Karel De Gucht, European Commissioner for Trade: "More inequality through free trade? I don’t believe it"

For some time now, Karel De Gucht has been a true believer in the benefits of free trade. This view is still apparent when we met in the Berlaymont building, the European Commission’s headquarters and where he, as Commissioner for Trade, holds office.

I remember a short discussion at the Belgian Embassy in Hong Kong during the World Trade summit of 2005. Karel De Gucht was not impressed to discover that between 1945 and 1980 Belgium too had financed its progress through a self-controlled financial sector (in part by way of an extensive list of public credit institutions). Therefore it was no surprise that developing countries, to the great displeasure of the Europeans, were not prepared to open up their own financial sectors.

De Gucht stayed true to his beliefs. Even the IMF’s admission that trade results in more inequality within rich countries does not make him doubt that more trade is good.

You are Commissioner for Trade, yet you don’t make the news in our country. Am I correct in summarising that your job is to defend European trade interests?

Karel De Gucht: Contrary to national ministers of foreign trade, I do not promote trade. I handle negotiations at the World Trade Organisation, trade defence mechanisms such as anti-dumping procedures, policy with regards to intellectual property rights and bilateral trade agreements. In fact, I am responsible for external European policy.

Does this mean that Member States no longer have any influence regarding trade?

Karel De Gucht: Not directly in any case. However, that does not mean that the Commission decides on its own: the European Parliament and the European Council also vote on the issues.

Despite this, it seems that powerful national politicians sometimes undermine your work. Chancellor Merkel informed China that a complaint by a German solar panel producer would be better handled through talks than via the European complaints procedure – meaning you? How would you respond to that?

Karel De Gucht: I take note of that. I cannot stop anyone having an opinion on such matters, however they can and will not undermine our work. The procedure is what it is: we receive a complaint from the sector and we consider whether or not it is serious and just. If that is the case, we open it to broader investigation. That is our function and we carry it out very meticulously. The investigation surrounding the solar panels has been opened in the meantime. If it turns out that this is indeed a dumping case, we will take measures against it.

Isn’t it difficult, given European diversity, to forge trade agreements which are interesting for all Member States? Paul De Grauwe recently notified me of Portugal’s difficulty in selling anything due to globalisation. China now produces anything Portugal used to make much cheaper.

Karel De Gucht: There is no reason why a country such as Portugal wouldn’t be able to specialise in manufacturing products which are in demand.

But a country will be in difficulty if it hasn’t done that and is now part of a union that makes agreements which are not necessarily compliant with said country’s interes

Karel De Gucht: Often it is stated that the EU is not competitive. That is not correct. Globally speaking, the EU does not have a competition problem. For example, we have a surplus of €250 billion for industrial and agricultural products, and €50 billion for services. We are fortunate to have this as we have to import enormous amounts of fuel and resources. Our problem is that there are large differences between Member States. Look, I am convinced that we will resolve the euro crisis but it will never be a permanent solution if no profound changes are made in Southern Europe. Those countries must regain their competitiveness.

Doesn’t that presume that these profound changes should take place in a too short period of time? Previously, countries could stay competitive by devaluating their own currency. Now that mechanism’s gone…

Karel De Gucht: To me that is not a fatality. Italy’s export results are not that bad by the way. Last year it increased exports by 20 %.

With China there is a trade deficit of €160 billion. Can we truly speak of honest competition when the Chinese don’t have trade union rights? If employees could assemble, they would receive higher salaries.

Karel De Gucht: I will not deny that China is no democracy and that individual rights are less optimally protected. But on the other hand, China has done well with its rights to development; there’s no denying that either. Incidentally, I doubt salaries would be much higher if there were trade union rights. Lately the salaries have been increasing sharply, which is becoming a problem for Chinese industry.

Even the IMF, an ardent advocate of globalisation admits in its World Economic Outlook of 2011 that trade combined with technology relocates the jobs of unskilled people. It recognises that the prospects for a large group of employees in rich countries are bad and that this contributes to more inequality.

Karel De Gucht: It is true that there are winners and losers in globalisation. Every system has winners and losers. Besides it is not only unskilled people who are currently exposed to global competition, academics are, too. But then again if we have a trade surplus of €300 billion, without taking resources into account, trade in globalisation is not bad for us.

Isn’t it a problem then that Chinese workers do not consume enough of what they make themselves?

Karel De Gucht: Definitely, internal consumption must increase. And that’s the premise of the Chinese five year plan.

Will you discuss this with Chinese leaders when you meet them?

Karel De Gucht: Yes, that is possible.

According to some, currency manipulation by China and other countries costs the European Union one million jobs.

Karel De Gucht: That is typical Anglo-Saxon reasoning. I don’t believe that. That reasoning does not hold water. Moreover, again, China tries to change its model but it’s not easy. China’s progress is irreversible. If an economic crisis were to take place, there would be political problems which wouldn’t benefit anyone.

