The UK in the EU

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Europe and Globalisation

In the 1990s and since, ‘globalisation’ has become a portmanteau term – of description, approval or abuse – meaning many different things to different people. It is used here primarily in its economic sense – to reflect the integration and interdependence at the global level increasingly manifest since the 1990s, when transportation costs fell, world output increased by an annual average of just over 3%, world trade in goods and services by over 6%, FDI by 14%, and internet connections by 20% a month. But it is also widely viewed as a deeply political and cultural phenomenon – involving inter alia climate change, migration, energy security, poverty, shared entertainment, and competing languages and spiritual values. It is creating unprecedented opportunities, but has also eroded old certainties and aroused new fears.

Overlapping with the speeding up of globalisation has been the declining validity of the assumption that what happened to the economies of the West mattered much more than what happened to those of others. In 1985 just 10% of the world’s manufactured goods came from developing and emerging countries; by 2020 the figure will be 50%. A key part of this story concerns the return to economic prominence of China and India. In 1750 they had between them over 57% of world manufacturing output, against Europe’s 23%, but by 1900 had only 8%, against Europe’s 62%. Chinese GDP per head was higher than the West’s in 1400, half the West’s in 1820, and by 1950 only a tenth. But the pendulum is now fast swinging back, and a new balance of power is in the making. Thirty years ago, emerging Asia was one eighth of the world economy, of which it is now almost a third, with the fraction increasing by the day. In part simply because of changes in the distribution of the world’s population, of which Europe in 1957 had 21%, today has 11%, and by 2050 is likely to have only 7%.

So how has Europe reacted to these changes, and how should it react from now on?

The European Community aimed from the start to contribute to economic liberalization. Article 110 of the Treaty of Rome laid down the aim of contributing to "the progressive abolition of restrictions on international trade". To some considerable effect: by 2005 world trade was 90 times larger than in 1957, due not least to the European contribution to successive rounds of world trade negotiations. This increase in the size of the economic cake has plainly brought with it very substantial gains for European prosperity and employment.

Globalisation, like liberalization, is not in economic terms a zero sum game: it involves benefits from the opening up of trade, from specialization, from economies of scale and from the diffusion of technology and best practice in which all can share. But it does lead to losses as well as gains: whereas the beneficial effects of economic change are generalized, the damage tends to be localized – adjustment costs from temporary unemployment and relocation, or the closure of plants due to intensified competition. The dismantling, for instance, at the start of 2005 of the Multi-Fibre Arrangement (which since 1974 had governed world trade in textiles, imposing quotas on the quantities that developing countries could export) will over time save all European consumers a good deal of money, by making available cheaper clothes from outside Europe – but in the short term is causing considerable pain in those parts of Europe with a domestic textile industry which till now has competed on labour costs.

Hence the pressure from some quarters to create a Fortress Europe, with gates we could pull closed to prevent change, and the campaigns run on the themes of European jobs "stolen" by other countries, European livelihoods undermined by cheaper labour costs elsewhere. Hence, too, the equally misguided notion of economic patriotism, which despite its superficial attractions in fact erodes what it seeks to protect.

The pain underlying such concerns should not of course be ignored. Popular fears that globalisation could undermine living standards are understandable. There is a case for ensuring that the world trading system continues to incorporate core labour standards, and another for action, whether at the European level or the national, to ease the difficulties caused by industrial relocation – on the lines of the Globalisation Adjustment Fund proposed by President Durao Barroso.

It is important however to be clear that the hundred million plus new jobs created in China since 1979 have not on aggregate cost Europe jobs or hurt Europe economically. Rather the reverse: the same increase in total trade which has so sharply expanded the Chinese work force has also safeguarded and created a great many jobs in Europe – in part since many items described as ‘Chinese exports’ also create profit for European middlemen, and because many products are assembled in China but made in Europe. To retreat into protectionism would be short-sighted in the extreme, not least because that would ultimately undermine competitiveness and economic growth, increase unemployment, and thus reduce the ability of governments to assist or compensate the losers. What we need instead is a strategy that keeps us open to the world but nonetheless delivers a full-employment Europe, fit to meet the challenges the rest of this century will bring.

As the European Commission argued in its "Global Europe" proposal of October 2006, for Europe the keys to competitiveness are education, innovation, intellectual property, services and the efficient use of resources. To create jobs and growth, we must remain open. And to flourish in a fast globalising world economy we must become more productive, as well as moving increasingly into higher value goods and services. The Lisbon agenda, which in the view of the Centre for European Reform is still only very slowly becoming an integral part of national reform debates, needs to be much better understood and taken seriously to heart. For in a world of accelerating change, Europe cannot afford to stand still: to remain competitive, it must continually nurture, sustain and promote education, research and innovation. The review of the EU budget due to take place in 2008-2009 needs to ensure that adequately substantial funds are earmarked for these objectives. The EU also needs to take further the recent Services Directive in order to build over time a true internal market in services.

At the same time the EU needs to build on China’s entry into the WTO in 2001 in order to integrate it harmoniously and effectively in a peaceful and liberal world order. That will involve controversy on every side, requiring both enhanced understanding from Europe’s protectionists and, from the Chinese, both greater self control and an increased readiness to accept liberalization of their domestic market. But the potential rewards could be very great indeed.

In an age of growing interdependence, the EU member states know that they are stronger together, negotiating with others as one large unit, than they would be on their own. As Gordon Brown has put it, global public goods such as energy, natural resources, a healthy environment and the fight against terrorism can only be secured through cooperation across borders. The EU is best seen not as a fortress against globalisation but as the best tool we have in a globalising world for the projection of Europe’s collective interests - the entity which maximises our power to help shape the process which willy nilly is increasingly affecting a wide range of our interests.

On balance, globalisation provides Europe, and the world, with many more opportunities than risks. The best way for the UK to help shape the way it develops is for us to be a strong player inside the European Union, working to keep Europe competitive and, from within a strong Europe, to work for an increasingly open world economy, allowing the dynamic power of trade to continue to increase global prosperity, as it has done so remarkably since the conclusion of the GATT in 1947.

Sir Colin Budd

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