CATHERINE NOVELLI'S REMARKS ON CONNECTIVITY AND POLICY

FROM:  THE STATE DEPARTMENT 
Policy Choices for a Connected World
Remarks
Catherine A. Novelli
Under Secretary for Economic Growth, Energy, and the Environment 
University of Pretoria
Pretoria, South Africa
November 13, 2014

Good afternoon.  I am delighted to be here to speak at this distinguished university and to visit your beautiful country.  Thank you so much for inviting me.  South Africa is the last stop on an Africa trip that included Tanzania and Kenya.  Along the way, I’ve seen incredible energy and dynamism.

I’d like to speak today about a new economic reality and the policy choices we all face.  These choices are in front of every government, business, university, and individual as they determine their economic future.  The reality is, the world is more connected than ever before, with goods, services, information, people, and financial resources crossing borders at an unprecedented rate.
                 
Before this speech and after it – perhaps during it – you will be looking at mobile devices, tapping into the internet, engaging in social media, and conducting business and commercial transactions on line. The object in your hand, perhaps a smart phone, is the result of a manufacturing process that started with innovation and design at various locations around the world, manufacturing at a host of other sites, and distribution and marketing from even different corners of the globe.

That’s the reality of today’s world, whether you are in South Africa, Kenya and Tanzania – as I was in recent days – or Washington, DC, or London or Tokyo.  Global supply chains have come to define the way we do business in today’s economy.

The Connected World

McKinsey Global Institute recently wrote that cross-border flows of goods and services totaled $26 trillion in 2012.  This represents 36 percent of global gross domestic product, more than 50 percent larger than 20 years ago.  About half of those flows are knowledge-intensive, compared to labor-intensive, and the proportion is growing. Intermediate goods – ones that are incorporated into a finished product—have become an ever-increasing proportion of trade.   These goods in turn are fueling exports from the countries that have imported them.  Over a quarter of the total value of global exports is made up of intermediate imports, and this share has nearly doubled since 1970. These statistics bring to light the changing nature of business.  Older models of single-country, soup-to-nuts manufacturing arrangements are giving way to globally integrated supply chains.  Innovation and design come from a worldwide network of research and development.  Raw materials and components flow from site to site, supported by worldwide procurement systems, logistic hubs and warehousing.  Marketing and financial services may be at other locales. Consumers are targeted for sales around the globe.

How Countries Can Take Advantage of Value Chains

So what are the implications for countries, companies and citizens of a world where global value chains are increasingly dominating trade?  What policies should countries follow to benefit the most from value chains? I would suggest that countries need to focus on five policy areas as they enable their citizens to fully reap the benefits of today’s connected world.

First, open markets facilitated by fast customs procedures, international product standards and modern infrastructure is critical. Supply chain production is more complex than traditional export systems, with more import and export transactions for each unit of value added.  This means that as goods and services move across multiple borders on their way to the final market, even small barriers can add up and affect the competitiveness of a product.

In the connected world, policies that may have offered protection to domestic firms in an earlier era, like import substitution, local content requirements, or data localization obligations, now make them less attractive as supply chain partners.  An OECD study of local content requirements, found that local content requirements not only made countries less innovative, these requirements actually harmed the domestic market by raising prices for the public for products of lesser quality.

Because of just-in time production, concentrating on bread and butter trade facilitation issues like customs procedures, transportation and modern infrastructure is all the more important.  Since products need to be sold in many markets, adhering to international standards is essential for their international viability.

Second, countries need to adopt legal and regulatory processes for doing business that are transparent, predictable, streamlined and include input from all stakeholders. The ability for investors to enforce contracts, and high standards for labor and environmental protections along with an intolerance for corruption are all key considerations for businesses in deciding where to locate or source.
I have heard some voices suggest that these “doing business” issues don’t matter, and that companies merely want to find the lowest labor costs.  But in my experience, that’s not true.  The ability to do business transparently matters a great deal to the bottom line.  Morever, branded companies value their brand image, and don’t want to risk harming it due to scandals over labor or environmental conditions. Nor do they want to be in the position of being labor and environment regulators.  Besides the moral issues surrounding poor labor and environmental enforcement, the need to constantly oversee these practices among suppliers when countries are not policing them themselves adds a great deal of cost.

Fostering Global Collaboration Through the Internet

Third, an open Internet, access to broadband, and free flows of data are essential to competitiveness. As I mentioned earlier, global supply chains are dynamic and highly collaborative, with teams of suppliers and purchasers from various stages of the value chain working together across borders to solve design, manufacturing, and marketing problems.   This really is the essence of today’s connected world. This cannot occur without internet.

The best way to unleash the creativity and ingenuity of your people, your companies, and your universities is to let them connect with others to develop new ideas and start new businesses.

