Select Committee on Trade and Industry Minutes of Evidence


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 view—not because we are empty-headed—in 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 investment—legal barriers and barriers to financial services—and 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.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 16 July 2007