Very few firms from developing countries are really part of the leadership of these global value chains and dominate the world economy in the way that the lead firms in the North, in the U.S. in particular, and in Europe, do says Faizel Ismail discussing the global value chain approach to trade and its rise to prominence in the World Trade Organization
July 23, 2014 Produced by Lynn Fries
LYNN FRIES, TRNN PRODUCER: Welcome back to The Real News Network. I’m Lynn Fries in Geneva. In part 1 of this report on global value chains, we looked into how in sector after sector, a handful of firms now dominate global production in the world economy. We also looked into what developing countries prioritized when negotiating the Doha Development Agenda. In this segment, we put the two threads together.
Here to continue our conversation is Faizel Ismail. Ambassador Ismail served as South Africa’s Permanent Representative to the World Trade Organization from 2002 through the end of June this year. While at the WTO, he authored two books, Mainstreaming Development in the WTO and Reforming the World Trade Organization. He is currently writing a book on the history of South Africa’s trade policy, from apartheid rule to its new democracy. Ambassador Ismail joins us in Geneva. Faizel, welcome.
FAIZEL ISMAIL, SOUTH AFRICAN AMBASSADOR TO THE WTO (2002-2014): Welcome to you too.
FRIES: Before getting into a question on global value chains, for viewers who may not have seen part 1, I’ll just repeat a point that was made, that what shapes these global value chains are the lead firms, that not only has there been tremendous industrial concentration among the lead firms, but because of this deepening interaction between the lead firms and their suppliers, there’s been a deepening of concentration throughout the value chain in the first-tier suppliers, and even down to the second- and third-tier suppliers.
So, for example, taking the sector of the large commercial aircraft that you used in part 1, at the apex of the global value chain are the two lead firms, Boeing and Airbus. But under them, there’s a deepening of concentration in their suppliers that’s been shaped. So, for example, two firms that supply braking systems to the sector have a combined 75 percent global market share; three firms supplying tires, 100 percent global market share; and so on and on with other suppliers to Boeing and Airbus; and in other sectors, sector after sector.
So the question is: why did global value chains became important and relevant in the World Trade Organization and the Doha Round negotiations in particular?
ISMAIL: Well, it didn’t necessarily have to. It did become important and relevant because a group of, let me say, academics, thinkers, lobbies, mainly from the United States and Europe, decided after the collapse of the 2008 ministerial meeting of WTO negotiators here in Geneva that the round was dead. And they decided that the round as a whole and all the negotiated texts up to that point were obsolete. They decided that these forces that I was talking about that were beginning to form themselves in the 1990s and at the turn of the millennium, they decided that this phenomenon of global value chains rendered the negotiating agenda of the Doha Round obsolete, because the Doha Round focused–its principle focus was on agriculture. And then, of course, it focused on market access in goods, which is and was the traditional negotiating focus of the GATT, and then on services, which became important since the Uruguay Round. So this was the main part of the agenda of the Doha Round. Of course, it had a number of other rules, issues, in the negotiating agenda. But this group of people, including some important players in the U.S. administration, both from the previous Bush administration and the incoming administration, felt that the Doha Round was obsolete. It didn’t address the newer issues and the new trend in the global economy, which was dominated by global value chains. And they said that according to their analysis, this phenomenon of global value chains did not see agriculture and rendered obsolete the whole negotiating agenda on agriculture, because what we were negotiating in agriculture was a reduction of subsidies, tariffs, and other barriers that were preventing developing countries from exporting into the North. But these people were focused on the lead firms in the North, the big multinational companies and what was preoccupying them. What was preoccupying them was how to reduce barriers for their companies throughout the developing world, and particularly in the emerging markets.
FRIES: But while the Doha Round prioritized development needs, it also included the needs and priorities of developed countries too. Is that what was meant by a “single undertaking”? What was that about, and what happened there?
ISMAIL: The “single undertaking” was a concept we agreed to at the launch of Doha Round, and it meant that all the issues in the Doha Round, a large package of issues, should be taken together and considered together in the overall balance of the negotiations. And they argued that this way of negotiating, using a single undertaking, was obsolete, and that we should rather focus on issues which were more relevant in the new world economy ushered in by global value chains.
And this new world economy ushered in by global value chains privileged trade facilitation and services. And trade facilitation, they argued, was the core issue going forward. To quote them, one of their papers, they said, this is where the money is, and that’s why we need to focus on trade facilitation. And this is indeed why trade facilitation became the issue that the WTO focused on as we went towards the Bali Ministerial Conference. And it is also the reason why a so-called plurilateral form of negotiations emerged in services, because services was one of the issues–is one of the issues in the Doha Round where the United States and other members, mainly in the North, decided that we needed a group of like-minded countries to come together first to negotiate a services agreement, a so-called plurilateral agreement, amongst a small group of countries, and after they had agreed amongst themselves, then they would come to the rest of the membership. And because services were so important, they wanted to change the modalities in services, change the way negotiating took place in services. And they wanted to raise the level of ambition. In other words, they wanted to have a higher degree of liberalization and market access in services than the Doha Round modalities had provided for. They also argued that developing countries like China, India, Brazil, and even South Africa, had risen in the last decade and become more dominant in the world economy, had gained an increasing share of world markets, and therefore need not be and should not be given any additional policy space, as they were in the Doha Round. And therefore they argued that the modalities–and modalities in WTO language means the method by which we decide on tariff reductions and how we distinguish between developed countries and developing countries in the different proportion and burden of adjustments and contribution that each has to make to the Doha Round.
