Speeches, etc.

Margaret Thatcher

Speech to the World Trade After GATT Conference

Document type: Speeches, interviews, etc.
Venue: London
Source: Thatcher Archive: speaking text
Editorial comments:
Importance ranking: Major
Word count: 3567
Themes: Agriculture, Industry, Trade, European Union (general), Economic, monetary & political union, Foreign policy (Asia), Foreign policy (Central & Eastern Europe), Foreign policy (development, aid, etc), Foreign policy (International organizations), Foreign policy (USA), Foreign policy (USSR & successor states), Famous statements by MT (discussions of)

Opening Remarks

I am delighted to open the proceedings on this, the second day of the conference on World Trade After the Uruguay Round.

I am pleased that this event has been organised under your Chairmanship, Cecil ParkinsonCecil. As a leading member of my Government for many years, you have played a critical role not only in fighting for the cause of the free market in Britain, but also as Cabinet Minister for Trade and Industry, in taking the case for free trade to the rest of the [end p1] world. I should also like to pay tribute to Arthur Dunkel for his endless patience in dealing with the many discords in the Uruguay Round and to Peter Sutherland for bringing it to a successful conclusion. Neither trade nor prosperity will solve all our problems but they will make it easier to do so. [end p2]

The Importance of Free Trade

Trade is the oldest form of exchange known to man. From ancient times it was the most natural form of daily co-operation between peoples, whether it be in the smallest village or the bustling market places of Athens, Babylon or Rome. The market place is not the invention of some academic economist, it is the daily habit of the people.

It is no accident of history that the great cities grew up on the vigorous trading highways of their age. [end p3]

They drew their riches from the caravan routes, river crossings or natural harbours on which they were situated. For centuries trade, wealth and power went hand in hand, and the most successful trading states were the superpowers of their day. Venice is perhaps the most obvious example for as Wordsworth wrote:

“Once did she hold the gorgeous East in fee,
And was the safeguard of the West.”
[end p4]

Trade has proved the most effective vehicle for spreading prosperity to large and small nations alike. A small nation can still thrive as long as its businesses have access to the larger world market, where they can compete on equal terms with the commercial and political giants. The “large market” fallacy, which once guided dreams of empire, collapses when you have truly free trade. We have only to look at the success of Hong Kong, Singapore and Taiwan to know this to be true. With free trade you can have both large-scale economic efficiency and small-scale political [end p5] decentralisation.

Meanwhile, poorer nations are equally free to penetrate international markets, generating wealth by selling their goods at a competitive price and thus bringing increased prosperity to their peoples, unless obstacles are put in their path. If you are seeking to make the world your market place, the poorest nations must be able to sell their goods. [end p6]

The Historic Struggle Against Protectionism

The lessons of history amply demonstrate the benefits of Free Trade and warn us of the dangers of protectionism.

In the first half of the 19th century the price of food in Britain was kept artificially high by those who sought to distort the market in order to protect their own landed interests. With the abolition of the Corn Laws in 1842 [sic] came one of the most far-reaching upheavals in Britain, resulting in wholesale political [end p7] change as power was transferred from the Protectionist landowners to the liberal middle-classes who believed in the ethos of Free Trade.

In this century, the recession which followed the Wall Street Crash was turned into the Great Depression by the misguided lurch to Protectionism. The imposition in the United States in 1930 of the Smoot-Hawley tariffs erected the highest trade tariffs in the history of America. Thus debtor nations were unable to pay the interest on their debt or repay the capital [end p8] from their export trade. As a consequence things went from bad to worse as banks collapsed. [end p9]

The New World Order

It is not surprising that, after the upheavals of the Second World War, there was a widespread demand for the creation of a new set of rules to guide international relations. The horrors of the two world wars and the economic misery which had plagued the world in between, led many to believe that there must be some better order through which the nations of the world could conduct their affairs. [end p10]

On the political side, this manifested itself in the creation of the United Nations, while on the economic front it led to the establishment of the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade.

The common factor was a commitment to political and economic freedom which was seen as going hand in hand. [end p11]

The Aims of the GATT

As you know, the General Agreement on Tariffs and Trade was founded in 1948. It is not really a free trade organisation. Tariffs and other restrictions are permissible. But its aim is the greater liberalisation of world trade.

Obviously the rigid centrally-controlled economies of the Communist countries were not eligible for membership. And, as the European nations and Japan were only just recovering from the war, leadership of the [end p12] GATT was left to the Americans. Under their guidance, the world has moved progressively towards freer trade.

