This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Vince Cable sets out the benefits of operating a more liberal trading system.
Good afternoon. It’s a pleasure to share a platform with Minister Sharma from India and Minister Aganga from Nigeria.
Tomorrow we are welcoming the world to London for the start of the 2012 Olympic Games, an event that embodies the spirit of open competition. So today I would like to consider the benefits of open competition when it is applied in the sphere of international trade.
An open and competitive trading environment offers potential benefits for emerging economies, just as it does for those in the West - increasing economic growth, boosting productivity, and creating employment. So I am delighted Minister Sharma and Minister Aganga are here today to share their perspectives on overcoming the challenges involved in creating a more liberal trading system.
We must face those barriers while still confronting the greatest economic crisis since the 1930s, which continues to play out in the Eurozone.
Fortunately, the picture on trade is not as bleak as it was at the time of the Great Depression. The multilateral trading system has withstood pressure to move significantly towards greater protectionism. We have not seen a major retreat behind tariff walls and world trade is recovering from the collapse witnessed in 2008/09. The value of world goods trade increased 19% between 2009 and 2011.
Even so, there is evidence that many countries have been tempted to edge towards protectionism of one form or another. Monitoring for the G20 has found that while overall levels remain modest, there was a pick-up in activity in late 2011. This is significant and unwelcome because there is good evidence to show that trade liberalisation is closely connected to economic growth.
Analysis has found that an increase of 10% in trade openness translates into an increase of around 4% in income per person. The World Bank, meanwhile, found that during the 1990s income grew three times faster in developing countries that had lowered trade barriers compared with those that had not.
For mature and developing economies alike, free trade, and consequently new trade agreements, are the route to achieving long-run growth.
This is particularly true here in Europe at the current time. Demand fuelled by continued expansion in the emerging economies is one of the few motors for growth in the global economy at the moment. At the same time, boosting trade and foreign direct investment are among the few options available to support economic growth without putting further pressure on severely constrained public finances.
But, clearly, increasing trade flows requires genuine openness in all directions.
Boosting export levels for both goods and associated services is one part of the picture - and that’s why, in the UK, we are aiming to increase our exports to £1trillion annually by 2020. However, openness to imports and investment from other countries is critical. Trade openness in services as well as goods boosts the supply side of the economy by helping spread new ideas and technologies, and providing a competitive stimulus to home companies. Overall, the evidence suggests that a 1% increase in trade openness results in a 0.6% increase in labour productivity among European firms.
So we have to scrutinise our performance objectively, at the UK level and as a member of the European Union. Agriculture is highly protected. We have relatively high tariffs in some industrial products, such as clothing. And we have significant non-tariff barriers, with studies estimating they are equivalent to tariffs of 24% in chemicals, 57% in food and beverages, and 20% on telecoms. Along with these, the latest Global Trade Alert highlighted the UK’s own migration controls as a barrier to trade, including of UK exports.
If we expect other countries, particularly those whose economies are developing, to remove non-tariff barriers we have a responsibility to practise what we preach.
Previously, we would have looked to make progress via multilateral negotiations. A multilateral approach is greatly preferable to a plethora of bilateral agreements which risks fragmenting the trading systems. But it is clear the Doha Round has stalled, with no sign of it moving again any time soon. Against that backdrop, momentum has to be found in new ways with trade liberalisation driven forward by coalitions of countries intent on making progress.
One of the Doha issues where prospects look good is in the area of trade facilitation - reducing bureaucracy at borders. This has a decisive impact on developing countries’ ability to grow through trade. Analysis suggests that each additional day goods spend in transport reduces the probability the US will source from that country by as much as 1.5%. The potential gains for emerging economies are great if the costs of trade procedures are reduced. The UK is willing to argue strongly in favour of progress to ensure the benefits are realised.
In the absence of a grand bargain on the Doha round, the time has come to explore the potential of plurilateral agreements. The most obvious one at the moment is the US-inspired plurilateral for trade in services. This is a real opportunity. It would of course be better if it could include as many countries as possible, and we hope it can be designed accordingly.
Finally, here in Europe we need to be serious about driving forward the programme of Free Trade Agreements in train. Even as a second best alternative to multilateral agreements they can have very real benefits. The cumulative impact of all on-going and potential negotiations could boost EU GDP by 2.2% and create a further 2.2m jobs.
Now more than ever, given the continuing volatility in the global economy, the argument in favour of openness has to be made loudly and persuasively. And the notion of reciprocity, which is gaining strength in some quarters, has to be challenged. This can easily lead to a protectionist spiral. Of course there must be clear benefits for all the parties to any agreement. But that’s not the same as insisting that every trading or investment relationship must be symmetrical or reciprocal, with the threat of retaliatory closure for countries that don’t open their markets.
A more productive approach is to recognise the benefits of globalisation and harness them to drive economic expansion. Yes, lower barriers make it easier to relocate production and transfer technology or intellectual property. But there are substantial advantages, for productivity and specialization, which stem from having clusters of skills and tasks in particular locations.
Furthermore, we can benefit when our partners have a significant cost advantage and we are able to use their products or services as inputs into products the products we make. This means we should no longer be thinking in purely national terms when considering competitiveness. Instead, our job is to find ways of supporting good, viable jobs: those where a critical mass of expertise and innovation support high levels of value added.
For this reason, the UK government is in the process of developing a coherent industrial strategy that will allow us to get behind our best-performing sectors - those with the strongest trading figures, high value-added, and a proven commitment to innovation.
The achievements of for example the UK’s aerospace and automotive sectors, in spite of fierce global competition, demonstrates how an open trading environment helps rather than hinders growth. Indeed, it plays a vital role in giving global companies the confidence to invest here in the UK.
They know the UK is completely committed to an open trading environment, enabling companies with British operations to use them as a gateway to Europe and a springboard to markets around the globe.
But this government recognises that we have many rivals as a destination for investment, in Europe and elsewhere, so we will not be complacent. Instead, we will continue to hold the line against protectionism, and make the case to our international partners for trade liberalisation, open markets, and fair access for developing countries. It is the only path back to economic health.