Japan and New Zealand: An Added Value Relationship – Realising the TPP Opportunity

Address To Japan New Zealand Business Council, 42nd Annual Joint Meeting, Tomakomai, Hokkaido, 20 October 2015 by Stephen Jacobi, Executive Director, New Zealand International Business Forum

It’s good to be with you at this 42nd annual joint meeting of the Business Council and good to see all our Japanese friends and colleagues again.

 The theme of our conference – Japan and New Zealand: an added value relationship – takes on particular relevance some two weeks following the decisive Ministerial meeting in Atlanta at which the conclusion of the long-running Trans Pacific Partnership (TPP) negotiations was achieved.

 For the longest time this Business Council has advocated the need for a stronger economic partnership between Japan and New Zealand.

Now we stand on the verge of a new era in our relationship thanks to TPP and the FTA it will put in place between our two countries who share so much in terms of values and principles. 

In sharing some thoughts with you today I’d like to focus on three aspects:

 

  •  Why a new instrument like TPP has become so necessary to our relationship
  •  How we might begin to evaluate the Atlanta outcome – bearing in mind that none of us have yet seen the final text
  • What the next steps might be for the TPP enterprise and more importantly where it might lead us in years to come.

Why TPP?

 Governments seek to negotiate trade agreements primarily to seek advantage – advantage for business, advantage for workers and consumers and advantage for their economies as a whole.

 

Today trade and investment are changing as economies become increasingly integrated and inter-connected. 

The way we do business is also 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 simply market access.

 Tariffs are still a problem – especially in agriculture – but more than ever before there is a need to focus on issues more suited to the 21st century like investment, services, supply chain connectivity, regulatory alignment and innovation. 

This is where TPP comes in.

 It’s worth remembering that TPP was essentially a New Zealand idea – a vision of a more seamless environment for trade and investment in the Asia Pacific region – which was born in the early 1990s towards the end of the Uruguay Round and pursued with resolve over the last 20 years.

 Certainly New Zealand’s vision from the very beginning has always been for open regionalism – the widest possible membership of economies, the greatest possible coverage of issues, the highest quality of agreement. 

For us gathered here today Japan’s momentous decision to join the negotiations was very welcome. 

Not only did this respond to our call over many years for a new economic framework for the relationship but it catapulted TPP into the big league – significantly increasing the size of the potential deal but increasing at the same time the complexity of the issues under discussion. 

Japan’s involvement also reflected the role that TPP can play in the process of economic reform of Japan, particularly in relation to the third arrow of Abenomics. 

It is in the nature of trade negotiations that there are difficult issues and the most difficult issues are left to the last. 

The final outcome needs also to reflect a balance of interests that inevitably leads to a degree of disappointment in its wake. 

That is certainly the case for New Zealand with TPP, as I will explain, but I have no doubt that we are collectively better off for having completed this critical negotiation. 

Evaluating the outcome 

Japan’s decision to join TPP was all the more significant because it did so after significant elements of TPP had already been settled pending agreement on a final outcome. 

At the TPP Leaders meeting held on the margins of APEC in Honolulu in 2011 it was agreed that the final agreement would be “high quality, ambitious and comprehensive”. 

This wording reflected the original vision of the negotiating parties and the opportunity to create a new framework for trade and investment that would have a significant impact on sustainable growth and job creation. 

Looking at the final outcome from a New Zealand perspective it is hard not to escape the reality that the original vision has been somewhat diluted. 

Let me be clear: what came out of Atlanta is undoubtedly a major step forward, but it is something not quite as ambitious as the architects of TPP had in mind and less than what was on offer in Honolulu four years ago. 

It is disappointing from a New Zealand perspective that the final deal falls short of the goal of comprehensive tariff elimination – all duties on all products – even if thankfully no sector is completely off the table. 

Dairy is a case in point. 

While we understand the sensitivities about agriculture in Japan, as well as in Canada and the United States, the fact of the matter is that dairy products represent 25 percent of New Zealand’s exports. 

It is interesting to compare the outcome on dairy products with that on motor vehicles, a major sector for Japan. 

The debate on motor vehicles in TPP was more about the extent to which the reality of global value chains could be reflected in the final agreement particularly in terms of the way in which inputs from outside the TPP economies would be treated 

In contrast the debate about dairy was solely about market access and tariffs: the final agreement yields useful, but limited new access to domestic consumption in Japan, Canada and the United States. 

