On China-made iPods and why we should buy

By Pascal Lamy | 2009-11-24 | NEWSPAPER EDITION

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GLOBAL trade contracted in 2009 at a rate not seen since the Great Depression, and those paying the heaviest price are those who can least afford it.

So, when trade ministers from the World Trade Organization's 153 members gather in Geneva later this month, the issue of how the WTO and the global trading system can help the poorest countries will be high on the agenda.

Driven largely by collapsing domestic demand and production levels, but also by a shortage of affordable trade finance, trade volumes will fall by more than 10 percent this year.

Whether trade will recover next year is an open question. Despite some evidence that trade volumes grew over the summer, recovery has been so fragile that a sudden shock in equity or currency markets could once again undermine consumer and business confidence.

The world's poorest countries face the greatest hardship when trade languishes. They do not have the luxury of cobbling together fiscal-stimulus packages or rescuing ailing industries in order to cushion the shock brought about by the economic crisis.

For them, trade represents a huge share of overall economic activity and is unquestionably the best avenue for exiting a crisis that has hit them hard.

The irony is that trade has collapsed just when these countries were becoming increasingly active in global markets, with their exports rising by more than 20 percent during this decade.

For nations that depend on trade, the sharp drop in exports this year was crippling. Since the crisis began, export earnings of the poorest countries are down US$26.8 billion, or 44 percent.

The WTO Ministerial Conference later this month will provide an occasion to consider the best ways to generate growth and alleviate poverty in these countries.

Concluding the Doha round of trade negotiations by the end of 2010 -- as world leaders have said they wish to do -- is one of them. A Doha deal represents one of the most valuable tools at our disposal to help meet the United Nations' Millennium Development Goals.

Frankly, all of us already know what needs to be done. Yet the Doha Round has fallen victim to basic misunderstandings -- first, about why countries trade, and, second, about how they trade.

Countries trade, first and foremost, because it is in their interest to do so.

It is in a country's interest to lower its import barriers so that it has cheaper access to goods and services that it cannot produce competitively.

Trade increases competition and keeps inflation in check. In this way, trade can raise living standards. Moreover, countries that lower their import barriers also end up exporting more.

The reluctance of trade negotiators to pursue what is in their obvious self-interest reflects another, more serious misunderstanding about the manner in which nations trade.

Consider US-China trade in iPods. Every iPod that the US decides not to import means a US$150 "decline" in China's recorded exports, though only about US$4 of that value is actually added in China. Japan, which contributes about US$100 in value, suffers far more from China's supposed decline in exports. Clearly, the words "made in" mean something very different from what they meant 20 years ago.

Our production processes are so globalized that a country's import tariffs could well penalize imports from one of its own global companies.

Capacity to trade

For many countries, particularly in the developing world, reducing obstacles to trade is insufficient for fuller participation in the global economy, because they also need to build their capacity to trade.

That is the central aim of the Aid for Trade initiative. Despite the economic crisis, Aid for Trade donor contributions to help the less fortunate have risen 10 percent per year since 2005, and major donors are on track to meet or exceed their pledges for future funds.