Examination of Witnesses (Questions 150
- 159)
TUESDAY 20 FEBRUARY 2007
DTI/FCO, UKTI, DTI
Q150 Chairman: Gentlemen, thank you
very much for coming today to this last but one evidence session
in the Committee's inquiry into trade with Mercosur which began
as an inquiry into trade with Brazil but was broadened slightly
in the light of our visit to Argentina. Minister, we are very
grateful to the officials we met both from the Foreign Office
and UKTI on our visits to Brazil and Argentina. We were received
in the customary excellent way and were briefed extremely intelligently
by all the staff we met. I should like to put on record our appreciation
of the effort made. Perhaps I may begin by asking you to introduce
your colleagues.
Mr McCartney: Thank you. I also
thank the Committee for its kind remarks, and I shall eGram my
colleagues in the Foreign Office later today. I am sure that they
will be most appreciative. I just hope that they have briefed
me as well as they briefed you. I think this is the first time
since my appointment that I have come before the Committee. In
my previous guise at the DTI I had a very good working relationship
with the Committee. I met your Sub-committee on ECGD matters.
I look forward to this and any other inquiry. In terms of my role
with UKTI when I visit markets, if in the next few months there
is any particular area in which the Committee is interested I
am more than happy in confidence to advise it of my travel arrangements
to give it an opportunity to look at the objectives that have
been set for each of my visits. Every time I go into a country
or region there is a new set of objectives for the visits. There
is much consultation beforehand and afterwards I go back to those
I have consulted to give a sense of what we have been doing, what
successes we have had and in what areas we need to do further
work. I am happy to do that with the Committee if that would help.
With me today I have Adrian Hockney, our Deputy Director of the
International Directorate of UKTI. He is responsible for trade
development in Latin America. John Souttar is Assistant Director
in the Europe and World Trade Directorate of the DTI responsible
for trade policy and relations with Latin America.
Chairman: It was discourteous of me not
to welcome you on your first appearance to the Committee. I was
so busy praising your officials that I forgot to welcome you,
Minister, and I apologise for that.
Q151 Mr Bone: In the case of the
Mercosur countries, from the evidence we have taken there appears
to be some indication that it is really Brazil and the rest. Should
we be treating Brazil as a separate entity? There is conflicting
evidence about whether free trade and the customs union are a
benefit. UKTI says that Brazil "stands alone". What
is your view?
Mr McCartney: Brazil is our most
important trading partner in Latin America. It is one of our key
markets and is an emerging global economic power and with that
social and geo-political development takes place. It is a critical
partner. As a group we welcome the relationship that is developing
between the countries of Mercosur. The change that takes place,
whether it is a common market of goods and services or a market
for free trade and labour, will be at their pace; it is for them
to do it. Alongside that, each of these countries is entirely
different. Their relationship will reflect that in terms of the
resource put into them or it will detract from it. Argentina and
Brazil are the power houses in that region; the others are part
of that. It is a bit like the emerging nations in the European
Union and the size of their economies compared with those of other
countries. The relationship reflects that. It is important to
have that relationship because the alternative is potential protectionism
which we do not want. I do not think there is any disagreement
around this table, whatever political opinions may be held, that
we want an open, fair marketplace, including large and small countries
and developed, least developed and developing countries. In Mercosur
one has emerging and lesser developing countries and economies.
We shall have to balance them all and will do so on the basis
that Brazil is a major global player, not just because of the
size of its own market and potential for both inward investment
and trade but also because of its leadership role in the G20 countries.
That role is of critical importance if we are to have a successful
Doha Round, for example.
Q152 Mr Bone: That probably leads
on to my second question. Do you see the countries as developing
a common market and perhaps moving towards a European Union-style
bloc, heaven forbid? Is that how you see it?
Mr McCartney: That is a matter
for them. I am not giving a prescription. How they develop is
a matter for them. It is not for us to intervene in any way, but
as they develop or not develop the relationship, whether it goes
any further and where is a matter for them. Some people will give
you evidence that they think it will go no further; some say that
it will disintegrate. Who knows? From our perspective we shall
do nothing proactive to undermine what they are attempting to
do. Each of these countries seems to be very proactive as the
situation dictates. Brazil is overwhelmingly the huge political,
economic and social power in the region along with Argentina,
and that will be reflected in the resources and effort we put
in.
Q153 Mr Bone: Obviously, we would
not want to interfere, but I wonder whether the Government has
a view on whether it is likely that it will form a sort of EU
bloc.
