Speech ´The benefits of economic diplomacy´
Speech by the Netherlands Minister for Foreign Trade, Frank Heemskerk, on the occasion of the Clingendael Conference on Economic Diplomacy on 16 October 2009 in The Hague.
Ladies and gentlemen,
From the nineteen sixties to the nineteen nineties, the role of states in the world economy dwindled. In those years, multinationals grew to proportions that seemed to dwarf national states, which, according to some, were nearly rendered obsolete. Clearly, the tide has turned. Even our strongest companies increasingly depend on government support to open up business opportunities abroad.
Take, for instance, the development of the oil and natural gas fields in Russia's Yamal Peninsula, in which Dutch companies take a keen interest. To help promote their interests, the Dutch government pursued two courses of action. First, we initiated a partnership between such major companies as Shell, Gasunie, GasTerra, Boskalis and Van Oord, and various research institutes. Their
combined technological expertise makes a much stronger case with the Russians, in our experience. Second, a number of representatives of the Dutch government - led by the Prime Minister and the Minister of Economic Affairs Maria van der Hoeven - brought the Dutch industry's case to the attention of the Russian government and Gazprom.
The results? Russian and Dutch energy experts are now exchanging views on ways to sustainably exploit the energy resources in Yamal and in the Kara Sea. Dutch dredging companies have also already received orders for the first stage of preparation of gas pipelines. Van Oord announced that its contract amounts to twenty million euros.
So, ladies and gentlemen, my experience as Dutch Minister for Foreign Trade has shown me that governments play an increasingly dominant role in the world economy. This is particularly true of sectors that are of vital importance to my country, such as water management, energy, port development and medical devices.
The growing role of governments is the result of dramatic power shifts taking place in today's world. It's a response to the rise of countries with a strong centralised government, such as China, Russia, India and Brazil.
The financial and ecological crises further promote the trend toward increased government involvement in the world economy. How does this translate into practice? As the international economist and economic diplomat of the Dutch government, I would like to share some of my experiences in the field with you today. But allow me first to touch on economic theory.
I know this is a bold move on my part, considering that some of the world's best researchers in this field are present here today. But I will nonetheless take the risk.
Economic theory
I received my training as an international economist at the University of Amsterdam. Before I took on this job, I thought this would be the best preparation for addressing international trade issues.
It wasn't, at least not entirely. In fact, my formal training in international economics did not enable me to fully grasp how trade works. Why? Because, as you know, standard economic models generally disregard the impact of economic diplomacy.
[I agree with Bhagwati, with whom I recently met, when he says: "How can we possibly explain what happens, unless we bring in the political equations into our modelling?" Unfortunately, most textbooks on international economics leave out politics.]
According to the theory on international economic exchange, which finds its roots in Ricardo's "Principles of Political Economy and Taxation", countries are to specialise. At the same time, they should avoid subsidies and other government policies that - in a first-best world - reduce prosperity.
This is all well and good in theory, but we all know that our world is not "first-best". Subsidies do exist, and governments do play an increasingly dominant role in the world economy.
Is this bad? Ricardo thought so, but many disagree nowadays. So do I.
Take the measures governments are implementing to respond to the current crisis and stimulate the economy. They prevent the global economy from slipping into an even deeper recession. At the same time, many governments have joined forces to resist protectionism and protect free trade. This is to say that governments can indeed positively impact trade!
The need for more government involvement is not solely the result of the latest financial and economic crisis. It also stems from the food crisis, the growing pressure on raw materials, and the steadily increasing role of emerging countries in the world economy.
As former communist states become more market oriented, they acquire an increasing share of world trade. Asia's trade is expected to account for no less than 36 percent of world trade in 2025. At the same time, the EU will see its share of world trade shrink from 40 percent in 2004 to 23 percent in 2025.
The role of governments in the world economy will likewise increase. Even though former communist states have come a long way in terms of market orientation, their current governments are in no way letting go of their economic power.
I witness that all the time. In China, for instance, the Chinese counterparts of Dutch companies are often linked to the government.
This has a dramatic effect on trade. Cultural and institutional differences are becoming increasingly important factors in directing trade flows. As the critics of Thomas Friedman say: "the world is not flat". Consequently, governments need to invest increasingly in
raising mutual cultural and institutional understanding, in order to open markets that would otherwise remain closed to their companies.
The growing role of government will increase the complexity of international trade in the foreseeable future. This also lays the ground for a more intensive role for economic diplomats such as myself.
I know what the sceptics say. How on earth can you measure the impact of economic diplomacy? Does all this wining-and-dining, handshaking and talking really pay off? Are tax euros spent on economic missions, euros well-spent?
The cost-benefit analysis demonstrate that mainstream economic models are indeed incomplete when they disregard the impact of economic diplomacy. Most of you probably agree.
