"The missing link for developing countries to benefit from trade liberalization: the supply-side constraint"
I would like first to convey to the representatives of the German Government here today our deep gratitude for the continued support that Germany has given UNCTAD, particularly in the course of preparations for our major conferences. Your generous staging of preparatory events has become a welcome tradition, as we saw prior to the Third United Nations Conference on the Least Developed Countries (Brussels, 2001) and UNCTAD X (Bangkok, 2000). I am sure that in keeping with that tradition, this meeting will similarly lead to practical conclusions that we can suggest to Ambassador Sha in the preparatory process for UNCTAD XI in São Paulo this June.
As we have already listened attentively to two very thoughtful and substantive reflections on trade, the economy, investment and the foreign policy of globalization, I will focus instead on a very specific issue: the missing link between trade negotiations and the supply-side constraints. But before I do so, allow me first to remind you what UNCTAD is about: UNCTAD is a body of the General Assembly of the United Nations, which was set up exactly 40 years ago, in 1964, to deal with the problems of trade, development and poverty. That is, we are not, like the World Trade Organization (WTO), a purely trade-related organization. We deal with trade because we believe it is a powerful instrument for promoting development and reducing poverty. But figuring out how to make this link work for the poorest of the poor is not always obvious or linear, and this is what UNCTAD is all about: trying to contribute to clarifying this link between trade, development and poverty reduction. And although we are not a negotiating forum like the WTO, what we do has an influence on the trade negotiations, and for one simple reason: development has now become a central issue in those negotiations.
This was not the situation that prevailed 15 or 20 year ago. I say this based on my own experience, because I have spent a good part of my life in trade negotiations. I participated in the Uruguay Round for four years, as the representative of my country, Brazil, and I also chaired the Council of the General Agreement on Tariffs and Trade (GATT), the contracting parties of the GATT and the Informal Group of Developing Countries in the GATT. Through those activities I was present at practically all the important trade meetings that have been held since the 1980s; the other day I realized that I only missed one or two. And what strikes me is the difference between the situation now and the one that prevailed at the end of the Tokyo Round or during the attempt to launch the Uruguay Round. In those days development was not a central concern, and developing countries were not yet very active in the multilateral trading system. Since then, however, we have had four ministerial meetings, two of the GATT and two of the WTO. And all of those meetings found it difficult to deal with the link between trade and development.
The first was the mid-term review of the Uruguay Round in Montreal in December 1988. This meeting collapsed around the issue of agriculture, because five Latin American agriculture-exporting countries -- Argentina, Brazil, Chile, Colombia and Uruguay - would not accept results in other areas without progress in agriculture. The same kind of scenario repeated itself in Brussels in December 1990, when the Uruguay Round was supposed to conclude. Following that there were two more WTO ministerials -- one in Seattle in November 1999, and the other in Cancún last September -- where the same problems arose: agricultural subsidies and the difficulties of engaging developing countries on the Singapore issues. They were responsible for the basic problems, because although there are trade problems between the European Union and the US, and between Japan and the US, it was the problem of development that was at the heart of the difficulties encountered by the WTO machinery in moving forward.
We have to tackle this problem in two ways: one is by addressing the difficulties in the trade negotiations themselves, but the other is by trying to explain why the mood in the WTO has had a sudden change, and why for some developing countries it is not so evident that the future of the multilateral trading system is more important for them than it would be for the more prosperous nations. Well, I would suggest to you that there are two problems in trade: one arises from market access, and the other from supply. All countries have these problems, but for some of them, one is more important than the other. By way of example, I would cite the case of my own country, Brazil, and that of Argentina. For these two countries, in the area of agriculture or agribusiness, the main problem is market access. Brazil would have no problem whatsoever in competing in sugar, orange juice, beef, soya or iron ore. If we had a completely level playing field, in some of those products we would probably dominate the scene. The same is true for Argentina and many other countries.
