Peter Mandelson speech on ’Strengthening the Lisbon Strategy’

Peter Mandelson
European Commissioner for Trade

Strengthening the Lisbon Strategy: the Contribution of External Trade to Growth and Competitiveness in Europe

High Level Seminar on the Lisbon Agenda
Stockholm, Sweden, 15 February 2005
Reference: SPEECH/05/91 | Date: 15/02/2005

In this speech, given at a High Level Seminar on the Lisbon Agenda organised by the Swedish Government in Stockholm on February 15 2005, EU Commissioner for Trade Peter Mandelson argues that external trade is an important dimension of the EU’s drive for strong competitiveness and growth. As the world’s leading exporter of goods and services and the world’s leading investor abroad, Europe’s companies and investors rely on open and fair international trade to compete.

The Commissioner argues that European Union should:

- Reduce its own protection in the areas where it remains.
- Press its trade partners to open their markets. This should be primarily pursued through an ambitious strategy in the Doha round: a successful completion of a far-reaching DDA is an essential deliverable of the Lisbon strategy.
- Use trade policy to contribute to developing Europe’s knowledge economy strengths by promoting intellectual property protection. The priority regions for action are the EU’s immediate neighbourhood as well as China. This is of utmost importance for the promotion of innovative products and to sustain the EU’s position in the knowledge economy.
- Work to improve market access in public procurement.
- Reinforce international norms and standards to tackle non-tariff barriers detrimental to EU industry. The hoped-for success of Doha should be complemented by bilateral or regional initiatives to reduce non-tariff barriers to trade. There are great gains to be unlocked through these.
- Do more in the developing world, through a more coherent approach to the issues of trade, aid and development, to help conquer world poverty and create sustainable global prosperity.

Sweden has always exercised an influence that stretches way beyond its power. As a model of progressive, internationalist commitment, it has no equal. It is therefore no surprise to me that, in taking up my new trade responsibilities, I should discover early on that Sweden is a leader in its thinking about trade policy.

Ten days ago I gave a lecture at the London School of Economics with the title Trade at the Service of Development. My speech today has as its focus - Trade and Competitiveness. Together they sum up my mission in this job. Pro Growth and Jobs in Europe; Pro the Poor in the rest of the world. The two are interlinked.

Today I want to argue the following. First, contrary to much popular belief, the European Union is arguably the most open economy in the world. But further opening our own markets, and other countries’ markets, across the range is how best the Barroso Commission can contribute to its “number one” strategic objective - Growth and Jobs.

At the same time, the EU should work with the Member States to invest substantially in the knowledge economy.

And the Member States themselves must also continue reforming their labour markets and welfare systems to promote flexibility and equip people for change.

This triad of economic policies should not become a Left - Right issue. It is wholly consistent with the goal of sustainable development. Europe retains, for the moment, key strengths in its international competitiveness. But this constitutes an unstable equilibrium that will quickly erode without greatly increased investment in the knowledge economy and more successful innovation.

And if we are not competitive, we will not be able to sustain high levels of social and environmental protection.

The second leg of my argument today is that an active and modern trade policy is a vital component of this strategy. The aims of our trade policy should be to achieve better market access for European goods and services worldwide, with better enforceable international rules to ensure fair competition, and a new drive to achieve regulatory convergence with our biggest trading partners so as to lower non-tariff barriers to trade.

But the last leg of my argument is that the outward looking policy I advocate - of more open trade, more competition and a faster rate of economic change - will only be achievable, and politically viable, with more effective policies to help and equip working families, particularly the less skilled, to benefit from change.

The single market and sustainability

Because open markets are a powerful stimulus to competition, innovation and productivity growth, the Single Market has significantly raised Europe’s economic potential. But it is to a considerable extent unfulfilled. Commitments to open markets in the EU, especially in key areas like financial services and energy, have yet to be delivered in practice. Also, Europe does not yet have a Single Market in services to complement the Single Market in goods. The Commission’s new strategy to improve delivery of the Lisbon agenda demonstrates a clear intent to put this right.

Europe’s Single Market is bolstered by an open market at the EU border. We are the world’s leading exporter of goods and services and the world’s leading investor abroad.

This openness to trade and investment has been a major “catalyst of growth”. It explains a quarter of the productivity gains witnessed across Europe. In key sectors, liberalisation of markets outside the EU has been a major factor in reinforcing our internal competitive disciplines. The removal of import restraints in the textiles and automotive sectors are obvious examples.

