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British Ambassador Sir Nigel Sheinwald in Chicago raises concerns over U.S. "Buy American" provisions

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British Ambassador to the U.S. Sir Nigel Sheinwald, was Chicago on Monday, delivering a speech titled "Britain, America and the Global Economic Recovery." In it, he raises British concerns--shared by Canada, the largest trading partner of the U.S.--over "Buy American" provisions in economic stimulus spending and warns of a possible backlash.


"But these are tough economic times. The recession has cut consumer demand around the world, leading to a severe drop in trade flows. The World Trade Organisation estimates that trade will decline by 9% this year, which is the single largest year-on-year contraction in the post-war era. Cities like Chicago, where trade has created jobs, business revenues and taxes, have suffered as a result.

Falling global demand is bad enough. But it is in danger of being compounded by protectionist sentiment. There are pressures around the world to build barriers to trade or other forms of protectionism, which become so much stronger during a downturn. As my Prime Minister wrote in the Wall Street Journal in May, there is a danger that "a banking crisis has become a trade crisis."

Britain, America and the Global Economic Recovery

Speech by Sir Nigel Sheinwald

British Ambassador to the United States

The Ballroom, Trump Tower

Chicago, 9 June 2009

It's a real pleasure to be visiting Chicago again; and a particular pleasure to be able to speak to you in one of the city's most dramatic new buildings.

I was able yesterday to visit another extraordinary new building: the Modern Wing of the Art Institute. And this morning, I visited one of your most venerable - though equally dramatic in its way - the trading floor of the Chicago Mercantile Exchange.

Both speak to the enduring vigour and ambition of this great city, in this, the 100th Anniversary year of Daniel Burnham's plan for Chicago. "Make no small plans" remains as true a motto today as when he coined it.

My last visit here, just over a year ago, was to attend the British American Business Council's annual transatlantic conference, which was being hosted here in the city; so I'm pleased this to welcome so many BABC members, and thank you for your contribution to the strength of the UK-US relationship.

On June 6, the New York Times carried a front page article about trade policy.

The story went over the President's election campaign and how he had set down the limits of trade protection.

It outlined how his supporters had stuck to that line, despite the efforts of others to represent them as seeking to destroy American industry. And how the protectionist cause had largely given up its attempt to enlist the President in the struggle.

But this wasn't this week's June 6. It was the June 6 1909, a hundred years ago this week. And the President was President Taft, not President Obama

The impetus for the story was a controversial speech on trade by William Taft's Secretary of the Treasury, Franklin McVeagh, made here in Chicago. Trade was a hot topic even then.

The issues in the newspaper a hundred years ago are strikingly contemporary.

The proper role of government in regulating markets. The proper role of government in creating and protecting jobs.

I'd like to concentrate today on how these issues are playing out as Britain and America strive for recovery from the severe downturn that began almost two years ago.

In a little over three months from now, in Pittsburgh, the G20 leaders will meet for the third time in a year. The previous two G20 Summits - one in Washington and then one in London in April - played an important role in setting out a clear and comprehensive international policy response to the economic crisis. I was fortunate enough to be at them both.

It's easy to dismiss international summitry as political theatre. But that would be unfair to these Summits. Last autumn one of the symptoms of the crisis was an apparent collapse of international co-ordination. We lacked a framework for working on a multi-faceted international response. The UK always believed it to be vital that national measures, aimed at restoring lending and repairing the financial system, did not encourage a retreat into domestic financial markets. The way forward was more, not less, co-operation.

The outcomes of the Washington and London summits emphasised the benefits of working together. That a global crisis required a global response.

The London Summit not only agreed the need for urgent action to support the global economy. It also agreed on additional resources for the international financial institutions to help those countries that would otherwise be overwhelmed.

The Summit also looked ahead. It made the first steps towards a framework for the future of the world economy such as through the new Financial Stability Board.

The next step after London is going be the tough part. Implementation. I want to highlight two particular areas where - as they say - the proof of the pudding will be in the eating. Financial regulation, and trade.

On financial regulation, we must ensure that policies are put in place that restore confidence and renew financial markets for the future.