These problems can be solved only through trade negotiations, and State Secretary Tacke has addressed this matter very convincingly. I will not repeat what he said. But one has also to realize that for the majority of developing countries, the problem is that they have a very limited supply capacity. They have very few products to offer the marketplace. In Africa, for example, there are some 50-odd countries, but more than 40 of them are totally dependent on two, three or four commodities, such as coffee, cocoa, palm oil or petroleum. What these four products have in common is that there is nothing much in the trade negotiations for them. You know, in some cases you could speak about tariff escalation in coffee or cocoa -- and this is a problem, even here in Germany -- but in most cases, these products face very low tariffs. Their problem stems, rather, from oversupply and from the enormous volatility in prices. There is nothing wrong in being dependent on commodities; I was saying a few minutes ago in the press conference that one should not forget Australia, where commodities account for 60 per cent of exports. But of course, when you have an export sector that is dependent on too narrow a group of products, you are much more vulnerable to the oscillations that we have been witnessing in those markets.
For countries that do not have a supply capability, the way out of this predicament is through diversification and the enhancement of the productive sector. When I say productive sector, I don´t mean only manufacturing or industry but services as well, including tourism and, for many developing countries, the use of information and telecommunication technologies. We have to link the trade negotiations to the supply-side constraints, and to tackle them not in isolation, not sequentially, as if they had nothing to do with each other, but trying to see what the interaction is between them.
What UNCTAD has been trying to do over the past seven years in this regard is to address systematically the problem of services. Each time we have chosen a different sector; for instance, what is there for developing countries in the export of health services? You will probably think there is not much, but indeed there are many opportunities: there are countries like Cuba, whose comparative advantages practically all lie in the pharmaceutical and biotechnological industries, including treatment, or countries like Jordan which have become regional centres for medical treatment. We also held meetings on the export of environmental services and energy services. Many of the oil-producing developing countries have expertise in the enormous variety of services revolving around energy, which, as you know, are much more important than the production of petroleum itself. We went into the matter of audiovisual services and other cultural industries. I do not know how many of you realize that the so-called creative industry is the number-one industry of the British economy, employing 10 per cent of the labour force. We devoted attention to this sector, to tourism, to the problem of the temporary movement of workers -- the so-called "mode 4" - which can enormously boost the income of many countries. This is not migration; it is the admission of specialized or unskilled workers for a limited amount of time. We have been trying to pay attention to this side, the supply side, but in connection with the negotiations, because in the last example I gave you, what is the purpose of promoting the introduction of temporary workers if we do not have rules to increase the quotas? There is an interesting study by Professor Alan Winters, who for some years worked at the World Bank and has since returned to a university in England, which shows that even a 3 per cent increase in quotas for temporary workers in the European Union would raise the income of the countries of origin of those workers by more than $130 billion. But of course, it is necessary to increase the quota to have rules.
This is what we are trying to achieve: to build a link between negotiations and the supply side. You can be sure that one of the main reasons why so many developing countries are reluctant to engage in trade negotiations of either the multilateral or regional kind is because they know that they are not competitive, that they have very little to sell and very little to gain. In Seattle, we were paralysed by the problems in the streets and confined to our hotels; I was in the same hotel as most of the African ministers, and I spent hours listening to them. I can tell you: it is true that they were bitter because they were not being consulted, but they were even more bitter because they knew that, had they been consulted, they would have had very little to say on many issues, because in many of those areas they had nothing to export.
Why is it that the Asian countries are much more forthcoming in the trade negotiations? The reason is that the Asians are competitive, and they know they are competitive, so they do not fear negotiating on trade. If we do not address this problem we will not solve the problem of trade negotiations, because sooner or later, we will face those problems again. We should not accept the simplistic view that there is nothing that can be done on the supply side because the supply will materialize once the trade opportunity is created. Of course, it is true that if you create trade opportunities someone will export, but what has been happening so far is that the same small group of countries have taken advantage of all the opportunities -- basically the East Asian or South-East Asian countries, and lately China and also India, in outsourcing. This group is not very numerous. We have to enlarge it.
The proof that trade opportunities will not create supply capability lies in your own experience, in the European Union. Europe, before it was called the European Union, had the Lomé agreements with the African, Caribbean and Pacific countries for 30 years. At first, those agreements granted very substantial trade preferences. Well, what could a trade negotiation produce that would be more significant than a trade preference of 15 or 20 per cent, such as you what had for many of the African countries? If the trade preferences worked by themselves, you would not have the situation as it was characterized by the European Commission on the eve of the negotiations on the last Cotonou agreement. They saw, and they said this in their report, that between the mid-1970s and the mid-1990s, Africa witnessed a decline of more than 50 per cent in its shares of the European market, even in those commodities where it enjoyed significant preferences, because it lacked the supply capability.