There is an inaccurate perception that the Internet mostly benefits industrialized countries.  The truth is that the Internet’s economic benefits are increasingly shifting to the developing world.  The Internet economy is growing at 15 to 25 percent per year in developing countries, double the rate in the developed world.  In Turkey, for example, smaller businesses that use the web have experienced revenue growth 22 percent higher than those that do not.  Here in South Africa, Ronnie Apteker founded the first Internet service provider and enabled countless new technology businesses.  I am looking forward to meeting some of those new entrepreneurs tomorrow.

A recent report by the American think tank, the Brookings Institution, showed how the internet and cross-border data flows are providing opportunities for small and medium-sized enterprises. The report notes that SMEs on eBay are almost as likely to export as large businesses and, in fact, over 80 percent of SMEs export to five or more countries.

Fourth, strong intellectual property protection allows countries to be part of a higher-value global supply chain. At a recent conference in Washington, General Electric noted that it maintains research and development centers in Shanghai, Bangalore, Munich, Rio de Janeiro and New York.  Many other international firms have similar R&D footprints.  This geographic diversity allows for an R&D operation that, given time zones, literally never stops.  Companies look at many factors when considering where to locate their R&D centers, including the level of education, vocational training, and scientific collaboration.  But the level of intellectual property protection is also critical.

Closely related to this is a fifth policy— an open market for services. We often think of trade as the physical movement of goods from place to place.  But in today’s global economy, knowledge-intensive trade and investment, particularly in the services sector, plays an increasingly central role.

Economists from the Organization for Economic Cooperation and Development have found that services now constitute 50% of the manufacturing process.  Insurance, accounting and other financial services, and creative and design services, are all integral parts of supply chains.  But in many countries, markets for these services are closed, or heavily regulated.   If the goal is to maximize participation in global value chains, closed market policies like these no longer make sense.

Regional Trade Liberalization

The policies I have set forth are important, but not sufficient to be globally competitive.  In addition to being islands of good practices, countries need to join together to create regions where those good practices are integrated.
Last August, I chaired a roundtable on global supply chains at the U.S-Africa Leaders Summit in Washington.  We invited corporate representatives as well as trade, investment, and economic ministers from African countries.
One of the most interesting themes was the need to create regional markets in Africa. Companies were clear that the markets in many individual countries in Africa are too small to support operations just for that market. That does not mean that there are no opportunities for smaller countries to benefit from the global supply chain.  In fact, recent research indicates that, on average, regional trade agreements increase member countries’ trade about 86 percent within 15 years.

The European Union is perhaps the largest, best known and most successful example or regional integration.  There is also the North American Free Trade Agreement, which just celebrated its 20th anniversary.  With Asia, we are now negotiating a Trans-Pacific Partnership, and with Europe we have launched talks on a Transatlantic Trade and Investment Partnership.
 
Arrangements such as these, which lower barriers to trade and investment, deliver a big boost to commerce in member countries. These arrangements also offer ready-made hubs for setting up a global supply chain.  Countries who haven’t established some type of true regional integration will find it harder to compete for the investment that a global supply chain brings.

In Africa, regional organizations like the Economic Community of West African States, the East African Community, and the Southern African Customs Union are working to create regional integration and address barriers so that countries can achieve economies of scale and maximize their comparative advantages.  Nelson Mandela recognized the importance of looking at regional integration when he  conceived of Development Corridors along cross-border  transportation routes.

Africa and Supply Chains

Here in South Africa, I had a wonderful illustration of the connected world yesterday at the Ford factory in Silverton.  It is an American investment, creating jobs in South Africa.  Inputs, like raw materials and components, arrive from various locations around the world.  Local workers assemble those components and the factory exports to other African countries and to European markets.
The United States recognizes Africa as a dynamic continent where economies are growing and innovation is taking root.  Many African countries are reaping the benefits of economic reforms, better governance and social investments.  We would like to be a part of this positive change and contribute to Africa taking its place in the global supply chain, so that the people of Africa can reap the benefits of global growth.

The United States is supporting Africa’s growth through the African Growth and Opportunity Act (AGOA), the Trade Africa Initiative, and similar efforts.  The Millennium Challenge Corporation, for example, has issued grants of almost $10 billion to support projects in sectors like transportation, education, and property rights and land policy.  Through President Obama’s Power Africa initiative, a number of U.S. agencies are making available $7 billion in financial assistance to double access to power in six sub-Saharan African countries.

Some continue to argue that African nations need “protectionism” to compete.  I disagree.  Africans are strong, resilient, and ingenious, and I have seen in my meetings with entrepreneurs, businesses, and students people who can go toe-to-toe with the most competitive companies in the world.  We need to go forward together towards openness, high standards, and opportunity for all of our citizens.

Thank you very much.