Keeping markets open: what’s next after the London G20 Summit? (June 04, 2009)
LOCATION Harborside Renaissance Hote - Baltimore, Maryland
SPEAKER Ambassador Nigel Sheinwald
EVENT Johns Hopkins University Carey Business School at Speech to Johns Hopkins University Carey Business School
DATE June 04, 2009
Ambassador Nigel Sheinwald gave a speech to Johns Hopkins University Carey Business School stressing the importance of free and open markets in building an economic recovery from the recession.
Read the full speech
Thank you, Dean Gupta, for the kind introduction.
I am delighted to be here today in the famous seaport of Baltimore. During a 280-year history this great Europe-facing city has always understood the importance and value of foreign relations and international trade.
I am keenly aware of Baltimore’s role as one of Maryland’s main economic engines. I know that the port alone sustains 16,500 jobs directly, and an estimated 120,000 more in the wider community. Baltimore exports more cars than any other US port – east coast or west. Overall, more than 8 million tons of cargo passed through the port in 2007. I followed this figure with particular interest, as it included the suit I am wearing today and all my other personal effects, which were transported from the UK when I took up my role as British Ambassador in Washington DC 19 months ago.
But these are also hugely challenging economic times. Today I want to focus in particular on the crucial role of trade and open markets in rebuilding global prosperity. I have some concerns that I want to outline, but also some ideas as to how we can work together to make progress towards a common goal of broad-based recovery.
In some senses talking trade is easy, because international commerce and openness are in the British bloodstream. It has been the foundation of our economy since the time of the Industrial Revolution. Today trade remains the cornerstone of the UK economy.
Why? It’s simple, and I believe we should say it more often: more trade means more jobs and higher incomes. It means better-value and more diverse goods and services for all citizens. It provides new and larger export markets for cutting-edge businesses. And it drives growth, at home and abroad.
Trade also binds nations together, and there is no better example than the United States and the United Kingdom. Our two countries enjoy one of the strongest bilateral trade and investment relationships in the world.
In trade, the US is the United Kingdom’s top export destination and its second-largest trading partner. The UK is the United States’ sixth-largest trading partner.
In terms of investment, British companies are the largest foreign investors in the US. British investment supports nearly one million American jobs with an average compensation of more than seventy thousand dollars: over 30% above the average wage. These are high-value jobs. Similarly the US is the largest foreign investor in Britain, where American companies employ more than one million people.
Here in Maryland, investments by British companies support about 18,000 jobs. And last year, Maryland companies exported nearly half a billion dollars worth of goods to the UK. I was also happy to see that Maryland’s most famous premium sportswear company, Under Armour, chooses to spell its name the British way.
The protectionist threat
But as I mentioned, we all know these are tough economic times. The recession has curtailed consumer demand around the world, leading to a severe drop in trade flows. The WTO estimates that trade will decline by 9% this year, which is the single largest year-on-year contraction in the post-war era. Cities like Baltimore, where trade has created jobs, business revenues and taxes, have suffered as a result.
Falling global demand is bad enough. But it is in danger of being compounded by protectionist sentiment. There are pressures around the world to build barriers to trade or other forms of protectionism, which become so much stronger during a downturn. Despite the hard-won gains of liberalisation and a well-functioning set of trade rules, there is still much scope for this damaging behaviour in the world trading system today.
Much of this has to do with what the experts call ‘water’ – the difference between legally-binding tariff levels and actual applied tariffs, which are often considerably lower. Because there has been no WTO world trade deal for more than a decade, many countries could raise the tariffs that they have lowered over the last ten years. While doing so would not technically violate their trade commitments, it would quickly cost the global economy billions of dollars. It has been estimated that an increase in currently applied tariffs up to the legally- binding levels alone could shrink world trade by $728 billion.
An even bigger concern is the wide range of hidden, or non-tariff barriers, that countries can be tempted to introduce in times of trouble. According to the World Bank, since the London Summit nine G20 countries have imposed or are considering 23 new protectionist measures. These are on top of at least 47 trade-restricting measures imposed by countries around the world after the G20 Summit in Washington in November. The top protectionist measures normally take the form of subsidies and other support packages rather than old-fashioned tariffs. What is more, the use of so-called ‘trade remedies’, such as safeguards and antidumping policies, to restrict imports has grown. In the first quarter of 2009 we saw a 15% year-on-year increase in the imposition of duties related to trade remedy investigations and a 19% increase in new investigations. These figures are likely to continue to increase though 2009.
