ADDRESS TO THE CANTERBURY CLUB CHRISTCHURCH, 27 MARCH 2019

By Stephen Jacobi, Executive Director
NZ International Business Forum

Thank you for the kind invitation to be with you today.

It’s always good to visit Christchurch but today I am conscious I am doing so just under two weeks since the terrorist attack which resulted in dreadful loss of life in this community.

I hope you have all felt comforted by the many expressions of support from around the country and around the world.

My hope and my prayer is that peace will be upon the Muslim community, upon us this great city and upon us all.

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You could be forgiven for thinking that something must have got into the water to make the world become so crazy about trade in the last few years.

Today’s “interesting times” for trade are the result of some deep-seated problems that have existed for a long time but have now come to a head.

A President in the land of the free and the brave prefers tariffs to trade and provokes a conflict with the world’s second largest economy.

The British go barmy on Europe and tie themselves in knots in what I have called a “hokey cokey” Brexit – “in, out, in, out, you shake it all about”.

That great life-boat for international trade – the World Trade Organisation – is now on the rocks and taking on water.

And in New Zealand our old adversaries in the European Union, have now become our new BFF.

If that sounds provocative, I’m glad, because these luncheon addresses are meant to be as interesting as the times we live in!

I’d like to unpack these recent developments with you today and I look forward to the conversation that will follow.

One of the great things about my several roles is that I get to work with a group of NZ business leaders from many sectors gathered in the NZ International Business Forum and dedicated to enhancing New Zealand’s position in global markets.

You can find out about us on our website – www.tradeworks.org.nz , where you can sign up to our mailing list to receive regular blogs and updates – and on Twitter, Facebook and Linked In.

In the land of the free and the brave

I need at this point to make a disclaimer.

I am a fan of America.

I spent the best part of ten years as Executive Director of the NZ US Council, working to lift our relationship with the United States to a new level and I am proud of what we achieved.

New Zealand and the United States share fundamental values about democracy, human rights and the market economy, although the different way we choose to demonstrate these values in areas like trade, climate change and now, guns, is also clear to see.

The best part of America is its extraordinary creativity, innovation and entrepreneurship.

The worst part of America is its politics – despite its continual fascination for us.

The current Administration in Washington is taking the US in a new direction – away from its traditional global leadership on trade, to a different place.

Protectionism is replacing market openness, bilateralism is replacing multilateralism and the foundations of the international trading system, which America itself once helped to create, are being shaken.

That has enormous implications for a small, open and outward-looking economy like New Zealand.

The US departed the fellowship of the Trans Pacific Partnership which has nonetheless continued as the Comprehensive and Progressive Agreement on Trans Pacific Partnership – a veritable mouthful of an agreement.

Tariffs have also been applied on bogus “national security” grounds to New Zealand’s small exports of steel and aluminium to the United States.

On the other side of the ledger, it has to be admitted, the US is under the Kiwi Act in the process of making it easier for NZ investors and entrepreneurs to gain visas to work in the United States.

But the real risks of this change in direction can be seen very clearly in the trade war between the United States and China.

Tariffs have been applied to around $500 billion in two-way trade and both economies are hurting as a result.

The President has doled out $12 billion in trade-distorting subsidies to American farmers to compensate them.

In the process markets have been disturbed – New Zealand has faced increased competition in third markets from US products diverted from China.

An air of pessimism has settled over the outlook for trade.

 A year ago, trade was predicted to grow by 4.4% in 2019, but the most recent forecast downgrades that to less than 3.7%[1].   

And, although the parties are talking, there is no definite end in sight. 

Meanwhile we know that companies are making investment decisions to try to avoid the fall-out by shifting production from China to South East Asia.

Supply and value chains, the lifeblood of global commerce today, are being disrupted.

This is not to say of course that there are not issues that need to be addressed in China – I say this also wearing another hat as Executive Director of the NZ China Council.

Indeed, New Zealand shares some of the American concerns about the role of Chinese state-owned enterprises in the economy and the sometimes patchy implementation of intellectual property laws.

But our experience of China has been fundamentally different.

In 2008 China gave us precisely what the United States has never been willing to give – a free trade agreement.

Thanks to the FTA, China has now emerged as our largest trading partner – we export twice as much to China today as we do to the United States.

We continue to face challenges in the Chinese market – and have been trying to upgrade our FTA to deal with some of them.

Our strong preference would be for the United States to join with others and deal with problems through the World Trade Organisation – it is ironic that just recently the US won a major dispute in the WTO against China about agricultural subsidies.

