November 28, 2006
hp-178
Remarks Prepared for Delivery by Treasury Secretary
Henry M. Paulson
before the Confederation of British Industry Annual
Conference
London– Thank you, Gordon. I greatly appreciate the opportunity to spend time with you discussing issues which are vital to the international economy. In my previous job I spent much time in London, which is one of the world's great financial centers. I'm grateful to Sir John Sunderland, Richard Lambert, and the CBI for your warm welcome.
The United States and Great Britain have enjoyed a close bond for many years. This relationship is built on a foundation of shared principles and values rooted in individual, political, and economic freedom. Among these are strong support for free markets and confidence in the power of trade and commerce to improve lives.
Today we've had a good discussion about the issues we will face in the months and years ahead. We have discussed income distribution in our two countries and around the world. We have discussed strategies for maintaining and improving the strength of the global economy, and the economic condition of its people. And we agree that keeping the global economy strong depends to a large extent on our ability to promote competitive capital markets around the world and our success in reaching a comprehensive agreement in the Doha trade negotiations.
We are fortunate to face our long-term challenges from a position of strength. As a participant in financial markets for more than 30 years, I say with confidence that over the last couple of years, the world economy has been stronger than I have ever seen it.
Growth in world GDP is expected to be 5.1 percent this year, stronger than the average of the last 25 years. Furthermore, gains in GDP are not being eaten away by price spikes. Inflation for 2006 will be under 4 percent, compared with nearly 14 percent in the previous two-and-a-half decades. And perhaps most importantly, economic growth is broad-based. In fact, the IMF projects that GDP will decline in only four out of 181 countries this year.
Stable, non-inflationary, broad-based growth is the best way to improve living standards around the world. Now how do we keep this strong global economy moving forward?
Our modern economy is more interconnected than ever before. This is the result of decades of efforts to strengthen multilateral institutions and lower barriers to trade and capital flows. The rapid pace of technological change also brings us closer.
Our interconnected economy is aided by capital markets, which put money behind job-creating ideas in every sector. This generates a positive spillover effect, with strong financial markets spurring growth in everything from technology to manufacturing to services. Every healthy, balanced economy in the world has strong and competitive capital markets.
The United States and the UK have had well-developed, highly efficient markets for many years. And both serve as an example to the rest of the world. U.S. financial sector deregulation in the 1980s led to an explosion of new services and financial instruments, making the United States the world's leader and innovator in financial services, including mergers and acquisitions advice, securitization skills, derivatives, high-yield debt financing, and hedge funds.
Similarly, the UK experienced the benefits of deregulation 20 years ago with the Big Bang. Today, London attracts vastly more foreign investment than it did prior to deregulation, and it offers investors a wide variety of financial instruments. And your markets place a strong emphasis on innovation, competition, and the use of technology to increase efficiency.
As friendly competitors, New York and London push each other to be more innovative, more efficient, and more responsive to changes in the marketplace. Investors are the clear winners in this competition, as they have more choices about how to earn positive returns on their capital.
These innovations, combined with technological developments, make it is easier than ever before to make investments across the globe. British investors aren't limited to London, just as Americans aren't tied to New York. And our two markets capture investment capital from every part of the world.
As the world's largest investor and largest recipient of international investment, the United States has a key stake in promoting an open and stable investment regime. President Bush continues to work with Congress to maintain an economic and political environment that is welcoming to investment, both foreign and domestic. We understand that markets which are open to investment and capital flows are enriched by them.
Today we see emerging markets in Asia, Latin America, and parts of Europe that are opening themselves up to capital flows. More countries are recognizing that competition in all markets lowers costs, and a lower cost of capital means more growth, more jobs, and higher living standards.
A great deal of innovation is taking place in the international capital markets, which are in many ways laboratories of capitalism. A number of securities exchanges and markets in the U.S. and Europe are aggressively embracing technology and developing innovative business models that increase efficiencies. These markets are also developing their own standards and protocols for regulating commercial activity. A number of these approaches are excellent, and in the U.S., we will be open-minded about how ideas implemented by others might prove beneficial to us. Policymakers and regulators alike are constantly examining the dynamic marketplace and reviewing our policies to ensure we maintain both the integrity and the competitiveness of our financial markets.
In two weeks, I will travel to Beijing for the first session of our recently initiated Strategic Economic Dialogue with China. We will encourage China to accelerate the development of their financial markets infrastructure in order to support sustainable economic growth – growth that will bring benefits to many nations.
We should applaud successes in markets around the world, because in today's interdependent world, exports and employment opportunities in our two nations are affected by how well our major trading partners are doing. When any major economy does well, its growth benefits the overall global economy. When a major economy falters, it is a drag on global growth. The Asian Financial Crisis of 1997 may have reduced growth by as much as 1 percentage point in the United States and Europe. The Russian default in 1998 led to a sudden widening in credit spreads and a financial shock which contributed to the failure of the hedge fund, Long Term Capital Management, in the United States.
There are no islands of economic stability in today's world. Globalization and interdependence are here to stay. No nation can turn back the clock, so the imperative is to find ways for all nations to benefit together.
Economic integration makes economies more efficient, more productive, and more competitive. Integration gives businesses greater access to markets around the world, and increases their ability to achieve economies of scale. Global markets give consumers more choices. And global competition helps reduce the prices of goods and services – a real benefit to those with lower incomes, whether in the United States or abroad.