Until the Uruguay Round, the 8th Round of negotiations, the GATT applied only to trade in manufactured goods. Its rules were based upon the cardinal principles of non-discrimination, transparency, reciprocity and rule obedience. The GATT also provides the framework for contracting parties to resolve disputes which cannot be settled on a bilateral basis.

Let us look at the results. [end p13]

The Achievements of the GATT

Under the GATT we have witnessed a dramatic growth in world trade. Not only in the well established trading economies of the West but also among the developing countries for whom trade is their lifeline to prosperity.

Since the signing of the first GATT accord, total world trade has grown by a multiple of twelve, from 57 billion dollars in 1947 to 3,500 billion dollars in 1991. Even more dramatically, trade in manufactured goods [end p14] has grown by a multiple of 23. This represents the largest growth in history.

At the same time, under the first seven Rounds of the GATT, industrial tariffs have fallen from an average of 40%; at the end of World War Two, to 5%; today. After the Uruguay Round, the eighth Round just completed, they will fall even further.

But a global market for industrial goods was bound soon to require a global market in the service and financial sectors and some provision for intellectual property rights to [end p15] prevent counterfeiting of goods. Also, agriculture was highly protected and subsidised especially in the United States, the EC and Japan, therefore distorting trade.

So, under the Uruguay Round, the GATT has extended its scope beyond manufactured goods to cover services, agriculture and intellectual property. Reductions in tariffs and other barriers will not be made overnight: in most cases they will be phased in over 5 or 10 years. But, over time, they will mean a substantial improvement in trade. [end p16]

For Britain, the inclusion of services is particularly important: services already account for 23%; of all British trade, and in 1992 our exports of services were worth almost £33 billion. As there are now more jobs in services than in manufacturing, this is good news for job creation.

Agriculture too is being brought into the system for the first time. The new agreement will extend choice and lower prices while at the same time reducing the burden of agricultural subsidies. [end p17]

Britain in particular felt the full impact of agricultural protectionism when we joined the Common Agricultural Policy. Before our accession to the then-Common Market we imported more food from developing countries than any other country in the world. After 1972 the door was slammed shut on much of this trade. But not only did the Community restrict access for developing and other countries to Western Europe's markets, it also released its own subsidised surpluses onto the world market at artificially reduced prices. [end p18]

As a consequence, many developing countries were dealt a double blow. The could not export to us and could not export to other markets either. Over the years the Community has done little to make recompense for this damage. Indeed, I understand that the EC has spent nearly twice as much money protecting itself from agricultural imports from Third World countries than it has spent in overseas aid to those countries. [end p19]

In other words we are practising the most unfair competition against those who are often most in need of our help. This also applies to the newly free East European countries whose cause we so often plead while we deny them the free trade they need. They will have to wait a further 10 or so years for that.

Let me say I was very interested to read the report a few days ago that a group of EC economists were apparently recommending that the CAP should be substantially modified and that some powers over [end p20] agriculture should be repatriated. We await further details eagerly.

Thirdly, intellectual property has been recognised as an integral part of the GATT framework. There will be set of agreed multilateral rules requiring basic standards of protection in order to help reduce tensions over the trade in counterfeit goods. For Britain, this is particularly important for the development of pharmaceuticals and the registering of patents. [end p21]

These three important extensions of the GATT—services, agriculture, and intellectual property—taken with the decision to phase out the Multi-Fibre Agreement on textiles, represent a major growth in the provision of freer trade. But I hope that it is not too long before we can resolve the difficulties left over from this GATT Round: financial services, telecommunications, audio-visual trade, and maritime transport. [end p22]

This agreement on the Uruguay Round was signed by 117 member governments which account for 90%; of world merchandise trade. It was the most comprehensive Round ever and without doubt the best possible deal obtainable. [end p23]

The Danger of the Trade Blocs

The rules upon which the GATT is built are those of Most Favoured Nation treatment and Reciprocity. Providing they work within the rules of GATT, trading groups can contribute to the liberalisation of world trade. But at the very heart of the GATT itself there lies a legal conflict. While in theory it promotes equal status for all members as a general principle, it nevertheless allows, under Article 24, the creation of preferential customs' unions between any of the contracting parties. [end p24]

The worry must be that these preferential trading arrangements may undermine the carefully constructed rules of the GATT itself.

