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International Trade: problems and prospects

Rt. Hon. Lord Mandelson,  First Secretary of State, Secretary of State for Business, Innovation & Skills, Lord President of the Council
IGD Conference ,  10 July 2009

Thank you for inviting me to talk about my old stomping ground of trade, which I’m pleased is folded in to my new responsibilities.

I know the IGD is celebrating its centenary (1909-2009) this year, but I imagine people who work in grocery retail must look back at just the last twenty years and shake their heads at the way your industry has changed.

The technology behind the logistics and inventory. Certainly the change in British tastes and eating habits. The modern British supermarket is an all-purpose, exotic bazaar geared to all tastes and needs compared to its seventies’ equivalent. You know, these days, even in Hartlepool, it’s probably harder to find mushy peas than guacamole!

While a big part of the grocery trade will always be local – not least because carbon and quality conscious customers are going to demand it that way - this is nevertheless a truly globalised industry. Because the tastes and expectations it serves are now globalised. And the markets that supply it are now globalised - as well.

What has happened to your supply chains is part of a general trend towards fragmentation that has reshaped the way we think both about production and supply.

The net effect of this change is to give a huge number of people, from customers who like the choice and the price effect, to buyers and inventory managers, to developing country producers, a stake in an open trading system.

Many of our producers have the same stake. It’s easy to forget in this high tech world that British cheese and Scotch whisky - for example - are hundred-million and multi-billion pound UK export industries. Just the kind of balance-of-payments-improving industries that we will need more of over the next decade.

What I want to say something about today is the way this is forcing government to change the way it looks at production and supply in the economy. What it means in the recession, but also for trade policy in the longer term.

Threats to the open trading system

Now, even two years ago when trade was booming I would have said that it would be a mistake to take the openness of that trading system for granted. The fact that we have had a twenty-year bull market in trade liberalisation doesn’t mean it cannot go backwards.

You see that in the unease many people feel in the US and Europe about China’s growing trading strength.

We saw that at the height of the commodity price boom two years ago when net food exporters put up trade barriers in the name of food security, thereby guaranteeing food insecurity for their food-importing neighbours.

It’s worrying that countries including China and the Gulf States are buying up farmland and resources in Africa as a way of trying to guarantee their own supply.

It suggests that they just don’t believe - or they are not willing to trust that others believe - that the best way to control price volatility is to make the market as transparent and open as possible, so the supply and demand signals can push up productivity and food production. And if commodity prices rise again, then this is a huge potential source of international tension.

Now, of course trade is no longer booming today in the current period, as it was before. The WTO are now predicting a 10% fall this year and volumes are lower than at any time since the second world war. Trade is being hit from two sides: from a massive global slump in demand, and from the contraction in the supply of trade credit as a result of the banking crisis.

The challenge we face is making sure that this slump is reversible, is temporary. Because the openness or otherwise of the trading system will determine how quickly a return to growth and demand can be transmitted around the global economy.

I don’t think this is the nineteen thirties we are looking at now. I think that peer pressure and business and consumer pressure and WTO rules make it very unlikely that we will see a repeat of the Smoot-Hawley tariff wars of the inter-war period.

But economic nationalism is showing up in other ways. In Buy America, in Buy China. In the small print of stimulus packages and the support packages which are being introduced for certain industries.

So we need to be on our guard against protectionism. It is right and good that G20 and G8 leaders have kept this at the top of the agenda, as we saw in today’s reports from yesterday’s meeting. We need to support the WTO in applying peer pressure to countries that try to free ride on the general openness of the trading system.

We are part-funding the Global Trade Alert initiative, a new independent watchdog that will provide independent analysis to the public of trade distorting policies.

We also need strongly to support the next European Commission in taking a forceful line on rolling back bank crisis and other measures taken within the European single market when they are no longer needed.

It would be a disaster for us, if we were to see an erosion that would undermine the single market - we cannot allow these measures to permanently damage the European Single Market.