Today, the nations of the world have a tremendous opportunity to create freer markets in many sectors, through the Doha Round of trade negotiations.
Nothing would be more beneficial to global economic growth than a successful Doha agreement.
It is difficult to overstate the importance of these discussions. Global trade agreements are only on the table every 12 years or so. Representatives from many nations have already invested years of effort toward reaching accord on a variety of issues. The United States Trade Representative, Susan Schwab, regularly meets with her counterparts in bilateral negotiations around the world, and these discussions are fruitful. Now, we must build on that progress with the goal of getting a final deal done.
The United States has a strong track record of negotiating successful bilateral trade pacts. We also strongly support the WTO, and the multilateral framework for trade agreements. A successful Doha Round is crucial to the success of the WTO.
Why is trade so important? Simply put, free trading nations have access to an enormous flow of goods and services. In 1980, international trade flows totaled 41 percent of world GDP. By 2005, this ratio increased to 57 percent. And this year, the number is expected to be 60 percent.
Nations that are open to trade have vastly stronger economies than countries that close themselves off. By keeping our markets open and convincing others to do the same, we can generate growth that will benefit all parties, narrowing the gap between rich and poor in our own countries and among the nations of the world.
When foreign markets grow and foreign economies prosper, our businesses have more outlets for their goods and services. And by expanding their business into other markets, our domestic companies can become more efficient. With more outlets for selling abroad and greater efficiencies, U.S. and UK companies have more opportunities to succeed. Success translates into more jobs and higher incomes for American and British workers, as well as for foreign workers employed by our companies.
Despite the known benefits of trade, the protectionist sentiment that is rising in our two nations and elsewhere around the world is predicated on a false perception that trade harms our economies. The lesson of the last 25 years is that those nations which have opened themselves up to greater integration with the global economy have prospered, while others have been left behind. Nonetheless, at a time when global prosperity is at or near an all-time high, protectionist sentiment appears to be increasing.
It is true that openness to competition can result in job losses in some areas. We have a responsibility to help people acquire the education, skills, and training they need to compete in a globally integrated economy.
But we must not, in the name of a few jobs today, eliminate many more jobs and higher incomes in the future.
Protectionist policies do not work and the collateral damage from these policies is high. Jobs saved in the short term are offset by more job losses and a lower standard of living in years to come.
We should confront protectionist rhetoric with facts. It is a fact that trade improves wages and creates jobs. One study suggests that if post-Uruguay Round trade barriers were removed, global wages would rise by $1.9 trillion – including increases of $512 billion in Europe and $537 billion in the U.S. Other studies indicate that U.S. employees of multinational firms earn wages and benefits that are 18 percent higher than employees of purely domestic firms. Another report shows that nearly 42 percent of U.S. workers are employed by a company that engages in global trade. This implies that more than 56 million American workers today work in jobs that depend on trade.
These are the benefits that isolationists believe we can do without.
We cannot allow protectionist elements to stifle our growth, limit our opportunities, and dictate the terms of our engagement with the world. Giving in to protectionist sentiment would send a terrible signal. We would be telling developing nations that while we have benefited from increased trade, we aren't going to allow them the same opportunity to develop. We would effectively be relegating countless people to the status of a perpetual underclass, with little income and few opportunities for advancement. That is not only bad policy, it is morally wrong.
I can assure you that this month's elections have not altered the U.S. commitment to achieving a successful outcome to the Doha Round. The Round continues to be our top trade priority. We won't wait to raise this at the next heads of state summit. Ambassador Schwab is traveling extensively, and ready to meet anytime, anywhere. She and other senior U.S. officials are continuing to have quiet conversations with various trading partners to explore some "what ifs" and test new ideas.
We need to be clear on what constitutes a Doha "success." It can only be an outcome that generates meaningful new trade flows in agriculture, manufacturing, and services.
To succeed, these negotiations need to produce benefits for all nations and all sectors. The focus has been on agriculture, which has been a sticking point. Reducing agricultural subsidies and opening markets can create growth opportunities for millions of people across the globe, especially in developing countries. Just as vital to the economic growth of our nations is trade in manufacturing and services. In particular, opening up financial services markets to foreign competition can bring great rewards to every nation.
The stakes of the Doha trade round are huge. And they transcend the purely economic. Closer economic ties between nations help promote international peace and prosperity by creating common interests and raising the costs of conflict. In fact, the greatest threat today is not from conflict between states, but from instability within states, and from those states, like North Korea and Iran, which are not prepared to abide by international standards of conduct, including WMD proliferation and terrorism.
A successful Doha trade pact will reinforce the world's commitment to working in an international framework to advance a common agenda.
Chancellor Brown and I believe a Doha agreement that benefits everyone is within our reach. We all need to work together to find that agreement.
The global economy is in a period of exceptional growth. People around the world are enjoying higher standards of living. The task before us is to build on this strength as we move deeper into the 21st century. Strong, competitive markets will be a foundation for continued growth. And freer trade among nations is the way to help spread prosperity to every corner of the world.
The work ahead is not easy. But it is essential. In the United States, President Bush has set as a high priority achieving a successful Doha Round, and I will proactively work to help Susan Schwab and other members of the Administration do just that.
I appreciate having a strong partner in Gordon Brown. Together, the United States and Great Britain can lead the world toward a more prosperous future.
Thank you very much.