There are currently more than 85 such regional trading arrangements in existence, most of them small. The Cairns Group, one of the larger ones, was formed so that its members could have a common position on agricultural issues at the Uruguay Round. Asean, meanwhile, has no secretariat nor a mandate to negotiate on behalf of its members at the GATT. [end p25]

The common thread which runs through all these trading organisations, however, is the shared desire to become wealthier through greater commerce.

Today there are two overwhelmingly powerful trading blocs which determine the course of international trading relations, the European Union and the United States, now including NAFTA—a very welcome development. Indeed, I should like to see consideration given to a free trade area across the Atlantic and embracing the European Union and NAFTA. [end p26]

The task of defending the liberal global economic order depends to a very great extent on how the United States and Europe behave because their actions have a profound effect on the whole business world. Furthermore, because of their powerful influence, they tend to believe that they can be both successful and self-reliant, that liberalisation is costly, that making concessions to countries offering them little in return is pointless, and that they will not be penalised for breaking the rules of GATT. [end p27]

The reality is that the United States and the European Union dominate and no one else dare challenge under the GATT, whether they observe the rules or not, because of their overwhelming economic and political power.

Restraints of trade come in many forms and we should be ever wary not to measure the freedom of trade simply by tariff levels alone. In recent years the outward decline in tariff levels has been matched by an upsurge in non-tariffs forms of protection, such as Voluntary Export Restraints and anti- [end p28] dumping actions. It is interesting that, in the last few years, 60 developing countries have reduced their trade barriers, while 20 out of 24 industralised countries have increased theirs. This is an alarming trend and one which the GATT must tackle firmly in the future.

The United States, once the undisputed leader in the crusade to open markets, is now hesitant. Faced with a large trade deficit and an economy which is less protected than anywhere else in the world, American policy-makers are pushing for [end p29] bilateral arrangements. But this is not the way forward. The recent American pressure on the Japanese Government to intervene more in order to open up their domestic markets is a step backwards. Only by freeing the Japansese market from regulation and interference will you make it more open.

Facing two large trading blocs in NAFTA and the EC, it may not be long before Japan feels she must follow a similar course in the creation of its own more formalised sphere of economic influence. [end p30]

The Policy of the European Union

The combination of internal free trade with protection at the borders is something with which we are quite familiar, for it is none other than old-fashioned Mercantilism. As in the case of Colbert's France and Bismarck's Germany, the customs union can be and is used to promote greater political integration, and I am sure that this point has not been lost on those who aspire to European federalism, thus fulfilling Eli Heckscher 's dictum that “Mercantilism is primarily an agent of unification” . [end p31]

The policy of the European Union, and before it the European Economic Community, has been to create a trading empire with carefully specified trade preferences being used to build relations, influence weaker nations' policies, and secure a better position for European companies.

The European Union has created a pyramid structure of very carefully controlled preferences, six of them in all, which distort international trade in manufactures and which, I understand, are illegal under the rules of the GATT. [end p32]

As visualised by the founders of GATT, Most Favoured Nation treatment should be the norm. It should be applied to the trade of most of its members. However, the European Union accords MFN treatment only to a small number of countries, although they account for more than 60%; of imports which are not entitled to more preferential treatment. For the Europeans, the GATT is no longer about Most Favoured Nation, but “Least Favoured Nation” . [end p33]

The View to the East

The true extent of the power which control of the Twelve's external trade policy has given to the European Commission has not, perhaps, been fully understood.

The European Community Association Agreements with the countries of Eastern and Central Europe are examples of where trade policy should be conducted more generously, for if ever there was a case for trade more than aid, this is it. [end p34]

The European Union has resolutely refused to allow Poland, Hungary, the Czech Republic or Slovakia the means to increase their prosperity through free commerce with their Western neighbours.

In 1991, I observed that “a new wall—a wealth wall—has arisen in Europe to replace the Berlin Wall. And the instability of Eastern Europe may be prolonged and aggravated as a result.” I see no reason to distance myself from my initial reaction. [end p35]

Exporting Over-Regulation

It is true that some countries in Western Europe see the European Union either as a way of escaping the failures of their own national governments, or as a way of imposing their high costs on to others.

They fear comparison and competition, but instead of tackling their own problems, they seek to restrain the enterprise of others through regulation from Brussels. Within the Union itself there exists a comprehensive programme to spread the costs of the least [end p36] competitive countries to all of Europe's regions—it is called the Social Chapter. With its barrage of regulations and restrictions it is nothing short of an attempt to harmonise the social and working practices of a population of 360 million people from Copenhagen to Athens, from Rome to Amsterdam.

