Change the way the world measures trade flows

• Published: 2/03/2012 at 02:41 AM    ...

Bangkokpost - The global economy has undergone two major changes in the past 20 years. Those changes are going to continue and, in all likelihood, speed up over the coming decade.

China’s economic boom: A woman rides her tricycle loaded with polystyrene boxes on a street in Shanghai on Feb 29. China’s output today accounts for over 8% of the world’s economy, compared with less than 2% three decades ago.

The first change involves a radical upheaval linked to the growing power of the emerging countries with very large populations, or "economic masses". There is no other instance in the entire history of mankind of such massive economic development, which some describe as the "big swing", concentrated in so short a space of time.

China's output today accounts for over 8% of the world's economy (in current dollar terms) compared with less than 2% only 30 years ago. This increase is already having considerable economic, political and media repercussions _ but 20 years from now China is likely going to be worth 20% of the global economy.

The place that China occupies in this picture is of necessity unique because it is the largest and most important of the rapidly developing economic masses. India accounts for 3% of the global economy today and should account for only 5% two decades from now.
Africa accounts for 2% of the global economy today, while Latin America accounts for 4-5%. In 20 years' time, Africa should account for 3% of the global economy and Latin America's share should remain stable. Thus, while these other economic masses are also shifting, they are not doing so to as great an extent.

The downswing in the West's economic power is the logical offset to the increasing economic weight carried by the emerging countries. If the trend observed over the past two decades continues, the weight Europe carries in the global economy is going to drop from 35% down to 25% by 2030, and the weight carried by North America (the United States and Canada) is going to drop from 30% to 28%.

The fact that North America is likely to hold out better is due, in the main, to a more favourable demographic situation than in Europe. This swing in relative weights is destined to continue, or even to speed up in China's case, while heightening the kind of turbulence we are already experiencing today in the advanced economies.

The second major transformation that the world's economy has experienced in the past two decades is a deep change in the nature of the international division of labour, particularly in terms of stronger specialisation in the manufacturing apparatus of the various countries. This specialisation movement is rooted in the technological changes that have made the world a smaller place.

International trade has traditionally been restricted by the costs entailed by distance, particularly in connection with transportation and communications. That has led to a "preference for proximity" which translates into a country choosing to trade first and foremost with its neighbours. The invention of the container and of the internet has considerably reduced the obstacle of distance in the space of a mere few decades. Thanks to the container, the cost of transporting a ton of goods by sea has been slashed by 50 times in the space of a few years; while the internet revolution has had an impact of the same magnitude in the sphere of communications. The power of today's computer tools combined with the possibility of real-time communication with the whole world has made it possible to set up logistics chains on a global scale spread out over different countries.

These logistics chains, comprising a large number of distinct operations, would never have seen the light of day without a series of tools making it possible to handle complexity while at the same time regulating, monitoring and remote-managing the work of all the suppliers and partners involved.

Fully 60% of Asian countries' international trade is concentrated in the Asian zone itself, the area which has witnessed the most in-depth integration of its production chains, with the manufacture of parts and semi-assembled units that are then mixed with components which themselves comprise elements from different countries, and the whole then ends up in China for assembly before being exported elsewhere.

The underlying phenomenon, a process of fragmentation among different countries and types of labour, is effectively illustrated by the production chain of certain emblematic products such as the iPad, a part of which is assembled in Chengdu, western China. Over 100,000 people work in a factory that only "manufactures" one part, namely the iPad's aluminum casing. The rest of the factory's activity consists of alternating assembly operations with technical testing. Logistics circuits are enormously complex, and it takes eight hours to assemble the components of an iPad on account of the large number of quality controls required.

The Chinese added value generated by this factory accounts for 5% of the iPad's purchase price, while the American added value of the same iPad, assembled in China and exported to the United States, is over 20 times higher.

Global manufacturing chains are constantly changing, in an ongoing movement involving the allocation and reallocation of labor and capital in response to the opportunities that businesses perceive, to a changing regulatory environment, and to changes in trade barriers. The execution of these tasks, once performed in a given country by a given company and based on the use of an extensive labour force, can now be brutally shifted to another country and another company with different means of production.

It is no longer a matter of trading in goods and services but of "trading in tasks" which enter the production process of an end product or service. This underlying transformation has numerous and very obvious consequences because it rests on industrial location, transfer and relocation, which give businesses the leverage they need to improve their efficiency.

To understand where the efficiency in this new configuration of international trade comes from, we have only to refer to a simplified Ricardo-Schumpeter model. From David Ricardo we take the increased manufacturing efficiency that he argues is to be gained from an increasing international division of labour, while from Joseph Schumpeter we take his theory based on the uninterrupted cycle of the destruction and creation of manufacturing systems, the least efficient making way for the more productive, which then employ the labour and capital thus freed up. This movement is speeding up at the global level, and it is triggering an increase in growth and employment at international level. But the division of employment and the changes affecting it are by no means uniform. The social and economic fabric cannot develop at the same pace, and it takes considerable time to adapt to the changes to which it is subjected. Hence the de-industrialisation process that is hitting certain traditional labour pools, triggering dramatic social shocks in certain regions. Hence also the painful social insecurity in job markets in developed countries where the previous model had been stable for a long time.

In this new configuration of international trade, commercial issues broadly transcend the mere issue of trade imbalances. And in any case, bilateral trade imbalances are becoming meaningless when China's exports to the United States contain almost 50% of Chinese added value while US exports to China contain 80-90% of American added value. It is economic nonsense to continue to calculate bilateral trade balances the way we do today. What we need to monitor is the effective added value in each country, not the overall value of goods and services imported and exported.

Naturally, China is in a surplus situation and the United States is in deficit. That is a macro-economic problem whose causes are well known: excessive consumer restraint in the former case and insufficient savings in the latter. Yet politicians focus on the two countries' bilateral trade relations, which makes very little sense these days as we can see from the example of the manufacture of iPads.

That is why we have to stop measuring international trade flows using a gauge that increases a product's overall value each time that product crosses a border. We need to calculate trade in the same way as we calculate gross domestic product (GDP), in other words by adding together the value-added flows. An approach of this kind would also allow us to conduct a meaningful analysis of the impact of trade on employment, the most crucial policy issue in today's world.

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Pascal Lamy is Director-General of the World Trade Organisation. The second part of this article _ adapted from a recent talk to the Paris-based Notre Europe think-tank, of which Mr Lamy is the honorary president _ will run tomorrow and focus on which policies Europe must follow to prosper in the new global economic landscape.

http://www.bangkokpost.com/opinion/opinion/282439/change-the-way-the-world-measures-trade-flows