Between Protectionism and Neo-Liberalism: a European Progressive Way

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2 Peter Mandelson Between Protectionism and Neo-Liberalism: a European Progressive Way Between Protectionism and Neo-Liberalism: a European Progressive Way Peter Mandelson 80 progressive politics vol 4.2

3 Over the next decade, Europe and America face a fundamental choice of directions about our response to intensifying global competition. We could go one of three ways: resist change through protectionism; allow global market forces to do to our economies and societies what they will; or build a reformed economic and social model that successfully combines economic dynamism and social inclusion. The rise of China and Asia will become one of the dominating phenomena of our times. We have seen nothing like it since the emergence of the United States as a great industrial power. The big question is how we respond. The third choice is the correct one. But building a new economic and social model involves opening markets and an acceptance of sometimes painful economic change which can only be done while tackling the problems of the short term losers from globalization. In the past, protectionism has been a bigger challenge for progressives in America than Europe. I find Bill Clinton s explanation persuasive. In Europe, people enjoy the protection of a comprehensive welfare state. In America people s healthcare, their pensions, their whole security has traditionally been bound up with their job. As a result, they fight much harder to keep it when foreign competition threatens. This explains why political pressures for protectionism in the United States remain exceptionally strong, despite overwhelming evidence first, that it is an inefficient and costly instrument for protecting jobs and second, that it is the least well off who lose out most if they are denied cheap imports of everyday essentials, such as children s clothes and shoes. In America these political pressures are stronger in the Congress than perhaps in the population as a whole because of the strength of unions in the Democratic primary process. This power over the selection process has grown in the House, as the number of genuinely contested seats has declined. The situation in Europe is different, not least the fundamental instincts of many trade unions. In Britain, for example, labour pioneers like Keir Hardie were strong free traders a historic legacy of 19th century battles over cheap food. But feelings of international solidarity also ran strongly through 20th century social democracy in Europe. It was right wing nationalists and Imperialists who were most strongly in favour of protectionism. But today in Europe the protectionist tide is rising. The economic performance of the big countries in the Eurozone is at best mixed. Enlargement has had a huge impact, expressed in fears of delocalisation and wage competition from the Polish plumber. In addition, Chinese competition is now hitting specific sectors very hard (such as textiles and shoes); this impact will widen in years ahead. European protectionism is a different animal from the American variety. vol 4.2 progressive politics 81

4 Peter Mandelson Between Protectionism and Neo-Liberalism: a European Progressive Way In the first instance, the demand is for protection from internal competition within the EU itself. This leads to calls for tax harmonisation, a European minimum wage, and new legal rights We face a huge competitive challenge in labour intensive industries like textiles, clothing and shoes but in future, in every sector, we will face stronger competition unless we manage to keep a lead in research and innovation. to limit a firm s ability to restructure. It is perceived first as an attempt to stop a race to the bottom within Europe. At the moment the public are less exercised about the need to face up to external competition from China and elsewhere. In parts of Europe, France in particular, there have been increasing protests against globalization and demands for fair trade. Those seeking protection of particular sectors skilfully deploy the rhetoric of fairness, human rights and prevention of exploitation of child labour genuine as these concerns are. Yet, I am convinced that the rise of China and Asia will become one of the dominating phenomena of our times. We have seen nothing like it since the emergence of the United States as a great industrial power. The big question is how we respond. Sometimes there is a tendency to say globalization is good for business and by extension and implication, good for all of us. Of course, the opening up of the once furthest reaches of the world should be seen for what it is a tremendous business and economic opportunity for those whose commercial orientation is international and global. In Britain, the City of London stands to gain enormously. Also, I admire the success of German business in China an export record that exceeds by far, France s or Britain s, and gives the lie to the anti European propagandists in the British press who treat German capitalism as a basket case. Germany certainly has its problems but they are not in the main in its international business sector. So globalization can be good but here I choose my words with great care, because I do not want to be labelled as a late recruit to the antiglobalization movement market forces left to themselves, will not ensure globalization is good for all. Low wage competition in China and Asia is a reality. In the last two decades, hundreds of millions of Chinese have been raised out of the dire rural poverty but there are hundreds of millions more, literally knocking at the gates of the cities and the new industrial regions. In Europe, businesses and trade unions under competitive threat complain of artificial exchange rates and forced labour: and where there is justice in these arguments, we should use our political leverage to act on them. But the reality of low wage competition gives China and others a legitimate comparative advantage. From our relative comfort in Europe, we cannot object. We have no automatic entitlement to a good life to which the rest of the world is disbarred from aspiring. 82 progressive politics vol 4.2

