“A Progressive Case for Open Markets”

Peter Mandelson
EU Trade Commissioner

Council on Foreign Relations, New York
Tuesday, June 28, 2005

My contention is we are at risk of seeing an unhealthy isolationism gathering force in Europe and America, driven by a misguided critique of globalization. It is not exactly the kind of critique one might hear from the "green" movement or the more thoughtful elements that backed the demonstrations in Seattle five years ago.

It is a more basic, economic, street-level, gut reaction which says, “Foreign goods and foreign competition are threatening my job and what are you going to do about it?”

The new Asian competition is stoking public fears – doubly terrifying because it combines low wages and costs we simply can’t compete with, together with mounting skills, research and other capabilities which, eventually, we may fail to match.

So the age-old fear of job loss on both sides of the Atlantic is now compounded by the fear that, as a result of this unprecedented wave of competition, old jobs will not be replaced by new ones.

The standard of living of many seems threatened.

So my topic today is how our political leadership should respond to these fears and how we should make a fresh case for an open trading system.

For all our legitimate concerns with the war on terror, the proliferation of weapons of mass destruction, the global challenges that will be debated at the G8 next week of world poverty, Africa and climate change, this question of free trade - once seen as a golden opportunity now seen by many as a threat - is moving centre stage in the transatlantic relationship.

At an everyday level the state of our transatlantic economic relationship is strong. The flows of trade and investment - back and forth across the Atlantic – are massive. The political tensions in the recent past between the United States and some European countries have made little difference to growing economic interdependence.

President Bush’s visit to Brussels in February generated a new momentum.

And the EU/US bilateral summit in Washington last week cemented our readiness to work together, not only on our bilateral links, but equally importantly multilaterally.

So, in addition to deepening the transatlantic trade and investment relationship, we need to stand up for trade liberalization by coordinating our efforts to secure decisive progress this year in the completion of the Doha Development Round (DDA).

For liberalizing trade, and making the case for open markets, we have substantial past achievements to build on. By working together in the GATT, Europe and America steadily knocked chunks off the walls of protectionism between the more developed countries – and as a result helped deliver a large part of the prosperity we have enjoyed in the past half-century.

The establishment of the World Trade Organization (WTO) was a culmination of decades of progress towards more open trade, with the establishment of a multilateral system of rules-based order, including a unique international arbitration system for settling trade disputes. These achievements are remarkable. They must be nurtured.

But now, these achievements which we have taken for granted are under pressure.

Public opinion is constantly told that globalization is inevitable, which was fine when we were the principal beneficiaries of its power. Now that globalization is dramatically serving the needs of more economies than our own, public opinion is restless and has to be more carefully addressed. We have to demonstrate that globalization, if properly harnessed, can deliver benefits and opportunities for all and that sheltering our economies growing foreign competition will be self-defeating.

As the European Union opens its own Single Market to further competition, by enlarging itself to new low-cost economies in central and eastern Europe, the pressures of globalization are being intensified on our continent, with the public backlash we have witnessed in the recent referendums on our Constitutional Treaty.

In the public’s growing negative mood, they are answering "no" to everything before they have even heard the question.

Let’s be clear about the basic political problem with open markets: the benefits of lower consumer prices and greater choice are spread out, while the costs of job losses are concentrated on the few and the more vulnerable – and vocal.

And this, of course, exerts pressure on policy makers, who inevitably have to respond more to the immediate pain of those who lose out from market opening than to those who stand to gain.

It is not easy to stand up in front of an audience of people whose jobs are threatened by foreign competition and argue that, in the economy as a whole, jobs saved through barriers usually involve expensive opportunity costs, higher consumer prices, lower rates of returns to investors and reduced incentives for innovation. And that seems rather remote when your job is at stake this month or this year.

Nonetheless, the argument has to be made while, at a local level, alleviating anxieties, cushioning in appropriate ways those who lose out from greater competition.

For Europe, it requires a new, progressive economic and social model.

In Europe, we seek economic dynamism allied to social protection. The problem is that, in the recent past, we have been better at protecting existing jobs than creating new ones.

At this juncture, Europe is faced with a fairly fundamental choice of directions. One way we sink into protectionism, and the sort of populism that defeated the Constitutional Treaty in the French and Dutch referenda. The other way is to make our economies more dynamic and flexible, receptive to competition in Europe and from outside, by pressing ahead with painful economic reforms, to move the economy up the value chain.

Our priorities should therefore be to invest massively more in the future and at the same time help workers adapt to the more rapid economic change that a combination of deeper market integration and increased supply side investment will bring.

But reform is for a purpose: not to Americanize Europe but to make our European model of society sustainable for generations to come.

Our social policies need to go with the grain of economic change, not fight it.

We need new approaches and new institutions to tackle the new social challenges of extending opportunity throughout the lifecycle – whether tackling inherited disadvantage by investing in the social support and education of young children and their mothers or opening access to retraining and help with adjustment for the victims of industrial change; helping older workers reintegrate to the labor market and adapting the traditional concept of retirement.

At the same time we need to focus European spending programs on the creation of European centers of research excellence and building technology platforms that link in with European companies, and help counter the transatlantic brain drain Europe is suffering.

In these ways, we start building a social consensus to make economic change acceptable. That is the key to faster economic reform and to rolling back the erosion of public support for open markets.

We must also remember that we, whether in Europe or America, are not the most vulnerable to the trade shocks and adjustment brought by global shifts we are witnessing.

The impact on weaker developing countries is much greater and more urgent.

So the other argument we have to make against protectionism is therefore a moral one: that open trade is in fact the single most effective tool for ending global 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.

Critically, development must remain at the heart of Doha Round, delivering improved market access for all WTO members, through additional North-South trade, but also by promoting and facilitating South-South trade.

For this to happen, the developing countries themselves will have to display a new confidence and maturity, and our policies need to give opportunity not just to the better equipped emerging economies but to the poorer and more needy developing countries. We need to operate special and differential treatment.

The DDA must be seen as part of a broader crusade by the international community. The focus on Africa at the G8 Summit next month is the right focus. And today, I will go to the United Nations to sketch out what on trade and aid the EU is proposing to do to help us meet the Millennium Development Goals.

In Europe – let me say in conclusion - our approach to trade policy for the developing world can best be described as “progressive liberalization.” It is built on three principles.

- First, better market access for and between developing countries, including for the more vulnerable. Europe has taken the lead with Everything but Arms, which gives duty and quota free market access to our markets to Least Developed Countries. We want other developed economies to follow suit.

- Second, more effective development assistance. Trade plays a key part in promoting development. But it has to form part of a broader agenda - the expansion of supply capacities, the removal of bottlenecks which cripple trade and industry, better governance, stability and transparency and of course infrastructure.

- Third, development-friendly trade rules and more flexibility for some developing countries, for example through temporary waivers from WTO rules.

Open markets and free trade is the route to prosperity and justice, in both the developed and developing world.

For sure the shocks to our economies that trade-induced economic change brings, can be highly emotive. This is why we need fresh arguments, as well as reformist policies, to carry public opinion.

At home we cannot just say "sink or swim." There have to be policies that support and equip the losers from globalization as well as rewarding the winners.

Internationally, our approach should be progressive market-opening – helping poor countries step-by-step to become full participants in the global trading system.

My basic stance, therefore, is pro open markets that foster innovation and growth in the US and the EU, and pro a trading system and a Doha Round that works to raise the living standards of the world’s poorest.