Mr McCartney: We do not have a
viewnot because we are empty-headedin the sense
of giving a perspective, making suggestions, intervening or giving
some leadership about what would be a sensible way to go about
it. But we are certainly interested in and would take seriously
any efforts that are taken forward in regional integration not
just in this situation but in other emerging markets where that
is the case. One sees in Africa and South East Asia a trend towards
countries getting together, and Mercosur is an existing grouping
in South America. I shall soon be visiting a grouping in South
Africa. South Africa will be the dominant partner but there will
be developed and least developed countries joining in. We have
to have a relationship with them and develop that as the European
Union develops out of Doha, whether there will be other regional
trade agreements to go alongside whatever is agreed in Doha. That
may well mean one such agreement with Mercosur. That must be taken
into account. Our policy in that regard will be active relationship-building
and participation, in particular changing our resources and investing
a great deal more resources in Brazil, for example, to give UK
trade an advantage to pick up from what is a weaker position than
it should be in terms of penetration of a market in a country
the size of Brazil.
Q154 Mr Bone: To take it a bit further,
I understand that there is now a Mercosur parliament which is
not directly elected but appointed. Members are arguing among
themselves, so possibly they have already reached a European Union-type
body. Do you believe that in future rather than trade agreements
being conducted with, say, Brazil separately, they will be negotiated
between the European Union bloc and the Mercosur bloc?
Mr McCartney: In the first instance,
I hope that at some stage we can give the Committee an update
of the meetings I have had with Peter Mandelson and other European
trade ministers in the past few days. I should like to share that
discussion with the Committee. From our point of view, the most
successful thing we can have with Mercosur countries is a DDA
agreement both in terms of agricultural and non-agricultural goods,
services and services of a general nature. Alongside that, over
the next few years I am sure that there will be a growing trend
within the European Union to look to regional trade agreements
and economic partnership agreements with least developed countries.
In that regard last Sunday and Monday we had a meeting with Commissioner
Mandelson when we discussed a strategy for regional trade agreements.
We all agreed with the nuances among the 27 countries that their
priority is the Doha Round, but any other regional trade agreement
had to be compatible with the World Trade Organisation and the
strategic approach of any other agreement would be an addition
to and not separate from Doha. It cannot be an alternative to
Doha. Our priority at the moment is to get a successful Doha Round,
and Brazil is crucial to that. Brazil has a leadership role in
the G20 countries and in many ways that role is shared with India
and China. Brazil has been more proactive in trying to get a deal
around Doha and therefore they are very influential. That is our
first priority and anything that follows on from that will be
a bonus.
Q155 Chairman: How optimistic are
you about a successful outcome to the Doha Round?
Mr McCartney: Perhaps I may give
a politician's answer. I am genuinely more optimistic now than
I was four weeks ago, and extremely more optimistic than three
months ago. Three months ago I would have said that in the run-up
to and in the aftermath of the elections in the United States
and the coming elections in France there was a growing tendency
among people from the right and left towards protectionism. This
was very unhelpful. That led to a lull in discussions and negotiations
in the summer of last year. Having said that, there was a great
deal of activity on the part of our Government and others in the
summer and autumn and that was taken up immediately following
the elections in the Congress and Senate in the United States.
At both European Union and governmental level that led to discussions
with the United States, the G20 countries and key members of the
European Union which culminated in the events at Davos in January
where a genuine new impetus was given to advancing the negotiations.
That has led to a further discussion on 11 February between me
and Peter Mandelson and the other 26 trade minister colleagues
in the European Union. Out of Davos no numbers have yet been agreed,
but the United States has now agreed to engage seriously both
in terms of the President and his negotiating team and those now
in charge in the Congress and Senate. There are still significant
difficulties and hurdles ahead in relation to the United States
in terms of the Farm Bill and the effectiveness of the President's
powers to return to negotiate on trade agreements, in the light
of the expiry of "Fast Track" (requiring US Congress
to either accept or reject a trade agreement as a whole). Although
the United States has signalled a willingness now to enter into
serious negotiations it still has not signalled in any way its
bottom line in terms of movement on agricultural subsidies or
in terms of non-agricultural defensive measures on which it would
like to see movement by the G20. The European Union has a negotiated
position. Commissioner Mandelson has a negotiating envelope and
that has been confirmed, even with the pressures of a pending
election in France where again from whatever perspective one looks
there is a growing tendency towards protection. To be fair, France
was very much committed to discussions last Monday, although there
are nuances in the positions of a number of our colleagues in
the European Union on this. We are quite clear about being prepared
to make a move on the agricultural envelope, but that will mean
Brazil, India, China and others in the G20 being prepared to take
steps to change their bottom lines in terms of non-agricultural
issues. The fact that all of these have now been agreed to be
the subject of discussion over the coming weeks and months into
the spring means that hopefully a broad basis of agreement can
be reached to allow the negotiators on behalf of the G20 countries,
the European Union and the United States to go back and seek agreement.