5 However, the competitive threat to Europe does not simply arise from the bringing into productive use a huge pool of hitherto unskilled, untapped rural labour. That ignores the huge strides forward that the Chinese, Indians and others are making in education and R&D. That makes the new competition more broad based. Yes we now face a huge competitive challenge in labour intensive industries like textiles, clothing and shoes but in future, in every sector, we will face stronger competition unless we manage to keep a lead in research and innovation. Of course, this across the board competitive minus is at one and the same time for Europe, a business and jobs opportunity plus. The emergence of a new educated middle class in Asia creates huge demand to emulate Western tastes. It brings us new markets. It also offers hope of political change and policies that will in time be more compatible with sustainable development. But I do not underestimate the scale of the potential economic shock, and social consequences of this new competition. The populist response is to demand protectionism. And this demand is growing. Every day in my office as Trade Commissioner, files claiming unfair dumping land on my desk. And the voices calling for fair trade get louder and louder. And I m afraid that the call for fair trade is not a call for better access to European markets for farmers and other producers from the world s poorest countries. This sort of fair trade is a plea for help from industries that find they can no longer compete. They deserve sympathy. But to heed these calls unquestioningly not that there is any easy way to do so that is consistent with our international obligations would be disastrous in the long term for European industry. It would take the competitive pressure off, precisely at the moment when we need to maintain that pressure to modernise, innovate and move up the value chain. It would protect jobs for a short time, but cause lower living standards and higher unemployment in the longer term. Of course, I am not indifferent. I will listen to, and act upon, claims of genuine unfairness. Of course, I recognise that industries need time to adjust. I am not a free market obsessive or a neo-liberal dogmatist. But protectionism is a dead end. It will not help us build the progressive economic and social model that Europe needs. One way we sink into the attitude of mind that helped defeat the Constitutional Treaty in the French and Dutch referenda. The other way, we press ahead with economic reforms. But such reform is for a purpose: not to Americanise Europe but to make our European model of society sustainable for generations to come. We need a new social consensus for economic reform based on social justice. In response to globalization, we already see a growing divergence between Europe and America. I fear these divergences may get larger. Under the impact of Chinese competition, wage inequalities in US will continue to grow. The excellence of the States knowledge economy will prosper as will the upper end of skills and incomes. The low skill element of vol 4.2 progressive politics 83

6 Peter Mandelson Between Protectionism and Neo-Liberalism: a European Progressive Way America s left behind will fare worse. In Europe, inequalities are lower but unemployment is higher. The choice before Europeans is stark. Without reform, unemployment will grow as Asian competition intensifies ultimately leading to the dismantling of social protection due to its unsupportable cost. But with reform, Europe should build a modern social democracy. The essence of our European cultural and religious tradition is this recognition of the uniqueness and equal worth of the individual, combined with the need for a strong society, to enable the individual to achieve fulfilment within a stable social framework. I have always believed in a social dimension to Europe. My preoccupation has been that the Social Europe we build should be modern and forward looking, rather than stuck in the past. The old European Social Model was built around the protection of existing jobs. But today, many of these arrangements offend against social justice because they accentuate an insider/outsider divide. The challenge of today is to equip every citizen of Europe, from whatever social background, nationality, colour or religion, to fulfil their own individual potential in a rapidly changing world. The essence of our European cultural and religious tradition is this recognition of the uniqueness and equal worth of the individual, combined with the need for a strong society, to enable the individual to achieve fulfilment within a stable social framework. These essential insights of our Europeanness remain valid. But the institutions we built in the last century to underpin them have outlived their time. We need a new political vision for Europe that brings together competitiveness, modernity and innovation with a new response to social challenges and adjustments. Competitiveness, especially in an ageing society, must involve extending opportunity throughout the lifecycle tackling inherited disadvantage by investing in the social support and education of young children and their mothers; providing high standards of schooling in ethnically diverse and socially fractured communities; promoting skills and lifelong learning for those who missed out at school; reaching for world class standards of excellence in higher education and research; opening access to retraining and help with adjustment for the victims of economic change; helping older workers reintegrate to the labour market and adapting the traditional concept of retirement: integrating migrants and minority groups more successfully than we have so far succeeded in doing into our local communities. Some people will say what has this all got to do with the EU? Aren t these in essence national questions for each Member State to solve? Well, yes they are in the main. But there is an 84 progressive politics vol 4.2

