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Ministry for Foreign Affairs

Report on Foreign Affairs to the Althing

Foreign Minister}s Report on Foreign Affairs to the Althing
29. November 2001
The final text is the speech as delivered

Every so often, events occur which have a lasting effect on the course of history. These events can be technological revolutions, natural disasters or wars, and in an instant they transform our perspective, understanding and attitudes, in large things and small. The terrorist attack which cost the lives of thousands of civilians in New York and Washington on the eleventh of September this year is such an event.

The impact of the terrorist attack on security matters and international politics, economic affairs and global trade has been profound and will be felt for a long time. One of the principal consequences of September 11th for Icelanders, however, is that the words "peace" and "security" have gained a new meaning, because the attacks were directed at places which form a part of our world view and our reality, and they brought death to our peers, our partners and even loved ones.

The coherence of security and economic well-being has also been brought into much sharper focus than ever before. Thus, the terrorist attacks on the United States have had a substantially negative impact on the progress of world trade, with severe consequences for the Icelandic economy. The fact that terrorist attacks on cosmopolitan cities on another continent have led to lay-offs in the work-forces of Icelandic companies says a great deal about the interdependence of economies in the world and their dependence on stability, peace and security.

The acts of terrorism were not only an attack on the United States; they were also an attack on World civilisation and the World economy. There is good reason, therefore, at this time, to take stock of the position and interests of Iceland in the transformed world order now before us, particularly in trade and in matters of the economy.

I. International Politics and Acts of Terror

There are many examples of discord giving way to sympathy in times of apprehension and danger. Such is the case now, and if there is any consolation to be found in these events, it is that the acts of terrors appear to be setting off a trend which runs directly counter to the intentions of the perpetrators. With the right approach, these events could lead to better understanding among the nations of the world. It was clear at the UN General Assembly earlier this month that the world has united against the scourge of terrorism. Different countries all across the world, with different religions, different economies and different forms of government, are united in their common resolve to achieve the fundamental objective of eradicating terrorism and improving security. This unity of the United Nations is no doubt a result of the increased understanding that solidarity is our best weapon against the threat we face.

The relations between NATO and Russia are another illustration of the fact that the war on terrorism appears to have laid a foundation for the resolution of difficult disputes. In this context, there is reason to recall the ideas for a fundamental change in the security co-operation of NATO and Russia currently under discussion within the Alliance.

During my recent visit to Russia, I discussed the importance of vastly increased co-operation between NATO and Russia, and pointed out that concurrently with the increased security co-operation, Russia needed to form closer economic ties with Europe. The enlargement of NATO to the East is an important contribution to improved security in the region, and it is important for us to look to Russia as an ally and increase our co-operation with Russia in all possible areas.

The Taliban tyranny in Afghanistan is drawing to a close. It is obvious that a tremendous rebuilding task lies ahead. It is urgent to speed up all planning regarding the future of Afghanistan, and I welcome the process which has now begun with the participation of all the parties that need to be involved in the formation of a broad-based national government in Kabul, in line with UN Resolutions. In my opinion, it is important to find a solution to the regional disputes which appear frequently to underlie the hate to which extremists owe their existence. In this context, I would like to reiterate the necessity for the international community to exert greater efforts to achieve a solution of the conflict in the Middle East; such a solution must include the establishment of an independent Palestinian state and security for Israel within internationally recognised borders. Having said that, however, there is no justification in the world for the atrocities of September 11th, and the terrorists must be brought account.

II. International Trade

The terrorist attacks in the United States have had diverse effects on the world economy. Uncertainty in the currency and stock markets, difficulties in airline operations and the recession in the tourist trade are the most obvious consequences, and the effects have been severely felt here in Iceland.

This calls for a consensus on general principles to render the world economy better capable of withstanding adversity, with a widespread network of international agreements to guarantee open markets and unobstructed trade. The shock of recent months has brought home to us how important it is for Iceland to enjoy a favourable competitive position in foreign markets.

Export trade is the foundation of our prosperity. There are few countries that are as dependent on foreign trade as Iceland. According to a statistical report prepared by EFTA, Iceland ranks 6th in the world based on importance of exports. In times of globalisation, it is unavoidable for the Icelandic government to secure terms of trade for the Icelandic economy which are at least comparable to those of neighbouring countries. It is therefore difficult to overemphasise the importance of the foreign service to the interests of the increasingly varied Icelandic foreign trade.

As before, the EEA Agreement will be of key importance, as it secures access to Iceland's most important export market. This market is set to grow with the enlargement of the EU to the east, and we need to keep a close watch on our interests. In addition, new agreements created under the auspices of the World Trade Organisation and new EFTA free-trade agreements will create definite opportunities.