It is uncertain whether sufficient progress can be made by March,
April or May. I would hate to say that we expect it by a certain
date and because of that things fall down, but we are now making
progress. The first gateway is agriculture. Without an agreement
on agriculture we will not get through the gate to the non-agricultural
issues. That is why it is so critical for the European Union and
the United States in particular to make a move in agriculture.
At the moment a great deal of effort is going into that.
Q156 Chairman: That is a very comprehensive
and helpful answer and I think reflects what the Committee heard
in Brussels the week before last. Is there not a risk that the
Doha Round will produce a lowest common denominator outcome which
will need to be topped up with regional trade agreements with
places like the Mercosur countries? I am just trying to get a
feel for your enthusiasm for regional trade agreements. You have
set up an analytical and intellectually robust position about
their relationship to WTO matters, but what is the Government's
views of RTAs?
Mr McCartney: I shall be quite
open because the answers both on trade and geo-political matters
are enmeshed. Whatever agreement is reached in Doha must be one
that is taken as a success, because a failure there will lead,
quite frankly, to the least developed and many of the developing
countries being passed by. They will be in a seriously difficult
position in terms of being able to negotiate as equal partners
in any regional trade agreements with the European Union, the
United States and other economies like those of Korea, China or
Japan. It is critically important to the developing nations and
the G20 countries, but particularly the least developed countries,
that there is a successful Doha Round. That will set the international
standards in terms of both agricultural and non-agricultural access
to other markets. It will then give us the opportunity to use
regional trade agreements in a very proactive way: first, to give
sustainability to aid-for-trade with the least developed and developing
countries; second, from the European Union perspective, to be
able to get better arrangements to bring down barriers to market
access in financial services and other services and a whole range
of issues to do with the environment, core labour standards, sustainability
policies and our ability to secure inward investment into key
countries and regions with certainty about how our investors will
be treated. Regional trade agreements will give added value. One
could sit back and say that Doha would be enough, but the truth
of the matter is that all major economies are currently engaged
in regional trade agreements. To give an example, South Korea
is a political ally of the United Kingdom and Europe. It has long-standing
trade, cultural and political relationships. It has been negotiating
for some time a regional trade agreement with the United States.
That agreement, if we are not careful, could undermine the interests
of our pharmaceutical, automotive products and financial service
industries. There is a whole range of issues to which we must
be alert. It is not just a matter of what regional trade agreements
we can negotiate to create trade opportunities for us; it is also
a matter of ensuring that in defensive terms other trade agreements
do not either inadvertently or deliberately undermine either Doha
or any legitimate bilateral arrangements that we have. Therefore,
RTAs are important, but to get them we need a proper framework.
That is what Commissioner Mandelson is doing at the moment with
us. We are setting out a timetable framework of what agreements
we can reach, what these RTAs look like and what we need to see
included in the packages for individual countries or regions,
whether it is Korea on the one hand or the ASEAN or Mercosur countries
on the other. All of them will be different because they cover
different types of economies. Some of the features will for obvious
reasons be the same, whether it is intellectual property rights
or whatever. I will send a note to the Committee on this because
over the next few months there will be some progress. As to EPAs,
I am happy to come back to the Committee at some stage to discuss
the whole concept and principle of economic partnership agreements.
These are in the main agreements reached with the Caribbean, Africa
and the Pacific island nations and they are all at different stages
of discussion and debate within the European Union. Some are reasonably
well advanced; some have advanced little; and some give rise to
difficulties, including negotiations with the European Union about
content and the lack of capacity for particular EPA regions to
negotiate appropriately. There are lots of issues, but I am happy
to come back at some stage and talk them through, because this
is very important in terms of aid-for-trade and sustainability
of trade. With many of the countries that we are talking about
we have a relationship either through the Commonwealth or the
fact that we have been on their side and given them open access
to the European Union.
Chairman: Minister, those are extremely
interesting and helpful context-setting answers which we appreciate.
Perhaps we can try to move slightly faster with the rest of the
questions. I know that you have a deadline; so do we. We also
appreciate your offer to come back, and we may well take that
up. We want to move back specifically to Brazil.
Q157 Miss Kirkbride: Earlier in your
evidence you implied that we did not really take Mercosur countries
and Brazil in particular seriously enough. Do you have any ideas
as to why that has been the case? What can British business do
to treat it more seriously? What is it about them that is not
cutting the mustard in those South American countries?
