International Trade

Lord Davies of Stamford Excerpts

Thursday 23rd January 2014 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, I add my congratulations and my gratitude to the noble Lord, Lord Harrison, for this debate, which enables the House to focus on this very important issue today. Standard economic theory tells one that economic growth is a positive function of two variables: increases in factors of production and increases in productivity. Increases in productivity arise from the application of technology, changes in work practices and specialisation. The three things go very much hand in hand. Specialisation is what requires trade: trade within the local community, within one nation and internationally.

We can all take pride in the fact that the central economic theory breakthroughs in this area are all achievements of the great British political economists. Smith first identified the importance of specialisation with his memorable analogy in The Wealth of Nations about the makers of pins, who suddenly became more productive when one man ceased to make the whole pin and another man added the head. Fifty years later Ricardo formulated the much more counterintuitive theory of comparative advantage. This demonstrated that a country with an absolute advantage in everything still has an interest in trading with its neighbours, because if it concentrates all its resources on those areas where its absolute advantage is greatest, it will so increase its output as to be able to purchase anything else it needs from the world on very favourable terms. Global output and global welfare will then be maximised. Those theories are now just as embedded and well established in economic science as Maxwell’s equations are in physics, Mendeleev’s periodic table is in chemistry, or Darwin’s theory of natural selection is in biology.

Over the past 50 or 60 years and the lifetime of most of us in this House, there has been a remarkable phase of economic growth. This has been cyclical, as one expects, but nevertheless it is extraordinary. I often wonder whether it can be continued over the next 50 or 60 years. There have been four very special, remarkable and unusual features to the last 60 or 70 years, which have made possible that great growth in output. All of those four developments can and should go further. They should be pushed further, which I will come to in a moment. However, it is not clear to me that they can be effectively replicated or replaced in their totality. We should be quite worried about that, and should not be complacent in simply extrapolating the growth rates of the last 50 years—which in this country have averaged about 2.5% per annum—into the indefinite future.

The first of those great developments and changes was the introduction of the female half of the human population into the labour force of developed countries. Obviously, that was an event of enormous social consequences, but also enormous economic importance. That is a classic example of an increase in a factor of production, of the major factor of labour.

The second great development of the last 50 or 60 years has been what I call the economic emancipation—unfortunately not always accompanied by political emancipation—on free market models of countries in the Far East. The first of these was Japan, followed by Korea, Taiwan and the ASEAN countries, and then over the last 20 years by China and India. China and India alone account for more than 2 billion of the world’s 6 billion population. That is an enormously important development for the future of everybody on the globe. Can it be reproduced? Can an equivalent dramatic event occur in the future? That is a classic case of the rise in productivity which happens when people move from very low productivity activities such as agriculture—sometimes at subsistence or near-subsistence level—into manufacturing and into the cities. That has been the history of Asia over the last two generations.

The third factor, which I do not need to dwell on as everybody knows about it, is the introduction of IT into the economy. Again, I do not doubt that we have much further to go on this, but is it possible to envisage that over the next 50 or 60 years there will be an equally dramatic impetus to growth from new technology? I do not know, but I sometimes worry about that.

The fourth factor, which comes down to the subject introduced today by the noble Lord, Lord Harrison, is the growth in free trade. Since the Kennedy round in the 1960s right through to the latest chapter—I hope it is not the end—in the Doha process, there has been a steady reduction in tariff barriers. This has been a great achievement, and a great boost to growth. The establishment of regional free trade areas or economic areas of co-operation is, in a way, the greatest success. The European Union has been a model for the whole world. It has done something which none of the others has succeeded in doing: addressing the non-tariff barriers to trade just as effectively as the tariff barriers. We all know that the non-tariff barriers are the most difficult to deal with.

It is very unfortunate that the Doha round seems to have run into the sand. Perhaps it can be pulled out, as we all hope. In the mean time we must concentrate on doing what we can. The Government and the European Union in partnership have been very sensible in putting the emphasis on doing trade deals, particularly with other economic groupings around the world. Quite the most important of those is the potential EU-US trade agreement.

I will spend the rest of my time asking the Minister about that agreement, because it is so important that the House of Lords—and, indeed, the House of Commons—are kept up to date. We all know that the negotiations are taking place, and of course practically they can only take place at the level of the European Union. Clearly, this is one of the great things which the European Union can do much more effectively than 28 different countries could do separately. They could not even begin to think about it. I know that mechanisms are in place for national Governments to keep abreast of the developments. It is very important that they in turn keep us abreast of developments, so perhaps I can ask one or two questions.

