Challenges and Opportunities in Global Trade: Supply Chain Resilience and Sustainability

University of Tokyo

President Fujii, thank you for that kind introduction.

Dean Iida

Executive Director Ishii

Professors, students, friends.

1. I am deeply honoured to join you here today. It is always a pleasure to be back in this remarkable city, and to see old friends like Professor Ishii.
2. The University of Tokyo, which is so tied up with the history of modern Japan, is an appropriate venue for us to discuss the themes I want to cover today.
3. In this age of constant change and crisis – in the economy, the environment, and the geopolitical system – countries around the world are seeking to build resilience and sustainable prosperity. I will make the case today that there is a great deal they can learn from Japan’s experiences and achievements.
4. From the economic modernization of the Meiji Ishin, which included the creation of this university, to the postwar miracle and the later role Japanese companies played in building Factory Asia, Japan provides many lessons on how to harness international trade as a force for growth, development, and resilience.  
5. But before I explore any of this further, I want to speak to where the World Trade Organization fits in.
6. The public policy students here will know what the WTO is: the multilateral institution dealing with trade among nations – where governments negotiate and administer trade rules, discuss concerns about each other’s trade policies, and resolve trade disputes.
7. Those of you who are interested in global trade probably remember that the multilateral trading system underpinned by the WTO, and before it the General Agreement on Tariffs and Trade, the GATT, was set up in the wake of World War Two. In the pre-war period, the world economy had fragmented into rival, hostile blocs, and this was a conscious attempt to foster peace and prosperity through economic interdependence.
8. You may be familiar with how WTO members had in recent years been struggling to negotiate new rules – and how we broke that streak last June and delivered agreements on fisheries subsidies, food security, and access to COVID-19 vaccine related intellectual property.
9. But something you may not have heard before is that the WTO is about people. Don’t worry if that sounds new – I sometimes have to remind trade negotiators in Geneva about this too!
10. The fact is, the WTO’s core objective, as stated in the preamble to our founding Marrakesh Agreement, is to use trade to raise living standards, create jobs, and promote sustainable development. These goals are fundamentally about improving people’s lives and livelihoods. This is the purpose that guides our work.
11. Japan was the first country to demonstrate just how powerful a force trade could be for improving people’s lives. During its postwar economic renaissance, this country basically invented what we now think of as the trade-led growth and development model.
12. Japan used external demand, especially in the United States market, to accelerate the shift of people and resources out of farming and other low-productivity work and into more productive sectors of its economy.
13. The cumulative results were dramatic. Between 1945 and 1958, per capita income growth averaged 7.1%, as Japan regained and then surpassed pre-war GDP levels.
14. Growth subsequently accelerated further, averaging 9.5% between 1959 and 1970 – meaning that incomes multiplied by 2.7 times in the space of just over a decade.
15. For people in your grandparents’ generation, this translated into an extraordinary expansion in economic and personal opportunity. Day to day life was transformed by increasingly ubiquitous televisions, washing machines, and refrigerators – not to mention Japan’s pioneering bullet trains.
16. Japan’s trade performance was at least as remarkable. In the five years after Japan joined the General Agreement on Tariffs and Trade in 1955, its exports doubled. As late as 1960, though Japan’s top export sector was still textiles and clothing, and the value of its exports was in the same neighbourhood as those of the Netherlands, a much smaller country.
17. Over the course of the 1960s, Japanese exports grew at an annual average of over 15%. The country diversified out of silk and cotton textiles and other light manufactures into cars, electronics and high tech, shipbuilding, and precision optical equipment.
18. In the 1970s, Japan’s GDP growth slowed down amid the oil shocks, trade and financial frictions with the United States, and currency fluctuations related to the breakdown of the Bretton Woods exchange rate system. But export growth remained strong. All told, between 1960 and 1980, the dollar value of Japan’s exports as well as its imports increased more than 30-fold (31.2 times for exports, 30.5 for imports).
19. As heavy industry began to lose competitiveness, Japanese companies moved up the value chain. After decades selling playing cards, a company called Nintendo made its first electronic toys. You might not know what a Walkman is, but I can promise you the portable audiocassette players were a big deal when Sony introduced them at the end of the 1970s.
20. By the 1980s, real living standards in Japan had almost converged with those in the United States, France, and West Germany. The ‘Made in Japan’ brand had evolved from signifying low-cost imports to signalling high quality, attention to detail, and innovative assembly line management.
21. I described Japan’s postwar experience in detail because my advisor, Ambassador Uyama Tomochika, advised that it would be ancient history to at least some of you. But what I really want to focus on this morning is two ways in which Japan’s economic miracle transformed the region and reshaped global trade.