III. Review of the EEA Agreement

The EEA Agreement is by far our most important trade agreement. The agreement has stood up to economic expectations and provided an essential foundation for progress.

Since the conclusion of the EEA Agreement, the course of events within the European Union has been rapid while the EEA Agreement has remained static. I have therefore argued within EFTA for updating of the EEA Agreement. There are now indications that the EU may be prepared to discuss a limited technical revision of the Agreement. The issues I have emphasised in this context include substantive adaptation of the Agreement, more secure participation in committees and increased influence on the work of EU institutions. The revision of Protocol 9, concerning tariff-free trade in fish and other marine products, is a task that needs to be addressed. The three first items are of a political nature, and they have been discussed here on other occasions.

With Protocol 9, the majority of customs and duties on Icelandic marine products was abolished. This was a milestone achievement at the time, although it was a disappointment that an agreement could not be reached on full free trade in marine products. There are still tariffs, some quite high, on certain categories of herring, processed salmon, fresh fish fillets, lobster, etc. Notwithstanding the fact that the proportion of tariff-free trade is high and that relatively few species are subject to tariffs, the amount in question is substantial and poses an obstacle to free trade, hurts local economic interests and can impede the development of new industries, such as fish farming. In particular, these tariffs have the effect that the final processing of certain products is more economically viable in the EU than in Iceland.

IV. The Enlargement of the EU and the EEA

Another matter which concerns Protocol 9 is the enlargement of the European Union. It is becoming increasingly likely that up to ten new states will join the EU in 2004. With the enlargement, the division of the continent into East and West will become a thing of the past. The Union will change from being a group of homogenous states into a larger alliance of partner states with different backgrounds and economic strengths.

The enlargement of the European Union entails the enlargement of the European Economic Area, as new member states will be under obligation to apply for membership of the EEA. This will require separate talks and negotiations with the EFTA states.

In recent years, the EFTA states have concluded free-trade agreement with most of these aspiring member states, most of them involving full free trade in marine products. On the accession of these states to the EU, these agreements will no longer be effective, as they will be superseded by the rules of Protocol 9, which entail less favourable tariff terms. Iceland will therefore formally request adaptation of the EEA Agreement to this fact and measures to ensure that market access is not curtailed as a result of the enlargement of the EU. The reaction of the EU indicates that this will be a difficult task, but this is a matter of tremendous importance, and no effort will be spared.

When the EU was last enlarged, the outcome was that Iceland was granted zero-duty tariff quotas based on previous history of trade. The problem of using this solution now is that Iceland has little market share in this area following the fall of Communism. I have on previous occasions expressed my concern at how limited our market development has been in these countries in recent years, while Norway has engaged in substantial marketing efforts in Poland. Norway currently has a 50% market share in fish in the Polish market, while Iceland has 1%.

The Foreign Ministry has recently invited Icelandic industry to co-operate on marketing efforts in Poland, which will become one of the largest member states of the EU. It is certainly the responsibility of the Government to ensure that the most advantageous agreement possible is reached with the EU in this regard. But I also believe it is extremely important for exporters and producers to look to the long term and increase their emphasis on these markets, thereby improving our position in this respect.

The EFTA States have made their contribution to economic development in Europe through their allocations to the EU Regional Development Fund. The EU may be expected to request additional contributions from the EFTA states as a result of the enlargement. The European Union has declared that the enlargement should not result in new toll barriers in Europe. I therefore believe that the EU is bound to take a broad view. It should be borne in mind that the EFTA states concluded their free-trade agreements before the applicant states submitted their applications. These agreements laid the foundation for the development of trade in the long term, and they have therefore created potentials which are as yet unrealised. Our balance of trade with these countries is negative and our main opportunities for market inroads are in the field of marine products. It is therefore important that the enlargement does not preclude our utilisation of these opportunities. It will be difficult for me to argue for increased contributions to the Development Fund as a result of the enlargement if the enlargement has the effect of restricting our market access and our opportunities for foreign trade.

V. The Euro

At the beginning of next year, the Euro will become the legal currency of most of the member states of the EU. Only time will tell what the effect of the Euro will be on the economies of the Euro countries, on the one hand, and on the position of Iceland in that regard, on the other. The Icelandic Government has already taken the initiative to improve the position of Icelandic companies to the extent possible through proposed tax reforms. However, we must constantly reassess our situation in the light of new developments, especially with regard to the competitive position of business enterprises and interest terms. Also, the competitive position between the EU and EFTA could be disrupted and changed from the current status secured by the EEA agreement with considerable consequences for Iceland. I have said before that we are not running out of time, but I think it is necessary for the situation to be carefully monitored by the Government, industry and other parties whose interests are at stake.