Mr McCartney: There is an issue
about companies' perceptions of Mercosur. I do not want to give
the wrong impression to companies out there who want to trade.
Getting companies to take seriously the potential of having trading
partners in Latin America has been difficult. One of the reasons
is that in the recent past there has been a whole range of issues
to do with some of the economies. There have been issues to do
with economic and political stability and the protection of intellectual
property rights and barriers and difficulties put in the way of
investment, access to trade and the scope of trade and commercial
co-operation. Having said that, I believe that the time is now
overdue for us to up our game. When I say that I do not mean simply
industry but that effort should be put in by Government. That
was why I was very keen when I got a response for UKTI to finalise
its strategy to ensure Brazil was one of the countries in our
champions' league of increased investment. That increased investment
is intellectual and is concerned with capacity building. We shall
be far more adept at providing on-the-ground help and support
for companies in the UK that want to trade, make inward investment
or seek a partner for trade and inward investment. We are keen
to work with our Brazilian counterparts, and that is why we have
set up JETCO, which we will come back to later in the hearing.
We are looking at sectors where we can have an expanding interest
and as a result some recent memoranda of understanding have been
drawn up. We also expect strong growth in areas like oil and gas,
education and skills, agriculture, aerospace, environment, healthcare,
biotech, security, engineering and financial services. We now
have both a trade and political infrastructure which, with resources,
can be sustained. It is a difficult market to get into, but so
is China and India. It is never easy, is it? I think that we now
have a framework with the resources available to industry to make
significant inroads in terms of both trade and inward investment
particularly in the economies of Brazil and Argentina.
Q158 Miss Kirkbride: What you have
just said chimes with what the Committee has been told about the
issues to do with trading with Brazil. Do you have any good examples
of where other countries have been successful and British companies
have missed out as a result? What have our competitors done that
we are missing out on?
Mr McCartney: Some of this is
cultural, and I do not say that as an excuse. There are some emerging
markets where because of our cultural relationships we have done
rather better than some of our competitors, but that is not the
whole story. Germany, Japan, Italy and France have long-standing
business and cultural communities in the big markets in South
America, and in the case of Portugal it has the advantage of language.
Despite the language advantage of Portugal, we have a greater
penetration than that country. Germany and Japan have significantly
large historical ties, but those have not been sufficient for
them; they have turned those ties into hard cash in terms of investment.
We have only about a 2% penetration in this marketplace. That
is ridiculously low given the capacity of the marketplace. We
must not use that as an excuse. In the same way, we have a cultural
relationship with South Asia, the Indian sub-continent, Hong Kong
and the mainland of China. If we fail to use that the opposition
will take the pants off us in the next decade. It is an advantage
but only if you build on it and improve your capacity to penetrate
a growing marketplace. Brazil and Argentina are emerging from
their economic and political problems and are also growing markets,
but over the next few years we have to make significant inroads
into the list of sectors that I have mentioned in terms of trade
and direct foreign investment.
Q159 Miss Kirkbride: In your evidence
to the Committee you frequently talk about Brazil, India and China
but not so much about Russia. Do you see these four countries
as being the BRIC moniker and something that is relevant? Do you
separate Brazil and Russia from India and China in terms of the
sophistication of their markets and the opportunities that might
be available as a result?
Mr McCartney: All of the countries
in what is called BRIC have their own differentiations in terms
of growth, size of market, size of labour force and the sectors
where they concentrate their efforts. All of them have different
challenges in terms of barriers to trade and inward investmentlegal
barriers and barriers to financial servicesand the security
of investments once made, and about relationships in securing
partnerships and access to marketplaces. One thing that unites
them all is that they will be substantial growth areas, not just
in the next five years but for decades to come. They all face
different challenges. For example, China's challenge is its ageing
workforce; India's challenge is to do with its youthful workforce.
India has a burgeoning consumer society. It has already taken
four million people out of poverty and it will take another four
million out by the end of the decade. The same goes for China.
The Brazilian market is different. Increasingly, the market trades
out of Brazil, but we see very little access to the UK and foreign
direct investment. For example, Brazil has made only about £77
million direct investment in the UK. It is such a small sum you
cannot identify specific projects, but they are all in the financial
services sector. Last year India made over half a billion pounds
of direct foreign investment in the UK, and that will build and
build. Therefore, there are different challenges facing different
markets. I am not quite sure that the concept of a synergy between
them is the right way to go. We have to treat all of them as massive
markets with different barriers but also great opportunities,
and we need to deal with them differently.
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