Executive director remarks at foreign trade association (en)
15 June 2017
Let me begin by thanking the Foreign Trade Association for inviting me to join you as you celebrate your 40th birthday. It is an honour to be here with you to mark this important milestone in the FTA's history.
Given the title for this session, you’re probably expecting me to talk about the backlash against open markets we are seeing in many advanced economies. And about the Paris Agreement. I will get to both. But first, I want to talk about a museum in the US. Not a famous one. A small-town museum, in south-eastern Kentucky. It’s dedicated to the industry that used to power the region’s economy: coal mining.
Two months ago, the Kentucky Coal Museum made headlines when it announced it was installing solar panels on its roof. Was it making a symbolic statement about the carbon to solar transition? No. It was a pure business decision: the panels will save the museum thousands of dollars in electricity bills every year.
The cost of producing renewable energy has been falling far faster than most people thought possible. Last year, more than half of the new power generation capacity installed around the world was renewable.
The average global price of solar power is one-fifth of what it was in 2010, and still falling. Wind and solar are becoming competitive with fossil fuels at market rates. A Danish offshore wind company recently announced that its new projects in Germany’s North Sea would not need subsidies. Why not? Because they would be commercially viable at wholesale electricity prices. Breakthroughs in battery technology now promise to give a further boost to the renewables boom. Batteries matter a lot, since as those living in rainy Brussels know, the sun doesn’t always shine!
I’ve got even better news: it’s not just about power generation and storage. Artificial intelligence software is helping internet companies like Google minimise the energy consumed by their power-hungry data centres.
Refurbishing, recycling, and other circular economy practices are saving companies production and transportation costs while reducing their environmental footprints. Renault, the French carmaker, is saving money and raw materials by refurbishing durable components like pumps, engines, and gear boxes, and returning them to the market at a 30 to 50% discount.
New business models promise to sharply change resource use patterns around the world. In the not-too-distant future, many of us will trade in our individual cars – which currently spend most of the time parked somewhere – for a much smaller shared fleet of self-driving electric taxis.
This brings me to what will be one of my two core messages today: even if the politics aren’t ideal, the tools we have for responsible production and trade have never been better.
By better, I don’t mean good enough. Think about cement, plastics, and steel – quite literally the stuff of which our world is made. We don’t have ready low-carbon ways of making any of them at scale yet.
For all of our recent innovations, we are still on a trajectory towards global temperature increases well above the 2 degree global target.
But the decarbonisation of growth is a reality already as the example of Sweden shows. I look forward to hearing their insights on the 2030 agenda, which places major emphasis on sustainable production and consumption.
And then, of course, there’s the politics. As we know, the political context for both climate change and trade, is currently a little … complicated.
We all felt a major disappointment with the withdrawal of the United States from the Paris Agreement. Not because this was about Paris. But because it was a first serious global effort to reduce greenhouse gas emissions and promote international security.
But it’s worth remembering that the renewable energy revolution I’ve been describing happened without a global carbon price. It was spurred primarily by business innovation in response to policy action at the national, regional, and sub-national levels. Germany’s subsidies and regulations to incentivise renewable energy were emulated elsewhere in Europe as well as in many US states.
China and India have invested heavily in solar and wind capacity. When California tightens its auto emissions standards, every company that hopes to sell cars in the US ends up complying. The business opportunities will keep growing. This is why I am confident that the politics will eventually follow.
In the meantime Governments around the world have reiterated their commitment to meeting their nationally determined contributions to reducing emissions. A challenge will be to build on this momentum in the years ahead, and collectively decrease emissions below the 2 degree C level and beyond. Looking ahead, we may see trade tensions arise if some major economies adopt stringent carbon constraints while others do not.
Trade tensions are a reality of today's world which is seeing its fastest pace of globalization- even though globalization has been with us in some form or fashion for centuries now. It is a reality that globalisation has not lifted all boats. As a result, trade has become a lightning rod for public angst over globalization, especially in some advanced economies.
Part of this is because trade is visible and foreign in ways that deeper phenomena like technological change and shifting societal values are not. This visibility makes trade – like immigration – a simple and convenient scapegoat for more complex underlying challenges. The United Kingdom voted to exit the world’s biggest trade bloc to ‘take back control’ over immigration and regulatory issues. Across the Atlantic we have seen float the erroneous proposition that trade protectionism can bring back jobs and income growth.
There is a serious divergence between our economies, clearly in the XXI century, societies, many still in the XX century and political systems which in many cases still live in the XIX century. The answer is not to move our economies back to the XIX century; we must ensure all parts of our societies can benefit from economic growth and prosperity.
In that respect, today’s anger over trade obscures what a remarkable success the open global economy has been. Predictably open markets have made it possible for billions of people across the world to hitch their wagons to the world economy, and use global demand and knowledge to drive rapid growth. We have seen massive drops in extreme poverty and open markets have been a big part of this story.