Externally, Europe's traditional response to freer world trade and the free movement of capital has been to introduce protection and controls, or to export the very regulatory burdens which are now making us uncompetitive. [end p37]

M. Delors, President of the European Commission, revealed his own ambitions on this matter when he called last year for a global “Social Charter” to be built into the Uruguay Round in order to protect European working practices and labour costs from outside competition. We must be thankful that those in charge of the Uruguay Round resisted his efforts. [end p38]

Protectionism has failed time and again to revive the fortunes of European businesses. European companies suffer because they have operated for far too long in subsidised and over-regulated markets which is in danger of making them uncompetitive. [end p39]

Can Europe Compete?

Overall taxation in most European countries is relatively high and manufacturing output lags behind Europe's two major competitors. Similarly, real wages are out of line with productivity when compared with the US and Japan. Meanwhile, the cost of European labour will be increased further by over regulation from Brussels.

Does the Maastricht Treaty do anything to reduce these burdens? [end p40]

Quite the contrary: instead of relieving Europe of costs, inflexibilities and restrictions, Maastricht threatens to impose the framework of a uniform economic policy of a single currency, and a dirigiste social and working environment. This threatens to snuff out the competitive and entrepreneurial instincts of Europe's people.

In 1988, at Bruges, I warned against the reimposition by Brussels of all that we had removed in Britain, and I am tempted not just to remind you of what I said but to repeat it again and again until the central [end p41] message is made clear: the very prosperity and status of Europe at the heart of the international trading system is now at risk. [end p42]

Challenges Ahead

Having completed the Uruguay Round it is not too soon to look ahead.

The GATT must continue to expand both its membership and its scope. In particular we face the need to integrate both China and Russia into the international trading system from which their economic and political philosophies have for too long excluded them. [end p43]

For China the understanding of the market and participation within the trading network should come as a less difficult challenge. The Chinese are born traders. Where ever they go trade goes with them. The reforms of Deng Xiao Ping have led to a remarkable story of economic growth. Assisted by the Chinese diaspora who have led the investment drive the Chinese are rapidly progressing with economic freedom. The challenge for China will be how to marry this economic liberty with the political freedoms which surely must follow. [end p44]

For Russia, confidence of success is far less sure. There, 70 years of total tyranny has left the people passive. The legacy of the total elimination of ownership under a political system which viewed initiative as dangerous will be far more difficult to over come. Presidents Gorbachev and Yeltsin were quick to encourage personal and political liberty but both have struggled to bring about the economic freedoms which will bring their people prosperity. [end p45]

Even now, in spite of the total failure of the centrally planned system there are still those who would plunge Russia back into a dark age. You cannot have a “half-reform” .

For the countries of the West our task is to do all we can to see that the former Communist countries achieve their transition to political and economic freedom. But at the same time we must also look towards those parts of the world where that transition is already well advanced. [end p46]

The countries of Asia and the Pacific Rim—Hong Kong, Singapore, Taiwan, South Korea and Thailand—have been the world's fastest growing economies for nearly two decades, with standards of living fast approaching those in Europe. Taiwan, the world's 19th largest economy with the second largest foreign exchange reserves in the world, has become such a powerful economy that it is now the driving force behind investment in the other countries in the region. [end p47]

The “tiger” nations of the Pacific have thrived on international competition and have amply demonstrated that they have the will and enterprise to present a formidable challenge to the United States and Europe.

The question is: are we ready for that challenge? [end p48]

Conclusion

This is, Mr. Chairman, a timely conference. The GATT Round which came so perilously close to failure has been successfully concluded—though there are still important points to resolve. It would be tempting to believe that the case for free trade had triumphed. Tempting—but sadly, I fear, wrong.

We are now at one of those watersheds in economic affairs which occur perhaps once in a lifetime. [end p49]

The pressures between open trade and protection are finely balanced. We have still to see whether regional trade agreements will be used in order to go beyond the GATT or become a means of subverting it. We have still to convince popular opinion in Europe and the United States that opening markets to foreign goods and services raises living standards and generates jobs. We have still to win the argument that just as economic and political freedom go together, so too do open trade and international harmony. [end p50]

I fervently hope that this conference will increase the momentum for trade—the life blood of nations and so often the progenitor of peace.