Foreign Affairs: Global Role, Emerging Powers and New Markets

Lord Green of Hurstpierpoint Excerpts

Thursday 6th December 2012 Lords Chamber

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

My Lords, I thank my noble friend Lord Howell of Guildford for initiating an extremely important debate that has attracted a great deal of interest. My sense is that we have covered an enormously broad range of issues. I assure the noble Lord, Lord Liddle, that although I travel a lot around the world, I hope I travel economically. I turn right, not left when I get on a plane. I do not know what the travel policy is in Brussels.

Many issues have been raised. I hope noble Lords will appreciate that if I do not succeed in responding to every one of them, I will write in respect of the issues that I do not cover. I start with the point laid out by my noble friend Lord Howell that we are in a new era. The context is worth rehearsing briefly. One could argue that there have been only two periods in human history when there was a single global superpower. One was between 1815 and 1871; the other was between 1989 and about now. We are entering a phase where there is no longer one global superpower —or indeed two—but a series of actors on the world stage.

We are also moving out of a period of history that was unusual in the wider context of human experience. For most of human history, a country’s share of global output roughly equalled its share of the world’s population. In 1800 the second largest and largest economies were those of China and India. We are moving towards a situation where that sort of balance of economic output on the world stage will be true again. We all know what happened in the mean time. The industrial revolution enabled Britain, then other European countries, then America and—after the war—Japan to move ahead and take up a far larger share of world output than their populations would support in terms of their share of the world market. That time is now receding and we have to get used to a position in the world where a number of actors on the world stage are competing with us. In that sense there is indeed a global race.

Over the past 20 years or so we have seen the opening up of China, with the extraordinary consequences that my noble friend Lord Bates sketched out for us, and substantial reform in India. It does not always seem that India’s economy is very open, but the reforms introduced in 1992 by the present Prime Minister launched it on what is now, by its earlier standards, a significant growth path. We have also seen the collapse of the Soviet Union. These three major changes brought some 3 billion people into open markets and more into the financial and economic mainstream of the world. That has now spread through other continents as well. We have seen the emergence of powerful economies in Latin America, the Middle East of course, as the supplier of hydrocarbons to so many of those emerging powers, and now Africa. It is worth reminding ourselves that six of the 10 fastest growing economies in the world over the past five years are African. Ghana, Nigeria, Ethiopia and Mozambique are all growing at more than 8% a year.

The G20 is a key sign of this change. Global institutions are evolving in response. The G7/G8 has a role to play, but its central role in determining the economic issues of importance to the world as a whole has essentially now been taken over by the G20, which is a much better balanced grouping of nations to reflect the state of the world’s economy in the 21st century. This reflects the macroeconomic reality of today, which is that the global centre of gravity has shifted from west to east and from north to south, and that change is irrevocable.

The growth performance of China is remarkable. The numbers are extraordinary: anything times 1.3 billion looks like a very large number. It can be compared to the performance of Japan in the 1950s, 1960s and 1970s. If we look at Japanese growth rates at that time, they were not dissimilar to the extraordinary performance that we have seen in China in the past 20 years. That tells us that as countries go through the process of urbanisation, growth rates take off at a remarkable rate. This is a reminder that this transformation is only halfway through, or thereabouts. China's level of urbanisation now is at about 50%. India's is at about 30%. It will probably move up in both cases to something like 80% over the next generation.

The year 2008 marked the point at which more than half the world's population lived in cities. By 2050, that will be at least three-quarters, maybe 80%. Never before have the two largest nations of the world been urbanising at the same time and at such a pace.

All of this poses substantial challenges for us in this relatively small country. I am not sure whether we are indeed smaller than all the provinces in China, but I am sure that we are smaller than most of them. I am not sure whether “punch above our weight” is the right phrase, but at the moment we certainly have a larger share of output than our population would support. We are at about 3% to 3.5% of world output and our population is slightly less than 1% of world output. We must reconcile ourselves to the inevitable implications of that for market share over time.

We also face many other challenges, which indeed the world faces collectively. The implications of all the development that we have been referring to and the urbanisation that I have alluded to for such matters as climate change, environmental impact and claims on water resources, food and energy are all profound. Greater prosperity and a burgeoning middle class in so many of these countries do not translate straightforwardly into greater peace and harmony on the world stage.

However, this rebalancing neither can nor should be reversed. We must recognise that in the energy markets of the world we will be competing for sources of energy that are reliable, affordable and sustainable. We will have as a country to mobilise significant investment to deliver energy to the economy and to our consumers. We will have to play our part in ensuring that the world’s institutions of governance evolve in a way that makes sense in this new era that we have been talking about. But I want to focus most of my remarks on the direct commercial challenge for the UK. I want to persuade the House that I see the commercial challenge as extremely important to us, but as one that goes inevitably and inextricably with a positive cultural engagement.

