Speeches
HOW GLOBALIZATION WILL IMPACT THE FUTURE OF EU/US ECONOMIC AND POLITICAL RELATIONS
Ambassador John Bruton
Joint Session, Rhode Island State Legislators
April 4, 2007
50th Anniversary
Couple of weeks ago, Europe celebrated the 50th Anniversary of the Treaty of
Rome. On 25 March 1957 six countries with 168 million people between them
joined together to form what has now become a European Union, which has
expanded to include twenty-seven countries and 493 million people.
I would like to make a few personal reflections on this historic birthday.
The early steps of the European Union were quite modest. No new members were
added until 1973 when the United Kingdom, Denmark and Ireland joined. While
tariffs and quotas were quickly abolished, many non-tariff barriers remained
between Member States. It was not until after the
Single European Act of 1986
had introduced majority voting in the
Council of Ministers, on what Americans
would call interstate commerce, that most of the remaining non-tariff barriers
to interstate trade and investment were eliminated.
Some barriers still remain in regard to some cross-border services and energy.
Now, at last, even those barriers too are in the process of being removed by
initiatives of the
Barroso Commission.
There has been much talk of Europe's mid-life crisis, but crisis or not, EU
has enjoyed many achievements in its fifty years of which I will add a couple more:
It has created the world’s only multinational democracy.
It has facilitated an economic environment in which, since 1957, European
(EU-15) GDP per capita has risen by nineteen times in real terms whereas US GDP
per capita has risen by fifteen times.
The average European enjoys a life expectancy that is four years longer than
that enjoyed by the average American. In
polls, Europeans routinely register a
higher level of satisfaction with life than any other group of people in the
world and, thanks to EU’s strong commitment to economic and social cohesion,
income inequalities in Europe (EU-15) are in general lower, and in most of
these Member States well below, the level of income inequality in the United
States.
More remarkable than that is the fact that the European Union has opened the
door to membership to
new states, almost all of whom were, at the time of
joining, considerably poorer than the existing members, and has been able to do
so at each stage with the unanimous agreement of all the existing Member
States. On this basis, the Union expanded from six to nine in 1973, from nine
to ten in 1981, from ten to twelve in 1986, from twelve to fifteen in 1995,
from fifteen to twenty-five in 2004 and, most recently, from twenty-five to
twenty-seven in 2007.
On each occasion the existing Member States, who agreed to each enlargement,
knew that bringing a new member meant admitting a new competitor to the market,
admitting a new vote to the decision-making table and admitting new workers who
would be free to work in their labor market. All this involved risks. It
involved embracing change, rather than seeking security in the status quo.
Challenges of Globalization
The EU and the US are not the only big economic players anymore. The WTO now
has 150 members, almost half as many again as took part in the GATT Uruguay
Round. Another very important difference is that developing countries play an
important role in this
Doha Round.
This contrasts with the Uruguay Round negotiations where the EU, US, Canada and
Japan played the key roles. In the Doha round, the new Group of 4 (G4) is
comprised of the EU, US, Brazil and India.
The rise and challenge of emerging economies, especially in Asia, and the rush
by both the EU and the US to negotiate bilateral or regional free trade
agreements [FTAs] with Asian countries is another factor. For instance, the EU
has announced negotiations with
South Korea, India and ASEAN. The US just last weekend announced a Free
Trade Agreement with South Korea, and though FTAs with Malaysia and Thailand
will not be concluded under the current Trade Promotion Authority (TPA) which
expires on June 30th, negotiations are likely to continue in some format, e.g.,
under TIFA (Trade and Investment Framework Agreement, which is often used by
the US Trade Representative to prepare the negotiating partners for FTA
negotiations).
Here are some numbers from a new world. Everyday, 10,000 new cars appear on the
streets of Beijing; every week, the Chinese government builds a new power
station. In 2004, Infosys in India advertised 9,000 software engineer jobs: they
got 1 million applicants. One in every two cranes standing in the world today is
standing on a building site in China. The population of Egypt increases by a
million people every nine months.
We all know we live in a world of rapid change - it has become a cliché to say
it. We all know that a global economic and political order that has shaped the
world since the middle of the nineteenth century is ending.
But sometimes it takes the image of those cranes and power stations - or the
fact that in the time that I will be speaking to you today 400 new cars will
roll onto Beijing streets and immediately get stuck in Beijing traffic - it
takes those images to really bring home the world just over the horizon and how
fast it is changing.
And although I will chiefly talk about the economics of globalization today, it
is vital to remember that, however central economic change is to what is
happening around us, globalization is a deeply political phenomenon. The
politics of globalization are the politics of the environment, climate change,
migration, energy security and poverty alleviation.
