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Lockwood Smith Speech - The Power of Trade


Lockwood Smith Speech - The Power of Trade. To Central North Island Party Conference, Thames

The Power of Trade

An address by Lockwood Smith National Party spokesman on Foreign Affairs and Trade To Central North Island Party Conference, Thames May 2, 2004

If you consider all of the actions that lie within the power of politicians, the one that I believe could enhance the wellbeing of the world's people the most is trade liberalisation. I know that's a bold statement, but it is one I make with confidence.

In parts of the world, freedom, personal and property security through the rule of law, and the elimination of corruption, would of course have a profound impact. Education, too, is vital, as is basic infrastructure.

But trade liberalisation is the single individual initiative that would deliver the greatest improvement in living standards to the people of the world. And the gains would be across the board - in free countries and those still struggling without democracy; in larger countries and smaller countries; and in countries rich and poor.

In fact, one study has suggested that if all trade barriers could be abolished right now, global income would be boosted by as much as US$2.8 trillion.

But it's not about the money per se. That growth in global income would lift 320 million people out of poverty by 2015 - that's in just 11 years time.

While that's an estimate from an academic study, and can therefore be the subject of debate, I doubt it is out by US$2.8 trillion. The history of the world is the real case study and that undeniably demonstrates the extraordinarily positive effect of liberalising trade.

I want to take you back a bit over 80 years. After the First World War, the world faced serious economic difficulties. With the wisdom of hindsight, the way the situation was handled wasn't great. Governments may have had the best of motives. They sought to protect their industries and workers by putting in place protective barriers to reduce competition from trade. The result was the great depression, which itself played no small part in the lead up to the Second World War.

After that war, governments of 23 nations, determined not to make the same mistake again, agreed to establish the General Agreement on Tariffs and Trade at the historic Bretton-Woods conferences. What became known as the GATT was established soon after in 1947.

Since then, the theatre that often surrounded eight sets of trade negotiations rightly raised cynicism in some. But, in fact, the cumulative effect of that trade liberalisation was overwhelmingly positive. Average tariff rates were reduced from 40% to just 4%, and global trade has grown more than sixteen-fold.

Again, though, it's not the money. It's the people. Over the five decades since the GATT was established in 1947, according to a United Nations human development report, more people have been raised out of poverty than during the previous five centuries of human existence. And while war is still with us, the world has not suffered the calamity of the two major world wars of last century.

It raises the question then: if trade liberalisation is so good in eliminating poverty and preserving the peace, why is the Doha round at the World Trade Organisation almost stalled? And why did the WTO ministerial at Cancun fail?

I blame politicians, my own profession. Too often the trade ministers at the WTO, often on orders from their governments, abandon their historic mission. They abandon what they know to be right in favour of political expediency. The political power of protected interests too often wins the day.

If you doubt that, look at the recent United States steel decision. Raising tariffs on imported steel in the past couple of years has cost the United States tens of thousands of jobs. For every American employed in producing steel, there are at least 30 employed in using it. Protecting one job in producing steel cost the US, through higher input costs, many more jobs in steel-using industries.

The political reality, though, is that those producing steel are concentrated in key states that have a significant impact on the outcome of us elections. Those whose jobs depend on the use of lower-cost steel are spread much more thinly across the country.

Of course, one of the most economically absurd protectionist policies is the common agricultural policy of the European Union. We're told that European families are happy to pay the extra $1500 a year they do in artificially high food prices. But I can't believe they're happy to see the millions of young people unemployed that is, in part, a legacy of the common agricultural policy.

Believe it or not, across the OECD, that is the 30 countries of the developed world, almost one billion US dollars a day goes into subsidising farmers one way or another and protecting them from the competition of international trade. That subsidy would be enough to pay for each of the OECD's 41 million dairy cows to fly first class around the world one and a half times. And that cost is incurred each and every year.

Those massive subsidies in Europe mean that vast levels of investment are going into activities, which purport to be farming, but from which there is no market return. The subsidies are so high that they are often equivalent to the world product prices.

Were those billions to be invested in growth areas of the economy, it's been estimated that economic growth in Europe could be improved by 1% a year. That in turn could raise employment across Europe by millions.

You'd think that might sway politicians. But no, the voting power of farmers in France and Germany, and their skills at direct action, mean that rational development is, again, held hostage to the headlines of the day.

It may be that some European politicians are prepared to accept higher unemployment amongst their young people to keep their farming lobbies sweet. But their trade-offs do not affect their own people alone.

