‘Made in the World’

The Director General of the World Trade Organization Pascal Lamy delivering a speech recently, made some interesting comments on a new label coined by the WTO: ‘Made in the World’.

In explaining this further, he said that in the 21st century, the notion of geography and a defined market place is becoming increasingly irrelevant in a world where the edges between international, regional and national trade are becoming increasingly blurred. In such a situation, national policies and decision making on international trade have to take into consideration external factors beyond the borders of their nations, and be based on the whole economic picture.

The DG explained that the term ‘Made in the World’ was coined because countries today are trading not so much in the final product, but in intermediates where the components of goods and services are made and assembled indifferent parts of the world. Almost 60 per cent of trade in goods is in intermediaries or trade in services and the average import content of exports is around 40 per cent.

He went on to explain that in this context, protectionist measures could be trade distorting or trade diversionary because of the reliance on imports to complete a country’s export of a product or service. He quoted an example of the iPhone where the label at the back states ‘designed by apple in California, assembled in China’ saying that the words do not do justice to parts made in China, Korea, Japan, Germany, and the US by companies with headquarters or factories in these countries. Like this iPhone, many products are without a single country of origin. Such products, he said, can only be described as ‘Made in the World’.

Also interesting was his reminder that this is not necessarily a new phenomenon or one that is exclusive to high-tech products of the present scenario by quoting the case of jewellery where even in the eleventh century, African ivory was sent to India for Indian craftsmen to carve them into jewellery and the jewellery was exported to Europe.

A more complicated example was of an opal mined in Ethiopia, brought by middlemen to traders in Addis Ababa, air-freighted to a company in India for cutting and polishing, sold to US based jewellery designer/retailer and sent to Thailand to be set into a bracelet to be sold to customers at one of the retailer’s authorised dealers in China, Europe, the Caribbean or North America! With value addition occurring in at least four different countries, that bracelet too was ‘Made in the World’.

A few items such as the items mentioned above may have gone through a number of countries in past history. But, today, in addition to the reconfiguration of the actors in the multilateral trading system and the changing patterns of trade moving away from traditional North-South lines and also incorporating greater intra- and inter-regional trade, the number of goods and services going through a number of countries during the process before the end product is completed cannot even be easily quantified. In this context, governments and businesses need to align their policies and priorities around this development.

This also changes the traditional methodology used to measure and maintain trade statistics where the total commercial value of an imported product is assigned to a single country of origin. In the case of ‘Made in the World’ products, this methodology can give a distorted picture of the trade balance and understate where the actual value addition took place.

As the DG explained, this incongruence has two main impacts; one, inflated bilateral trade numbers which can inflame anti-trade sentiment; and two, lead to policies which are not aligned with the pace, direction and reality of world production and trade. Having an accurate, evidence-based methodology of the true value of trade is necessary if policy makers are to make informed decisions on trade and economic policy. The WTO, he said is now working with the OECD and other partners to release by mid December, the first set of comprehensive statistics on trade in value added. This would be an extremely useful guideline for future work of trade analysts.

The increase in trade in intermediates, together with decreasing transport and communication costs, and greater fragmentation of production across the globe is facilitated by the growing network of national, regional and global value chains which are increasingly characterising the trade conveyor belts of the twenty-first century. Value chains cannot be described as new development as the example of eleventh century trade in jewellery portrayed. But in today’s context in which the globalised world is so interconnected, value chains represent a dynamic method of organising production.

The chain of production within one company is today a chain of production within the world with the production conveyor built running across a number of countries. The DG had explained how this process has now moved beyond the outsourcing of manufacturing production and now involves services activities as well, primarily, office tasks. Increasing the range of services in the form of transport, logistics, insurance and distribution will add value to the raw materials.

Value chains in addition to creating trade among countries can also be catalysts in expanding the productive capacity in developing countries, helps enterprises to find suitable foreign partners, gain access to foreign direct investment, become familiar with international business practices and upgrade skills and technology. Value chains benefit smaller developing countries in particular as they help in entering the global economy.

The importance of not having any type of trade restrictions when having value chains running across countries was emphasised in the speech because even if tariffs are low, other non –tariff measures could prevent the efficient functioning of value chains. Regulatory convergence is also equally important, because lack of non acceptance of technical standards, conformity certification, health and safety requirements and services regulations can hamper the smooth functioning of a value chain. It is in this context that a WTO deal on trade facilitation between its members would help international trade.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)