For some, talk of market opening and liberalisation gives a bad name to the new Commission’s priority for Growth and Jobs.

It sounds right wing. To others it conflicts with the overriding goal of sustainable development.

Of course open markets are a means to an end, not an end in themselves.

We should not be market dogmatists. But, equally, we should acknowledge that in most situations, open markets are the best motor of economic growth that human experience has been able to identify. For me growth and jobs have always been the foundation of social justice and the fight against poverty - and we need growth to finance a generous welfare state.

I am with Lionel Jospin who defined the modern Left position as in favour of a ‘market economy, not a market society’.

However, open markets are not enough.

A stable macro-economic context is crucial. Markets need public intervention to correct for their failures, not least in the environmental field. They need public investment to satisfy what would otherwise be unmet social needs.

And they require a public commitment to a modern welfare state that equips working families to cope with insecurity and rapid economic change, and creates new opportunity for those who suffer or inherit disadvantage.

The European Commission cannot, of its own initiative, achieve all these things, nor should it. We are not the government of Europe. But the EU should have an adequately resourced European budget to incentivise investment in research and infrastructure; and, through its Structural and Social Funds, help regions and individuals adapt to change. The tasks of public investment and social cohesion, on the other hand, are a principal responsibility of Member States. That is why the Barroso Commission has called for a new partnership for European renewal between Brussels and the Member States.

This partnership for growth is the route to sustainability. Without additional growth, the European social model will come under increasing pressure as a result of the ageing society. We would have less money for the research in new technologies that offer environmental breakthroughs. Of course, growth does not automatically lead to greater environmental sustainability, but markets can be regulated to incentivise sustainable outcomes, as Europe’s bold experiment in “emissions trading” testifies.

The Barroso Commission - with Margot Wallström in pole position as Vice President - has certainly not abandoned sustainability. The Commission is not proposing to set markets free and let capitalism rip, as some imply. The purpose of a revived Lisbon agenda is to restore the growth that will better enable social cohesion to be strengthened and long term sustainability built.

Trade policy and competitiveness

It is this mindset that conditions my approach to trade. This year’s vital negotiations will decide the fate of the Doha development round. We have the opportunity to open further markets worldwide - but this time, unlike the rounds that went before, to put the interests of the developing world to the fore. Our bilateral trade relationships, too, must address the issue of sustainability. We must offer poor countries the help with capacity building and adjustment they need.

Today, however, I am focussing on trade’s contribution to European competitiveness. What are the conditions to make this happen?

First, as I have said, greater European openness. Our trade policy must seek to eliminate or reduce the tariffs and non-tariff barriers that put up production costs. Industries should not be sheltered from the benefit of more competitive disciplines, a key effect of trade openness. Nor should regulation deter foreign direct investment, which is a key provider of jobs, skills and technologies.

Second, we need market access elsewhere in the world. Access to third markets means more exports contributing to growth. It is the basis for more competitive specialisation and the achievement of economies of scale. Overcoming market access restrictions today encompasses not just tariffs on goods. Non-tariff barriers are becoming just as obstructive, including behind-the-border restrictions on goods and, crucially, services. They can take the form of national ‘norms’ and standards, restrictions on competition or discrimination in public procurement.

Third, we need fair competition. Anti-competitive practices should not distort or undermine trade. Trade policy should help to ensure that the positive changes induced by openness are not jeopardised by abuses in local markets.

So what are the issues we face? How competitive is the European Union today?

Building a European market benefiting from third country exports and investment has long been a consistent European policy. The EU played a leading role in securing the dramatic reduction of industrial tariffs during successive GATT rounds. Sectoral barriers have been dismantled. For example, the Information Technology Agreement, covering almost the entire IT sector, was instigated by the EU.

The EU’s trade regime for industry now clearly helps EU competitiveness. The borders of the EU are largely open to trade. There is no real restriction on inward investment. Such pockets of distortion that remain affect imports such as aluminium which are already partly mitigated by tariff suspensions and quotas, and they are likely to be removed by the Doha negotiations. As for the anti-dumping duties that the EU imposes, our analysis suggests that they do not raise costs significantly to downstream industries.

The same applies to services. While measuring restrictions is more difficult here, there appear to be no restrictions on the supply of business services, which impose high costs on potential overseas entrants. It is of course arguable that a genuine Single Market in Services would increase the attractions of doing business in Europe to overseas suppliers.

