Sunday, November 23, 2008

The competitive export position of EU business in 2008

Speech by EC Trade's Director General David O'Sullivan, at the Business Europe conference
Brussels, 28 October 2008

Good morning to all. Very glad to be one of the opening speakers for this conference on "Going Global: the way forward". This is particularly timely, two years after the adoption of the Commission's Global Europe strategy. My hope for today's conference is that, jointly, we can take stock of where we are, reflect on how useful the re-organisation of our work and resources has been in the last two years, and how EU companies have made use of it.

Global Europe: what and why?

For Europe, the way forward to going global is clear. This is our "Global Europe" agenda, which can be declined into three main pillars:
- an effort to see trade policy as part of the wider globalisation agenda,
- to make sure we were addressing the most important challenges and pressures of the global age, and
- that our trade instruments were fit for that purpose.

The Global Europe strategy was adopted in 2006. The case that the Commission made at that time was a simple one. In a globalised economy, in which Europe sources and sells goods down long global supply chains, Europe's economic strength at home depends on its competiveness in the world.

Europe must have open economies at home, because that is critical to its economic well-being. The reason is simple: in a global market, with global supply chains, European companies need to import in order to export. The growing inter-dependence between economies means that countries all share a stake in each other’s prosperity and development. EU competitiveness depends on growing prosperity in our major and future markets. At a time of rapid change – and concerns about the pace and nature of change – Europe needs to make the case for openness and engagement, not isolation and retreat.

With the financial crisis looming, Global Europe and the market openness that it advocates are more topical than ever

The core argument of Global Europe is that Europe must reject protectionism at home and be active in creating open markets abroad. This is about both the economics and the politics of openness.

This recasting of our strategy was – in my humble view! – the right move at the right time. If anything, the current financial crisis only reinforces its rationale. There is a real risk that countries rely on market closure to isolate themselves from global developments. But look at what happened in the aftermath of the 1929 crisis: isolationism would only accelerate and expand the crisis. In my view we need to continue to make the case for openness, turn the tide of protectionism and show how Europe can help find answers to the changes that globalisation implies. And Global Europe is there precisely to this end.

Global Europe, two years after

The Commission will release a report today assessing the EU's performance in the world economy. Its aim is one of introspection and the report provides an economic picture, two years after the launch of Global Europe.

Its conclusions may surprise you: they are not always in line with popular thoughts about Europe's strengths and weaknesses. However I think this report gives a very accurate and sensible vision of our competitive advantages and food for thought on the means to sustain them.

The report puts forward 5 main conclusions.

First, and allow me to repeat myself, Europe is part of global production chains. Two thirds of EU imports (excluding energy) are used as 'inputs' in manufacturing processes. This shows very clearly that the EU as a whole relies heavily on open markets for inputs for its manufacturing and that open supply chains are integral to its manufacturing strength. More than ever, we need to import to export and our trade policy must factor in this reality fully.

Second, Europe's trade performances are remarkable:
Its trade balance for manufactured products has improved sharply, reaching a surplus of €162bn in 2007. This has helped us to offset partially the rise in the EU's energy bill over the same period.
The EU accounts for 19.5% of global markets for merchandise trade (excluding energy) having lost only 1.3 percentage points since 1995. "Only 1.3 percentage points", in the context of China's and others' rise in world affairs is not an exaggeration: market share losses are much greater in the case of the US and Japan, falling by 4.4 and 4.1 percentage points respectively; the US and Japan now respectively account for 13.0% and 9.5% of the world market.

Third, this can be explained by the fact that Europe has strong assets.
The participation and intertwining in global production chains I have already mentioned.
Key sectoral assets such as chemicals, pharmacy products, motor vehicles and non-electrical machinery.
But also, more fundamentally, the EU’s strong performance is due to an upgrading of the quality of its products, combined with the ability of EU companies to sell products at premium price because of quality, branding and related services. We account for more than 30% of the world market for these products, as much as the US and Japan combined. These products contribute to half of our exports. We need to build on this ability to sell products at premium price. This is the only way to uphold high levels of employment, wages and social protection in Europe.

