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    Multilateralism is Better for Business


    © International Trade Centre, International Trade Forum - Issue 1/2006

    © Jupiterimages Corp.

    The multilateral trading system is the surest way to build up the global production systems from which more countries and firms can benefit.

    The aftermath of the World Trade Organization's Ministerial meeting in Hong Kong, China is a good time to remind ourselves of why multilateral trade agreements serve the interests of today's global production system in a way that the alternative - a fragmented system of bilateral agreements - does not.

    Over the past six years, we have seen discord in Seattle and Cancún, followed by what appears to be a widening divergence of views between developed and developing countries. Related to this, we have seen a rise in bilateral trade agreements. I would like to give my point of view as a businessman on what is at stake and why WTO negotiators have an interest in finding common ground.

    Global rules ease global production

    Manufacturing today is quite different from the past. In the old days, when we talked about manufacturing a product, it was assumed everything would be done "in-house" - in one factory, under one roof and in one country. But manufacturing carries a completely different meaning today. Products are no longer made in one factory and under one roof. Increasingly, production is dispersed across different factories in different countries - it is becoming globalized. Information technology and logistics help dissect the value-added process into component parts, with factories, locations and countries assigned for each stage according to their competitive advantage.

    In modern production systems, we need to ease the flow of items across borders according to a single set of trade rules and regulations.

    Let me illustrate what I mean. My company, the Li & Fung Group, through its export trading arm, Li & Fung (Trading) Ltd, sources high-volume and time-sensitive consumer goods on behalf of customers in the world's leading markets. If, for example, we were to receive an order for 10,000 shirts from a retailer in the United States, we would analyse the supply chain into various stages of manufacture and choose locations according to objective criteria.

    First, we would consider the best place to source the yarn, perhaps deciding on the Republic of Korea, where we will identify an appropriate factory. For dyeing and weaving the fabric, the client's need, timing, capacity and the technology requirements may lead us to select China. So we ship the yarn from Korea to, say, two factories in China because we have a tight deadline to meet. Next, we would identify the best place to tailor the shirts, the final process in the chain of adding value. In this case, for reasons of labour, skill and capacity, we may select three different factories in Thailand. The final products we deliver to the retailer will look as if they had all come from one single factory, whereas they were manufactured in six factories in three different countries.

    Avoiding the "spaghetti bowl"

    Now imagine a similar kind of situation, but this time, instead of being faced with one set of multilateral rules, the supply chain manager has to deal with multiple bilateral trade arrangements between different countries, each one with different requirements and provisions. Of particular concern are "rules of origin", which define where a product is made and determine what kind of market access it will have. With each new bilateral agreement, considerations relating to rules of origin multiply and become more complex in the phenomenon trade experts call "the spaghetti bowl effect". Even larger companies have a hard time keeping track. For small firms, it is impossible.

    In a hypothetical example, "Country A" and "Country B" sign a bilateral agreement requiring that goods have Country A as their country of origin in order to qualify for duty-free entry into Country B. Raw materials can only be sourced from Country A and perhaps a few small neighbouring countries for the finished products to enter Country B duty-free. Returning to the previous example of the order for 10,000 shirts, bilateralism starts to distort the flows. It throws up barriers, creates friction, reduces flexibility, raises prices and hinders companies' ability to bring new countries into the global production system.

    From a business standpoint, the question in structuring the supply chain should not be how to qualify for favourable rule of origin treatment. Instead, the question should be: "What is the optimal way to create a product?" The answer is to do it in the most cost-effective way for the final consumer.

    Dispersed manufacturing is the way of the future and the multilateral system is vital for its efficiency because firms have only to understand one set of defined rules, universally applied. It benefits consumers worldwide who get higher quality, greater variety and lower prices with the entire world as a production base. It also enables more locations all over the world to participate and contribute according to their skills and to develop their competitive strengths.

    More can take part

    With dispersed manufacturing, developed countries can focus on what they do best: design, branding, understanding consumers' needs and other specialized knowledge-based activities. But it is developing countries that stand to gain the most as their small and medium- sized companies gradually integrate into the international supply chain. This integration to a previously inaccessible international trading environment is made possible by their ability to focus on the core activities that give them their competitive edge, and not have to deal with areas where they lack expertise, such as design, marketing and so on. With comparative advantage and open trade, every company in every country can take part.

    The efficiency of today's dispersed system of global production depends upon the multilateral solutions of the Doha Development Agenda for issues such as market access, tariff and non-tariff barriers to trade and trade facilitation. The current proliferation of bilateral agreements neither substitutes nor complements true multilateralism. Bilateral agreements, as they proliferate, do not merge into a coherent multilateral system. Instead, they make it harder for business to create value and hence for economies to create jobs.

    It is only the multilateral system called for in the Doha round that enables each location around the world to contribute according to skills, capabilities and competitive advantage, providing access to the developing world's small and medium-sized companies. Multilateralism democratizes the global economy: there is indeed a place for everyone.

    Victor K. Fung is the Group Chairman at Li & Fung, a global consumer products export trading company in Hong Kong, China. This article is based on his comments at the United Nations Economic and Social Commission for Asia and the Pacific High-level Government-Business Dialogue for Development in Macao, China in October 2005.