New and Emerging Trade Dynamics: Leaving No-One Behind

New and emerging trade dynamics: Leaving no-one behind

Concept note for the 12th Meeting of National Focal Points for Policy Coherence, 15th June 2017

(Update on the PCSD Programme of Work 2017-2018)

Introduction

The UN 2030 Agenda recognises trade as an important means of implementation (MoI) for the SDGs. As such, SDG17.10-12 assigns a set of specific targets through which trade and trade policy can contribute to sustainable development: (i) the promotion of a well-functioning trading system (defined as “universal, rules-based, open, non-discriminatory, equitable [and] multilateral”); (ii) an increase in the global export share of developing countries; and (iii) preferential market access for Least Developed Countries (LDCs).

A prior concept note on PCD and the SDGs has examined the role of trade in the 2030 Agenda. It charted the interactions between trade and 21 different targets relating to a number of goals including food security (SDG2), access to technology (SDG7), economic growth (SDG8), reducing inequality (SDG10), sustainable consumption and production patterns (SDG12). It also raised the question whether the SDG framework allows one to identify the trade-related drivers of development with sufficient precision to guide policy. Two areas in particular were singled out for further research: the obstacles that developing countries face when accessing global markets; and the key enabling conditions through which they can benefit from participation in the international trading system while dealing with the transformational processes that greater openness to trade entails.

The current project, entitled New and emerging trade dynamics: Leaving no-one behind, pursues this line of analysis. Building on existing OECD work, it aims to highlight the new and emerging dynamics that are affecting global patterns and terms of trade and to draw out some of their implications in terms of policy coherence. Applying a PCSD lens to OECD work on trade will enable us (i) to better assess the impact that these trade dynamics may have on enabling economic, social and environmental conditions in developing countries; (ii) to outline policy responses that can help fulfil the goals set out in the UN 2030 Agenda, taking account of potential spillovers and critical interactions; and (iii) to map available resources in the OECD’s coverage of the relations between trade, development and the SDGs, as well as any areas that may require further research.

The note is structured in three parts:

(i) The first section provides an overview of current OECD work on trade that is of relevance to developing countries.

(ii) The second section identifies some of the main linkages between OECD work on trade and the SDGs and considers whether any further trade-related issues need to be addressed from a developing country perspective.

(iii) The final section underlines a number of critical interactions through which trade dynamics may potentially impact on developing countries’ ability to achieve the SDGs, with a view to providing guidance on policy coherence and coordination as a next step. The key issue of developing countries’ participation in global value chains (GVCs) will receive particular attention.

The annex to this note contains some illustrative data on GVCs and the results of the mapping exercise conducted in the first section.

1. Overview of Current OECD Work on Trade and Sustainable Development

Much of the recent OECD work on trade needs to be seen in the context of a broader discussion on the Trade, Technology and Jobs Nexus. This discussion reflects a growing recognition on the analytical side of the complexity and interdependence of transformational processes, as well as a heightened demand from policy-makers for integrated approaches that can address the multidimensional nature of current challenges – illustrated for instance by the 2017 MCM’s theme of “Making Globalisation Work: Better Lives for All”. As a result, OECD has increasingly directed its attention towards the interlinkages between technological innovation and changes in the patterns of international trade and investment, while also seeking to provide tools that can help assess the impact that trade and technology have on economies, societies and the environment, with particular emphasis given to labour market effects.

The adoption of this broader perspective on Trade, Technology and Jobs has several implications which are significant from the point of view of our project:

- TAD provides the core data and analysis on trade, but other Directorates are also engaging with trade-related issues and there has been a renewed focus on horizontal work within the OECD: Examples of horizontal projects include TAD’s work with STI on the trade dimensions of digitalisation (notably in relation to trade in services), as well as possible areas of collaboration with DAF, ELS and GOV (on issues such as Trade and Investment; Jobs, Skills and Digitalisation; or the Measurement of Digital Transformation). Examples of work by other Directorates include chapters on the effects of trade in the forthcoming 2017 editions of the Economic Outlook (ECO) and Employment Outlook (ELS), as well as the already published 2017 Skills Outlook (EDU/STI) which is devoted to skills and global value chains. Furthermore, this broader perspective has also led TAD to address questions of policy alignment and coherence at the national and international level.

- TAD has developed clear arguments in support of trade and international economic cooperation, as part of the search for a new convincing narrative on globalisation: These arguments are well summed up in the paper International Trade: Free, Fair and Open? presented and discussed at the 27th April 2017 Trade Committee Meeting.

- Participation in global value chains (GVCs) has emerged as a key policy issue: GVCs reflect the interlinkages between trade, technology and offshoring of production processes, and their emergence as a major driver of trade has had a profound impact on the analysis both of trade and of development. GVCs have different policy implications for advanced OECD economies and emerging/developing economies, but in both cases the benefits of trade and innovation are tied to GVC participation.

