The EU and America in the world economy

Speech by Peter Mandelson at the German Marshall Fund

Washington DC, USA, 17 June 2005

Summary

In this speech, Peter Mandelson notes a defensiveness to free trade in Europe and America
that "if it builds into protectionism or isolationism, will threaten our prosperity and the
international trading system we have laboured to build."

“Both in the United States and Europe economic certainties are being eroded. Manufacturing
and trading patterns that have shaped the global economy for decades are shifting…In the
space of a decade, India and China have emerged as challenging, dynamic competitors. The
case for open trade needs to be made again and again.”

Commissioner Mandelson argues that this new situation “demands active political responses
but not protectionism …The US and Europe today have to make the political choice to
compete. To recognise where we are up against the laws of comparative advantage. To
move up the value chain and to bear the costs of retraining and adjustment. The rise of
China and India is a clarion call to reform and greater competitiveness, not a cause for
retreat and introspection.”

Mr. Mandelson argues that the EU and the US also have to make a case for free trade that is
“almost a moral one”: that “open trade can deliver real development for the poorest. It is in
fact the single most effective tool for ending poverty and achieving sustainable development.”

Commissioner Mandelson concludes: “Our goal should be a transatlantic partnership of

principle to tackle the shared global challenges of our time, between a strong internationalist
America and a more united and effective Europe.”

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I am happy to be in Washington today. I welcome the invitation of the German Marshall Fund
to share with you my thoughts on Europe, on transatlantic relations and on the need for a
strong and open global trading system. I am pleased to see that my friend Grant Aldonas
has found a new home here after leaving the Commerce Department.

What is happening in Europe?

I imagine that most of you have followed recent events in Europe with a mixture of interest
and bemusement. The triumphant achievement of enlargement one year ago has given way
to the political uncertainty generated by the referenda in France and the Netherlands
rejecting the new Constitutional Treaty.

I am not sure I would have dignified this treaty with the badge of a full-blown Constitution,
that had to be put to referenda in our Member States. And fundamentally, Europe is no
different for the freezing of the ratification process, although there are many bits of the Treaty
that would have – and, I hope, will yet – make the EU a more effective and efficient
organisation. In the meantime, the powers of the EU remain unimpaired, and the rights of its
citizens unchanged, and, I am pleased to say, the authority of its Trade Commissioner
unchallenged.

The Constitutional treaty has run aground not on its particular merits or demerits, but rather
on domestic political dissatisfactions and also a sense that the European Union is uncertain
in its direction. By many, the EUs virtues and accomplishments are simply taken for granted.
Its contribution to the continent’s peace and prosperity discounted, or not understood.

This situation does not spell crisis. But it is crying out for clear, strong political leadership.

The fact is, far from falling apart, Europe is living in a time of unprecedented prosperity. But
for many in Europe, it feels like an insecure place. Listening to the debates before the votes,
especially listening to the young, who voted against the treaty in massive numbers, you were
struck by a profound anxiety about unemployment and economic insecurity. I sense a similar
public anxiety here in the United States. How we should respond to that anxiety is essentially
the subject I want to address today.

But first let me reiterate that I am confident that the EU will overcome its present difficulties,
just as it has overcome past problems. We may need to pause and gather our forces before
moving forward again. But I am sure we will do so. The answers to our own problems in
Europe are in many ways the same answers to the wider problems that Europe and America
face together in the global economy.

A new protectionism?

Both in the United States and Europe economic certainties are being eroded. Manufacturing
and trading patterns that have shaped the world’s economy for decades – at least as seen
from industrial Europe or Ohio or Michigan or North Carolina - are shifting.

In the space of a decade, China and India have emerged as challenging, dynamic
competitors. Industries are moving to Central America and Asia. There is a fear on both
sides of the Atlantic that we have somehow given away too much in the name of free trade.
Traded old certainties for cheaper clothes or cars. Now, if this defensiveness builds into
protectionism or isolationism, it will threaten our own prosperity and the international trading
system we have laboured to build since the end of the Second World War. We have to help
people understand why.

The case for open trade needs to be made again and again. It is the foundation of our
prosperity. Our late twentieth century prosperity was built on it. Our twenty first century
prosperity will be founded it. Protectionist policies might save a few jobs in the short-term,
but at the cost of economic competitiveness in the long term.

The progressive removal of quotas and tariffs through the GATT unlocked a tide of prosperity
that has never risen higher in human history and which – if we manage it right – can now
reach into every part of the global economy. Growth continues in the United States and
Europe today, despite the loss of manufacturing jobs to China and white-collar jobs to India.
Real wages are up, and inexpensive goods from Asia are holding down inflation and helping
pay checks go further than ever before.