22. The first way was through the power of example. Japan’s export-led success inspired many other developing countries to try to follow suit: initially Korea and some countries in Southeast Asia, then – and most consequentially – China. Later still, India and several Latin American countries moved away from limiting imports to conserve foreign exchange, towards trying to boost exports so as to earn more of it. Albeit to differing degrees, many of these countries were able to emulate Japan in importing what the world knows, and exporting what it wants.
23. As much of the developing world embraced outward-oriented, market-based reforms, growth and trade accelerated sharply – and so did development progress. In the decades leading up to the COVID-19 pandemic, over a billion people were lifted out of extreme poverty. The share of the global population living on less than the equivalent of $1.90 a day declined from 36% in 1990 to below 9% in 2018. There is a tendency to attribute this progress entirely to China, but that is inaccurate: take China out of the equation, and the poverty rate fell from 28% to 10.5%.
24. The predictably open global economy, underpinned by the GATT/WTO system, was an essential element in making this growth and development possible. Between 1986 and 1994, the Uruguay Round negotiations reformed and expanded the multilateral trade rulebook, doing away with the growing array of voluntary export restraints – many of which had targeted Japan.
25. Today, however, all of these achievements are being contested – as is the role of the WTO and trade more generally.
26. Rising geopolitical tensions, above all between the US and China, have combined with the sequential shocks of the global financial crisis, the COVID-19 pandemic, and the war in Ukraine to give rise to a different narrative about economic globalization and interdependence.
27. In this view, globalization is a source of excessive risks. Countries should seek more self-reliance instead of interdependence. Integration  should be limited at best to a small circle of friends. We hear more and more talk of decoupling and deglobalization, backed by industrial policies to encouraging the reshoring of manufacturing production.
28. I want to be clear: there are some reasonable grounds for dissatisfaction with the status quo on global trade. Many poor countries, and poor people and regions in richer countries, did not share adequately in the gains of recent decades. And the pandemic and the war in Ukraine did expose genuine vulnerabilities in the way supply chains were organized, with product shortages and bottlenecks.
29. But these crises also underscored how global trade is a shock absorber for societies and economies. Trade and multi-country supply chains helped ramp up production and access to the vaccines and other medical supplies needed to beat back the pandemic. Trade provided ways to mitigate the economic impacts of the war: Ethiopia was able to compensate for the loss of wheat imports from Ukraine by importing grain from Argentina and the United States. Because international markets remained broadly open, countries were able to tap into each other’s demand to drive economic recovery after the pandemic lockdowns.
30. Deglobalization and de-coupling would be extremely costly and disruptive. Roughly 30% of global economic output is tied to trade. Despite the contentious political relationship, US-China trade is at record highs – $691 billion last year, according to the US Department of Commerce. China remains Japan’s biggest trading partner, although bilateral trade has plateaued between $300 and $350 billion since 2011.
31. WTO economists estimate that decoupling the global economy into two isolated blocs would lower long-term real incomes by at least 5% from the current trend.
32. In my view, the problems exposed by the past three years have less to do with interdependence per se, than with overconcentration in trading relationships for certain vital products. This points to a better path towards robust and resilient supply networks that are less susceptible to weaponization by strategic rivals. And this path is deeper, deconcentrated, and more diversified global supply chains, achieved by bringing more countries and communities from the margins to the international economic mainstream. We are calling this ‘re-globalization’.
33. And that brings me to the second way in which the Japanese miracle reshaped global trade. It’s very relevant here, because starting in the 1970s and 1980s, Japanese companies re-globalized parts of East Asia.
34. In the late 1960s and early 1970s, as production costs rose at home, and access to imported inputs and export markets became less predictable, Japan could have retreated inwards.
35. Instead, it turned outwards to other countries in the region, and became a strong advocate for the rules-based trading system. Japanese direct investment in East Asia soared, surpassing the US in 1977.
36. In what the economist Kaname Akamatsu popularized as the ‘flying geese’ model of development, Japanese companies upgraded at home, while relocating some industrial processes to developing countries in the region.
37. Today’s ‘Factory Asia’ supply chain has its origins in the 1970s. Japanese companies – the lead geese in the metaphor – invested in low-cost transistor radio production in Hong Kong. Investment in Korea included tie-ups between some familiar names – Mitsubishi with Hyundai, and Sumitomo with Samsung. Malaysia received investment in electrical and transport machinery. And in 1987, Panasonic signed a joint venture to produce colour television picture tubes in China – back when China did not offer anything like the ecosystem of manufacturing inputs and support services that it provides today.
38. Japan complemented these investments with efforts to share its own institutional expertise in fostering technological learning and productivity. In 1961, Japan set up the Asian Productivity Organization in Manila. The Japan Productivity Center worked with countries across East and Southeast Asia to improve their production processes. Japanese overseas development assistance in the region helped improve the business climate – an early instance of aid for trade and investment.
