Britain, America and the Global Economic Recovery
The Ballroom, Trump Tower
On June 6, the New York Times carried a front page article about trade policy.
The story went over the President's election campaign and how he had set down the limits of trade protection.
It outlined how his supporters had stuck to that line, despite the efforts of others to represent them as seeking to destroy American industry, and how the protectionist cause had largely given up its attempt to enlist the President in the struggle.
But this wasn't this week's June 6. It was June 6, 1909, a hundred years ago this week. And the President was President Taft, not President Obama.
The impetus for the story was a controversial speech on trade by William Taft's Secretary of the Treasury, Franklin McVeagh, made here in Chicago. Trade was a hot topic even then.
The issues in the newspaper a hundred years ago are strikingly contemporary: the proper role of government in regulating markets; the proper role of government in creating and protecting jobs.
I'd like to concentrate today on how these issues are playing out as Britain and America strive for recovery from the severe downturn that began almost two years ago.
In a little over three months from now, in Pittsburgh, the G20 leaders will meet for the third time in a year. The previous two G20 Summits - one in Washington and then one in London in April - played an important role in setting out a clear and comprehensive international policy response to the economic crisis.
It's easy to dismiss international summitry as political theatre. But that would be unfair to these Summits. Last autumn one of the symptoms of the crisis was an apparent collapse of international co-ordination. We lacked a framework for working on a multi-faceted international response. The UK always believed it to be vital that national measures, aimed at restoring lending and repairing the financial system, did not encourage a retreat into domestic financial markets. The way forward was more, not less, co-operation.
The outcomes of the Washington and London summits emphasised the benefits of working together and that a global crisis required a global response.
The London Summit not only agreed the need for urgent action to support the global economy. It also agreed on additional resources for the international financial institutions to help those countries that would otherwise be overwhelmed.
The Summit also looked ahead. It made the first steps towards a framework for the future of the world economy such as through the new Financial Stability Board.
The next step after London is going be the tough part: Implementation. I want to highlight two particular areas where - as they say - the proof of the pudding will be in the eating: Financial regulation and trade.
On financial regulation, we must ensure that policies are put in place that restore confidence and renew financial markets for the future.
It's difficult to argue in black and white terms that lack of regulation as such caused the financial crisis. After all, the most affected sector has been the banks - the most regulated part of the financial system. Instead, low interest rates encouraged financial institutions to increase borrowing and to invest in new highly complex products. With hindsight, it is now clear that there was insufficient understanding and monitoring of the resulting risks by the private sector and others.
Until the crisis struck, our approach was based on an overt philosophy that markets are in general self-correcting. That market discipline is effective. And that management and boards are better placed than any regulator to identify business system risks.
But, as Alan Greenspan testified to Congress in October last year, this model was flawed.
Learning the lessons of the crisis, our watchwords for the future should be better and smarter regulation, and not regulation for the sake of it. Better oversight of banks. Smarter capital requirements. Better checks on the system as a whole.
Smarter regulation means creating incentives so that executives pursue long-term gains, not short-term profits. It means establishing a system of international co-ordination to spot potential issues before they blossom into crises.
At the global level, we need to ensure that institutions like the IMF have the robust independence to do excellent macro-prudential analysis and to criticise, if necessary, the policies of major economic powers, and to challenge conventional wisdom.
The challenge with global banks is that we have a global financial system but no global government. And that mismatch is not going to entirely disappear. But we need to ensure as much global co-ordination and co-operation as possible. As the Governor of the Bank of England has noted: "Firms are international in life but national in death."
One positive to emerge from the crisis has been the opportunity to have an honest debate about the kind of capitalism we want in the future. I'm optimistic that we will be able to take advantage of this once-in-a-generation chance. And optimistic that the innovation and industry at the heart of our economies will enable us to bounce back.
International trade is vital to the prospects for recovery. The G20 leaders recognised this, pledging to promote global trade and investment and to reject protectionism.
Trade binds nations together, and there is no better example than the United States and the United Kingdom. Our two countries enjoy one of the strongest bilateral trade and investment relationships in the world and a uniquely strong political alliance.
In trade, the U.S. is the United Kingdom's top export destination and its second-largest trading partner. The UK is the United States' sixth-largest trading partner.
In terms of investment, British companies are the largest foreign investors in the U.S. British investment supports nearly one million American jobs with average pay over 30% above the U.S. average. These are high-value jobs. Similarly the U.S. is the largest foreign investor in Britain, where American companies employ more than one million people.