Fourth, the report points out that we should not be complacent: in the mid to long term, our performance is at risk. There are two reasons to that.
The EU is trailing behind in several high tech products whereas countries such as China are rapidly catching up. Some may argue that this is in part an optical distortion: whenever an EU or US company chooses Asia as the last point for assembly of a product, the product becomes Asian. This, in turn, looks like an Asian trade gain and our loss. But in my view the problem goes beyond optics. Overall, the EU's performance for high-tech products is disappointing. Our market share in high-tech products is even below our market share on other products. Given its level of development, the EU should perform better in this area. Maintaining the EU’s ability to sell expensive top-of-the-range products is not just a matter of technological advance. The quality of products, their reputation, their continuity over time and their related services are all decisive factors in determining prices. However, innovation remains a key component of this picture. We must ensure the EU's capacity in the future to keep its products at the cutting edge of quality and innovation. For this, we need the right policies at home – innovation, R&D, training policies are key elements of the Lisbon strategy. And we must also ensure intellectual property rights are effectively protected abroad.
Let us not forget, either, that the EU has lost significant market share in some of the fast-growing emerging markets, particularly in Asia. In the long run, this underperformance on some of the most promising markets could undermine overall the EU's position in international trade. We run the risk of missing market opportunities in areas which account for more than half of world import growth. Hence our new commitment in Asia, with China but also with India, Korea and ASEAN (the latter being countries with which we are negotiating FTAs).

Finally, it is also very important to recall that the EU is the leading exporter of services, with 26.9% of the world market against 19.7% for the US and 6.1% for Japan. The EU is also the world's biggest investor and the principal host of foreign investment. When intra-EU stocks are excluded, the EU owns 33% and hosts 29% of world investment stocks.

Where do we go from here?

The basic policy prescription must be that we continue to nurture these strengths and address these risks through Global Europe.

Over the last two years, the Commission has been very active in implementing this agenda:
We have been a firm – if not the firmest – defender of the WTO and the Doha Round of world trade talks.
We have launched new free trade agreements with India, Korea and South East Asian countries.
We have focused new resources on important questions such as fair access to raw materials, better intellectual property rights protection and less barriers to European exports in our most important markets.
We have established a close new trade dialogue with China.
We have set up a solid partnership with Member States and EU business to tackle trade barriers in third countries.

The clear priority for the coming months should be delivery. We must show that Europe can bring benefits to the EU economy and EU citizens. This is the rationale for Global Europe. We have set out an agenda for opening the markets that matter most and charting new territory in areas not yet covered by the WTO, and launched concrete initiatives in virtually all aspects of trade policy. We have now to show that it works and brings tangible results.

This means a very heavy agenda ahead of us. On-going FTA negotiations in particular are key for the future. Negotiations with Korea are the most advanced and a deal is possible in the months to come. Of course there are still open issues and difficult negotiations but we can aim for a very ambitious result. With India, this very much depends on its own political context and commitment to reforms. I hope there will be a window of opportunity to move forward swiftly. The challenge with Asean is still to put the negotiations on the right track. We need to build on the commitment of Thailand, Singapore and Brunei, and possibly Vietnam, to move forward, while paying full attention to the regional process.

We also need to deliver on new issues and enforcement of our rights. We are going to need to continue to focus resources on making sure that our exporters, no matter how big or small, get fair treatment abroad. This includes our renewed market access strategy and the IPR enforcement strategy. We have set up a new partnership between Commission services, Member States and EU industry. The foundations are healthy and commitment is there. We already get results but we need to maintain commitment to show that it works. Need your constant support on this point. We have clearly a shared interest here.

I want to thank Business Europe and all present in the room today for their constant support in the launching and in the implementation of this agenda. This support is essential to our strategy. We need it to continue, and this is the purpose of our Conference today: getting all ideas on the table and discussing how we can support each other for the benefit of all EU companies and citizens in the present troubled times for the world economy.