I’ll have more to say about the WTO in a moment, but using increased tariffs to promote market openings in other areas is a blunt instrument which does far more harm than good.

Barmy Brexit

Some of the societal pressures that gave rise to a change in economic direction in the United States can be seen also in Britain, which, as we meet today, is dangling dangerously on the cliff edge of Brexit.

I need to make clear that whether or not Britain remains in the EU is a matter for the British people to decide but the matter is not without implication for us Kiwis.

Britain, despite the changes of the last fifty years, remains very important to New Zealand in political, economic and cultural terms.

New Zealand has an interest in an orderly Brexit if indeed Brexit is what the British people wish to achieve.

And the converse also applies – we face risks, most particularly to trade and to New Zealand businesses established in the UK, if Brexit is disorderly.

The Brexit deal, which, somewhat against the odds, continues to be advocated by Prime Minister May, would allow the current trading arrangements to remain in place as they are now through to the end of 2020, while the detail of the future trade relationship with the EU is worked out. 

The original deadline for Brexit was 29 March: the EU has now granted Britain a slight reprieve to continue considering the Brexit deal – until 22 May if a deal is approved or until 12 April if it is not.

So it’s now up to the British Parliament to accept or reject the EU offer.

Without a departure deal, or some other action being taken, Britain is still on course to crash out from the EU if not on 29 March, then two weeks’ later on 12 April. 

This risks significant disruption to supply chains, to customs clearance at British ports and quite likely a significant dent in the British economy.

Now, the British Government is interested in a future FTA with New Zealand.

That is a welcome prospect from our point of view and there are both opportunities and challenges from a future FTA.

If a hard Brexit were to occur on or before 12 April, Britain is able and will indeed be eager to negotiate and implement a future FTA with New Zealand as soon as possible, bearing in mind of course these things are always more difficult than politicians would have you believe.

For as long however as Britain remains a member of the EU Customs Union, including under any transition arrangement, it may negotiate but not implement an FTA.

For New Zealand therefore, under hard Brexit, we face potentially short to medium term pain, with the prospect of a future FTA on offer.

Under soft Brexit, we face short to medium term continuity but an extensive delay to realising our FTA ambitions.

It’s worth noting too that in anticipation of hard Brexit the British Government has published a list of reduced tariffs that will apply on leaving the Customs Union– while they are to be commended for learning from what New Zealand did in the 1980s, it is interesting to see that the tariff reductions do not apply to dairy, beef and sheepmeat – further raising the stakes of that future FTA.

Meanwhile in Geneva

The trade war and wrangles over Britain’s exit from a long-established Customs union are not matters to warm the hearts of the trade gnomes who live and work in Geneva, at the headquarters of the World Trade Organisation.

The WTO is not global government – it is a binding agreement between governments, which establishes a set of rules for global commerce and a system for settling trade disputes.

It once seemed inconceivable that the WTO would not form the unshakeable foundation of the global trading system, but today the WTO is in a parlous state – its negotiating functions, although not completely exhausted, have been marginalised, as countries resort to bilateral and plurilateral agreements, and now the dispute settlement system is also under threat.

New Zealand has always put a lot of store in the WTO and rightly so – a small country needs those global rules and an independent referee if something goes wrong.

New Zealand can point to a number of victories in the WTO – finally securing predictable access for butter, beef and sheepmeat to Britain and the EU, prohibiting the use of hugely trade-distorting export subsidies for agriculture, successfully challenging the giants of world trade including the US, EU, Canada, Australia and Indonesia when their actions have been contrary to world trade law.

The US has however advanced a number of concerns about the way the WTO operates, most particularly in relation to dispute settlement.

New Zealand shares some of these concerns but we disagree on the way the US is choosing to drive action on these issues.

The US is blocking the appointment of judges to the WTO Appellate Body, the system’s upper court which hears appeals – this will render the whole system unworkable before the end of the year.

New Zealand, and our Ambassador in Geneva, David Walker, is in the thick of trying to find a solution to the problem, but it is not clear whether the US is genuinely interested in an outcome or simply prefers to blast open the whole system.

New Zealand would have cause to worry about this at the best of times, but the situation is even more delicate right now as we face a looming dispute with the European Union and Britain about those tariff rate quotas for butter, beef and sheepmeat we thought had been long ago secured.

These tariff rate quotas goveren the quantities of product that can be sold and the tariffs, if any, which apply.

Brexit casts a big shadow over these important arrangements because the European Commission and the British Government have proposed that upon Brexit the tariff rate quotas will be split in half.