Current TAD work on trade and sustainable development

Five main areas stand out with regard to emerging trade dynamics and their potential impact on developing countries: (i) the implications of GVCs for trade and domestic policies; (ii) trade facilitation; (iii) trade in services; (iv) global and regional trade liberalisation; and (v) aid for trade (TAD/DCD-DAC). Most of these areas have been the object of longstanding work.

- Implications of GVCs for trade and domestic policies:

As mentioned above, the internationalisation and fragmentation of production processes constitutes one of the most important dynamics affecting trade and investment flows. Under this rubric, TAD has notably been looking at levels of participation in GVCs, the structural determinants and policy drivers of GVC participation, the behaviour of firms within GVCs and the complementary domestic policy agendas needed to adjust to the effects of GVC participation. TAD, STD and STI have developed new statistical tools to analyse the trade policy implications of GVCs, building on the OECD-WTO Trade in Value Added (TiVA) database. Efforts are being made to collect more data on developing countries participation in GVCs.

- Trade facilitation:

With the emergence of GVCs, trade, investment and knowledge flows have become increasingly sensitive to policy- and non-policy-related trading costs. Tariffs matter as their effects multiply in GVCs, but they tend to be low, declining (at least until now) and predictable. Unpredictable delays due to customs procedures, behind-the-border barriers and regulatory compliance can prove far more costly in a context of lean production and just-in-time delivery. Delays of this kind may even preclude trade in time-sensitive or perishable products. Under this rubric, TAD has notably analysed the effects of trade facilitation measures on the operation of supply chains (including standards harmonisation for food and agricultural products) and the benefits of implementing the WTO Agreement on Trade Facilitation. TAD and STD have also developed a set of Trade Facilitation Indicators, covering the full spectrum of border procedures for 160 countries, the vast bulk of which are LDCs, in order to identify areas for action and assess the impact of reforms.

- Trade in services:

Services form an ever-growing part of the economy, generating more than two-thirds of global GDP, employing the most workers in major economies and creating more new jobs than any other sector. While trade in services has grown, its expansion is still dwarfed by that of trade in manufactured goods. This pattern could change in the future: not only are services becoming more easily tradable in and of themselves thanks to ICT, they also constitute a significant part of the production and trade processes for goods. In the context of GVCs, services are essential “links” in the chain, allowing firms to coordinate the production and delivery processes, localise and customise goods. This view is reinforced by the value-added data, which show notably that the service content of exports is 40-50% in value-added terms for G20 countries (against a service share of world trade of only 20% in gross terms). However, despite this growing importance, international trade in services often remains impeded by significant non-tariff barriers and domestic regulations. Under this rubric, TAD has analysed the role of services in manufacturing competitiveness and GVC engagement and sought to assess and quantify the trade costs associated with services trade restrictions, developing the OECD Services Trade Restrictions Index (STRI) as an evidence-based diagnostic tool. Given recent trends and the importance of services for GVC participation, TAD has highlighted the need for LDCs to foster a more competitive domestic service sector and to ensure that services can be efficiently traded across borders.

- Global and regional trade integration:

With the failure to close the Doha Round of WTO trade negotiations and a slowdown in multilateral trade reform, many economies are turning towards regional trade agreements (RTAs) as an instrument for advancing the rules-making agenda on international trade. Following this trend, TAD has looked at the implications of regional trade integration for GVCs, assessed the impact of RTAs on a broad range of areas (including the environment, agricultural markets and food security), and sought to identify ways in which they can deepen and expand multilateral commitments. LDCs have greatly benefited from WTO membership, through Special and Differential Provisions (market access; trips waivers; aid for trade…), as well as ongoing discussions on services waivers for LDCs and recourse to the Dispute Settlement Body. RTAs would need to take account of the position of LDCs in order to avoid harming their ability to develop in sustainable fashion, while a return to bilateral trade relations would likely prove heavily detrimental to LDCs.

- Aid for trade:

TAD contributes to the OECD-WTO Aid for Trade Initiative in partnership with DAC. In this capacity, it highlights the rising importance donors attach to private sector development as an engine for growth and the potential for aid and other forms of development finance to help achieve the objective of trade expansion set out by SDG17.11 through increased GVC participation, trade facilitation and investment in infrastructure and productive capacity.

Work on trade and sustainable development by other Directorates

The OECD Development Centre (DEV) has tended not to deal with the trade dimension of development, focusing instead on other areas of expertise (Migration, Gender, Inclusion…). However, as part of the OECD Strategy on Development, it is involved in the Initiative on Global Value Chains, Production Transformation and Development. This initiative covers much of the same ground as TAD’s work on GVC participation (improving measurement and evidence on new trends in global organisation of trade and production; promoting development through better participation in GVCs…). However, it applies to a wider set of countries through the Development Centre, whose membership extends well beyond that of OECD.