But many have not shared in this progress. Whether in poorer countries or in richer economies, large sections of society are being left behind.
For a generation after 1989, in too many advanced economies, we overpromised the benefits of globalization and under-delivered on the measures needed for everyone to share in the gains. If anything, policies have frequently exacerbated instead of narrowing inequalities of income, wealth, education, and opportunity. Today’s angry politics are, in significant measure, a result of these failures.
Does this mean closing markets is a solution? No. Protectionism would reduce purchasing power and weaken productivity growth by decreasing specialization, competition, and scale. It might save a factory here and there, but at the cost of making entire societies poorer than they otherwise would have been. In effect trade protectionism is an intellectually lazy answer to the challenges posed by globalisation.
Open trade, rooted in multilateral institutions like the WTO, remains the best way forward. But market-opening alone is not enough. Which leads to my other main message: For growth and trade to be truly responsible, they need to be more inclusive.
One part of the answer here is social policies. Governments need to invest across the board in education and skills training, as well as active labour market policies to better match people with job opportunities. Future job opportunities- for as is often quoted, a vast number of the jobs your children, grandchildren and nieces may be doing in the future are not yet known.
If robots and automation start to put more and more of us out of jobs, and while it puts many of us into new jobs, measures like wage top-ups or universal basic incomes may become necessary. Just like the industrial economy did in the 19th and 20th centuries, the gig economy needs new protections for workers, and the sooner we can come up with viable models, the better.
Two additional points: One, this social policy agenda is also relevant for developing countries, where the biggest income gains have gone to the relatively better off.
And two, this agenda won’t be cheap, which is why multinational companies that engage in accounting acrobatics to minimize their tax bills are no friends of open markets in the long run. In fact we need more of these businesses to step up to the plate and become 'development actors' as they make profits.
Another key to making trade inclusive is to make sure that the businesses that employ the vast majority of the workforce are able to participate in the global marketplace.
The businesses I am referring to are micro, small and medium-sized enterprises. Just about everywhere, SMEs account for the overwhelming majority of companies, and around 70% of jobs. But small firms tend to be much less productive than their larger counterparts. Research conducted at the International Trade Centre shows that these productivity gaps translate to low wages and poor working conditions. So when SMEs are equipped to become more competitive and tap into international value chains, it’s a recipe for growth that trickles down.
Here in Europe, Germany’s mittelstand stands as the iconic symbol of how a globally connected SME sector, closely tied into bigger companies’ value chains, can increase economic dynamism while fostering a more equitable distribution of the fruits of growth.
So what can we do to help bring SMEs more fully into international trade? ITC’s experiences working to enable SME internationalisation point to a few insights.
The first one is policies that reduce the fixed costs related to trade. Costs arising from complex border procedures and the need to meet various product standards and other non-tariff measures weigh disproportionately on SMEs. Inclusive trade means setting norms that are not unnecessarily complicated.
It also means making targeted investments on the supply side. For example support SMEs the WTO trade facilitation agreement, and support testing labs and other facilities for SMEs – especially those in developing countries - need to meet the quality and safety demands of target markets and lead firms.
Governments could also act to curb subsidies to fossil fuels and fisheries, to open markets for environmental goods and services and to fully unleash the power of e-solutions such as e-commerce by working towards common understandings of how it can work for traders at all levels of the value chain.
But the, companies can do a lot to help bring more SMEs into supply chains in a socially responsible manner. For example, standard-setting is no longer the province of government agencies alone. In many market segments, private standards count far more than public ones. Setters of voluntary sustainability standards should strive to avoid needless duplication, and work to support compliance by smaller companies. A standard is only responsible if it provides an on-ramp for SMEs to comply. I invite all of you to look at ITC’s Trade for Sustainable Development principles, which set out some guidelines for ensuring that sustainability initiatives live up to the name.
And technology can provide companies a growing toolkit to trace and promote sustainability to the furthest reaches of their supply chains.
I have talked a lot about new inventions, but I want to emphasise that responsible trade is not just about cutting-edge technology. About a year and a half ago, I visited a tea plantation in Kenya and saw how two decidedly 20th-century sets of interventions were helping farmers cope with climate change and deforestation. Agricultural extension services taught farmers new techniques to shield tea plants from newly extreme weather. A machine imported from Calcutta allows personnel to compress waste materials like rice husks and sawdust into briquettes that can be burned instead of firewood to dry and process tea leaves. The cumulative results: over 70 thousand trees saved annually, lower carbon emissions, higher yields and higher incomes for small-scale farmers in Kenya’s most important export sector. That’s responsible trade.
To sum it up, responsible trade has to be environmentally sustainable and socially inclusive, rooted in cooperation based on shared rules. Governments and businesses have the tools to make it happen. What remains to be seen is whether they have the inclination. If they succeed, today’s political earthquakes may be remembered as bumps in the road towards sustainable development. If not, they may be a precursor of even greater turmoil in the years ahead.
Thank you for your attention.