VI. Multilateral Trade Agreements

Just as the EEA Agreement secures our access to the European Market, we have created a complex network of trade agreements with other states to secure our interests in other markets. In recent years, international trade has become more complex and variegated, but at the same time more open and fragile. Improved access of Icelandic enterprises to foreign markets on the basis of multilateral agreements creates new opportunities for market breakthroughs and product development and promotes increased economic variety. Concurrently, we have emphasised the conclusion of double taxation avoidance conventions and bilateral investment agreements. Of the latter, two are in their final stages of preparation, i.e. with Russia and Mexico.

VII. The World Trade Organisation (WTO)

Within the World Trade Organisation, preparations have been in progress for a long time on a new round of negotiations on the next steps toward liberalising global trade still further. At the Ministerial Conference of the WTO in Doha, an agreement was reached on initiating a new round of talks. It is especially welcome that this milestone has been reached at a time when a recession appears to be setting in in the world economy. It is more difficult to achieve a consensus among nations on steps of this kind in times of recession, but at the same time the benefits of such agreements are never greater than in such conditions.
Small economies have a greater interest in harmonised rules of international trade, as larger states are in a better position to exert their strength to secure market access. The developing countries also benefit from increased liberality in this area, as long as reciprocity is the rule and as long as they are granted secure market access for their exports.

In these negotiations, Iceland will place special emphasis on free trade in manufactured goods, including marine products, and the abolition of state aid to fisheries.

I have pointed out earlier the importance for the competitive position of Icelandic fisheries of abolishing state aid. This has been our main point of emphasis within the World Trade Organisation. In this matter, Iceland has positioned itself at the forefront of those states within the Organisation which have recommended working toward a consensus on the abolition of state aid. At the Doha meeting, a decision was made to address state aid in the fisheries industry specifically for the purpose of establishing rules on the use of state grants and to work toward their abolition.

Work on this issue will be among the priorities of the Foreign Service, as the abolition of state grants is not only important to our trade interests, but also supports our position in the global debate on fisheries and the sustainable utilisation of marine resources. The abolition of state grants is an important aspect of ensuring better conduct in the utilisation of the living resources of the sea. State grants to fisheries promote excess capacity in fishing fleets and overexploitation across the world, and they represent an obstruction in the path of developing countries in their attempt to base their futures on sustainable fisheries.

There was little dispute regarding agriculture in Doha, with the principal contention being whether export subsidies should be abolished. In Iceland, export subsidies were abolished over ten years ago. There has been some misunderstanding in this country regarding the nature of the debate on trade in agricultural products within the World Trade Organisation. There is in effect a separate agreement on trade in agricultural products, which permits certain support measures for the sector. Iceland has supported the long-term objective of increasing competition in trade involving agricultural products. On the other hand, like many other nations of the world, we want to utilise the available scope for support afforded to us under current agreements, in the interests of food security and regional development. In this respect we are in agreement with the Nordic countries, who have emphasised the special position of sub-arctic agriculture.

The member states of the WTO are now 144, following the accession of China and Taiwan. In the course of the membership talks with China, Iceland obtained extensive concessions regarding trade in marine products, and preparations for similar talks with Russia are already under way.
With the Doha decision, the WTO has shown that it is capable of performing its role of promoting and increasing global trade based on fair rules designed to secure the interests of all the member states. For Iceland it is important that the WTO achieve its objectives, and preparations for the negotiations in the coming years will require a great deal of effort as regards co-operation with the industries and among the government ministries.

VIII. EFTA's Free Trade Agreements

In recent years, the EFTA states have created a network of free-trade agreements with eighteen states across the world. These agreements improve our marketing opportunities beyond the objectives achievable within the WTO. This network is growing steadily more dense. Recently, an agreement with Mexico took effect, negotiations have been concluded with Singapore, and negotiations with Chile and Canada are in their final stages. All these agreements will ensure free trade for Iceland, e.g. in marine products, and create opportunities for advances in new markets. It is particularly welcome that an agreement was reached with Singapore, which represents an important foothold for the EFTA states in the Asian markets. A free trade agreement with South Africa is in preparation, and preliminary talks have already started with several states in Northern Africa.

IX. Advances into New Markets

The foundation that has been laid with these agreements for Icelandic foreign trade is important, to be sure. It is no less important, however, for the infrastructure developed in support of enterprises in their marketing efforts to be strong.

The Foreign Service is, to an increasing degree, positioning itself at the front line of Icelandic industry abroad. A consensus has been reached here in the Althing in recent years on strengthening the Foreign Service. It has been a matter of priority for the Foreign Ministry to increase the number of trade counsellors for the purpose of promoting trade in foreign markets. This is fully consistent with trends in other countries and is rooted in today's buzzword, Globalisation. The Icelandic Government must attempt to provide exporters with support comparable to that provided by other countries.