I highlight these facts to remind you that wealth creation via our globalised economy has not come about by accident. It is the result of a collective choice for openness. Now more than ever, we have to resist the siren voices. Protectionism doesn’t actually protect anyone. In the long-run it just makes things worse.
It is imperative that the G20 countries, which together comprise 85% of the global economy, think internationally as they act nationally to get their economies through the downturn. The G20 commitment to free and open markets at the London Summit in April was important. It was a central part of your new President’s first overseas trip, and he played a key role.
In London, leaders made important commitments to shore up international trade. As my Prime Minister wrote in the Wall Street Journal last week, there is a danger that “a banking crisis has become a trade crisis.” Trade is the most serious casualty of the global financial crisis. And part of the downturn in trade flows can be explained by a lack of available credit to finance international trade transactions. To this end, leaders at the London Summit agreed to provide $250 billion in trade financing over the next two years. And we must be ready to go further if more money is needed.
Leaders also strongly rejected protectionism. They pledged to refrain from raising new barriers to trade or investment; to refrain from imposing new export restrictions; to refrain from implementing measures that are inconsistent with WTO rules to stimulate exports; and to rectify promptly any such measures if taken. Importantly, the WTO was also mandated to monitor and report quarterly on countries’ adherence. This has undoubtedly helped to douse protectionist fires and we have thankfully not seen a widespread hike in tariff rates. But as I have mentioned there remain causes for concern.
No one is blameless – the EU’s recent imposition of export subsidies for dairy products was a regrettable step. Here in the United States, there are some worrying signs too. We were pleased to see the final Buy American provisions in the stimulus package watered down from some very tough early proposals. But we were concerned that Congress was playing with fire. And there are some disturbing indications since then that some States and local authorities are applying the Buy American provisions in a much more restrictive fashion than the legislation mandates. It is clear from the Congressional language and implementing regulations that British and European companies should be free to compete for contracts in each of the 37 US states which have signed the Government Procurement Agreement. However, the danger is that some officials interpret the Buy American provisions as simply banning all foreign companies or foreign-made goods. We will be monitoring this issue very closely and will want to see federal, state and local authorities held to account, to give US citizens, and UK businesses, the best deal. We have no equivalent ‘Buy British’ requirements for government procurement in the UK. Shutting out foreign competition sends a bad message on how open markets are valued in the United States and will often end up with taxpayer money going less far – building one less school or one less bridge.
Another example it is worth highlighting is in the aviation sector. The renowned British entrepreneur Sir Richard Branson allegedly once joked that the best way to become a millionaire was to first become a billionaire, then start an airline. But aviation offers an interesting glimpse both into how liberalised trade can open markets, and the practical implications of erecting barriers. A little over 18 months ago the EU and US signed an historic air services agreement, ending decades of restrictive practices in transatlantic travel. The deal allows for any American and EU-based carrier to fly from any point in the US to any point in the EU and vice versa. It therefore created a much more open aviation market, with greater competition between carriers and better services and prices for customers.
The next phase of the EU/US talks on aviation liberalisation starts later this month. A key objective is to create much more liberal rules on ownership. The EU wants to end restrictions on ownership and control of carriers. In practice that would mean US investors could own and control any EU carrier, on the understanding that EU nationals were offered the same opportunity in the US. We do not underestimate the political difficulties in achieving this ambition. We are engaging the Administration, Congress and organised labour to explain why we think this will benefit all sides, more now than ever.
But will the atmosphere for negotiations be conducive? For example, the FAA Re-authorisation bill recently passed by the House would place a new set of onerous certification conditions on foreign repair stations handling US commercial aircraft. The only realistic option would be for American airlines to do all repairs in the US. This is completely unnecessary - there is already a detailed EU/US agreement on common safety standards in this area. Why tear it up? It also seems wrong-headed when you consider that there are almost four times the number of EU repairs carried out by US personnel in the US, and thousands of EU pilots trained here. All that would be put at risk by this heavy-handed measure. This much greater number of jobs would be lost to the US economy. It is this sort of creeping protectionism that we must guard against. The consequences of pulling up the drawbridge are exactly the ones the G20 is trying to avoid: we must not retreat behind national borders and move to "deglobalisation" precisely at a time when we need these benefits more than ever.
From defence to offence
It is clear from these examples that eternal vigilance will be the price of open markets, and we cannot let those who would restrict trade and investment be the loudest voices that are heard in this debate. Now some time ago my employers in the Foreign Office banned the use of sporting analogies in formal reporting. I think the problem was that not all staff should be expected to understand the intricacies of the Leg-Before-Wicket ruling in cricket, or the nuances of offside in soccer. But I think everyone here today, in the city of the Baltimore Ravens, and their famed defence, can be expected to understand an American football analogy. Just as linebackers, cornerbacks and linemen must work together on defence – like governments, businesses and academics resisting protectionism – we should also play offence.