That poses a lot of difficulties for New Zealand exporters who have over a considerable period developed markets in both Britain and EU which they manage according to market trends and consumption patterns and in the light of flows of British products to the EU and European products to Britain.

Our exporters will lose considerable flexibility from the proposed splitting of the tariff rate quotas even though their right to export within the quota limits and rules has been guaranteed in the WTO since 1995 – and, I might add, effectively “bought and paid for” by New Zealand once already.

What’s more the European Commission and the British Government have in effect decided to proceed over the strenuous objections of New Zealand and other trading partners with similar arrangements – they risk opening up years of trade litigation in the WTO.

That is, if there is a dispute settlement system at all under which to litigate.

Is the European Union our new BFF?

It is another of life’s sweet ironies that just as we face a fight with the European Union about agricultural issues we thought were settled long ago, we are engaged in a negotiation for an ambitious free trade agreement.

I began my career working on EU trade policy including a stint at the NZ Embassy in Paris.

For the longest time, we have tended to see the EU as competitors rather than partners.

This has tended to obscure both the continuing economic importance of Europe even as we sought to diversify our markets.

It is supremely ironic that today we hear similar calls for diversification – away from Asia and back to Europe!

Despite all this, the 28 (for the time being) member states of the European Union constitute a 510-million strong consumer market, ranking as our third-largest export destination, our second biggest supplier of imports, and our second-largest source of investment, with strong people-to-people linkages.

The rules governing our trade are however 30 years old and that puts our exporters at a distinct disadvantage especially when compared to competitors whose countries have concluded FTAs with the EU.

The EU has had a very active negotiating agenda over the years and the current EU leadership, as was made clear to the Prime Minister when she visited Brussels, sees this negotiation as a matter of priority.

Although it would be flattering to think so, this is not so much about the potential of our small domestic market – it has more to do with geo-politics and the opportunity this FTA gives to demonstrate openness to trade at a time when others are turning inwards, and to fashion some next generation commitments that can address today’s trade challenges.

For example, both New Zealand and the EU share a commitment to advancing the concept of “Trade for All”:  how, at a time of increasing scepticism about trade, how can we find ways of making trade work better for people and address the specific needs of those groups who previously may have been left on the side-lines, including smaller business, women and in our case Maori.

Or, reflecting new models of doing business, how can we address the needs of the digital economy, promoting cross border digital trade and e-commerce while respecting privacy and upholding cybersecurity?

Or how to build in new commitments and undertakings in climate change and the environment, which are priorities for us both ?

From a New Zealand perspective, this negotiation is an opportunity also to promote and advance growing exports of high-quality food products including horticulture and wine, services such as tourism, education and creative sector exports, and well as high-tech and niche manufacturing.

The export boost at the New Zealand end is likely to be significant, with EU modelling suggesting the deal could add up to 0.5 percent to New Zealand’s GDP – a gain of up to $2 billion, giving rise to better jobs and living standards for New Zealanders.

But we should not see this simply in two way trade terms.

There is also huge scope to develop and deepen global value chains spanning from Europe through New Zealand into the Asia-Pacific incorporating the best of our complementary goods, services, capital, R&D, technology, ideas and innovation to service customers beyond both of our shores.

This is not a straightforward negotiation – besides the tariff rate quota issue, there are also differences in areas such as geographical indicators for dairy products and wine and rules for digital trade to name just two.

We may not see an early conclusion to this FTA – trade negotiations take time – but the fact we are negotiating is a marked contrast to what is happening elsewhere at present and a future FTA could send a strong signal about the importance of openness and engagement.

Conclusion

I’ve painted a rather sobering picture and I apologise for any indigestion that I have caused.

These are “interesting times” for trade and these issues do matter.

They matter because trade is the lifeblood of the economy – it’s the returns from trade that make possible the lifestyles we have become accustomed to, that pay for hip replacements, roads and bridges and pre-school education.

Whether it’s our highly competitive agricultural exporters, our innovative SMEs, the tech-savvy digital and creative sector – all of these rely on strong, open and secure global markets.

And trade provides around 620,000 jobs with many more indirectly linked to trade.

My friend Matthew Hooton, the sometimes controversial lobbyist and political commentator, wrote about this in the Herald last week:

“New Zealand can never succeed, on any measure, by cowering behind a wall. Not just our economic destiny but our national identity depends on us maintaining the sense of adventure that brought us all here and extending manaakitanga to those who want to join us, visit us, do business with us, or take a holiday or study here”[2].

We can certainly make the trading system work better and we need to keep working at it.

So let’s continue to do so and kia kaha Christchurch!

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[1] World Bank and IMF

[2] https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12215075