7 indispensable European dimension to national reform policies. Establishing greater consensus on how we make economic change acceptable is the key to faster economic reform, Member State by Member State, from which we When anti Europeans in Britain say, we like a free trade Europe but we don t want Brussels, they gloriously contradict themselves in a single sentence. You can t have the Single Market without Brussels end of story. all benefit. And addressing the needs of the losers in Europe is essential if Europe is to win back political consent for enlargement. And here, I believe, there is a role for leadership, at the European level, from the European Commission. Why do we have such an executive? In order to force the pace of change. That has always been the role of the Commission when it has been working well. And now there is a new challenge for the new European Executive under Barroso: not usurping the political rights of Member States, but showing legislative and administrative leadership to help equip Europe to meet the challenges I have described. The key question is to ask is: what should sensibly be done at European level? Welfare systems and labour markets are national and distinctive. Economic intervention generally works best when it is as close to the ground as possible. I am not in favour of uniform approaches that do not account for national and regional diversity or massive new spending programmes at European level. But we should be confident in arguing the case for two things: first a new approach to competitiveness and social policy in Europe a new balance between these two over-riding and indissociable policy objectives. Second the case for reflecting these priorities in a reformed European budget to promote a sustainable knowledge economy and tackle market failures at European level where EU action can add real value to national efforts. Europe s knowledge economy deficit with the United States is huge. On higher education, the EU spends 1.4 per cent of GDP; the United States around 3 per cent. On R&D, the EU spends 1.8 per cent of GDP; the United States 2.7 per cent. On both measures, Britain is around the EU average, despite the Labour Government s efforts on the research budget and university tuition fees. European spending programmes should be focused on the creation of European centres of research excellence and building technology platforms that link in with European companies. Business conceives its innovation policies on a European scale but research remains largely compartmentalised on national lines and too distant from business. We need bigger European incentives to promote researcher mobility, intellectual exchange and higher academic rewards within the EU in order to counter the transatlantic brain vol 4.2 progressive politics 85

8 Peter Mandelson Between Protectionism and Neo-Liberalism: a European Progressive Way drain and attract the world s highest talent to Europe. Europe s top social priority should be to help workers adapt to the more rapid economic change that a combination of deeper market integration and increased supply side investment will bring. The Structural Funds should be modernised rather than scrapped. What we now need focus on is a comprehensive package of assistance for workers in mid life faced with economic restructuring, to help both with full skill retraining and mobility. Dealing with the poorer developing countries, we should pursue an approach that expands their opportunities and capacities to trade, step by step. There are occasions when trade has to be managed, just as trade itself isn t the solution to developing country problems. Britain has a central over-riding interest in such a reformed Europe, from which in future we will bolster our own economic strength. Our economy will not in the long term prosper as a let the market rip offshore island to a protectionist Continent. Nor will we be able to advance our ambitions for a more socially cohesive Britain that offers genuine opportunities for all, if we simply allow global market forces to overwhelm our society The fate of Britain s economy and our personal prosperity is inextricably bound up with the rest of Europe. 50 per cent of our trade is with the rest of Europe. Their market is our market. Their demand for goods and services is the demand we want for what we produce and supply. The reason, therefore, that the European Union really matters to Britain is that the Continent s economic success or failure contributes directly to our economic success or failure. I saw a Treasury statistic the other day suggesting that a 1 per cent increase in the Continent s growth rate lifts the British growth rate by 0.25 per cent. So the more we contribute to more successful economic policies in Europe, the more we gain ourselves. And the potential is huge. Many people tend to think of the Single Market as something that happened in the past back in 1992 and which, with skilful diplomacy, we could seek to hang on to whatever happens to Britain s broader relations with the EU. But the Single Market is largely an incomplete venture. The biggest advances are yet to come. The next decade offers enormous scope for productivity gains and higher growth potential for Britain that would be lost if we are not fully engaged in Europe. But remember this too. It s impossible to have the Single Market without the supranational institutions that make it work: the Commission that is the initiator and enforcer of legislation and fair competition; majority voting in the Council that breaks deadlock; and a Court of Justice that can hold Member States to account. When anti Europeans in Britain say, we like a 86 progressive politics vol 4.2

9 free trade Europe but we don t want Brussels, they gloriously contradict themselves in a single sentence. You can t have the Single Market without Brussels end of story. In addition to breaking down the remaining barriers to the Single Market, Europe should pursue a progressive trade policy, one that welcomes open markets in order to strengthen domestic competitive pressures and reform efforts, but also strives to build markets for what we sell worldwide. That success in building new overseas markets depends above all on a bold outcome to the Doha Development Round; this is the only way that Europe will achieve new trade opportunities in the rapidly expanding markets of China, India, Brazil and other advanced developing countries. At the same time in dealing with the poorer developing countries, we should pursue an approach that expands their opportunities and capacities to trade, step by step. Progressives are wrong to be pure neo-liberals. There are occasions when trade has to be managed, just as trade itself isn t the solution to developing country problems. Peter Mandelson is the European Commissioner for Trade and Honorary Chair of Policy Network. vol 4.2 progressive politics 87