The people who are hurt most by protectionism are the poorer people of the world. If the quotas and tariffs imposed by developed countries, including New Zealand, on textiles and clothing imports were eliminated, developing countries could earn an additional US$8 billion a year. And if North America, Europe and Japan were to eliminate import barriers for products from sub-Saharan Africa, that region's exports could earn an additional US$2.5 billion each and every year.

In the poor West African nation of Mali, 3 million people, that is a third of their population, depend on producing cotton for their survival, and I mean survival. But 25,000 cotton farmers in the United States are paid almost US$4 billion a year in subsidies. Some might say but "ah, the US gives Mali $38 million a year in aid"! The problem is those massive US cotton subsidies cost Mali $43 million in lost trade.

What's obscene is that those agricultural subsidies in the developed world are two thirds of Africa's total GDP. Abolishing those subsidies would return three times all the official development assistance for developing countries put together. United Nations Secretary-General, K ofi Annan, wanted US$10 billion to fight Aids. That is just 12 days of the developed world's subsidies to farmers.

The protectionist policies of so many in the developed world are a stain on the morality of the world.

But it's not all bad. The Uruguay round of trade negotiations completed in 1994 achieved much lower tariff levels that have saved, to take New Zealand as an example, NZ$3.1 billion in tariffs so far. So far our economy has gained more than NZ$9 billion, and more than 17,000 jobs, from the liberalisation achieved through the Uruguay round.

And the WTO dispute settlement system has seen us win cases against Canada on dairy, and the US on lamb, worth a combined NZ$90 million a year. Just last week it was reported the WTO is about to rule that the subsidies paid to US cotton farmers contravene the WTO rules on subsidies and countervailing measures as well as the agreement on agriculture.

These gains are just the start of what's possible. The New Zealand Institute of Economic research has shown that if all our exports went to Japan, we'd pay an average tariff of 50% compared with the US and EU, which would pay less than 2% if all their exports went to Japan.

If all our exports were to go to the US, we'd pay an average tariff of 24%, while Japan and the EU would pay less than 4% tariffs on their products. And, likewise, if all our products went to the EU we'd pay an average tariff of 45% while Japan and the US would pay less than 6%.

We stand to gain hugely from the Doha development round that just this week is balanced on a knife-edge in Gneva. An outstanding New Zealander, Tim Grosser, is chairing the agriculture committee that, as i speak, is trying to find a way forward to deal with market access problems.

There is some hope of consensus emerging on the phasing out of export subsidies. Likewise, there is hope that domestic support of agriculture will be decoupled from production. But how best to deal with tariffs and quotas continues to defy all efforts to find a way forward.

I know some will challenge me on my focus on the economic gains from trade liberalisation. They will cite, as being of greater importance, the increasing tensions between extremist parts of the Islamic world and the West, the growing tentacles of terrorism, not to mention the ongoing situation in Iraq and the Middle East.

But let me again take you back, this time just 57 years. About the time of the Bretton Woods conferences that led to the formation of the GATT, US Secretary of State, Cordell Hull, is quoted as saying, "if goods don't pass our borders then armies surely will".

Europe was living proof of it. War had blighted almost every generation, reaching a catastrophic crescendo with the trenches of the somme and passchendale and shortly after the worldwide horrors of the Second World War.

The European leaders who recognised that things had to change were of world historical importance. They initiated international cooperation in the coal, iron and steel industries, developments that were to become the forerunner of the European economic community, now the European union. Within its borders, it has been spectacularly successful, accelerating living standards after the destruction of the Second World War and making a repeat of that unthinkable.

Put bluntly, people are usually pretty reluctant to shoot their customers. In other words, if trade flows smoothly and freely, and both sides enjoy a healthy commercial relationship, political conflict is less likely.

What's more, smoothly flowing trade helps people all over the world become better off. Better-off people are usually more contented and less likely to get into major conflict. The economic gains from trade can reduce the inequality between nations that can spark resentment and conflict.

And so there is a powerful link between trade and security.

Addressing today's global tension the growing evil of terrorism, and ongoing conflict in the middle east, obviously requires more than trade liberalisation. But how much more effective could those diplomatic efforts be if the economic powerhouses of the US, the EU and Japan were prepared to offer the rest of the world more open access to their markets, and if the extraordinary benefits of trade and economic integration could be demonstrated to those who currently feel shut out of the global economy, and trapped in poverty?