Practice
ut enough about economic theory. Let me turn to the practice of economic diplomacy and my experiences as the Dutch Minister for Foreign Trade. What does my job entail in practice? To me, economic diplomacy means using my political influence and contacts at both the bilateral and multilateral level to:
- promote trade,
- facilitate foreign investment by Dutch companies,
- stimulate investments by foreign companies in the Netherlands,
- and reduce the risks involved in cross-border transactions for Dutch companies.
I have led twenty-five large-scale economic missions over the past two years, as well as various smaller ones. I have visited a wide range of countries, including Vietnam, South Africa and Mozambique. My primary focus, however, has been on key emerging markets such as China, India, Brazil, Russia, Turkey and the Gulf Region. I will lead my fourth mission to China next month.
Why focus so much on Asia? The main reason is that our trade and investment flows do not yet reflect the dramatic shifts in global economic power taking place today. The bulk of Dutch trade continues to involve other European countries. This pattern could jeopardise our welfare, as the emerging economies in Asia are currently the most dynamic. Asia is now the region where most business opportunities arise. So businesses need to pay more attention to that part of the world. But they can't do without
government support at the highest levels.
It's a paradox that the need for government support is felt most keenly in sectors in which the Dutch have a comparative advantage, such as port development, water management, sustainable energy and medical devices. Those sectors are gaining significance in
emerging markets. If we want to retain our competitive edge in those areas, the Dutch government needs to play its part.
I have experienced how effective economic diplomacy can be. In countries such as China, Russia and Brazil, I can open doors that would otherwise remain closed, and help companies compete for contracts that would otherwise remain beyond their reach.
Allow me to give you three examples.
Shortly after Hurricane Katrina and Hurricane Rita struck, we established trade missions to Louisiana and publicprivate partnerships to jointly promote the Dutch approach to water management. The benefits have been substantial. Many Dutch firms and engineers, scientists and researchers are now helping to protect not only Louisiana, but also Mississippi, California and Florida against new floods. The engineers from Arcadis - to cite just one example - received 150 million euros in contracts in 2007.
A second example of effective economic diplomacy is the way in which the Dutch government and private companies worked together to promote Dutch know-how and acquire a stake in the 5,5 billion dollar project to enlarge the Panama Canal. As a result, the Dutch consultancy group DHV is now advising the government of Panama; the Dutch engineers of Iv-Groep won a 30 million dollar contract to design the canal's massive new lock gates; and the Dutch firm Heerema is going to construct them. Sixteen gates -30 metres high, 58 metres wide and ten metres thick! All Dutch!
At this very moment, 23 companies are wrapping up a mission in Panama to win subcontracts - a mission that my ministry supports. I will receive Panama's Vice-Minister of Trade next month.
The third example involved the creation of a level playing field for the Dutch express and mail delivery services company TNT in New Zealand. In this case, the problem was not getting a seat at the negotiating table for a contract, but changing a new law that put new entrants on the postal services market at a disadvantage.
The Dutch embassy in Wellington, instructed both by my ministry and the Ministry of Foreign Affairs, forwarded a letter by TNT to the New Zealand ministers concerned. The results? The new law was amended, and its negative consequences for TNT greatly diminished. In this case, economic diplomacy was crucial for a Dutch company to secure its position in a developed market.
Slot
Ladies and gentlemen,
In light of such examples, it will not surprise you that I have become an even stronger advocate for economic diplomacy than before I got this job.
I am the economic diplomat of the Dutch government, but I am certainly not the only one. Many of my colleagues in the cabinet, including the Prime Minister, are practicing economic diplomacy.
What's more, economic diplomacy goes well beyond ministerial travels. Much of our international effectiveness is due to our extensive network of embassies, consulates and business support offices. I am also supported by a "crash team" in The Hague, which responds to unfair competition abroad. And I am assisted by professionals to effectively promote Dutch economic interests and maintain contacts with Dutch and foreign CEOs and diplomats.
I believe the benefits of economic diplomacy for Dutch businesses and society as a whole are substantial.
I already told you that the net gains of economic diplomacy are estimated to be at least 100 to 200 million euros a year. I could have also told you that Pascal Lamy estimates that the gains of a WTO deal at Doha to amount to 160 billion dollars world-wide, and no less then three billion euros for Holland alone.
Holland is a small country that means big business. We have a very open economy. Trade is vital for us. However, our companies will increasingly do business in government-dominated markets in Asia, Russia, Brazil and the Gulf, as well as in government-dominated sectors such as water management, energy and port development. Consequently, we need to increase our economic
diplomatic efforts in order to retain a strong economic position and a competitive edge. I think politicians, business people and the public do not yet fully grasp nor recognise how important this is.
I hope that your efforts here at Clingendael, but also at other scientific institutes around the globe, will contribute to a better understanding of the importance of economic diplomacy in the international economy. In doing so, I believe you would be making a major contribution to global prosperity, and make my job as a politician easier.
Thank you.