manufacturing decisions, especially in the sporting goods industry; access to raw materials and a skilled work force, labor laws, consumer desires, social and environmental performance, and intellectual property protection do. And punitive rules of origin can lead to absurd results, where even as much as 95 percent of a shoe could be manufactured in Mexico but could still not meet the NAFTA rule of origin due to the complex rules.
As noted, the WTO also took time to reach out to the business community. During a debate on how to make trade work for business, WTO Director-General Roberto Azevêdo discussed how the WTO has taken steps to make trade work for business, especially with the Trade Facilitation Agreement (TFA) concluded at the Bali Ministerial in December 2013. The TFA is about streamlining and simplifying customs procedures to reduce the cost of trade by up to 15 percent, and will bring a higher level of predictability to customs processes, he explained. Now, he wants to focus on how the trading system will work for small and medium enterprises in particular—but the WTO needs the support of the business community, and Azevêdo is confident that if the WTO and business join forces, they can achieve a great deal.
The point was further emphasized during an invitation-only meeting between business representatives and the Information & External Relations Division of the WTO. They explained that there could be three possible scenarios at the Nairobi Ministerial in December: reach agreement on the Doha Round (unlikely), package of reforms for LDCs (within reach), or nothing. The second option would be a significant outcome, but the WTO wants input from business on what to do next, especially since there is the thought that failure in Nairobi could be the end of the Doha Round. The WTO recognizes that there has sometimes been a chasm between the WTO and the business community—mainly because the WTO moves more slowly than business—but they are asking for business to support the TFA and the Information Technology Agreement (ITA). There will be a window of opportunity in 2016 for things to change, if business can engage. In particular, the WTO invites business groups to come to Geneva to meet and discuss issues, and they can even put together a full-day agenda for groups. Additionally, they encourage continued collaboration on joint association/business group letters and other outreach on key issues, because trade ministers always look for reasons to say “yes,” since they have many stakeholders telling them to say “no.”
So, what do policymakers need to do to continue to make trade work—and make it work better? Speakers across all industries had similar perspectives: create rules of origin that recognize the critical steps in the GVC instead of the final product or consumer, harmonize rules of origin and other regulations, eliminate tariffs especially on intermediate goods and services, eliminate non-tariff barriers, and eliminate policies that may have originally had good intentions but now just serve as disguised protectionism.
In the meantime, USFIA will continue to work on our mission to eliminate barriers to trade and ensure the industry’s voice is heard.