It's difficult to argue in black and white terms that lack of regulation as such caused the financial crisis. After all, the most affected sector has been the banks - the most regulated part of the financial system. Instead, low interest rates encouraged financial institutions to increase borrowing and to invest in new highly complex products. With hindsight, it is now clear that there was insufficient understanding and monitoring of the resulting risks by the private sector and others.

Until the crisis struck, our approach was based on an overt philosophy that markets are in general self-correcting. That market discipline is effective. And that management and boards are better placed than any regulator to identify business system risks.

But, as Alan Greenspan testified to Congress in October last year, this model was flawed.

Learning the lessons of the crisis, our watchwords for the future should be better and smarter regulation, and not regulation for the sake of it. Better oversight of banks. Smarter capital requirements. Better checks on the system as a whole.

Smarter regulation means creating incentives so that executives pursue long-term gains, not short-term profits. It means establishing a system of international co-ordination to spot potential issues before they blossom into crises.

Here in the US, Congress is holding hearings on the future of financial regulation. Treasury Secretary Geithner has been developing his proposals.

In the UK we are in the process of laying out the regulatory changes we would like to see. Our Treasury will shortly publish a White Paper on the details. Although the UK's detailed proposals are still to be finalised, it is fair to say that they will be informed by a Review written at the request of the UK Treasury by Adair Turner, Chairman of the Financial Services Authority. In his Review, he sets out a number of core objectives for reform. The banking system of the future should operate with more and higher quality capital, reducing its vulnerability to shocks.

Most importantly we need to make the banking system a shock absorber in the economy not a shock amplifier. That requires actions to ensure the capital regime is counter-cyclical, not pro-cyclical. Capital buffers built up in good times should be drawn on in economic downturns. Turner also notes that it is essential that we regulate according to economic substance not legal form. That we do not again allow off balance sheet vehicles to run large risks without adequate controls, or investment banks to escape constraints. If an activity looks like a bank and sounds like a bank, we should regulate it like a bank.

In addition our regulatory approach should be focused on the big picture. That is why the G20 rightly recognised the need to amend our regulatory systems to ensure authorities are able to identify and take account of macro-prudential risks across the financial system. These systemic risks fell into a gap - or what Paul Tucker, the Deputy Governor of the Bank of England has labelled the "underlap" - between regulators and supervisors.

Finally, approaches to systemic oversight have to change. In Adair Turner's words: "In this area, bluntly, regulators across the world took their eyes off the ball, focusing too much on the intricacies of capital regulation." In other words, regulators got so immersed in the details that they couldn't see the whole system was fragile.

In the UK it will be crucial to ensure that the areas of responsibility between our central bank, financial regulator and treasury are clearly defined.

With around 70% of the FSA's policymaking effort driven by European initiatives, active engagement with Europe is essential on financial stability issues. But there is a perceived mismatch between the level of European integration of EU financial markets and the national organisation of supervisory responsibilities.

That is why the European Commission has published proposals for action at a European level. The proposals present the opportunity to enhance and improve European co-ordination. One of the proposals is to establish a European Risk Council, where risks that span countries can be considered together. The UK will study the Commission's proposals and will work with European partners in the coming months to discuss the detail. In particular the UK looks forward to taking things forward at the June European Council.

At the global level, we need to ensure that institutions like the IMF have the robust independence to do excellent macro-prudential analysis. To criticise if necessary the policies of major economic powers, and to challenge conventional wisdom.

The challenge with global banks is that we have a global financial system but no global government. And that mismatch is not going to entirely disappear. But we need to ensure as much global co-ordination and co-operation as possible. As the Governor of the Bank of England has noted: "Firms are international in life but national in death."

Our regulators are working to establish more supervisory colleges for significant cross-border firms. We support an initiative by the Financial Stability Forum - now Board - to ensure that we have contingency plans in place for a globally co-ordinated crisis response.

One positive to emerge from the crisis has been the opportunity to have an honest debate about the kind of capitalism we want in the future. I'm optimistic that we will be able to take advantage of this once-in-a-generation chance. And optimistic that the innovation and industry at the heart of our economies will

enable us to bounce back.

The UK is committed to our financial services industry while embracing the need for regulatory reform. We are convinced that a reformed financial services sector will play an important role in Britain's economic recovery.

London is the world's leading international financial centre. Companies choose to locate in London because of the city's unrivalled concentration of capital, capabilities, and a financial infrastructure that is robust enough to deal with the scope and scale of trade in today's global financial markets.