In short: you don’t consider the trade deficit with China as problematic.

Karel De Gucht: Don’t forget that a considerable part of that export runs through European companies. For instance Chemical giant BASF has built its largest installation in China.

That is good for the shareholders of those European companies, but not necessarily for those who work for BASF. I’ll rephrase that: can we stay in competition without risking our social cohesion?

Karel De Gucht: I am convinced of that. I would even stretch to say that if we do not become competitive, we cannot keep supporting our own social cohesion.

How do you then explain last year’s OECD study on growing inequality in rich countries? In particular, the reference to the erosion of the middle classes by trade, something that is now also recognised by the IMF.

Karel De Gucht: I don’t believe that. Even if inequality has risen, maybe it’s because the rich at the top earn a lot more. That would mean something is wrong with internal repartition.

That the top doesn’t pay enough taxes?

Karel De Gucht: No, that we skim too much off the middle class income through taxes.

The negotiations at the World Trade Organisation (WTO), the so-called Doha-Development Agenda (DDA) seem to be stuck.

Karel De Gucht: A lot can be said about that but the fact is that the USA has given up on that agenda. The DDA presumed that rich countries would concede the most, the BRICS (Brazil, Russia, India, China, South-Africa) a little less and the least developed countries even less. They think that now there should be reciprocity between the BRICS and rich countries. No matter how you look at it, China and India will never agree to that. The EU takes on a more tactical position: we do want to give up a little more than the BRICS but the USA doesn’t agree. This is why, in my opinion, you’ll never find a solution.

The negotiations surrounding the Economical Partnership Agreements (EPAs), the free trade agreements the EU is desperate to make with groups of African countries, the Caribbean and the Pacific, also seem to be a never-ending story. If it takes so long, is that a sign that those countries are not convinced the EPAs will benefit them? Or do we know what is best for them better than they do themselves?

Karel De Gucht: That’s the type of journalistic trap I will not get into. Why would we Europeans not be able to have a clear view on how a development process works best? It’s no surprise that there is a lot of resistance. There are always strong lobby groups that influence the government. On top of that they already have good access to our market, why would they concede?

It is often stated that ‘the farmers in the South’ stand to gain a lot by more free trade. Are large plantations not being confused with the solitary farmer and his rake? The latter will be glad when we stop dumping food on his own market. How can he compete with our highly educated farmers with all their machines and income support?

Karel De Gucht: People caricaturise the EPAs. It’s not that they are forced to open up their entire economy immediately. The EU is prepared to be very flexible with regards to the degree of openness and timing. The EU has redrafted its agricultural model to counter its market disturbing effect.

But you have to dare to conclude that the current model isn’t working for the bulk of the least developed countries: despite tariff free access to our market, their economical development hasn’t improved and their dependence on resources remains problematic. A real economic take –off is only possible by finding a connection to regional and international markets. The support needed by little farmers can only come from a government that has money, guarantees property rights and offers social protection.

The euro crisis, then. Polls show that the population has never been so sceptical towards the EU. At the same time, we are taking unprecedented leaps towards European integration. How far can you go against the feeling of the people before it explodes?

Karel De Gucht: We are forced to take a certain number of steps forward because of the Euro. On the other hand, we know that people in times of crisis step back to what they know, in their trusted circle. We are compelled to go against that. That’s why I found it so alarming that Magnette asked: “Who is Olli Rehn?”

He did have a point, though. People are more concerned with their own national democracy than with European level.

Karel De Gucht: That was outright populism. The six-pack and other measures of stronger economical government have been approved in a fully democratic way by the European Parliament and the European Council in which Belgium has a seat. It is not up to a Belgian minister to oppose that.

But populists do have a point when they blame Eurocrats for installing a Euro with large construction flaws which now deepen the crisis?

Karel De Gucht: The Euro was a decision made by European leaders not Eurocrats.

The decision was, but wasn’t its realisation taken care of by specialists?

Karel De Gucht: There are two theories on a currency union. Either you start with a monetary unit and assume that everyone else follows. Or you first take care of politics and then establish the monetary unit. In the case of the Euro, that last option was purely theoretical. Like this, the Euro would never have happened. Thus the first option was the only option. The Euro is here now and we have to find a solution. That is hard, I agree, but it’s a must.

You do open up an enormous door for your critics. Mistakes have been made.

Karel De Gucht: But the populists do not speak about construction flaws. They only state: the Euro is bad. I was recently in Holland. There you hear people say: the Euro costs us money and that is why it has to go. Plain and simple.

In the short run, a lot of hope is vested in the European Central Bank (ECB) to go against the markets. For a liberal such as yourself, is it not counterintuitive to have a public institution like the ECB going against market trends?

Karel De Gucht: That has nothing to do with liberalism. A market needs to be regulated. If speculation and mistrust threaten to bring down government finances, public institutions, each nation has to repair the trust and stabilise the economy on its own terrain. A competitive economy undermined by speculation is what I would call counterintuitive.

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