Wednesday, March 18, 2009

Free trade the gateway to recovery, writes Mandelson

Mandelson, Peter (Times Online, UK) 2009-03-17 

“A crisis invites us to think the unthinkable”, writes Peter Mandelson, former European Union (EU) trade commissioner. As Gordon Brown argued recently, “there is no conventional thinking that should be so ingrained that we are not willing to test its assumptions in the search for solutions to the credit crunch and the rebuilding of global growth”, he says.

As the build-up to the G20 crisis summit to be held in London next month intensifies, leaders have reiterated the imperative of ensuring that the global trading system remains open through the downturn. Mandelson argues that the basic case for open, free trade “has not been damaged by the credit crunch, and it remains central to any chance of a sustained global recovery”.

None of the Group of 20 major developing economies has failed to benefit from the expansion of trade and the creation of a global economy in the 20th century. Open trade has been a driving force in the rising levels of global prosperity that had been witnessed for the two decades before the crisis hit. “The growth of trade allowed countries and their companies to specialise and compete for sales globally rather than just in their home market”, Mandelson writes.

Including developing regions in global production lines supplying developed world markets has further driven growth and lifted more people out of poverty more quickly than ever before. These economies have created demand for imports from the developed world in turn.

It is this demand engine that has been stalled by the credit crisis, particularly because it has dried up much of the temporary credit that finances 90 percent of international trade. Facing the G20 governments is the fundamental challenge of rebuilding the global demand engine so that demand is transmitted throughout the global economy. This requires an open trading system.

United States President Barack Obama’s chief economic adviser Larry Summers argued last week that this is the reason internationally coordinated fiscal stimulus measures are important. Consequently, the G20 needs to coordinate and reinforce each other for the sake of economic effectiveness as well as economic fairness.

If the crisis of the 1930s taught us anything, it is the importance of trade in driving recovery, Mandelson says.

When business representatives from across the globe meet in London this week ahead of the G20 Summit, the key message they can send to the G20 political leaders is that they must avoid a repetition of what happen some 70 years ago. The Group should be urged to renew a pledge made in Washington in November not to erect any new barriers to trade or investment.

The G20 represents 90 percent of all global trade.

Furthermore, the leaders should commit to completing the Doha Round of world trade talks “as a matter of urgency, which… would strengthen world trade regulation to everyone’s benefit”. They should also “commit to strengthening the capacity of the World Bank and other financial institutions to bridge the trade finance gap for developing countries”, Mandelson says.

The ministers should condemn protectionism and actually mean it, he adds.

Free trade has long been the object of criticism. Although it does produce huge benefits for consumers and the wider economies, it comes with costs for industries exposed to greater competition. “Open trade must be flanked by policies that help workers to adapt to change and that enable the poorest countries to compete fairly with their more advanced trading partners”, Mandelson says.

“The growth that comes with rising trade, especially in the developing world, has to be sustainable and properly managed.”

According to him, trade was central to the pre-crunch global economy. However, the imbalances that emerged through the persistent trade deficits and surpluses of some of the world’s largest economies worked to destabilise the system.

“This and other governance challenges will keep the G20 busy enough. But the principle of open trade itself was not the problem and it is a necessary part of the solution. Whatever orthodoxies might need rethinking after the credit crunch, the value of open trade is not one of them.”

Mandelson is currently the British Secretary of State for Business, Enterprise and Regulatory Reform.