39. Looking back, the outward push by what the western media used to call ‘Japan Incorporated’ benefited everyone. For the developing countries in question, it meant more jobs, more opportunities for learning-by-doing, and faster trade and output growth. East Asia has been one of the great success stories of globalization. For Japanese firms, it meant lower production costs and diversification against typhoon, earthquake, and other risks. For Japan overall, it meant more markets in the region for its goods and services, and the space to specialize in relatively higher-productivity activities, contributing to higher living standards.
40. Let me say it again: this precedent could not be more relevant today.
41. The ‘re-globalization’ required to make supply chains more resilient to climate, geopolitical, or other shocks involves bringing into global production networks the parts of Africa, Latin America, and Asia that remain on the margins.
42. In other words, we need to do for those parts of the world what Japan helped do for the likes of Hong Kong, Malaysia, and Korea a few decades ago. Yes, we may lose some scale and agglomeration effects, but we would also spur productivity gains and faster growth as new firms and countries integrate into global supply chains. If more micro, small, and medium-sized enterprises and women-owned businesses can be brought into this process, the resulting gains would be more socioeconomically equitable.
43. Japanese businesses and policymakers will have to be a bit more daring. For instance, as of 2021, only 0.3% of the stock of Japan’s outward foreign direct investment was in Africa. The roughly $6 billion in Japanese FDI in Africa is half of what it was in 2013 – though it is over four times higher than the levels in 2005.
44. There will be risks – but there are also potential rewards. The world has changed since the 1980s, and new challenges have emerged. At the same time, there are new opportunities to use trade  and trade policy to address these problems.
45.  For Japan in particular, as you are all aware, a major economic challenge is this country’s ageing workforce and shrinking population.
46. Deepening economic integration with Africa and its young and growing population would enhance Japan’s access both to the markets and the workforce of the future.
47. In a related vein, one of the fastest-growing areas in global trade today is digitally-delivered services – that is, services delivered across borders over computer networks, from streaming games or software development to telehealth and consulting services provided via video.
48. For Japan, services and digital trade can help sustain competitiveness, living standards, and quality of life. For instance, the healthcare system could cope with rising demand by outsourcing some administrative or even medical processes to other countries. Japan’s world-leading robots still rely on software – and software services can be imported. Work permits for foreign healthcare workers can help Japan fill gaps.
49. Artificial intelligence, for all of its mind-boggling potential, cannot hold an elderly person’s hand. Leveraging services trade would help Japan make the most of its human hands.
50. I should say here that Japan has been active in WTO members’ ongoing efforts to develop new rules for services and digital trade. It is party to our agreement on services domestic regulation, and it is one of 89 members participating in talks seeking to define some shared global rules for digital trade.
51. Another set of challenges that have become more visible since the 1980s are environmental in nature – above all climate change.
52. Here too, trade is part of the solution.
53. In fact, we cannot meet our climate goals without trade. Trade and supply chains are essential for ramping up the production of green technologies, driving down their costs, and disseminating them to wherever in the world they are needed.
54. Japan is part of ongoing discussions at the WTO on how to make trade a stronger force for environmental sustainability – from reducing plastics pollution to reforming fossil fuel subsidies.
55. On the climate adaptation side, an open global trading system remains a valuable tool. If changing rainfall patterns cause farm yields to drop in a former breadbasket region, other parts of the world can make up the difference. After extreme weather events, trade helps countries and people access the goods they need to recover and rebuild.
56. One example might appeal to those of you who like sushi. As rising temperatures in Japanese coastal waters change the quality and types of fish available, imports can help fill the gap – Japan is already the world’s biggest importer of tuna. In addition, wasabi production in Japan is down by 55% over the past decade, in part due to climate change – heatwaves, excessive rainfall, and so on. Researchers and farmers are trying to develop more climate-resistant strains of wasabi – but in the meantime, you can get wasabi from countries including the United States, Canada, South Korea, and New Zealand, with Brazil and Iceland poised to become suppliers.
57. Please allow me a moment here to salute my friend Executive Director Naoko Ishii. After several years leading the Global Environmental Facility and its efforts to finance climate and other environmental projects, she is now working to leverage new economic thinking to achieve safe and equitable access to water for people everywhere. You are lucky to have her here at the Graduate School of Public Policy!
58. Let me conclude by briefly addressing geopolitics. Amid today’s tensions, we need effective multilateral fora more than ever. Japan knows better than most that much of the world does not want to have to choose between one or the other superpower. The goal of avoiding such fragmentation would be best served by a robust multilateral trading system, anchored in a strong and reformed WTO. In the months between now and our Thirteenth Ministerial Conference next February, members have an opportunity to strengthen the WTO.
59. I will be counting on Japan’s leadership.
60. Thank you.