Global Trade in the 21st Century
10 June 2015 - Turin, Italy
Thank you to the International Chamber of Commerce for inviting me to exchange views on trade, investment, growth, and job creation in the XXI century.
What better place for us to discuss the evolution of trade than the Lingotto industrial park, once home to the world's largest car manufacturing factory, and now a centre for the hospitality, tourism, and creative services.
The landscape of world trade has significantly changed in the last decades.
South -South trade, which 30 years ago did not represent more than 10% of world trade, has exponentially grown with the emergence of the global South.
We have also seen the fragmentation of production along value chains both global and regional, offering new opportunities for firms to benefit from trading in tasks.
Services are also increasingly dominating trade, taking ever-greater importance in the manufacturing chain. This ‘servicification’ of manufacturing trade presents opportunities for economies with a growing youth population, such as in Africa and Asia, and has altered the skill premium in the global marketplace.
Finally, in the modern international trading system, tariffs have a relatively smaller importance versus non-tariff measures. Global and regional trade negotiations have meant that traditional tariffs are at an all-time low and falling. It is the non-tariff measures - many legitimate but some serving as barriers to trade - where attention really needs to be placed. Non-tariff measures such as standards and technical regulations today impose trading costs worth an estimated 20 to 30% of the value of the goods traded.
Underlying all of these global changes is another fundamental transformation about which less has been written: the growth in importance of small and medium enterprises (SMEs). SMEs are the largest untapped potential for growth and for jobs. They are the missing link in ensuring inclusive growth through trade.
SMEs represent more than 90% of firms in any of our economies and provide up to 60% of jobs including half of women and youth employment. And this is just the formal sector. Adding the informal SME sector would further increase these figures. But despite the vast potential which SMEs have as growth vectors, the reality is that in general they are marked by lower productivity and lower wages. So we collectively have a challenge to see how we can both raise productivity and wages as these are two crucial elements to promote sustainable and inclusive growth.
And here trade matters. Not just for productivity but for driving development and diversification. The evidence increasingly confirms that firms which are involved in trade are indeed more productive, more innovative and more competitive. The rise of value chains makes it easier for businesses and countries to connect to cross-border markets. Instead of having to produce finished goods ready for a consumer, SMEs can today internationalize in multiple ways. They can make or process components and sell them directly abroad, or they can supply other exporters – often multinationals – based in their own country. At ITC, a significant part of our work focuses on helping SMEs to seize this opportunity to supply a greater variety of goods and services to value chains.
This year, during the October World Export Development Forum (WEDF) in Qatar, ITC will release its first flagship publication on SME Competitiveness providing interesting evidence-based solutions for SMEs wanting to embark on a path of internationalisation.
The question we have to ask ourselves is how to support SME internationalise in an ‘elegant way’. How to help them to be a part of the value chain rather than simply being trapped at the bottom tier of these production and distribution networks. Let me offer six considerations.
The first relates to knowing what to do. This is where reliable trade and market intelligence is key. According to a recent survey conducted by ITC, this is the single most valued improvement by SMEs wanting to internationalise.
The second is about financing SME activities. Access to affordable finance to allow companies to trade and to invest in innovation is essential.
Thirdly, it is about production quality - recognising, understanding and meeting standards, both public and the growing number of private standards. The growing number of users of ITC’s “Standards Map”, our on-line tool supporting SMEs as they work to meet private standards, is a clear indication of the growing importance of these non-tariff measures for SMEs trade.
Four, in a world where exports require quality imports, open markets are essential.
Next on my list is the importance of reducing the costs of trade and improving logistics to help SMEs get their products and services to markets. This is why it is essential to implement the recently agreed WTO deal on Trade Facilitation. This is also where the International Chamber of Commerce and its members have a crucial role to play to ensure the benefits of this deal – which a 10-12% reduction in trading costs, according to an OECD study - are quickly realized by SMEs on the ground. But beyond trade facilitation lies the issue of smart logistics, an area to which ITC is paying greater attention.
Finally, SMEs today need to be forward-looking, investing in constant innovation. It is essential that they pay attention to information and communications technology in areas such as e-trade, e-commerce, e-logistics and virtual marketplaces.
Underlying all of these issues are two crosscutting matters: skills and smart trade policy.
Upgrading skill sets through targeted training and capacity building in line with the needs of the market has to be part of the business decision making. It has to be a core function of an SME’s business plan to invest in and upgrade the skill set of its employees.
Trade policy, which although traditionally the purview of policymakers is seeing greater business involvement through public-private dialogue, must also be accommodating to SME internationalisation. This should entail addressing barriers to trade through enacting effective trade facilitation policies; focusing on eradicating unnecessary and trade distorting NTM and building the capacity to meet legitimate measures; and paying closer attention to the potential which services has to transform economies.
It also calls for continued focused development assistance to those countries - such as the least developed countries (LDCs) - that may need it the most, through Aid for Trade. The Enhanced Integrated Framework, the Aid for Trade mechanism for the world poorest countries, is an excellent example of how well targeted trade support can help unlock their trade potential. Increasingly we must look into how traditional development assistance can be better leveraged with private investment and domestic resource mobilisation efforts.
And what are some of the practical steps that can be taken to allow SMEs to compete connect and change?
First, improve the business environment. In the surveys of SMEs conducted by the ITC, practical challenges to trade have consistently been one of the top three concerns raised. Ratifying the WTO Trade Facilitation Agreement and beginning to develop bankable projects where assistance is required is an important step in ensuring all WTO members abide by the same rules, and all SMEs can have consistency and transparency in the rules and regulations they face in exporting and importing.
Second, build the capacity of SMEs to understand and navigate the world of trade. ITC approaches this through a concept of ‘one to one to many’. This means working with Trade and Investment Support Institutions to build their capacity to further retail this training and knowledge within their country. Not only does this build ownership but it ensures capacity remains in-country.
To ensure that TISIs always remain on the cutting edge of providing this support to SMEs, there is a need to fully understand their strengths and weaknesses. Through benchmarking the tools, polices and capacities of TISIs, a roadmap for constant improvement is created which increases effectiveness and reduces costs. Importantly it ensures that TISIs are equipped to provide first class service to the SMEs within their borders.
By supporting SMEs, we would help some of the most vulnerable players in the global economy and contribute to ensuring a better distribution of the gains from globalization. More importantly, though, would support some of the most innovative and creative players in the economy. It is these players that need to be nurtured in order for economies to benefit fully from the opportunities that globalization and technological change offer.
Thank you for your attention.