I begin with the raw matter of trade. We have had some rather disappointing statistics this morning on the trade account for last month. Overall, the Office for Budget Responsibility report yesterday showed that trade was a drag on growth in the first three quarters of this year. This is a disappointment to us and a reminder of how far we have to go. What is absolutely clear is that, as we work to rebalance our economy, trade has to play a central role. It is not in my view a matter of mercantilism: it is a matter of understanding where growth will come from on a sustainable basis in this economy.

We must engage effectively with the international markets if we are to pay our way in the 21st century and find sustainable growth. That growth has to be based, as the noble Lord, Lord Bilimoria, reminded us very importantly, on competitiveness. We have a lot of work to do on that and I believe that trade itself is an important driver of competitiveness. There is ample evidence that particularly smaller companies that get into the international markets become not marginally but quite significantly more efficient, and quite quickly too. The more that we are successful in engaging more companies in the international markets, the more we will strengthen the backbone of our own economy.

We should recognise the importance of the European Union. A number of noble Lords drew attention to the importance of the single market. It is an affluent market of 500 million people. It may not be growing significantly at the moment, but half of our exports go to the European Union. We need to remind ourselves that, if you look at incremental import demand over the next few years, Europe will produce as much incremental demand as China. I could put that point around the other way of course: China will produce as much incremental demand as will Europe over the next few years. The real point is that, as a number noble Lords stressed, this is not an either/or issue between the EU and the rest of the world or between the EU and the Commonwealth. This has to be both/and. We cannot afford to turn our backs on any of the important markets, whether the rich ones on our doorstep across the channel or the Atlantic, or the fast-growing ones further afield in Asia, the Middle East, Africa and Latin America.

We need to recognise that the emerging markets will be the main drivers of growth for the next generation. This is not a flash in the pan. People talk about the slowing down of some of the key emerging markets in the past year or so, in Brazil, India and China. But, first, the slowdown is clearly relative. Slowing down to 7.5% in the case of China is a growth rate that anyone in Europe would rejoice to have. Secondly, we should certainly not see this as an implosion. The best central forecast is that they will continue to grow significantly for the next generation because there is quite a long way to go in the transformation, urbanisation and social transformation underway there.

This is important to us for all sorts of reasons. One is that their growth paths will not be automatic. It is very clear that as these countries grow and as their middle classes develop in number and spending power, we discover that they want the same things that everyone else wants. They want air conditioners, fridges and mopeds first and then cars, fashion, overseas travel and good healthcare. The opportunities from the emergence of these countries with significant purchasing power are tremendous for international suppliers. The opportunities are there for Britain as they are there for all our obvious competitors.

As I mentioned, in terms of our own economic needs, we have no choice but to engage internationally and to do so competitively and energetically. That is why we set a challenge last year of getting 100,000 more companies into the international markets over the next few years and focusing more on the non-traditional markets for British business. The fact is that our current market share in these newer markets is disappointing. We have lost market share in virtually all of them. We have not merely lost market share to newer competitors such as China and Korea; we have lost market share to our more obvious competitors just across the Channel in the shape of Germany, France and Italy.

Specifically, we have a minimal market share in many of the 19 priority emerging markets for UK Trade and Investment—that is to say less than 2% in 12 of them. We are behind Germany, France and Italy in 12 of them and we have lost market share in 18 out of the 19. We have work to do in order to encourage and support British business into these markets.

The good news is that we have the underlying capability. I think I have mentioned this to the House before, but I repeat it because I go on rediscovering it. I travel not only around the world but around this country. In every region of the country and in every sector of the economy, you find businesses of all shapes and sizes—traditional and high-tech, old and new—that are taking on the world. They are aggressive, entrepreneurial, dynamic, growing and engaging internationally. The second piece of good news is that our brand, if I can use that phrase, stands in very high regard around the world, not only for our reputation for integrity in the way business is done—the Bribery Act is widely admired—but for the quality of the products and services that we offer. The boost provided by the Olympics to that brand is of incalculable value.