The global age is interconnected in a deep and often subtle way. So that, when
President Bush announced a US push to grow more biofuels in his State of the
Union address in Washington, the rise in the price of corn had poor people in
the streets in Mexico City protesting the rise in the cost of tortilla flour -
their basic food.
There is a tendency - chiefly a political and journalistic tendency - to see
the economics of globalization as a zero sum game. Our jobs shipped off to
their countries. Our livelihoods undermined by their cheap labor costs. Our
prosperity traded for theirs.
The political problem in a liberalizing economy can be summed up very simply:
the beneficial effects of economic change are generalized; the costs are
localized.
The dismantling of the WTO textile agreement at the start of 2005 will save
every person in this room hundreds, if not thousands, of dollars over their
lifetime on the cost of clothes.
But if you have a friend or a relative in the textile industry - which, if this
were a Spanish or Italian or North or South Carolinian audience, would be a
certainty - the likelihood is that the last five years of their life would have
been spent in political activity defending barriers to trade in textiles.
Because China and other parts of the developing world are putting those parts
of our textile industry that compete on labor costs out of business.
But China is not stealing our jobs. In fact, for every job that Europe has lost
to economic change in the last two decades it has created a new one in more
competitive parts of the economy. Thanks to growing internal and external
trade. In the US the figures are even more striking: USTR [the US Trade
Representative] has quoted that every
year 15 billion jobs are lost, but 17 billion are created!
In Europe we are still the world's biggest exporter, the world's biggest
investor and the world's biggest market for foreign investment. We still
dominate global markets for high-value goods. They wear Italian shoes in Japan.
They don't wear Japanese shoes in Italy.
So the economic cake has got bigger, as economists have always argued that it
can and does. A hundred million new jobs in the developing world have not cost
Europe jobs or hurt Europe economically on aggregate. In fact the opposite is
true - they've made us more competitive, they've lowered our input costs and
they've reduced prices for consumers. They've depressed interest rates and
lowered inflation. And we are better off.
And a hundred million jobs in the developing world - the biggest ever shift of
a portion of humanity out of poverty - is hard to argue against. Not least
because, as the Egyptian trade minister has put it: it's fine to congratulate
the developing world for growing at 8 or 9% a year, but when you are adding a
million new people to your population every nine months, you have to grow that
fast just to create the jobs they need. So those jobs are also part of a wider
picture of security and stability.
Nevertheless, a hundred million new jobs in the developing world means painful
competition and restructuring for our economies. And a lot of old certainties
have been eroded and some industries have already changed beyond recognition.
And, by the way, if you think that the textile industry's challenges are not
your challenges, then I would refer you to the 1 million Indian software
engineers I mentioned. That might bring it closer to home.
Addressing that change is a genuine social justice issue in Europe. The
dislocations can mean human tragedies - painful and traumatic - and all the
macroeconomics in the world do not change that. Governments have to be ready to
help with adjustment and to equip people for change. And if we don't want a
politics of retreat, and national chauvinism and protectionism in Europe, we
will have to build a credible - and practical - politics of openness.
The US is struggling with the same issues, and the new Congress is actively
formulating its policies on trade as well as how to help people to adjust to
the changes brought by globalization. One of the answers is the discussion on
how to renew and possibly expand the scope of the TAA (Trade Adjustment
Assistance), which expires at the end of September this year.
However, answering to the challenges of globalization and trying to keep our
economies competitive will also require changes to education, pensions, healthcare systems. A recent OECD study (Taking Stock of Structural Policies in OECD
Countries) says on the US that “the outcomes of compulsory education are poor
despite much higher spending per pupil” than in comparable countries. It calls
for a reform of Medicare, and the idea of ending the open-ended tax
deductibility of health insurance premiums (also advocated by President Bush in
his State of the Union speech) is also endorsed.
Even more controversially, the OECD advises the US to “move from personal
income taxation towards a consumption-based tax system, inter alia by raising
current low taxes on carbon-based energy consumption”!
In one respect, this OECD study bears out other work explaining the US’ good
economic performance over the past ten years. The US has made much better use
of information technology, the adoption of which required a dramatic change in
business philosophy – something that the US can do more quickly than other
countries.
IT investment was over 30% of all investment in the US since 1995, whereas it
was less than 20% in most EU Member States. The more regulated European economy
could not derive benefit from IT as quickly as the US could.