Over one third of all Fortune 500 companies have based their European headquarters in London. London is one of the most open markets in the world and there are over 20,000 overseas-parented companies; 250 foreign banks; and 200 foreign law firms operating in the city.

London has some unique advantages. English. A respected legal system. A highly skilled workforce. An open investment regime. Ease of doing business. Even the right time zone, sitting between the Asian afternoon and the American morning.

As a result of all these factors, the UK hosts more international firms that any other country.

Some myths have gained currency as the crisis has developed. That financial services occupy a disproportionate share of the UK economy. That financial services play little part in the "real" economy beyond London. And that all financial innovation is of little economic or social value.

None of this is true.

Financial services account for around 10 per cent of the UK economy. A large share, yes, but hardly a dominant one. Instead the UK is a diverse and varied economy, with strengths in many industries and markets. And there is a significant financial presence throughout the UK which lends to and works with businesses and households nationwide. History shows that financial innovation has been a critical and persistent part of the economic landscape over the past few centuries with a rich contribution to our standard of living from things like ATM machines, credit and debit cards and the growth of venture capital.

It is in the UK's long-term and strategic interests to ensure that - subject to effective regulation and supervision - the financial services sector is improved and strengthened, thereby maximising its contribution to the British economy.

So London is, very much, still open for business.

My second theme is the importance of international trade to the prospects for recovery. The G20 leaders recognised this, pledging to promote global trade and investment and to reject protectionism.

Trade binds nations together, and there is no better example than the United States and the United Kingdom. Our two countries enjoy one of the strongest bilateral trade and investment relationships in the world and a uniquely strong political alliance.

In trade, the US is the United Kingdom's top export destination and its second-largest trading partner. The UK is the United States' sixth-largest trading partner.

In terms of investment, British companies are the largest foreign investors in the US. British investment supports nearly one million American jobs with average pay over 30% above the US average. These are high-value jobs. Similarly the US is the largest foreign investor in Britain, where American companies employ more than one million people.

But these are tough economic times. The recession has cut consumer demand around the world, leading to a severe drop in trade flows. The World Trade Organisation estimates that trade will decline by 9% this year, which is the single largest year-on-year contraction in the post-war era. Cities like Chicago, where trade has created jobs, business revenues and taxes, have suffered as a result.

Falling global demand is bad enough. But it is in danger of being compounded by protectionist sentiment. There are pressures around the world to build barriers to trade or other forms of protectionism, which become so much stronger during a downturn. As my Prime Minister wrote in the Wall Street Journal in May, there is a danger that "a banking crisis has become a trade crisis."

Much of this has to do with what the experts call 'water' - the difference between legally binding tariff levels and actual applied tariffs, which are often considerably lower. Because there has been no WTO world trade deal for more than a decade, many countries could raise the tariffs that they have lowered over the last ten years. This would not technically violate their trade commitments, but it would quickly cost the global economy billions of dollars. One estimate suggests by as much as 700 billion dollars.

An even bigger concern is the wide range of hidden, or non-tariff barriers, that countries can be tempted to introduce in times of trouble. According to the World Bank, since the London Summit 2 months ago nine G20 countries have imposed or are considering twenty-three new protectionist measures. These are on top of at least forty-seven trade-restricting measures imposed around the world after the G20 Summit in Washington in November.

These have taken the form of subsidies and other support packages rather than old-fashioned tariffs. What is more, the use of so-called 'trade remedies', such as safeguards and antidumping policies, to restrict imports has grown. In the first quarter of 2009 we saw a 15% year-on-year increase in the imposition of duties related to trade remedy investigations and a 19% increase in new investigations. These figures are likely to continue to increase though 2009.

I highlight these facts to remind you that wealth creation via our globalised economy has not come about by accident. It is the result of a collective choice for openness. Now more than ever, we have to resist. Protectionism doesn't protect. In the long run it just makes things worse.

It is imperative that the G20 countries, which together comprise 85% of the global economy, think internationally as they act nationally to help their economies through the downturn. In London, G20 leaders made important commitments to shore up international trade.