It is in this light that we must view the establishment of the embassy in Japan, Iceland's most important trading partner in Asia and the World's second largest economy. This project has been the subject of a special political consensus in the Althing in recent years between the majority and the opposition. It is clear that the embassy has an important role to play as regards trade, but it is also important from a political and cultural point of view. The embassy is intended to play a substantial role in clearing the path for Icelandic exports to Japan, and in this context I particularly emphasise the tourist industry.

The Asian market is already among the most important in the world, and its importance will grow in the coming years. In this context, it is worth mentioning that economic growth in China is among the highest in the world, and in the year 2000 China increased imports by 36% and exports by 28%. China is, quite simply, the market of the future, especially following its accession to the World Trade Organisation, and this is where all the countries of the world are focusing their attention. It is obvious, therefore, that our embassies in Japan and China have a key role to play in assisting Icelandic enterprises in this region of the world.

It is clear that the Foreign Service can have a great impact on the competitive terms of Icelandic exporters in foreign markets. It is therefore important to ensure close co-operation between the Foreign Service and industry. This is what we have tried to do and will continue to try to do.

X. Tourism

The industry which has, perhaps, the greatest need for our embassies is the tourist industry, one of the biggest growth sectors of the Icelandic economy in recent years. This applies particularly to Asia, where there are indications that new markets may be won. Tourists from this region are increasingly looking to Europe, but they have not looked to Iceland in the same proportion, even though they attach greater importance to the safety of their destinations than other tourists. As economic conditions improve in Asia, the importance of safe destinations will increase in the tourist industry's marketing efforts. An international tourist organisation recently published a forecast projecting that the number of Chinese tourists may reach 100 million in 2020. It is our duty to ensure that Iceland is included on these tourists' map.

If predictions regarding the negative impact of the terrorist acts on the tourist industry prove correct, this will be a matter of grave concern for Iceland, as tourism has become the country's second largest industry. Although the long-term effects of the terrorist attacks on the Icelandic tourist industry may be doubted, it will be necessary to promote Iceland as a safe tourist destination, with the objective of defending and building on the results achieved so far in this field.

XI. Sustainable Development

So far in my address I have mainly emphasised the link between foreign trade and welfare in Icelandic society. It is also necessary, however, to underline the fact that trade and environmental issues are also intertwined.

Sustainable development is a key factor in promoting economic and social development and stability across the world. Recently, a milestone agreement was reached in Marrakech which enables the developed countries to ratify the Kyoto Convention. Iceland played a role in the achievement of this agreement, which is yet another confirmation of the fact that the world community has to work together to solve global problems.

The Kyoto Protocol provides new opportunities for promoting technological development and the sustainable utilisation of natural resources. When the protocol takes effect, the demand will increase greatly for energy sources which do not result in the release of greenhouse gasses. Iceland has great potentials for power-intensive industry and the development of new energy sources. The Kyoto Protocol provides increased opportunities for the use of our expert knowledge of the development of renewable energy sources, particularly geothermal energy, for investment and contracting in other regions of the world. Examples of this include recent contracts in Hungary and China as well as the growing co-operation with Russia.

The Kyoto Protocol secures the economic interests of Iceland and at the same time supports the basic objective of reducing the emission of greenhouse gases. The environment is not an isolated issue; it has an impact on other aspects of society, including the economy. Discussion of environmental affairs without regard to the economic impact of environmental measures is pointless. The conclusion of the Kyoto process represents a victory for our environmental policy, and at the same time preserves the economic advantage we have derived, and will continue to derive, from our renewable energy sources.

XII. The Importance of the Foreign Service

Iceland undeniably enjoys a special position in that the country possesses various resources, all of which have the common feature of being sustainable. We need to preserve our resources and maximise their yield. This is not only the duty of single nations but of international organisations.

The course of events in international politics following the events of September 11th have crystallised the interdependence of security, economy, environment, democracy and human rights. The objective of Iceland's foreign policy is to secure Icelandic interests in all these areas. Our economic welfare and the strength of the freedom and democracy that we currently enjoy hinges on our success. The work of the Foreign Service is therefore of direct benefit to all Icelanders: the farmer who depends on the agricultural working conditions, the fish processer who relies on secure market access for his products or the employee whose job depends on services to tourists.

Domestic and foreign affairs have rarely, if ever, been more intertwined. Economic downturns call for more work and more extensive services to the industries. The Foreign service will place great emphasis on attending to the urgent needs of the day.

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