On the other hand, people do not realise the costs of protectionism. According to the WTO,
consumers and governments in the developed world still spend 350 billion dollars a year
supporting agriculture alone. Recent, textiles liberalisation will in time save every European
family two or three hundred dollars a year in the cost of clothes. The WTO estimates textile
liberalisation could save more than 2 billion dollars a year for Europeans and 8 billion dollars

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a year for poor consumers in the developing world. But, on the way, it may also cost workers
in France or Italy - or North Carolina - their livelihoods.

And that is the crux of our problem. The benefits of trade liberalisation are widely spread and
only vaguely appreciated. The costs are borne by a vulnerable – and vocal – few, who may
be hit very hard.

Yet if we protect those jobs from the realities of global competition every one of us pays too,
in lost savings. And ultimately, the people we are trying to help also pay for it because the
industry of which they are a part falls further and further behind the global competition. We
do not help industries by sheltering them, we chain the weight of future obsolescence to their
ankle.

This situation demands active political responses, but not protectionism. We are not inert,
passive recipients of whatever the global economy throws at us. We need to promote
dynamism and innovation in our economies: to develop new areas of comparative advantage
based on scientific innovation and human creativity. This is the central policy theme of the
new European Commission, of which I am a member, with its “Lisbon Agenda” for jobs and
growth.

This economic dynamism is more urgently needed in Europe than America – I readily admit.
We need greater flexibility and efficiency in our product, capital and labour markets

This means investing in the futures of those affected by globalisation by providing training,
increasing productivity and investing in research and development. Not protecting today’s
jobs, but equipping today’s workers to do tomorrow’s jobs.

We also need to take a pragmatic, progressive, humane approach. Open trade is a long
game – the benefits accrue over economic cycles but often to the cost of individuals affected
immediately, today, by change. Our task is to set out the longer term vision so as to make
the short term pain at least understandable as our policies try to manage change and
adjustment. This was the philosophy I pursued in the recent agreement with China to set
temporary, transitional limits on the growth of Chinese textile imports to Europe. I do not call
this managed trade, but it is intervention – carefully chosen – to manage the short term
impact of sudden shifts in trade flows.

As advocates of open trade, it is instructive to remember our own history here. During the
rise of America throughout the 1800s, Europe prospered. Why? Because new technologies
bounced back and forth between us. We didn’t block it or impede it through fear of economic
change.

The telephone was invented by Alexander Graham Bell in Boston in March 1876. It showed
up in Britain just six months later. Thomas Edison started operating an electric power station
in London in 1882: New York got its own just eight months later.

Similarly the US and Europe today have to make the political choice to compete. To
recognise where we are up against the laws of comparative advantage. To move up the
value chain and to bear the costs of research and development, retraining and adjustment.
The rise of China and India is a clarion call to reform and greater competitiveness, not a
cause for retreat and introspection.

Trade and development

We must also remember that we, in Europe and America, are not the most vulnerable. The
impact on weaker developing countries is much greater and more urgent. The second great

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argument we have to make is almost a moral one: that open trade is in fact the single most
effective tool for ending poverty and achieving sustainable development.

In the last decade trade has lifted millions out of poverty in Asia. It can do the same in Africa,
if we can channel its dynamic force into job creation, wider prosperity, social and regional
stability. The keys to this are an effective WTO; fair rules and fair chances for all, and a focus
on development in the Doha trade negotiations. Raising Africa’s share of global trade by 1%
would raise 8 times more revenue for the continent than it currently receives in financial aid.

This means not just opening our markets to the poorest – without demanding reciprocal
access if necessary. Europe already does this, and others should in my view do more. It
means also massively boosting the capacity of poor countries to trade through targeted
development assistance. Helping to improve their transport and energy infrastructure.
Improving their banking and services sectors.

Let me give some examples: Because of bad roads it now costs more to ship a ton of maize
from Zambia to Tanzania than it does to ship that ton of maize from Tanzania to Europe or
the US. Electricity provision is so bad in Uganda that about 30% of start-up capital for small
businesses goes on generators. It is not unusual for a container to clear customs in a US
port in a single day. In Ethiopia it takes 30 days.

It is no use our markets being open if we can’t help solve these capacity problems. It is like
putting a plate full of food in front of a man with no knife and fork. In the Doha round we
must pursue both better market access for the poorer countries, and also measures to
ensure that they are actually able to take advantage of that access.