We should bear in mind that this is an enormous challenge and that the United States does not have a good record as a free trader. On two occasions in the 20th century, or, at least, in the past 130 years—first, with the McKinley tariff in 1890 and, secondly, with the Smoot-Hawley tariffs in the interwar period—the United States led the way in starting a world tariff war, with disastrous results for everybody concerned. We also have to remember that the two Democrat Administrations—the Woodrow Wilson and Kennedy Administrations—reduced tariffs. Thank goodness, both Republican and Democrat Administrations in the United States have been committed to freer trade over the past two generations. However, we are going forward into this negotiation, which I think is going to be enormously complicated and take a very long time. Some of the great challenges are very unclear, so perhaps I may ask the Minister some very precise questions. If he does not know the answers to them, I should like him to write to me, if he would be so kind, and to place a copy of his letter in the Library so that the whole House can be informed.

First, at the behest of the French, as we know, a whole area of cultural products was taken out of the negotiating mandate by the Commission. I should like to know what the American response to that has been. Have the Americans accepted it or are they asking for a difficult, or any, quid pro quo?

Secondly, what scope is there for getting joint recognition of geographical descriptions of products—for example, the preservation of the concept of Scotch whisky or champagne—in the United States? That would mean that no one was allowed to produce New York or Californian champagne. This is an important issue. Is it in the negotiating brief? Is it something that the Minister is confident we can achieve?

Thirdly, what about the ownership rules? The United States, unlike the European Union, has ownership rules in certain sectors. I think I am right in saying that foreigners can own only 25% of an airline or 25% of a broadcasting corporation. Those are important sectors and there may be others as well. Are those issues on the table? Is it practicable and possible that the Americans will change those rules?

Fourthly, the Jones Act always struck me as being one of the most extraordinary pieces of protectionism. It prevents vessels which are not American-owned and American-crewed handling merchandise from one American port to another. It is rather like the navigation Acts that we had in this country and in Europe in the 17th century, but it is still alive and kicking in the United States. Is that on the table and is it going to continue?

Fifthly, I understand that the European Commission has given an assurance that the negotiating mandate will exclude health and environmental protection measures. For example, the European Union would not have to accept the import of American beef produced with the use of growth hormones. That is potentially an important public health issue, so I am told. Equally, in the EU we control GM products for environmental reasons; the Americans do not. Are we going to have to give up our controls on GM plants and crops? What is the American position on this?

Finally, I have a question on the whole area of insurance. This seems to be an extraordinarily difficult area in which to make progress because it is managed and controlled by the states and not by the union of the United States. Each state has its own insurance commissioner. In many states, no foreign insurers are allowed at all in the insurance market. Other states let them in for what they call “surplus lines”, where the local insurance companies do not want or do not have the capacity to handle the business. Obviously in relation to certain things, such as wind storms on the east coast and earthquakes in California, they do not want their insurance companies to bear the whole potential risk burden. What is happening on insurance? Is it going to be opened up and are we going to be able to sell insurance directly, either through binding authorities or on the internet, to retail customers in Eau Claire, Wisconsin, or Kansas City, Missouri?

Those are some of the essential questions on which I think it would be very useful to have an update, and I should be very grateful if the Government could give it to us.

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[The Minister of State, Department for Business, Innovation and Skills & Foreign and Commonwealth Office (Lord Livingston of Parkhead) (Con)]

My Lords, I thank the noble Lord, Lord Harrison, for initiating this important debate. I am very much aware of the noble Lord’s contribution in this area, and his expertise has been shown by his thoughtful comments. I will seek to outline our Government’s approach to trade, as requested by the noble Lord, Lord Liddle, and other noble Lords.

International trade is, of course, essential to the world economy. It creates growth and employment, and enhances consumer choice and value. It is not just something for “rich” countries or big business. Trade is the greatest single tool to bring hundreds of millions of people out of poverty and set countries on the path of development. Trade is vital to the UK’s economy. We have an open economy and seek to champion that; we have a global outlook and a strong and proud history of commerce. Exports are equivalent to over 30% of UK GDP and, in the last financial year alone, FDI into the UK supported in excess of 100,000 jobs.

The noble Lords, Lord Giddens and Lord Davies of Stamford, outlined their support for free trade agreements, which I very much welcome. It is important that the whole global community can benefit from trade, and to do that we require a functioning global trade regime. It should reduce or, ideally, remove the barriers to imports and exports and provide convergence of standards so customers around the world can choose the best of what the world has to offer. I hope that they will choose “Made in the UK”, and it is part of my role to make sure that they do that more regularly.

This Government are proud of their position at the forefront of European and global efforts to facilitate free-trade growth. My predecessor, the noble Lord, Lord Green, whose outstanding work in his two and a half years as Trade Minister I commend, was a vice-chair at the World Trade Organisation Conference in Bali in December, where the important trade facilitation package was agreed. This agreement will cut red tape and unnecessary processes and streamline customs procedures at borders. It will benefit the UK by around £1 billion per annum. However, crucially, most of the gain is global, with around $100 billion accruing particularly to emerging nations such as those in Africa.