In Asia, by contrast, when the Asian miracle began 30 years ago, and when Japan started to invest in textiles in Hong Kong, or to invest in Singapore, there was no form of agreement, no trade preference, but there was the constant movement of investment flows, and this brings me to investment. I am glad that it was mentioned here, because of course this is not a simple proposition: in some cases, several generations may be required to build supply capabilities. But we have to start somewhere, and one of the obvious approaches is foreign direct investment (FDI). This will bring not only capital but also technology, know-how, managerial capabilities and the possibility of integrating into the globalized chains of production and distribution. All this is absolutely necessary, and the requirements have already been explained.
UNCTAD has been trying to promote these ideas for a long time. The State Secretary mentioned the
Report, which is now almost a bible for investment and is produced by a very competent team at UNCTAD; Karl Sauvant, who is here with us today, is the director of our investment division. What we have been trying to do with this report is to make countries aware of the need to create the right macroeconomic conditions and public policies that will attract the kind of investment they need to expand their export potential. This conference is about precisely that.
How can we envisage the best public policies? I stress public policies, because UNCTAD works with public policies; there are other organizations, such as the International Trade Centre UNCTAD/WTO (ITC), the United Nations Industrial Development Organization (UNIDO), that work at the level of the firm and of specific sectors. We work with public policies. What are the best public policies to diversify and enhance the productive sector with a view to participating in international trade? Here, we have to look at everything, including commodities; in this room I see Dr. Rolf Boehnke, director of the Common Fund for Commodities. His organization´s particular effort is precisely to upgrade the presence of developing countries in commodity exports, because in commodities, there is much that can be done in terms of value added or diversification, particularly given the new markets for fruits and vegetables, fish and sea products, and many others.
We will have to look at manufacturing, but we will also have to look at services. We have to consider the role of FDI, of national investment, technology and managerial capabilities. We would like to see some practical ideas and concrete examples coming out of these two days of discussion, including examples from companies and from different continents: Asia, Africa, Latin America. As a result, our idea would be to identify what are the best practices, the best advice, so as to feed them into the preparatory process that Ambassador Sha is chairing, which will ultimately result in a decision by the Conference on UNCTAD´s work in the years ahead.
Let me just say in conclusion that we are on the eve of important changes in the international trade arena. The president of my country has been talking about what he calls the "new geography of trade", referring rightly to the emergence of developing countries as an important engine for import demand.
And this is exactly what is happening. You probably know that last year, for the first time in history, the United States exported more to developing countries than to OECD countries. You probably also know that last year´s recovery in Japan was due largely to import demand from China, and it was the enormous increase in Chinese trade -- both ways, exports and imports -- that made an important contribution to intra-Asian trade. Nowadays, developing countries are already trading among themselves - currently about 43 per cent of their total trade. Unfortunately, this trade is heavily concentrated in Asia; we would like to see more of it in the other regions as well. This is coming as a complement to North-South trade, because one of the concepts that is central to us at UNCTAD is the idea of interdependence: interdependence in the sense that the future of developing countries depends on the growth and the prosperity of the industrial world, because it is from the industrial world that we will receive the surplus of capital for investment, along with technology. We find at least part of the market beyond what we can provide in South-South trade. This is a reflection that I have to share. As new countries emerge - first China, with its huge success story, and now India, in outsourcing or offshoring -- we know that there will be reactions, and we are already witnessing some protectionist actions, because of the problem of unemployment and the fear of job losses. We at UNCTAD have taken a clear position on this, trying to show the exaggerated nature of those fears. Just a few days ago, I took a public stand against the pressures now building up around the outsourcing of services and the attempts to prove that this trend is very negative. But we have to be aware that the root cause of those unfounded fears is the insufficient growth of the world economy.
And so I come to my final remarks, which have taken me somewhat beyond my given subject. I wish just to remind you that the world has faced a similar challenge before: after World War II, we had an emergence in manufacturing exports by Japan and Italy. Italy was not very far behind Japan in terms of the rate of manufacture penetration in those years, the late 1950s and 1960s. At that particular time, however, it was not difficult to accommodate the rise of Japan or Italy as new industrial powers because Europe was growing at a very fast pace; Germany and France were importing workers. Today we face a different situation, and I will close by saying that we must all share in the effort to restore satisfactory growth to the world economy and to the industrial countries themselves. This is the key way to overcome supply-side constraints and bring prosperity to developing countries through trade.