The real driver of greater trade integration

But we also need to recognise that the real force driving and sustaining greater trade integration isn’t the WTO or governments negotiating FTAs - its traders trading.

It’s the retail and supply chain businesses that are sourcing and supplying internationally, and indirectly the customers that benefit from that.

It’s ultimately these businesses that can and will pressure governments to keep domestic tariffs down and markets open, because they and their customers can really quantify the costs of protectionism. They feel it in their pockets.

I draw three conclusions from this.

Openness to imports

The first is that we have to make sure that it is easy to import into the UK and into Europe.

In a supply chain economy, or the supply chain of a modern major grocery business, every cost at the border goes straight to the bottom line, and probably ultimately to the high street. And for a big re-exporter of imported parts and unfinished products as we are in the EU, that makes little sense.

Tariffs also keep internal prices higher than world markets, which is of dubious value if you’re a shopper.

Anyway, to help importers we have been looking at a range of ways to ease their burdens. Last year’s Pre-Budget Report asked the Department for Business and HMRC to lead a work programme to review the costs of complying with international trade regulation at the UK border.

This sector has made a big contribution to that, for which, I thank you. Our final Action Plan will be published alongside the 2009 Pre-Budget Report.

Support for exporters

Second is that we have to give exporters the help that they need. The UK needs, in any event, to strengthen its export performance as a counterbalance to a necessary balancing of consumer spending in the economy.

UKTI already does a huge amount of work in this area and I know it works with many of your members. We strengthened it with new funds at the Budget.

We have also been working on two further forms of support for exporters to reflect the fact that about a quarter of British businesses say they are having problem getting trade credit in the current environment.

We’re consulting on a scheme to underwrite letters of credit from banks for exporters. As well as possible plans to expand the business model of ECGD to provide a wider range of support for exporters, both in the short and the medium term.

A world trade deal

Finally, and at a completely different level of global aspiration, we need a global trade deal, and we need to understand why it is important that we have one.

If I’m right about the basic role of business as the main force behind trade integration, then the key role of the WTO may not be to drive forward trade liberalization in huge strides.

This is because trade opening is often too sensitive and involves too many domestic pressures and vested interests to really be negotiated under international pressure.

The key role of the WTO system is therefore periodically to lock in that new openness with a trade deal, to make sure that what has been incrementally achieved through voluntary means is locked in - so that the gains cannot be lost, so that there cannot be a slip back to protectionism.

Because a trade deal locks tariffs at around their current level or lower, it acts like an insurance policy against future protectionism.

But Doha would also lock in recent reforms of the Common Agricultural Policy, which are helping to improve competitiveness of the food industry across the EU. And it will cut many of the EU’s highest agricultural tariffs, which would be good for food processors and retailers.

There is a lot of openness that is at risk. Its fifteen years since the last global deal, and that is fifteen years worth of trade liberalization that can be rolled back without breaking a single WTO rule.

Which is why a trade deal matters so much now, in a recession, when economic nationalism is that extra bit tempting, rather than less.

We have a new Indian administration that has clearly signaled its willingness to come back to the negotiating table for the trade round. The US has an internationalist President who seems open to the prospect of a deal, despite scepticism from Congress and some parts of the business lobby. And with commitment from the G8+5 group of countries yesterday to conclusion in 2010, we need to keep up the pressure.

Conclusion: trade and the upturn

So, in conclusion. I don’t think you can separate the basic issues of trade policy from the recession and our response to it.

We know that it is exports and investment that will drive recovery out of this recession.

The trade policy choices we make in Europe and others make across the global economy will determine the cost of the commodities on your shelves, the cost of your goods to the customer.

And ultimately they will help determine how quickly and effectively a return to growth in the global economy can become a sustained upturn.

One of the things I think the UK has done well over the last decade is to make the case for a globalised economy internationally and in Europe. And we have got to keep doing precisely that. As I say, our challenge now is to make sure that that trading system survives the downturn and that your businesses thrive in the upturn and beyond.