16 September 2015
Andrew Mackenzie, Chief Executive Officer, BHP Billiton
U.S. Chamber of Commerce
Washington, 16 September 2015
It’s great to be back in Washington. I’m thrilled to be here at a time when trade and development are at the top of the agenda.
Although political support for free trade has waxed and waned over the years, the U.S. Chamber of Commerce has been unswerving in its commitment. It was your grass-roots campaign which helped secure congressional approval for the North American Free Trade Agreement (NAFTA) twenty years ago and you were instrumental in the decision to open trade relations with China at the turn of the century.
Free trade matters to BHP Billiton. We have supplied essential resources since 1885 and believe open markets in those resources promote job creation, economic growth, and innovation. All are jeopardised by the pressure placed on global trade over the last decade.
First, the scale of China’s growth stoked fears of competition and resource scarcity. Many countries introduced export restrictions and non-tariff barriers, like red tape at the border, which they believed would protect them.
Then seven years ago today, the collapse of Lehman Brothers and the financial crisis that followed added to the clamour for protectionism. Policymakers gave up on the World Trade Organisation (WTO) talks, finance and insurance became more insular, and yet more trade barriers were erected.
For fifty years, trade growth has supported prosperity. But since the crisis, trade has grown more slowly than GDP and the figures actually went backwards in the first half of this year. As a share of GDP, trade remains below its 2007 peak and projections for global growth have fallen as a result.
Free trade creates jobs
Opponents of open markets argue that they harm working people and their families, and say that protectionism is the right response to resource scarcity. But I say free trade doesn’t take jobs; it makes them.
In the U.S. right now, trade secures over 40 million jobs, or a quarter in U.S. manufacturing, and these pay about 15 per cent more than work purely focused on the domestic market. Despite warnings when NAFTA was negotiated, U.S. manufacturing exports to Canada and Mexico have more than doubled and the U.S. has increased its manufacturing trade surplus.
In total, trade liberalisation has added US$1.5 trillion to the U.S. economy since World War Two and made the average American almost 10 per cent better off. So today, middle class Americans gain more than a quarter of their purchasing power from trade.
We need not fear the global trade that makes the growth of China, India and other emerging economies possible. Their continued development will create jobs, raise productivity and lift living standards in the U.S and beyond.
Today, over 95 per cent of the world’s consumers, and three-quarters of its purchasing power, live outside the U.S. Within five years, China’s e-commerce market, which is already the world’s largest, will double to a trillion dollars.
Other countries are following suit. By 2030, two billion people who don’t have a bank account today will store money and make payments by mobile phone. This will create demand globally and opportunities for the countries that embrace free trade.
If the U.S. eliminates the remaining trade barriers to these new markets, the economy would grow by hundreds of billions of dollars and 1.5 million jobs.
Open markets for commodities benefit producers and consumers
I now want to tackle the false premise that we must protect the supply of scarce commodities. I'm an earth scientist, as well as the head of a major mining and oil company, and I can tell you that we have all the resources we need to meet demand, for everything we mine or drill, for many decades to come.
Australia alone has enough iron ore to meet global demand for 80 years. And enough uranium to meet global needs for decades. Free trade makes sure the cheapest resources can get to where they do the most good with less environmental impact. Technology also constantly expands the lifespan of already plentiful resources by increasing efficiency as they are developed, used and recycled.
A misplaced fear of scarcity has led to growing resource nationalism that hurts both commodity producers and consumers alike. The agriculture, mining and oil industries were not prepared for the increase in demand created by China’s development in the last decade. Supply struggled to keep up and commodity prices rose significantly.
Then markets, trade and technology did their job. New producers came on-stream, supply increased and prices fell back to more sustainable levels. Countries that embraced open markets, found their long-term supply of commodities became more resilient. Those that didn’t lost out.