FRIES: So, taking the case of China as a developing country that’s risen in dominance in the world economy over the past few decades, according to development expert at the University Cambridge Peter Nolan, while Chinese firms rank highly in Fortune 500, the FT 500, he points out that these ranking can be misleading, that they can mask the weakness of Chinese firms as global competitors, that these rankings are based on very high revenues, profitability, very large market capitalization of China’s state-owned enterprises, but that it’s been the industrial policy of China over the last 30 years to leverage these, the state-owned enterprises, as their national champions, as firms that they can turn into world leaders, as globally competitive Chinese firms. And yet, according to the analysis of Peter Nolan, China lacks a substantial number of globally competitive firms. And he points to what we discussed in part 1, this “global business revolution”, that since then, the competitive landscape for developing countries is far stiffer than it was for developing countries before. And your thoughts on this?
ISMAIL: Yes. No, I think the interesting thing about this business revolution was that it was dominated by firms in the North. So, yes, we have also seen in the last decade–very interesting decade for me being here in Geneva, because at the time of the change towards the Doha Round and the launch of the Doha Round, China just acceded to the WTO. And, of course, it was also an interesting moment, because when you look at the statistics over the last decade, you see the sharp rise of China’s participation in the global economy, not only its trade and imports and exports, but also increasing outward investment. Similarly, companies in developing countries like India, even South Africa, Brazil, have become real players in the world economy. However, very few of these are lead firms, very few of these firms are really part of the leadership of these global value chains and dominate the world economy in the way that the lead firms in the North, in the U.S. in particular, and in Europe, do.
FRIES: And more broadly, the developing country perspective?
ISMAIL: Of course, even the idea of global commodity chains was present in many discourses of developing countries over the last few decades. UNCTAD has been writing about this. Of course, the forms in which this has taken has begun to change, but the phenomenon was out there. And in each case when this was studied from the point of view of developing countries, developing countries were concerned about how to move up the value chain from the bottom, because the reality for almost all African countries is that they are at the bottom of the chain. Even South Africa, a relatively more advanced African economy, remains largely a commodity producer, an exporter, and in most cases it is either at the bottom or at the lower end of the global value chains in which it participates. And the objective of developing countries who are at the bottom end is to move up–in other words, to increase their share of the value, to increase their gains from the total profitability. And what the evidence shows is that most of the profits and the largest share of the value from these chains, it goes to the lead firms. Even though the lead firms have a relatively small number of workers and professionals who are employed, they tend to be highly skilled, and they take the bulk of the value that is obtained from these chains.
Developing countries are struggling to move up, to increase their gains, and to do that they have to adopt different policies. Rather than look at how to improve the transmission of goods and services in and out of their country and reduce transaction costs, their task is to develop policies to increase the value that they get, to improve the living standards, to improve the working conditions of workers, and to return a larger share of the profits and value to the government and societies where production is taking place in global value chains. And this may require a mix of policies. Some may need greater liberalization and deregulation, but in other cases, these countries may need to increase protection and to develop regulations, which will allow for the spreading of production and services towards a wider community. It will enable both the increasing creation of more jobs but also the increasing number of decent jobs and a higher standard of living. So they are contrasting policy objectives.
But the discourse of those proponents of global value chains in the WTO is to blur these differences and to suggest that the interests of the lead firms is the same as that of all developing countries, and this is simply not the case.
FRIES: Next up, let’s talk about future prospects. Please join us for our next and final segment with Ambassador Ismail.
Faizel Ismail, thank you.
ISMAIL: Thank you, Lynn.
FRIES: And thank you for joining us on The Real News Network.
Ambassador Faizel Ismail served as Permanent Representative of South Africa to the World Trade Organization (2002-2014) and as the Chair of the WTO negotiating group (CTDSS, 2004-2006) and the Chair of the WTO Committee on Trade and Development (CTD, 2006/7). He led the new democratic South Africa’s trade negotiations with the European Union, Southern African Development Community, Southern African Customs Union and several other bilateral trading partners including the US, India, and Mercusor since 1994. He is the author of two books on the WTO: Mainstreaming Development in the WTO and Reforming the World Trade Organization. He is currently writing a history of South Africa’s trade policy from apartheid rule to its new democracy. He is Associate Editor of the Journal of World Trade; Advisor to the BRICS Trade and Economic Research Network; Senior Research Associate, Centre for Rising Powers, University of Cambridge, United Kingdom; Senior Research Associate, Brooks World Poverty Institute, University of Manchester, United Kingdom; and member of the Partnership Council of the Global Alliance for Improved Nutrition (GAIN), Geneva, Switzerland. He holds a Masters in Philosopy degree in Development Studies from the Institute of Development Studies, University of Sussex, United Kingdom and an LLB and a BA degree from the University of Kwa-Zulu Natal, South Africa
Originally published at TRNN