The Doha Round

The United States and Europe share these aims. We work together on them. Now is the time
to show reinvigorated leadership and urgency to push for a successful agreement in Hong
Kong in December that puts us on track for an ambitious Doha deal in 2006.

But the multilateral trade system is now truly multilateral, so we also need leadership from
other countries too. We should look to those countries who stand to benefit most from a more
open trading system to make greater contributions to bringing it about.

A significant responsibility lies on the shoulders of the more advanced developing

economies. I call on those countries in the period before the summer to make clear their
commitment to a balanced Round – recognising that they will have to give in some areas in
order to take in others, so that we achieve a genuine win-win outcome. They need to make
real and not paper commitments to market opening in sectors that are vital to the
development of their own economies. Some countries that have recently acceded to the
WTO will be asked to contribute again.

We need serious new commitments in four key areas: industrial tariffs, agriculture, services
and rules. With minor exceptions, broadly comparable progress will have to be made in all
areas in order to create the climate of trust for the final phase of negotiation. The EU will play
its part – but others also have to be prepared to contribute as well.

We are in favour of an ambitious tariff-reducing formula for industrial products. There is

already broad agreement to proceed on a harmonising formula. In agriculture, in July last
year, the EU offered to eliminate all agriculture export subsidies. We stand by this. This
proposal built new support for the Round at a moment of flagging enthusiasm, and it should
be seen by others as a powerful incentive to bring the Round to a successful conclusion.

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We must now build on this, by seeing matching proposals from other trading partners in this
area, and by tackling together in a balanced way the other areas of the agriculture
negotiations, such as domestic support, market access and non-trade concerns like
geographic indications.

The transatlantic economy

Finally, a word on our own transatlantic economic relationship. It remains the core of the
global economy. Every day across the Atlantic we do a billion dollars worth of trade.
Disputes are inevitable, and make good copy. But the obsessive attention to them gives a
false impression. Trade and investment flows freely between us.

But there is still work to do to improve that flow. We can integrate our economies, removing
or reducing barriers that go beyond the scope of WTO rules. Duplicated or incompatible
regulatory obstacles in financial services, in product regulations, and other in other areas
increase the cost of business without delivering any tangible advantage. Why double the
costs for companies doing transatlantic business?

We must encourage our antitrust authorities to work together even more, so that costs of
compliance for companies are reduced and conflicting decisions avoided. And should we not
be seeking to agree on how best to regulate the internet? I am not suggesting that we should
be creating a new bureaucratic layer, attempting to “regulate the regulators”, but I am
convinced that we will enhance our shared competitiveness and reduce our cost base if we
can get our rules to converge in certain areas.

In addition, there are areas not covered by WTO negotiations that would benefit from market
opening between us. For example, I have been encouraged by suggestions that we may be
able to lift existing equity restrictions on the purchase of airline companies, in the context of a
new transatlantic aviation agreement.

We could also take a second look at some public procurement restrictions that have existed
on both sides for many years and are a real brake on international business. I hope that next
Monday’s EU-US summit will see an agreement on how to take some of these issues
forward. I know that Rob Portman and I can address them productively together in the years
to come.

I am not, let me emphasise, calling for a major new ambitious programme of mandatory
harmonisation. I am advocating limited, practical and achievable steps to iron out problems
one by one – using the existing machinery, building on the excellent work that is already
going on, and focusing on agreed priorities.

Conclusion

I started by talking about Europe’s current political turbulence. But I hope that my comments
have underlined that the challenges of Europe – like those of the United States - cannot be
treated in isolation. They are interlinked. We need to address them at home; in our bilateral
relationship; and in our work together in the world.

Our goal should be a transatlantic partnership of principle to tackle the shared global
challenges of our time, between a strong internationalist America and a more united and
effective Europe.

It is crucial that America sustains its belief that European unity and European integration are
in the best interests of the United States. It is equally important that the United States
continues working with the European Union on the major challenges of our time: in my case,

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with Rob Portman, on the success of the Doha round. But also on Middle East peace and
democracy, our response to Iran’s nuclear ambition, climate change, offering hope for Africa,
handling the rise of China and developing a coherent policy towards Russia.

The United States cannot handle all these problems on its own. It needs Europe. It needs
an effective Europe. It needs an economically reinvigorated Europe with the economic
strength and the confidence to project its influence on the world scene. That’s what we in
Europe will bring to the transatlantic table and against the backcloth of our current
uncertainties. I am glad to have had the opportunity of saying so here today.