Emerging trade agreements Address to Primary Industry Summit Wellington, 25 May 2015 Stephen Jacobi, Executive Director, NZ International Business Forum

Thank you for the opportunity to be with you once again at this year’s Summit.

I’m speaking to you today from the perspective of the NZ International Business Forum.

NZIBF brings together the leaders of some of the country’s largest and most internationally oriented companies, mostly from the primary sector.

Their key concern is the way in which New Zealand connects and integrates with the rest of the world – further information about our organization can be found on our websites.

Last year I spoke to this Summit about the Trans Pacific Partnership (TPP); this year I intend to take a wider focus but never fear I will include TPP in my Last year TPP Trade Ministers had just met in Singapore; this year the Ministerial meeting planned Guam appears to have been stymied by the US Congress – I’ll have more to say about that later.

I’d like to start today by asking the question – why do we seek negotiate trade agreements in the first place, especially when they seem so hard to I’ll then give you a sense of where I, as business observer, think some of the more current FTA negotiations are up to.

I’d also like to venture some thoughts about what all this might mean for the primary industries.

Why negotiate trade agreements?

We negotiate trade agreements because we seek advantage for New Zealand as a trading nation.

New Zealand has been built on trade.

Our domestic market is small, our access to local capital is limited, so we need to look externally for growth and development.

Yet international markets have not always been kind to New Zealand.

Ludicrously high tariffs in a number of markets continue to impact negatively on New Zealand, and, as you see here, the most developed economies are among the worst offenders particularly when it comes to agriculture.

I spent four years at the New Zealand High Commission in Canada – I love Canada, but as Trade Minister Groser suggested recently, their dairy policy is not their finest achievement!

In New Zealand we learned a generation ago that the protection is the worst enemy of innovation and competitiveness.

That same penny is beginning to drop in Canada as well as in the United States and Japan.

Tariffs may appear to some like 20th century issues but they have not gone away.

More than ever before there is a need to finish off these old issues and focus on those more suited to the 21st century like investment, supply chain connectivity, regulatory alignment and innovation.

We need to do this because business is changing  – old models based on import/export are giving way to increasingly complex value chains and networks.

This gives rise to an urgent, new agenda based on market integration rather than market access.

That agenda sees policy makers moving beyond border issues like tariffs and rules of origin to behind the border issues like domestic regulations.

It sees a focus away from goods to services and investment and new attention being paid to the speed and cost of doing business.

New Zealand’s FTAs

New Zealand has been an enthusiastic participant in the process of signing free trade agreements, especially as progress in the World Trade Organisation (WTO) has stalled.

The WTO remains important – critically so – as the arbiter of global commerce, but its trade liberalising function is alas today much diminished.

Increasingly as a consequence countries are looking to the bilateral route for trade and investment growth.

New Zealand was an early adopter back in 1983 with CER – well ahead of the pack and still one of the world’s most comprehensive and successful trade

My old boss Trade Minister Jim Sutton took the first step with the FTA concluded with Singapore in 2001.

Today we actually have three agreements with Singapore, including that first bilateral, the TPP between four economies negotiated in 2005 and the agreement with ASEAN negotiated in 2010.

Singapore is also a participant in today’s TPP under negotiation by twelve economies.

Each of these agreements builds upon the last and New Zealand’s success is such that today in Asia we have FTAs with all major partners except Japan and India and we are still one of the few countries to have FTAs with China as well as Hong Kong and Taiwan.

Of course an FTA with the most logical partner of all, the United States, continues to elude us but the cheque is in the mail with TPP or at least so we are told.

Nor does New Zealand have an FTA with our traditional partner, the European Union – in fact we are among a small number of countries who have no preferential trading arrangements with the EU.

There has been criticism of the proliferating nature of FTAs as a ‘noodle bowl’ of over-lapping and sometimes contradictory agreements.

There is some truth to this and so gradually in the Asia Pacific region we are  seeing a move to negotiate what are sometimes called ‘mega-regional’ deals like TPP or the Regional Comprehensive Economic Partnership (RCEP) about which I’ll speak in a moment.

Both TPP and RCEP are seen as pathways to a wider agreement amongst all 21 member economies of APEC, the Free Trade Area of the Asia Pacific (FTAAP).

This brings me to where we stand today.

Korea

The latest agreement we have signed is with South Korea, an important market for many of the industries represented here today.

It took a long time to conclude and can be seen as a “catch up” FTA in the sense that the main aim was to secure New Zealand’s position in the Korean market compared with our competitors, all of whom had completed FTAs.

The FTA builds a pathway to tariff elimination for a number of key products for New Zealand including most dairy products, beef and kiwifruit and immediate tariff elimination on wine.

But tariffs are retained in a few areas like milk powder, processed deer velvet, squid, some horticulture and wood products and for some years New Zealand will continue to be disadvantaged while we catch up with others.

There is little New Zealand needs to do to implement the agreement.

In the area of investment, the FTA maintains a balance between the need to protect investors and the continuing right of the government to regulate in the public interest

That’s an area, which is going to come under increasing focus as we move to complete TPP.

TPP

TPP has been around for some time – even the so-called ‘end game’ has been with us for quite a while.

Back in 2011 TPP Leaders committed themselves to concluding a “high quality, ambitious and comprehensive” agreement.