Dairy has a long way to go to catch up with motor vehicles but TPP at least makes a start on that journey. 

On agricultural products there are nonetheless some very positive gains for New Zealand from TPP here in Japan, including:

  • reduction over 15 years of the beef tariff from 38.5% to 9%
  •  immediate elimination of tariffs on exports of  high protein dairy products and elimination (over 15 years) of tariffs on exports of cheese
  •  elimination of tariffs on all exports of horticulture including kiwifruit (eif), applies (eif), squash (eif), avacodos (eif), as well as wine (7 years), forest products (69% on eif), honey (7 years) and seafood (63% on eif, 98% over 10 years, balance over 15 years)

But TPP was always meant to be about more than agricultural tariffs. 

To the list of gains should be added liberalisation of rules applying to services trade in areas including education, financial and professional services, greater certainty for investors and new disciplines for addressing non tariff barriers. 

Japanese exporters will beneift from the elimination of New Zealand’s remaining tariffs and Japanese investors will benefit from the raising of the investment screening threshold from $100 million to $200 million for areas other than sensitive agricultural land. 

In the New Zealand market Japan will enjoy equivalent access to competitors like China, Korea and Taiwan who all have FTAs with New Zealand.

For us both TPP sets up a more contemporary framework of rules for trade and investment that will lower costs, reduce the time of doing business, provide greater certainty and security and ensure that over time there is a more consistent approach to setting regulations and standards right across the region. 

That will be of great assistance to Japanese manufacturers operating in multiple jurisdictions across the region. 

TPP has also added for the very first time in an FTA binding disciplines on the environment and labour. 

In New Zealand’s case, while TPP may not have delivered all we wanted, this has been achieved without the likelihood of significant adjustment in areas like medicines, investment, intellectual property (apart from a longer copyright term) or the management of state owned enterprises, reflecting the fact that New Zealand is already at the level of world’s best practice in these areas.

Next steps and outlook 

Attention now turns to the release of the TPP text following legal rectification which is underway at a meeting in Tokyo this week. 

In New Zealand the ratification process includes scrutiny of the text by the Parliamentary Select Committee together with a national interest analysis. 

The Business Council will have the opportunity along with others to make submissions to the Select Committee, which will make a report to Parliament. 

In addition Parliament must under usual procedures pass implementing legislation without which the whole treaty cannot come into effect. 

Only after this process is complete, does the Government complete the ratification process.

 

Other parties will need to complete their own processes, including of course here in Japan. 

Release of the text and eventual ratification will also be closely observed by potential partners like Korea, Thailand and the Philippines who are known to want to join TPP. 

Even China will be watching this closely as it evaluates the impact on its interests by the significant new FTA between the United States and Japan created by TPP. 

This was always the strategy first espoused by New Zealand – build on each agreement incrementally to expand the vision of freer trade and investment across the whole region: in that sense TPP is not just about the twelve but about all 21 members of APEC, eventually including China and Indonesia. 

TPP is thus seen as a stepping stone, or a pathway, to a future Free Trade Area of the Asia Pacific, a concept which has been on the APEC agenda for some time but which has consistently failed to take shape. 

Meantime of course the Business Council will need to refine its analysis on the implications for our relationship and contribute to the ratification process while spreading the word about the benefits for business in Japan and New Zealand. 

Conclusion 

I said at the beginning that governments negotiate trade agreements to secure advantage. 

That advantage can only be secured by business taking steps to go through the new doors that have been opened and to benefit from the new rules put in place. 

Despite its contradictions, TPP remains a singular achievement and one which will have profound impacts on the region’s economy as market and investment flows react to the increasing economic integration TPP promotes. 

TPP will need ongoing strong support from business leaders including members of this Council both to help the public understand the benefits especially during the ratification process and to turn the final agreement once entered into force into economic and commercial success.

 

That is undoubtedly the best way to add value to the relationship between Japan and New Zealand in the new business environment which TPP creates.

Address To Japan New Zealand Business Council

42nd Annual Joint Meeting

Tomakomai, Hokkaido, 20 October 2015

 

Stephen Jacobi

Executive Director

New Zealand International Business Forum