My noble friend Lord Sharkey asked how we balance reducing barriers with supply-chain issues. Both are important, but I would also mention convergence: in many areas we have already reduced or removed trade barriers in terms of tariffs, but we also have to have convergence of standards so that manufacturers can produce global products and customers can enjoy them. Each and every one has its place and perhaps a different emphasis, depending on which area and which country we are negotiating with.

The UK has used its influence with both our EU colleagues and a wide range of other countries to help create a global consensus—we most definitely have such influence while in the EU. However, it has to be recognised that this was the first multilateral agreement in 20 years. It is appropriate, in the mean time, that the EU and other economies around the world have also pursued plurilateral and bilateral deals as well as regional routes to trade liberalisation. As the noble Lord, Lord Harrison, pointed out, those do not contradict each other; they can be mutually reinforcing and help build overall a system of improved trade, with higher volumes and prosperity.

Again, the UK has been at the forefront of efforts here. We were influential in shaping the EU-South Korea Free Trade Agreement, which was mentioned. This came into force in the summer of 2011 and was widely considered the first of a new generation of EU free trade agreements, in that it is genuinely deep and significantly more comprehensive than previous agreements. It has eliminated 97% of tariffs and addressed many of the non-tariff barriers. It makes doing business with South Korea much more straightforward. The results and successes of this agreement are clear, with trade between the UK and South Korea doubling over the course of the year following the agreement compared to the years before. Part of that is oil, but even excluding oil we saw a 40% increase in trade with South Korea. It may surprise many noble Lords that the UK now runs a £2.6 billion surplus in trade with South Korea. Before the agreement, it was broadly neutral.

Negotiations are also under way with a wide range of markets—east and west, large and small, developed and emerging. The largest of these is of course TTIP, which was mentioned by a number of noble Lords. This agreement was described by the US ambassador to the UK as,

“an important trade deal with a lousy acronym”.

He has a point, but what is more important is that it could be worth up to £10 billion to the UK. It is correct, as the noble Lord, Lord Harrison, mentioned, that we helped to sponsor a study to show the positive impact of the agreement in various US states. Why did we do that? Because it is very easy to spot the losers, but it is important that it is understood, on both sides of the Atlantic, where the winners are. Within the UK we have a clear view of the winners: for example, if we conduct a comprehensive TTIP, we expect the car industry to increase by 4.1% and financial services by 1.1%. There are real benefits for UK industry. However, critically, the point has been made previously in this House, including in Questions I have answered, that it will also benefit consumers, giving them better choice and lower prices.

The noble Lord, Lord Davies, raised a number of questions regarding TTIP, which I will do my best to try to answer. First, audio-visual services are initially excluded from negotiations at the behest of the French Government. The negotiation mandate was, unfortunately, leaked, so the US is of course already aware of it. However, we are just starting negotiations and setting out initial positions, and we will have to see how that is reflected and any interrelationship. The Jones Act might well be one of the quid pro quos but discussions will almost definitely continue and the UK will make its points. UK business is of course keen to see the removal of the Jones Act. We are raising this with the US Administration directly and through negotiations.

GIs are in scope, and the US and EU are taking different approaches to protecting geographical items. As the EU has done in other agreements, such as with Canada, it will seek protection of a list of geographical indications. However, to give comfort to the Scottish contingent, of which I am one, Scotch whisky is already protected in the US.

The US wants the EU to adopt a more science-based approach to treatments of food and the approval, for instance, of GM items. Her Majesty’s Government agree that the EU could improve its currently slow approval system but it is early days for all of these matters and, we should stress, there is a lot to be done on TTIP.

The EU has also launched other negotiations, including with Japan and India. It has also, as I mentioned earlier, reached—

[Lord Davies of Stamford]

Before the Minister leaves the topic of EU-US negotiations, will he perhaps address the questions I asked about insurance?

[Lord Livingston of Parkhead]

I will write separately regarding the matter of insurance. I have tried to pick up the various issues that have been raised and if I have missed any other detailed questions put by noble Lords I will be more than happy to discuss them or write separately on them. I will also come back to the role of Parliament in approving such agreements.

As I was saying, the EU has launched negotiations with Japan and India and reached an agreement with Canada. We believe that is worth over £1 billion and could be a good model for the start of discussions on TTIP. Our role in and membership of the EU is important to that, along with, as the noble Lord, Lord Harrison, said, our role in the Commonwealth. Canada is of course a member of the Commonwealth, and discussions are ongoing with India. We also want the EU to use trade policies to support development by putting in place economic partnership agreements with African and Caribbean countries. I hope to see good progress on EPAs this year at the same time as making progress on FTAs.