They committed to refrain from raising new barriers to trade or investment. To refrain from imposing new export restrictions. To refrain from implementing measures which are inconsistent with WTO rules to stimulate exports.

Part of the downturn in trade flows can be explained by a lack of available credit to finance international trade transactions. To this end, leaders at the London Summit agreed to provide $250 billion in trade financing over the next two years. And we must be ready to go further if more money is needed.

The WTO was mandated by the G20 to monitor and report quarterly on countries. This has undoubtedly helped. But as I have mentioned there remain causes for concern.

No one is blameless - the EU's recent re-imposition of export subsidies for dairy products was a regrettable step. Here in the United States, there are some worrying signs too.

Let me start with the controversy over 'Buy American'. It is clear from the Congressional language that British and other European companies, together with those from other developed countries like Canada and Japan, should be free to compete for contracts in each of the 37 US states which have signed the Government Procurement Agreement. However, the danger is that some officials interpret the Buy American provisions as simply banning all foreign companies or foreign-made goods. We will be monitoring this issue very closely and will want to see federal, state and local authorities held to account, to give US citizens, and UK businesses, the best deal.

We have no equivalent 'Buy British' requirements for government procurement in the UK. Shutting out foreign competition sends a bad message on how open markets are valued in the United States and will often end up with taxpayer money going less far. Building one fewer school. Two fewer bridges. It all adds up.

The US also stands to lose much from international retaliation over government procurement rules. According to an editorial in the New York Times last week, Buy American provisions protect about 9,000 jobs. But foreign government procurement of US products supports 650,000 jobs - jobs that could be lost if other countries implement their own 'Buy National' provisions.

I would like to highlight another sector that has had less attention. Aviation.

The next phase of the EU/US talks on aviation liberalisation starts this month. The aim is much more liberal rules on ownership and competition. But will the atmosphere be conducive?

For example, the FAA Re-authorisation bill recently passed by the House would place onerous certification conditions on foreign repair stations handling US commercial aircraft. These would mean that the only realistic option would be for American airlines to do all repairs in the US. This is completely unnecessary - there is already a detailed EU/US agreement on common safety standards in this area. Why tear it up? It also seems wrong-headed when you consider that there are almost four times the number of EU repairs carried out by US personnel in the US, and thousands of EU pilots trained here. All that would be put at risk by this heavy-handed measure. This much greater number of jobs would be lost to the US economy. It is this sort of creeping protectionism that we must guard against.

I want to finish by going back to 1909. A hundred years ago, President Taft was having a tough time of it. He tried to square too many circles, pleasing no one. He ended up signing the Payne-Aldrich Tariff Act of 1909 that kept tariffs high.

Taft's Presidency coincided with the final hurrah of the first period of globalisation. It was, after all, only a small step away from an open and global approach. But those small steps and departures continued for twenty years. Until a more notorious tariff act, one written by Senator Smoot and Representative Hawley, helped pushed the US and the rest of the world further into recession and then depression.

The damage done by Smoot-Hawley took a long time to undo. Everyone now agrees that "protectionism" is a bad thing. But, like Taft, some today would bend an ear to those who claim they are "seeking to destroy" this or that industry. It is clear that eternal vigilance will be the price of open markets. We cannot let those who would restrict trade and investment be the loudest voices heard in this debate. We must not retreat behind national borders and move to "deglobalisation" precisely at a time when we need the benefits of openness more than ever.

So, let me conclude by offering five thoughts.

One. The financial crisis and recession are causing huge suffering.

Two. Our leaders know it. And they are taking action to fix it. But it is not easy.

Three. Fixing financial regulation is essential and will help prevent this from happening again.

Four. We must keep markets open, promote trade, keep investment flowing and stand up and be counted on this issue.

Five. The underlying strength of our economies, based on innovation and openness, will ensure the future success of centres such as London, New York and of course Chicago.

Thank you.

1 Comment

Thanks, but no thanks your majesty.


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Lynn Sweet

Lynn Sweet is a columnist and the Washington Bureau Chief for the Chicago Sun-Times.

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This page contains a single entry by Lynn Sweet published on June 8, 2009 8:53 PM.

Burris asked to resign by Washington Post. So what else is new? was the previous entry in this blog.

President Obama official schedule and guidance, June 9, 2009. Focus on tax and spending is the next entry in this blog.

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