But these are tough economic times. The recession has cut consumer demand around the world, leading to a severe drop in trade flows. The World Trade Organisation estimates that trade will decline by 9% this year, which is the single largest year-on-year contraction in the post-war era.
Falling global demand is bad enough. But it is in danger of being compounded by protectionist sentiment. There are pressures around the world to build barriers to trade or other forms of protectionism, which become so much stronger during a downturn. As my Prime Minister wrote in the Wall Street Journal in May, there is a danger that "a banking crisis has become a trade crisis."
Much of this has to do with what the experts call ‘water' - the difference between legally binding tariff levels and actual applied tariffs, which are often considerably lower. Because there has been no WTO world trade deal for more than a decade, many countries could raise the tariffs that they have lowered over the last ten years. This would not technically violate their trade commitments, but it would quickly cost the global economy billions of dollars. One estimate suggests by as much as 700 billion dollars.
An even bigger concern is the wide range of hidden, or non-tariff barriers, that countries can be tempted to introduce in times of trouble. According to the World Bank, since the London Summit 2 months ago nine G20 countries have imposed or are considering twenty-three new protectionist measures. These are on top of at least forty-seven trade-restricting measures imposed around the world after the G20 Summit in Washington in November.
These have taken the form of subsidies and other support packages rather than old-fashioned tariffs. What is more, the use of so-called ‘trade remedies', such as safeguards and antidumping policies, to restrict imports has grown. In the first quarter of 2009 we saw a 15% year-on-year increase in the imposition of duties related to trade remedy investigations and a 19% increase in new investigations. These figures are likely to continue to increase though 2009.
I highlight these facts to remind you that wealth creation via our globalised economy has not come about by accident. It is the result of a collective choice for openness. Now more than ever, we have to resist. Protectionism doesn't protect. In the long run it just makes things worse.
It is imperative that the G20 countries, which together comprise 85% of the global economy, think internationally as they act nationally to help their economies through the downturn. In London, G20 leaders made important commitments to shore up international trade.
They committed to refrain from raising new barriers to trade or investment. To refrain from imposing new export restrictions. To refrain from implementing measures which are inconsistent with WTO rules to stimulate exports.
Part of the downturn in trade flows can be explained by a lack of available credit to finance international trade transactions. To this end, leaders at the London Summit agreed to provide $250 billion in trade financing over the next two years. And we must be ready to go further if more money is needed.
The WTO was mandated by the G20 to monitor and report quarterly on countries. This has undoubtedly helped. But as I have mentioned there remain causes for concern.
No one is blameless - the EU's recent re-imposition of export subsidies for dairy products was a regrettable step. Here in the United States, there are some worrying signs too.
Let me start with the controversy over ‘Buy American'. It is clear from the Congressional language that British and other European companies, together with those from other developed countries like Canada and Japan, should be free to compete for contracts in each of the 37 US states which have signed the Government Procurement Agreement. However, the danger is that some officials interpret the ‘Buy American' provisions as simply banning all foreign companies or foreign-made goods. We will be monitoring this issue very closely and will want to see federal, state and local authorities held to account, to give US citizens, and UK businesses, the best deal.
We have no equivalent ‘Buy British' requirements for government procurement in the UK. Shutting out foreign competition sends a bad message on how open markets are valued in the United States and will often end up with taxpayer money going less far. Building one fewer school. Two fewer bridges. It all adds up.
The US also stands to lose much from international retaliation over government procurement rules. According to an editorial in the New York Times last week, ‘Buy American' provisions protect about 9,000 jobs. But foreign government procurement of US products supports 650,000 jobs - jobs that could be lost if other countries implement their own ‘Buy National' provisions.
I want to finish by going back to 1909. A hundred years ago, President Taft was having a tough time of it. He tried to square too many circles, pleasing no one. He ended up signing the Payne-Aldrich Tariff Act of 1909 that kept tariffs high.
Taft's Presidency coincided with the final hurrah of the first period of globalisation. It was, after all, only a small step away from an open and global approach. But those small steps and departures continued for twenty years, until a more notorious tariff act, one written by Senator Smoot and Representative Hawley, helped pushed the US and the rest of the world further into recession and then depression.
The damage done by Smoot-Hawley took a long time to undo. Everyone now agrees that "protectionism" is a bad thing. But, like Taft, some today would bend an ear to those who claim they are "seeking to destroy" this or that industry. It is clear that eternal vigilance will be the price of open markets. We cannot let those who would restrict trade and investment be the loudest voices heard in this debate. We must not retreat behind national borders and move to "deglobalisation" precisely at a time when we need the benefits of openness more than ever.