The role of Parliament is very important and I was interested in comments from noble Lords that they do not feel they discuss trade very much. I have been in this role for about four weeks and have had three Questions here in the House and a debate. It does feel, as a Minister, that we are discussing this issue on quite a regular basis. However, I shall also make an appearance in front of a Select Committee to discuss TTIP. TTIP and any other agreement will go through the appropriate scrutiny process, while it is recognised, of course, that the EU has competence in many of the areas involved here.

We are discussing these matters also with many other lobbying groups; for instance, small businesses and consumer groups. We meet regularly with Which? to hear its views, because it is important that we represent large businesses, small businesses and, of course, consumers in these discussions.

While these trade deals provide real benefit to the UK, the EU remains a cornerstone of our prosperity. The single market remains the most important trading area: 45% of our exports are to the EU and seven of the UK’s top 10 trading partners are EU member states. The UK is a passionate believer in the single market, and a key part of the reforms that we are seeking is to support and extend that. In the negotiations that we seek with the EU, free trade, prosperity and growth will be a cornerstone.

I fully agree with the noble Lord, Lord O’Neill, regarding the risk posed to Scotland by a departure from the UK and consequent departure from the EU and the free trade agreements. I have made this point passionately already—if your Lordships read the Herald and the Scotsman, you will see me quoted—and will continue to do so, as will government and, I hope, noble Lords.

I should also mention Africa, which is one of the fastest-growing regions and will be an increasingly important market for the UK. Many UK-based firms have already spotted the opportunities for business in Africa. Total UK exports to Africa in 2012 were worth £20 billion, which was more than to Russia and Turkey combined. But that is only a starting point. Many more UK-based firms could be doing business in Africa. There are opportunities in all sectors, particularly in energy, infrastructure, healthcare, ICT, professional services, and education and skills. We will work across government, particularly with DfID and the FCO, to maximise our efforts in Africa, and help in the implementation of the agreements reached in Bali on free trade and reducing barriers. Africa will be the big beneficiary; it is important that the UK uses its knowledge, influence and relationships to help achieve this.

Another area that is often raised in regard to trade is human rights. The Government strongly believe that the promotion of business should go hand in hand with respect for human rights. It is now more important than ever for us to help British companies succeed but to do so in a way that is consistent with our values. I believe strongly that personal freedoms contribute to economic development and vice versa. The thread of safeguards running through society that are good for human rights—good governance, the rule of law and property rights—usually go hand in hand with economic growth and trade.

We also recognise the issues raised by my noble friend Lady Miller regarding the impact of trade on food. One of the most basic human rights is the right to eat. Trade and economic development are the most effective ways of raising people out of starvation and poverty. The World Bank estimates that developing countries that have opened up their economies to trade grow three times faster than those which have not. The opening-up of trade particularly in agricultural products will be an important next stage in many of the trade negotiations, particularly between the EU and African countries. I note the comments on food production made by my noble friend and they are well taken.

I note also the points made by the noble Baroness, Lady Symons, and thank her for her very hard and productive work in the Arab world promoting British trade and development. We note the points made about jobs. We will want to raise more trade with the Arab countries. Progress there on various trade negotiations and FTAs falls behind what we are doing in other areas of the world and should be looked at.

I have so far focused on the impact of trade at the global level. A key priority of this Government is to deliver economic growth and jobs in the UK. Business success in international markets is central to our economy. This is as true today as it was in May 2011 when UKTI launched its five-year strategy. That strategy set out how we were going to improve our trade position. We are targeting high-growth companies to encourage more exports and help existing exporters penetrate high-growth and emerging markets. We are winning business contracts for high-value opportunity. These are often in excess of £250 million each. We are delivering high-quality foreign direct investment to the UK, which I shall say more about shortly. Finally, we are building high-level relationships with inward investors and exporters. The Government are committed to build on this strategy and the many good initiatives that we have started.

Having taken up my new role just a month ago, this speech allows me to outline some of our priorities further to strengthen our trade efforts. We will support medium-sized businesses. I made an announcement yesterday that we will commit to contact all 9,000 medium-sized businesses to help them with trade. More than a third of them do not export today and, in an even greater number, exports account for less than 10% of their trade. Only 17% of them export outside the EU. If we are successful with them, the CBI believes that this forgotten sector of our economy could raise UK GDP by up to £50 billion by 2020.

We will enhance our support for small companies through better marketing. UKTI does a great job, but I have to recognise that it is not as well known as it might be. We will conduct targeted marketing exercises and improve our web capability. I note the comments made by the noble Baroness, Lady Thornton, about social enterprises. We will think about how we include them. Small companies, large companies and social enterprises all have their role in the UK’s overall trade efforts.

We will continue to focus on China, India and other high-growth markets. I am told that I am running out of time, so we must conclude. We will do a number of things to improve our overall position. We recognise so many of the opportunities. The UK has had many successes in exporting and we have some great companies. We are exporting cheese to France and spices to India. We will build on that. We will grow exports and we will continue to champion free trade as a Government and move it forward.