Some say producer countries get better prices, by restricting commodity exports. This too is a fallacy – the effect is temporary at best. Higher prices encourage the development of new supply outside of the country with restrictions. Prices rise briefly then return to long-term levels and the market share of those that held back capacity falls.
We’ve seen this repeatedly in oil with OPEC undermined by deepwater drilling in the 1980s and the U.S. shale revolution more recently. And it looks like the penny has finally dropped in Saudi Arabia which is now acting more like a low-cost free market producer of iron ore, coal or copper.
Supply restrictions also destroy demand. In potash, prices did rise briefly when supply was held back by two sales organisations. But farmers used less potash, which reduced their output. Potash prices fell, meaning lower revenues and higher unit costs for producers, while we paid more for our food.
If the U.S. revises its policies on the trade in natural resources, particularly the crude oil export ban, it will be a stand for open markets. The ban is a legacy of the 1970s oil-shock, that today cuts jobs, pay, and profits in the U.S. and worldwide.
Repeal would add hundreds of thousands of jobs to the U.S. economy and research shows that prices at the pump would fall. Importantly, it would show the world that the U.S. remains committed to economic freedom and the promotion of global growth.
We're not alone in calling for a change in policy. The leadership shown by Senator Murkowski, Chairman of the Senate Energy Committee, Leading Democrats, the Brookings Institute and, of course, the Chamber should be acclaimed.
We need innovation not protectionism
We also hear arguments that import restrictions will protect domestic industry, for example with steel here in the U.S. or in China with coal. Workers, families and communities matter, so I can understand why international competition is such a political issue.
But as we have seen in many industries, the solution is technology and innovation - not protectionism. Innovation creates new jobs, new companies, and new industries – from horsewhips and buggy manufacturers to the Model T and the iPhone.
The best way to succeed in the future is to invent it. We will only address the global slump in productivity with more open markets to foster competition and innovation. Around 30 per cent of research and development now takes place outside of OECD countries, for example China invests more than the European Union or Japan. We require free trade in intellectual property and services, in more countries, as quickly as possible. As we used to say when I worked in research, when you open the laboratory door, more ideas come in than go out.
TPP and TPIP will be a significant step forward but countries can also act on their own
So free trade is hugely valuable. But without satisfactory progress with the WTO, many countries will seek to capture the benefits bilaterally instead. Australia just signed an agreement with China and has another on the table with India.
While these deals are welcome, broader agreements create far greater benefits. That’s why the Trans Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP), which together cover two-thirds of the global economy, are so important.
TPP will be the world’s largest free trade area based on the WTO principles. It will provide a framework that could one day include China, India, and Indonesia - home to a third of the world’s population by 2030. TTIP will make U.S. and E.U. regulatory systems more consistent, and that will make business and international standards more straightforward. The success of both partnerships will seriously benefit global economic growth.
There’s a lot countries can do by themselves while we wait for these agreements. Last year, I chaired the business task force on trade for the G20. The country by country removal of non-tariff barriers that we urged could add US$3.4 trillion to global GDP and 50 million jobs – like adding another Germany to the global economy.
The benefits of trade liberalisation go beyond economics. Trade promotes dialogue between nations, increases transparency and encourages positive social change and geopolitical harmony.
Next week, the UN Assembly will endorse a new set of Sustainable Development Goals. These include the promotion of gender equality, minority rights and inclusive education along with a number of targets that require open markets for their success.
We will only end poverty, secure access to affordable energy and combat climate change with more investment in emerging economies, more innovation and more commodities – all of which rely on free trade.
In summary, open markets are best for open societies. They create jobs, fair prices and security of supply and help us meet the growing demand for building materials, energy and food with lower costs and less environmental impact.
Protectionism is the grit in the engine. It reduces efficiency, and if nothing’s done, you stall. Remove it, and the engine runs much smoother.
We must embrace change and build a world which is drawn together and stabilised by free trade. Where there are opportunities for all and scarcity for none, with better quality of life fairly shared, now and in the future. Objectives we can all get behind.
Check against delivery.