1. Linkages between OECD Work on Trade and Development and the SDGs

- TAD makes little direct linkage to the SDGs, one exception being the joint work with DCD-DAC on Aid for Trade (see notably LAMMERSEN & HYNES Aid for Trade and the Sustainable Development Agenda: Strengthening Synergies). This partly reflects a difference in perspective: TAD focuses on analysing the transformational processes which are affecting trade patterns and policy, rather than on implementing the transformative agenda set out by the SDGs. The difference and potential complementarity between these two perspectives (analytical and normative) was already highlighted in the prior concept note on PCD and the SDGs mentioned above.

- However, there is significant overlap between OECD work on trade and the SDGs. One of the main benefits of this project consists in underlining the connections between the two. Doing so allows us not only to identify emerging trade dynamics and their implications for developing countries, but also to better spell out the ways in which trade and trade policy can act as effective means of implementation for the 2030 Agenda.

Possible areas of overlap include, for instance, a shared recognition of the importance of the international trading system for fostering sustainable development. Here, TAD’s work provides arguments that can help clarify the policy implications of SDG17.10.

- The equity and non-discrimination aspects of a “well-functioning” trading system could notably be specified and strengthened in light of TAD’s arguments on fairness in international trade, including its work on the impact that state subsidies and other trade-distorting measures (such as certain forms of domestic support to agriculture or state-owned enterprises) taken by developed, emerging or large developing countries may have on low-income countries; its analysis of firm behaviour within GVCs and its promotion of Responsible Business Conduct through the application of the OECD Guidelines for Multinational Enterprises.

- TAD’s work on the benefits and challenges associated with trade openness could also serve to underline the powerful economic case in favour of advancing negotiations on a multilateral basis, particularly in the context of GVCs where barriers between countries further up or down the supply chain matter as much as barriers between direct trade partners. Recognising the growing importance of Regional Trade Agreements (RTAs), TAD makes recommendations on their design, e.g. arguing that measures to harmonise RTAs (notably through the incorporation of common standards) and deepen their provisions (particularly in the domain of trade in services) can ensure that they complement existing Multilateral Trade Agreements (MTAs).

Furthermore, TAD provides insight on the determinants of developing countries’ participation in GVCs and on the role of SMEs. In doing so, it outlines issues of coherence between domestic and trade policy, as well as enabling conditions at the international level which can help overcome barriers to GVC participation and facilitate access to global markets – thus supporting the objectives set out in SDG17.11-12.

Another area of overlap, already mentioned in the concept note on PCD and the SDGs, concerns the danger that closer trade integration may spill over into increased illicit financial flows (notably through trade mispricing), as well as greater opportunities for corruption. In this respect, TAD’s perspective on the adoption of standards, trade in natural resources and wildlife products as well as the reduction of subsidies to illegal, unreported and unregulated forms of fishing (IUU) can contribute to the achievement of targets under SDG 14-16.

1. Critical Interactions to Consider

Current OECD work on trade highlights two types of critical interaction through which emerging trade dynamics may significantly impact on developing countries’ ability to achieve the SDGs. First of all, GVCs amplify the effects of some existing trade-related trends. This reinforces the importance of coordinating policy at the international level and aligning domestic policies in order to reap the positive effects of greater trade openness and avoid or mitigate the potentially negative ones. It may also shift the locus of critical interactions and therefore the areas we need to look at for potential policy trade-offs and synergies. Secondly, broader non-GVC-specific trade dynamics also need to be taken into consideration. They tend to be better known but are no less important to mention.

• Critical interactions relating to greater GVC participation by developing countries

1) Development strategies based on GVC participation can contribute to achieving a number of SDGs, by increasing developing countries’ share of global exports (SDG17.11), creating greater economic growth (SDG8), accelerating technology transfers (SDG7) and poverty reduction (SDG1). This implies that emphasis be given to the determinants of GVC participation (particularly for low income countries and SMEs) as key enabling economic conditions. These determinants may include, at the international level:

- Low tariff barriers for intermediate input imports in advanced economies to ensure market access for developing economies, but also in developing and emerging economies. The importance of low tariffs increases in the context of GVCs, as they become means to facilitate access to cheaper or higher-quality intermediate inputs and therefore support productivity and export competitiveness, and as such they are essential to the geographic dispersion of value chains. Customs unions can also facilitate regional economic and trade integration;

- Greater service liberalisation – particularly in essential areas such as ICT, supply-chain management services and logistics services – to allow developing countries and SMEs easier access to global value chains and markets, including for manufacturing and agricultural products. Firms in low income countries may benefit most in this regard as they must often rely on a less diversified domestic service sector;