It’s not clear at this point whether TPP will live up to this vision.

Most commentators agree that a number of issues continue to hamper the conclusion of the negotiation.

I have time today to touch upon only a few of these – market access and transparency – but I’d be happy to discuss the others later.

From a New Zealand perspective an ‘ambitious and comprehensive’ agreement means one which, over time, results in tariff elimination for all products for all participants with all participants sharing equally in the benefits.

(The Korea FTA could be described as ‘mostly comprehensive’ in the sense that most sectors are included; I doubt it could be called ‘ambitious’.)

Unfortunately for TPP some participants especially Japan and Canada appear to want to continue to exempt some products from this goal.

That this should continue to be an issue at this late stage of the negotiation is more than deeply disappointing.

Comprehensive treatment does not mean that all products need to be treated equally – there can be differing timetables for tariff reduction and elimination, there can be safeguards, there can be compensatory actions – but the end point – zero – should be clear.

Some TPP economies have already departed from the consensus around these issues – Australia and Japan for example concluded a bilateral FTA that sets a low benchmark for liberalisation and the United States and Japan may well have agreed, although we don’t know for sure, that some tariffs will continue to remain.

The second difficult issue I want to mention relates to transparency.

It is true that like any international treaty the TPP negotiations are conducted behind closed doors.

This is because there are sensitive economic and commercial issues under negotiation and a more open process would inevitably lead to sectoral interests seeking to undermine the negotiation.

This also makes it difficult to release the text prior to the conclusion of the negotiations.

In New Zealand established practice for all treaties is that the text is concluded and signed by the Government.

The ratification process includes the publication of the text and a national interest analysis, scrutiny of the text by Parliament, a Select Committee process including public submissions and implementing legislation where this is required.

Only after this process is complete does the Government complete the ratification so TPP will not be thrust upon us in secret or without prior discussion.

Even at this point I think the Government could make available more background information about TPP – such as plain language descriptions of what is under negotiation and the processes involved – I can’t help thinking this would help inform a more productive public debate.

I hesitate to predict where TPP might head in coming months.

President Obama needs to convince his own party in the Congress to give him the “fast track” negotiating authority to complete the negotiations without risking they might be re-opened during the ratification phase.

That is an absolute pre-requisite to ensure that other parties, especially Japan and Canada, come to the table with realistic negotiating offers on agriculture and to enable other participants to show flexibility in dealing with other outstanding issues.

Substance needs to drive the negotiation not artificial deadlines but even when the negotiating is concluded there is time required to complete legal verification and ratification.

Meantime all governments and concerned industries need to redouble their efforts to convince a skeptical public and an energized anti-globalisation movement that TPP can bring benefits despite some risks.

Even while these processes continue other countries are continuing to observe and consider whether in time they might join the TPP train.

RCEP

In case TPP at the end of the day proves impossible to conclude, there are other negotiating initiatives like the Regional Comprehensive Economic Partnership (RCEP).

RCEP is a little known negotiation between sixteen economies – ASEAN, plus the North Asians plus Australia, New Zealand and India – which provides another possible pathway to the vision of a more seamless Asia Pacific.

On paper RCEP covers much the same areas as TPP but without the United States and Latin American economies.

One difference is that whereas in TPP all economies are aligned (at least to a point) on the merits of freer trade, in RCEP the alignment is somewhat less.

Some of the larger participants – China, Japan and Korea – do not have FTAs among themselves and India has decidedly different views on the merits of trade liberalisation.

That makes progress difficult – although the target end date is the end of this year, that seems highly unlikely to be achieved.

Other negotiations

New Zealand has a number of other negotiations on the books.

The same differing views about trade bedevil the negotiation New Zealand has underway with India.

The FTA with the Gulf Co-operation Council is essentially finished but ratification is held up by policy differences around the shipment of live sheep.

The negotiation with the Customs Union of Russia, Belarus and Kazakhstan is currently on hold due to political issues surrounding the Ukraine.

There are potential new partners in Eurasia, in Latin America and Africa, which will require attention in coming years and there are new issues to be included.

The next cab off the rank we hope will be the European Union, another major partner for the primary industries.

Implications for primary industries

The significance of these trade negotiations has to do with the growing demand for food in a world whose population already exceeds 7.3 billion.

Simply put we are going to need to feed a whole lot more people in the next fifty years.

FAO and the World Bank estimate that only 10 percent of new demand can be met by new cropland, and only 20 percent, from better use of existing cropland using existing technology.

70 percent of new demand must come from new technology and policy innovation.

Among this important new policy innovation must be trade and investment as we seek to link more effectively demand and supply around the world.

So trade agreements whether bilateral like Korea or regional like TPP and RCEP all focus on the same things – improved market access, lower costs of doing business and linking supply and demand to provide the food and other resources the world so desperately needs.

Conclusions

Trade agreements matter to the primary industries.

That’s because better and fairer trade arrangements confer advantage to New Zealand producers and suppliers.

With Korea concluded the big focus at the moment remains TPP, with RCEP further behind.

Other negotiations present difficulties – certainly it helps when New Zealand can get out ahead of others and show leadership and policy innovation as we did when we negotiated the China FTA and thought up the very first TPP.

Public understanding and support for these efforts remains critical and that is where all of you as primary industry leaders and stakeholders have a key role to play.