Some vested interests may see this as an argument against measures such as the Financial Services Action Plan and the proposed Services Directive. They oppose the ‘country of origin’ principle because they want to retain the right to lobby for protectionist rules on a national basis, so that they can continue to charge high prices to consumers and lead a cosy life. No one, including some colleagues on the Left, should be seduced by this subtle propaganda. We must of course safeguard genuine concerns about public services and employee rights. And I am confident Charlie McCreevy will bring forward proposals to do this. But let us not retreat in face of illegitimate pressures.

The picture is rather different in agriculture.

Some significant inputs for the EU food industry, such as sugar or dairy, are still protected. European prices are above prices on world markets. These distortions place burdens on European taxpayers and consumers and bear on the competitiveness of the EU food industry. The question is how much. The EU processed food industry is considered to be highly competitive with a reputation for high quality and strong brand recognition, internationally as well as in EU markets. And the protectionism that affects its inputs is not unique to Europe as sugar and dairy are also among the most protected sectors in the US and Japan. However, the pattern of production in the food processing industry might be different if agricultural protectionism was dismantled worldwide.

The greatest potential for improving the competitive position of EU industry is in addressing the barriers to EU exports of goods and services to third countries. This is a key Doha objective for us. While the EU is open by global standards, our leading trading partners are less open, sometimes significantly so.

The main lessons to be drawn from DG Trade’s Market Access Strategy are that substantial access restrictions to third markets are due to both tariffs and non-tariff barriers. Both matter. As stated by WTO, “tariff still matters”, even if this is less the case in developed countries. But this traditional tariff agenda is no longer enough. As we look ahead we shall have to devise new strategies to tackle other barriers to trade.

The protection of intellectual property rights is of prime importance. The labelling and branding of geographical origin also concerns the vital interests of EU exporters of wines, spirits, beers and other agri-food products.

Public procurement is another example where national preferences impede market access. Counting for up to 15% of GDP, it probably represents the biggest sector of trade sheltered from overseas competition, and everyone potentially loses from this.

Then the absence of agreed rules of fair competition limits market access in countries where restrictive practices and abuses of dominant position by national firms, can often be as big a hurdle as tariffs or traditional non-tariff barriers.

Trade defence instruments, especially anti-dumping and anti-subsidy measures, are permissible in order to correct distorting practices. This principle underlies EU policy on Trade Defence Instruments. For us they are the international equivalent of the Single Market rules on State Aids and abusive dominance. We use them sparingly. However, European producers in third country markets often have to face WTO-incompatible anti-dumping actions. And the severity of US anti-dumping practice continues unabated, despite WTO rulings against their behaviour.

For all these obstacles, the EU’s export performance remains strong - contrary to what is often said. This is mainly due to our ability to sell upmarket, high-quality branded products. It is a striking fact that upmarket products now account for about half of European exports and a third of world demand. Globally on this measure, the EU ranks in second place, just behind Japan but ahead of the US. Upmarket products account for 52% of Japanese exports and 48% of European exports, but for only 41% of US exports. At the other extreme, they still account for less than 15% of Chinese exports.

The weakness of the EU vis-à-vis the United States is in sectors which in the last ten years have seen the most rapid productivity growth - principally IT products and retail services. This is an important weakness and is creating an unstable equilibrium. European industry is losing ground in high technology products. It is lagging behind in several high tech products whereas countries such as China are rapidly catching up.

Maintaining the EU’s ability to sell expensive top-of-the-range products is not just a matter of technological advance; innovation remains a key component of success. Urgent action to reassert Europe’s technological leadership is crucial, which is why the Barroso’s Commission call for increased knowledge economy investment, must be heeded. Europe must rebuild its strengths as a centre of research, technology and innovation.

Of course, as with delocalisation, open markets and competition on the basis of the new “vertical” international division of labour will bring about change which the less qualified and most vulnerable workers will find costly and disruptive. Even if our prosperity as a whole gains, greater openness to trade risks adversely affecting the income and life chances of many.

That’s why help with adjustment is a political imperative. The benefits of trade-opening are diffuse while the harmful impact is concentrated. Such asymmetry directly feeds political opposition to market opening. But the fact is that faster anticipation of change will minimise its social and economic costs. Rather than try to delay inevitable change - locking workers into doomed jobs - public policy should aim to facilitate the transition. This will limit the duration of unemployment and the scale of individual workers’ wage losses.

So what, in sum, does all this mean for our programme of trade policy action?