The EU Member States don't escape the OECD criticism either, and the study
points out various reasons for slower growth in Europe – even though the growth
rate varies from one EU country to another: Ireland, Spain and the Nordic countries
are growing faster than others, but also Germany has picked up the pace.
The really striking thing about this OECD report is that it shows it is wrong
to generalize about Europe. Every European country is different. The
explanations for slower growth differ from country to country.
The OECD highlights overly strict employment protection legislation in
countries like the Czech Republic, France, Greece, Portugal and Spain.
On the other hand, high marginal taxes on earnings from extra work are seen as
a problem in Denmark, Belgium, Finland, Germany, Italy, Poland, the Czech
Republic and Slovakia.
Again, the OECD claims it is too easy to retire early in Austria, Belgium,
Finland, Greece, Luxembourg and Slovakia.
It says it is too easy to get sickness benefit in Denmark, the UK, Hungary, the
Netherlands and Sweden.
In a number of other countries, housing markets need to be liberalized so
people can move job more easily.
The OECD says regulatory barriers to competition in network industries - like
electricity, gas and telecommunications - need to be reduced in Austria,
France, Germany, Greece, Ireland, the Netherlands, Poland and Portugal.
And an easing of restrictions on the retail sector (weekend opening, new
supermarkets) is needed in Belgium, France, Italy, the Netherlands and Spain,
whereas the emphasis needs to be on liberalizing access to the professions in
Germany, Italy, Luxembourg and Poland.
Educational reforms (especially at tertiary level) are considered to be a
priority for Austria, Germany, Ireland, Italy and Poland.
Transatlantic Economy
Quoting from the latest study of Daniel Hamilton and Joseph Quinlan (The
Transatlantic Economy 2006), despite all the transatlantic political bickering,
the hype associated with the rise of China and India, and constant warnings of
a transatlantic divorce, the
bilateral economic bonds of the US and Europe have
only grown stronger since the beginning of this decade.
Since hitting the cyclical bottom in 2001/02, transatlantic trade, investment
and corporate profits have soared, with both the US and Europe leveraging off
each other's strengths. Strong economic growth in the US has been a catalyst in
boosting corporate earnings in Europe, which in turn has helped promote more
investment and employment growth across the region. Meanwhile, the enlargement
of the EU, coupled with micro-reform in various key nations, such as Germany,
have been a windfall for US multinationals.
However, it is not only multinationals that profit from the US/EU economic
partnership. Hamilton and Quinlan estimate that the transatlantic economy
generates roughly $3.75 trillion in total commercial sales a year and employs
up to 14 million (8 million directly employed by US and European foreign
affiliates; the rest indirectly) workers in mutually "insourced" jobs on both sides
of the Atlantic who enjoy high wages, high labor and environmental standards
and open, largely nondiscriminatory access to each others' markets.
Impressive as the trade figures are, the core of the transatlantic economic
relationship is investments. Over the first half of this decade, Europe
accounted for just over 57% of total US foreign direct investment (FDI)
outflows. In turn, Europe accounted for 75% of total US FDI inflows over the
same period. For example, while US FDI to China has increased sharply over the
past few years, total US investment in China was just 23% of total US
investment in Belgium in 2005. The same year, US investment in France was
almost 17% greater than what US firms invested in India.
While US affiliates on the whole target local European markets, many are
increasingly leveraging some European nations as export platforms. US affiliate
sales in Ireland, Belgium, the Netherlands, Switzerland and Hungary are greater
in third markets and the US than in the local markets. The same trend is
visible in Finland and Sweden.
Flowing from the specific feature of transatlantic economic relationship, the
importance of foreign investment and affiliate sales that drive the cross-Atlantic trade flows, a substantial share of transatlantic trade is considered
intra-firm or related-party trade, which is cross-border trade that stays
within the ambit of the company.
Quinlan and Hamilton give examples of related-party trade such as when BMW or
Mercedes of Germany sends parts to BMW of South Carolina or Mercedes of
Alabama. Or, when Michelin sends intermediate components to its plants in the
Greater Cincinnati area. Almost 60% of US imports from the EU consisted of related-party trade in 2005, while over 30% of US exports to Europe in 2004 represented
related-party trade. This helps to explain why Ireland is the number one export
destination for such US states as Minnesota, Washington, Maine or New Mexico:
each host company's engaged in close intra-company trade with the Celtic Tiger.
However, the picture of transatlantic economic ties wouldn't be complete
without services. While the US had a $124 billion trade deficit with the EU in trade in
goods in 2005, it enjoyed a $22.4 billion trade surplus in services with Europe
the same year. Europe accounted for 40% of total US service exports and 44% of
total US service imports in 2005. Five of the top ten US export markets for
services in 2005 were in Europe. The UK ranked first, Germany 5th, France 6th,
Switzerland (non–EU)8th and the Netherlands 10th.
