Multilateralism Is Better for Business

By Fung, Victor K. | International Trade Forum, January 1, 2006 | Go to article overview

Multilateralism Is Better for Business


Fung, Victor K., International Trade Forum


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

The of the World Trade Organization's Ministrial 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 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. 1 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 dillerent 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. …

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