First, reduce our own protection in the areas where it remains, notably in the start we have made in agriculture, but also the few remaining high tariffs on industrial inputs, as well as any restrictions on services. It is much better from our point of view that we do this multilaterally, not unilaterally. Europe needs to maintain the necessary “negotiating capital” in the WTO/DDA and in bilateral negotiations. And it is actually in the interests of the developing world that we use our multilateral muscle to secure agricultural liberalisation all round, as well as a reduction in the South-South tariffs that damage the poorest countries in the world.

Second, press trade partners to open their markets, using our possibilities for movement on our own trade protection as negotiating leverage. This should be primarily pursued through an ambitious strategy in the Doha round: a successful completion of a far-reaching DDA is an essential deliverable of the Lisbon strategy. We must maintain ambitious designs regarding tariffs, non-trade barriers, services, geographical indications and rules (especially anti-dumping disciplines) within the DDA.

Third, trade policy can contribute to developing Europe’s knowledge economy strengths by promoting intellectual property protection. The priority regions for action are the EU’s immediate neighbourhood as well as China. Implementation of the IPR enforcement strategy adopted in November 2004 by the Commission is vital. This is of utmost importance for the promotion of innovative products and to sustain the EU’s position in the knowledge economy.

Fourth, outside the DDA framework, we should launch new initiatives to improve market access in public procurement. We must examine the approach of applying reciprocity against third countries which fail to open up their public procurement markets. Similarly in our bilateral relationships, we should find ways to strengthen rules in areas such as investment and competition.

Fifth, the new challenge for trade policy is to reinforce international norms and standards if we want to tackle non-tariff barriers detrimental to EU industry. The hoped-for success of Doha should be complemented by bilateral or regional initiatives, such as Regional Trade Agreements with Mercosur and the Gulf Cooperation Council, which allow the pursuit of a wider agenda. At the same time, we should pursue with vigour bilateral regulatory initiatives recently launched with the US, ASEAN and Canada. There are great gains to be unlocked through these.

The last 30 years have seen an explosion of regulation in the developed world as a reaction to corporate scandals, food safety scares, environmental campaigns. These all reflect legitimate concerns about health and safety, environmental protection, and consumer protection. But this focus on regulatory solutions has also created new obstacles to trade. Solving these problems is not easy. However the way forward is clear - towards greater, science-based regulatory convergence worldwide. To achieve this will require painstaking investigation of the issues at stake and slow consensus building.

Sixth, the EU can do far more in the developing world, through a more coherent approach to the issues of trade, aid and development, to help conquer world poverty and create sustainable global prosperity and with that, win new export markets. We should encourage the integration of larger regional markets, as we are doing with Economic Partnership Agreements. Also we should promote institutions and policies that favour “inclusive” development strategies in emerging countries’ national policies.

Conclusion

We need to do more thinking about the relationship between external trade and our own competitiveness. The two cannot be treated as distinct policy areas. Tackling this intellectual and policy agenda will be one of my top priorities.

But this modern trade agenda will only work politically if in Europe we can counter fears of insecurity. “Anti-de-localisation” has become the rallying cry for those who seek to keep markets closed and resist change. Europe has to become much more successful at anticipating and managing the transitional effects of trade opening in order to facilitate and accelerate economic change.

This implies a push for more flexible labour markets and active safety nets within the EU. The likely impact of greater trade openness must be taken into account in designing and programming the Structural Funds for the seven years ahead.

Reserve funds should be put aside for intervention in case of unexpected trade shocks, as transition costs are disproportionate in those regions of Europe that have underdeveloped and non-diversified economies, which is why the regional dimension remains important.

Adjustment to the dynamics of the Single Market was the key reason for the inception of cohesion policy at the end of the 80s: the adjustment to changes induced by international trade opening and the division of labour should be part of today’s justification for a modern cohesion policy.

I see this, incidentally, as a key point for those of us who are social democrats. Open trade is fundamentally about creating sustainable conditions for reducing inequalities in the world. But I don’t want the price to be increased inequality at home. It is a determination not to contemplate this that makes our model of progress different from that of the United States.

What I seek is a global alliance between those like me who want to combine economic dynamism with social justice in Europe, and those in the developing world who see the gradual extension of openness as the path to social and economic progress for themselves.

This then is how trade can contribute to Europe’s competitiveness. The simple message is that Europe has to develop a new outward focus. Not only is this necessary to live up to our moral responsibilities to the world’s poor, it is a question of our own economic prosperity and the continued strength of the European welfare model for generations to come.