The Government need to do the best possible job of promoting this endeavour. We need to do it through active work on trade liberalisation, which takes me directly to the very constructive engagement with the Trade Commissioner in Brussels, as the Commission has the competence for the negotiation of free trade agreements. As the noble Lord, Lord Liddle, mentioned, the agreement to start discussions with Japan is important. We should not be naive about how smoothly those discussions will go or how quickly we will reach a conclusion but the obvious point is that a serious opening up of the Japanese markets, not merely in terms of tariff barriers but, almost more importantly, of non-tariff barriers, will have a huge and healthy impact on Europe as a whole and on the UK in particular. The US and the EU pushing forward next year, if we can, on the negotiation of a transatlantic partnership will be even more significant. There is a large agenda, quite apart from the existing work on an Indian free trade agreement and with Canada, Singapore and now Morocco. In terms of looking at the impact, and showcasing, I thank the noble Lord, Lord Kerr, for drawing attention to the importance of the Korean free trade agreement.

We will keep at this. The importance of the trade agenda in Brussels cannot be overestimated; nor, as an aside, can the importance of the single market. One of the things that we have to achieve as a major member of the European Union is a full-blooded implementation of the single market, and there is clearly work to be done on that. Out of 12 dossiers currently on the table under the Single Market Act I, only one has been fully implemented. In particular, with the services directive, digital broadband and the digital single market, there is a huge terrain of activity that will bring significant benefits to the whole of the European Union, including Britain.

However, trade liberalisation, crucial though it is, is only one prong of any meaningful strategy. Trade promotion, through UK Trade & Investment, UK Export Finance and posts around the world, is critical. I note that some noble Lords have reminded us not to throw the baby out with the bathwater and that our posts have other roles to play, but I believe that nothing they do is more important than promoting British commerce in their respective markets. We need to ensure that they are trained and equipped with the right kind of people, with energy, competence and experience. We will continue to work on that.

Furthermore, trade is a major driver of economic development. Turning to the comments of the right reverend Prelate the Bishop of Worcester, I am pleased to be able to report that we have reaffirmed the 0.7% of GNP target and indeed have committed ourselves to getting there next year—the first G8 country to do so. Within the commitment on development finance, I draw particular attention to trade facilitation, in which we now invest about £1 billion a year. The gains from effective trade facilitation, particularly in the continent of Africa, will be very significant indeed to the Africans—which is of course a great good in its own right—but also have resonances for opportunities for British businesses. We will continue to be very active in trade facilitation through the work of the Department for International Development.

There is one other crucial point. However well the Government do trade facilitation and trade promotion work among British businesses, and however well we prosecute the case in Brussels for open trading relationships between the EU and the rest of the world, it is very important that there is lively, active support for businesses both here and overseas. The House will be having a short debate later, introduced by the noble Lord, Lord Heseltine, on his report. I am working with chambers of commerce around the international markets to upgrade the support that we provide for businesses, particularly incoming smaller businesses into these markets. There is also a good deal of work to do domestically. As we would all recognise, the quality of business support for business is very varied around the country, and is certainly very varied around the world. This is a major agenda item for the next number of months.

Finally—I apologise that I am coming under some time pressure—I stress the importance not only of trade but, in that context also, of what we have variously called moral authority or soft power. A number of noble Lords have drawn attention in particular to the importance of education. I strongly believe in the importance of education, both as a significant earner in its own right but, equally importantly, as an indirect supporter of British relationships for generations. If you get that right, at the right stage of people’s lives, you build relationships that last a lifetime with people who become the leaders in their societies. We have a great story to tell in many respects with strong universities—and a strong higher education sector in general—many of which are actively engaging around the world. I note, as one example, the work of the Open University in Vietnam and also fully endorse the comments made by more than one noble Lord about the importance to British students of the internationalisation of our domestic higher education offering. That is a strength that is very hard to put any meaningful value on.

The whole House will be aware that student visas are part of a wider issue where there is a difficult circle to square. We have a commitment to reduce the amount of net migration into the country but we want to remain open for business. I believe we have a good story to tell on inter-company transfers and entrepreneurial visas. It is worth noting that there is no limit on student visas for those that pass the tests, including the English-language test, and where the institution is a sponsoring institution. We are looking at the way student numbers, and ins and outs, are monitored. If I may, I will write to noble Lords with more details on that.

I stress that we have a warm welcome around the world. Soft power is very much about education, the role of the British Council and the role of the BBC. It is also about well recognised brands and is, as I mentioned earlier, about the Olympics. Which other country in the world could have made fun of itself, in a gentle way, on the opening night ceremony by having Rowan Atkinson send up “Chariots of Fire” and by having Her Majesty the Queen accompanied into the Olympic Stadium by James Bond? I can promise the House that this was noted and appreciated all around the world. We have a great brand to build on but have a lot of work to do. Finally, I thank my noble friend Lord Howell for such an important and interesting debate.