That is why it is so important that we complete the Doha round. That would send out the biggest single signal of our intent, and be a huge benefit for the poorest countries. At the London Summit Leaders committed to ‘reaching an ambitious and balanced conclusion to the Doha Development Round’, stressing that it is ‘urgently needed’. The downturn has not reduced the value of such a multilateral trade deal, but rather raised it. The benefits to all countries of a multilateral deal outweigh those of any bilateral agreements that might be reached. Completing the Doha round would lock tariffs at today’s levels or lower, could boost the global economy by at least $150 billion per year, and would provide a global boost of confidence in the openness of world markets.
We must also remember that trade has an important role to play in global efforts to transition to a low carbon economy. Trade can facilitate the transfer of technologies and approaches for sustainable development and drive the efficiency of production that is needed to tackle climate change. The global market for low carbon and environmental goods and services, worth roughly $4.5 billion in 2007/08, is forecast to grow by 45% by 2014/15.
The benefits will accrue even faster if we can negotiate an international framework to address climate change. A 2005 report from the Confederation of British Industries noted that if governments agree to a global climate change deal, the world market for climate change solutions could be worth $1 trillion in the first five years. This is a tremendous opportunity for both developed and developing countries. To that end, the UK is pushing both for an international climate change agreement and for the liberalisation of markets for low carbon technologies and goods.
These are reasons why next week the UK will be holding our first ever World Trade Week. It will be an opportunity to underline the role of trade and open markets in the global economic recovery and highlight the success of the UK as a trading nation.
Playing offence on trade also means thinking about the longer term. What will be the big growth areas for international trade over the coming decades? How can we, the US and the UK, best position ourselves to take advantage of these new opportunities? Every article on trade seems to include one of two photographs – a colourful picture of a market place in a developing country or a large container port. I’m happy to say that my Embassy’s trade website is no exception. It is what one naturally thinks about trade – the exchange of things. But this is only part of the story. It is a reasonable assumption that we are likely to see an explosion in the amount of services trade.
In the modern world, fewer and fewer of us make our living by making things. The US Coalition of Service Industries estimates that services account for around two thirds of global GDP, but only about 5% of global trade. That is a staggering gap. I mentioned the Port of Baltimore at the start of this talk. Of course, the Port’s primary focus is on the trade in goods. But it is also seeing a boom in the cruise business, which is a symbolic move into facilitating service providers. In the past two months, Carnival Cruise Lines, a UK-US giant in the cruise ship industry, has set up Baltimore’s first year-round cruising programme.
What is more, the on-going revolution in information technology is rapidly opening up new services sectors to international trade. We are all familiar with outsourcing call centres to places like India, Pakistan and even Nigeria. But how about trade in medical services? Why not scan our x-rays and email them as PDFs to India to be read by doctors there? Or permit Baltimore’s world famous Johns Hopkins Hospital to export its top quality specialist medical services around the globe? Surely patients in countries with less stellar medical institutions would benefit from this exchange, just as Johns Hopkins would benefit from new sources of revenue. This same logic can be applied to any number of advanced fields, and the possibilities for trade become nearly limitless.
These very possibilities have made some observers nervous. They worry that by opening up more sectors to trade, we risk the livelihoods of millions. Undoubtedly, we will see some dislocation as trade in services picks up, just as we have seen with trade in goods in the past. But the key point is that freer trade in goods has made us all better off, and freer trade in services will do the same.
In any case, for advanced economies like the UK and US, the opportunity to expand trade should be welcomed. Both of our countries have excellent education systems that produce highly skilled workers. This makes us very competitive service providers. Last year the United States had a deficit $821 billion for trade in goods. It also had a surplus of $144 billion for trade in services, which is the highest trade services surplus it has ever recorded. How often do you hear this second number?
To conclude, we must all remain on guard against creeping trade restrictions, which will only endanger the global recovery. Let us hold leaders to the promises they made at the London Summit to reject protectionism. But it is not enough to remain on the defensive. Above all, we must push for a successful completion to the Doha Round, which is needed now more than ever. And we have to work together to take advantage of new opportunities and open up new sectors to trade. All government officials have a commitment to setting fair and simple frameworks, then getting out of the way and allowing our great businesses – large and small – to flourish.
Our future prosperity lies in open markets, so let us continue striving to make it so.
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