But also in the services sector, investments and foreign affiliate sales of
services on both sides of Atlantic have surpassed traditional exports. The
service economies of the EU and the US have never been so intertwined as they are
today, especially in financial services, telecommunications, utilities,
insurance, advertising and computer services. In fact, US affiliate sales of
services were over 80% larger than US services exports to Europe last year. The
same trend is true to European affiliate sales in the US. In 2005 they totaled
$260.6 billion, more than double US service imports form Europe the same year
($123 billion).
I have delved rather long into the EU/US economic relationship, and exhausted you
with numbers, to demonstrate that it is way beyond the traditional trade. The
US companies are taking full advantage of the world's largest single market
with a single set of rules on trade and a single business environment with
competition rules working to the benefit of third countries (especially
state
aids policing by the European Commission).
Further, in the medium term there will be a single currency (Euro) reducing
business transaction costs and making pricing throughout the Euro area more
transparent compared to the challenges and costs of dealing in multiple
currencies prior to the Euro's introduction.
Rhode Island and Europe
European investment in Rhode Island supported 22,200 jobs in 2004; 9% of these
jobs were in manufacturing.
Of the $3.4 billion invested in Rhode Island in 2004, 76% or $2.6 billion came
from Europe. The main sources of investments in declining order were the UK,
Germany, Canada, France and Switzerland.
In 2005, Europe purchased $312 million worth of goods from RI. Manufactured
goods and electronic goods made up the bulk of exports.
Trade's role in harnessing globalization
Now a word on trade. The way we channel the dynamic power of trade is arguably
the single most important impact we will have in shaping economic development
in the global age.
By progressively investing in export growth and opening their borders, Brazil,
China, India and the other emerging economies have grown fast enough to double
per capita income every ten years - which has no historical precedent.
And while all of these countries continue to face massive challenges of poverty
reduction, and while new prosperity exists alongside old deprivation, each of
them has taken an undeniable and irreversible step out of the developing world.
But here's another set of facts: despite having almost complete duty- and quota-free access to EU markets, Sub-Saharan
Africa actually trades less with the EU than it did ten years ago. Over 50% of Sub-Saharan Africa's exports to the EU
are now just two products - oil and diamonds. Africa exports its capital rather
than investing in itself.
The twin challenges of the WTO and the global trading system are to manage
these two - unfortunately divergent - trends. China and the other large
emerging economies need to be fully integrated into the global trading system,
and their contribution to the system in the form of reciprocal openness needs
to reflect their growing strength.
For poorer countries we need to recognize that open markets are not a magic
wand. In part because a lot of agricultural trade in least developed countries
is actually protected from more competitive agricultural exporters like Brazil
only by preferential tariff rates - which is why anyone who thinks that just
liberalizing farm trade is a panacea for development doesn't get it.
Liberalisation in these areas must be gradual and carefully assisted. That is
the lesson of Europe's
sugar and
banana reforms and their impact in the
Caribbean.
In part it is simply because these countries still lack the capacity to take
advantage of open markets. They need the aid for trade and development
assistance that will build the infrastructure and the capacity to get goods to
market. It is necessary to tackle the complex and sometimes corrupt management
of Africa's borders. It takes twenty days to get a container through a port in
Eritrea. It takes two hours in Liverpool.
And we need to work to improve the conditions in Africa that will encourage
people to invest there.
The importance of Doha
That is why we must complete the Doha Round of WTO talks. Unlike the Uruguay
Round, which had too much smoke and too many mirrors, Doha will impose serious
tariff cuts for all farm goods and restructure farm support for good. And it
will make big inroads into protection in other areas - in the developed world
but also in the emerging economies. If we let it slip away the economic costs,
and the lasting damage to the multilateral trading system, will be severe.
Doha is conceptually a different kind of trade deal - one that self-consciously
accepts the imperatives of development and in which the voice of the developing
world has been and will be decisive. One that will be accompanied by huge new
packages of capacity-building aid and special and differential treatment for
developing countries.
Doha can mark a pivot point in the history of the WTO in which it turns away
from simple mercantilism towards an agenda that sees trade as a means to an
equitable globalization.
Sources:
- "Europe and Globalisation" – speech by
[EU Trade Commissioner]
Peter Mandelson in London, 2
February 2007
- Hamilton, Quinlan:
The Transatlantic Economy 2006
- Ambassador's
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