International supply chains and the irrelevance of the WTO

I had earlier blogged about Richard Baldwin's presentation at the Public Forum at WTO titled WTO 2.0. In an article explaining what international supply chains is all about and what impact it has for international trade rules as well as the WTO, he emphasizes:

"The world of trade politics and trade governance also changed. If a high-tech firm is to locate production stages in a developing nation, the nation’s government must ensure the necessary free movement of goods, services, information and the protection of tangible and intangible property rights. Old-fashioned protection, anti-FDI policies, or lax property rights almost guarantee that the offshored stages will go somewhere else. 

Developing nations that got the offshored factories became hyper-competitive and wiped out the exports of developing nations that clung to import-substitution industrialization. In the world of supply-chain industrialization, protectionism has become destructionism. 

Having learned this lesson, developing nations unilaterally lowered tariffs and eagerly signed up for deep disciplines in regional trade agreements and bilateral investment treaties. It happened regionally, rather than multilaterally, since most supply chains are regional, a tendency that the WTO’s decade-long preoccupation with 20th-century trade issues (tariffs and agriculture) exacerbated."

He has predicted that the WTO would lose its centrality in international trade rules if it does not address this fundamental shift in trade pattern from old mercantilist exports and imports to supply chain industrialization. How severe is the impact of these changes going to be on international law and internternational trade rules? Will the WTO Agreements become irrelevant? Will bilaterals define the parameters and contours of supply chain trade? Will the role of the dispute settlement mechanism of the WTO move into oblivion in the coming years? Or will the WTO adapt to the changed reality and negotiate on new trade rules keeping in mind the reality of international supply chains? Will Doha be resurrected due to the inevitability of trade? What changes will the rules have to take care of the new trade world?

Pascal Lamy on the "fallacy of protectionism"

I have often blogged about the growing signs of protectionism in recent times.While some are manifested in "buy local" measures others are in the form of increased "import licensing" measures. Though countries espouse less protectionism, the facts indicate that countries in times of crisis do tend to look inward to protect domestic industry, growth and interests.

Pascal Lamy in this post titled "The Fallacy of Protectionism" in YaleGlobal Online has highlighted the dangers of a protectionist world in the context of global realities of trade. Referring to the global supply chains and the active role WTO has played in monitoring international trade, protectionism though in existence, is not as pervasive as it could have been.

"The internationalisation of production that had so visibly bound economies together prior to the crisis was underpinned by the predictable trading environment provided by WTO rules. When the crisis broke, the WTO's combination of monitoring and surveillance and a firm framework of rules worked to deter knee-jerk protectionism.  Since January 2009, the WTO has issued regular reports on governments' use of trade restrictive measures. Together with the United Nations and the Organization for Economic Co-operation and Development, the WTO monitors how the Group of 20 leading economies comply with their pledges to refrain from trade and investment protectionism, documenting new policies to restrict or facilitate trade."

Will the reality of international supply chains, integrated markets and internationalization of production be the key to a less protectionist world? How much of global production is integrated? Pankaj Ghemawat tends to believe that we are less integrated than we think we actually are. Why are there clamours for "buy local" even from developed countries which are part of this integrated supply chain? Is there a difference between global corporations being part of integrated supply chains and countries representing vast majorities who are cut off from the realities of trade? Is there a disconnect between global supply chains and the vast majority of people who vote? Is democratic politics and the pressures of local, domestic interest different from value chain trade and internationalization of production? We need to critically look at this aspect if one has to find answers to some of the discomfiture with international trade and openness in many parts of the world. I am not suggesting that more protectionism is the answer. However, we need to understand what the reality actually is. It surely may be somewhere in between, as usual.

International supply chains and Made in the world

Richard Baldwin has made an interesting analysis for the reasons for tariff liberalisation in developing countries since the late 1980's. In his "Unilateral tariff liberalisation" he proposes that tariff liberalisation in developing countries have taken place primarily due to the new reality of international supply chains that they are part of.

The two graphs below indicate the reduction of tariffs which were earlier a form of protecting local industry.

What caused this reduction? negotiations to reduce tariffs or trade realities. The explanation offered is the reality of international supply chains. The joining of international supply chains as well as the end of "infant-industry" protection seem to spark this reduction of tariffs.

"The second unbundling revolutionised development options facing poor nations – especially those geographically close to industrial powerhouse nations like Japan, the US and Germany. Rather than building their own supply chains behind tariffs walls over a span of decades (as was done in the US, Germany, Japan, Korea and others), the second unbundling allowed nations like Thailand and the Philippines to set up sophisticated manufacturing facilities in a matter of months by joining a supply chain.

The catch was that tariffs – and many other 'pro-industrialisation' policies from the pre-ICT era – turned out to be hindrances to joining supply chains. In reaction, many developing nations dropped the old policies to attract offshored manufacturing jobs and investment."

I am not an economist but I found this analysis interesting. the reality of international supply chains and their impact on tariffs is evident. Have the global trade  rules taken note of the reality of international supply chains? "made in the World" is the new reality rather than Made in China,  U.S. or Germany. While the stage in international trade law has shifted to non-tariff measures as new forms of protectionism gain ground, would the reality of global supply chains require a need for a relook at international trade regimes?  Another question is what explains the rise in "protectionist" measures, albeit non-tariff, in recent times though the reality of the global supply chains exist? While tariffs have reduced, non-tariff measures like technical regulations and other standards seem to have become the new norm.

Reverting back to the supply chain reality, Scott Lincicome has brought out the "Made in the World" concept aptly in his blogpost. I am borrowing the image used there (could not resist it) for its sheer clarity in explaining new realities:

The new reality of international supply chains?