That's why the US is trying to reach out in its bilateral trade work with strategically key economies, including some in the Middle East, with a free trade agreement recently completed with Jordan. That's also why it's so important for countries like Saudi Arabia to gain accession to the World Trade Organisation.

Having had the privilege of standing on Chanuk Bair at Gallipoli, standing under the Menim Gate at Ypres and in the village of Messines, i have felt a tiny part of the terrible cost of global conflict. Having stood beside the vast, gaping hole that was once the World Trade Centre, and thought of those innocent people jumping from 90th story windows in utter terror, i say again that the barricades of conflict must come down.

The politicians of the developed world have within their grasp the ultimate means of achieving that. They can put an end to the protectionist barriers to trade that keep parts of the developing world in the kind of poverty that can be the breeding ground for terrorism.

New Zealand can play a role in this, and does. For years now we've been consistent advocates of trade liberalisation. We've undertaken unilateral tariff reduction in our own market, that has benefited us foremost, but which has demonstrated to others the opportunities that are within their grasp.

Here, in New Zealand, we've shown that freeing up our markets did lead to some adjustment costs. But we've shown that the gains from doing so exceed those costs.

Protecting jobs is hugely expensive. It's been said that the cost of protecting our car assembly industry was such, that it would have made more economic sense to pay every worker in that industry the same salary as our Prime Minister, and send them on holiday forever, rather than protect that industry.

In the US, it has been estimated that across 21 industries in 1994, the cost of every job protected by tariffs was US$170,000. Across 47 industries in Japan at the end of the '80s, the equivalent figure was US$600,000 per job.

Right now, the US remains the key player in advancing global trade liberalisation, even though its internal politics can make that difficult for its trade negotiators. On our own, New Zealand is too small to make much impact. We should be working closely with the US, but we're not.

Last year when US trade ambassador, Robert Zoellick, held a breakfast for 'friends of free trade,"' New Zealand was not invited. Twenty years ago, whoever would have thought that our Anzac partner, and CER partner, Australia, would refuse to have us alongside them as they negotiated a free trade agreement with America?

While in polite circles it's suggested the Australians didn't want our significant dairy industry to burden their progress, in reality they didn't want the political baggage of our damaged relationship with the US to stand in the way of their agreement. .

The track record of the Labour Government of Helen Clark on concluding free trade agreements isn't that great. Sure, they finally signed the Singapore deal, but National had negotiated the guts of that. Since then the Hong Kong negotiation has stalled, progress is very slow on the three-way deal with Chile and Singapore, and with the US we haven't even reached the starting line.

Helen Clark is partly responsible for that.

Jim Sutton has built on National's work to progress work on free trade agreements with China and ASEAN, and they are potentially huge deals for New Zealand.

We must hope that the Prime Minister sticks to her foreign affairs brief, and doesn't make the same sort of off-the-cuff comments about those countries that so harmed our chances of making any progress with the United States.

A trade agreement with China would be overwhelmingly in New Zealand's interests. We must hope that the predictions of Dr George Friedman, chairman of the respected international consultancy, Stratfor, in New Zealand recently - do not come true: that the Chinese economy may be in for "meltdown", to use his words, in the not too-distant future. They are seeing the kind of capital outflow that preceded Japan's protracted economic malaise.

But we must also put the China development in perspective. Every analysis shows that by the middle of this century, the US will be economically an even more dominant player in the world than it is today. Its population growth will, relatively speaking, exceed China's and its age profile will stay much younger than that of Europe.

It is, therefore, even more in New Zealand's interests that the political difference between New Zealand and the US is sorted out.

It must be done in a way that can find broad acceptance in New Zealand; ideally, across political party lines. It is not in this country's interests to have foreign policy flip- flopping on changes of government. We should seek, wherever possible, to manage foreign policy across party lines.

I am not in the habit of scoring a political point each day over every little slip-up that Phil Goff and Jim Sutton make. But I most strongly criticise Helen Clark and her Labour Party for the radical direction she is taking New Zealand's foreign policy, that sees us turning our back on our traditional allies, and which is not in our interests.

The collapse of Soviet communism and the end of the Cold War, and the rise of ethnographic conflicts and terrorism make this century very different from the last. Just as Helen Clark and the Labour Party have shown their inability to competently manage treaty of Waitangi issues domestically in this new century, neither do they have the capacity or competence to turn around the gradual but ongoing decline in our relationship with the countries most important to us -- Australia and the United States.

It's just another reason why this country needs a Brash-led National Government. All of us need to fight towards that goal, in everything we do, through this winter and beyond, towards the change of government next year.

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