“Positioning New Zealand In A Time Of Uncertainty”

ADDRESS TO THE SHEPHERDS

WELLINGTON, 10 FEBRUARY 2020

STEPHEN JACOBI, EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

My thanks to my friend and New Zealand’s new Special Agricultural Trade Envoy, Mel Poulton, for the invitation to join you this morning.

Mel has asked me to share some thoughts on trade, market access and how New Zealand should position itself to capture opportunities in a time of uncertainty.

This is definitely an uncertain time – in fact, it’s downright dangerous!

The corona virus has managed to do in two weeks what President Trump has tried to do over the last two years – to bring China to its knees.

China is suffering, though not defeated and hopefully, hopefully, this terrible virus will in time prove to be a temporary though painful interlude.

I fear however the legacy of the US/China trade war will last longer and its effects on the global economy will be felt for years to come.

I’d like to unpack this with you this morning – to talk first about the big picture of New Zealand agriculture in the global economy, then to talk about the effects of the trade war, and lastly to update you on some current negotiations of interest.

I’m also looking forward to hearing your thoughts – please don’t agree with me !!

I’m speaking to you today on behalf of the NZ International Business Forum which brings together leaders from the international sector of the economy including from the agricultural and horticultural industries.

State of the union

Let me start with New Zealand’s food and fibre sector in the global economy – a sort of state of the union, if you like – and I hope Mel won’t rip up my speech at the end !

The state of the sector – at least in the context of international markets – is strong.  (I know there are domestic challenges and I do not under-estimate them).

A profound change has occurred since 1993 when the Uruguay Round of trade negotiations was concluded and agriculture was brought for the first time, albeit incompletely, into the ambit of international trade law.

For the longest time New Zealand had sought to sell into markets where domestic subsidy and protectionism were high, and returns were low.

We were essentially on the outside looking in, price-takers in a market where prices were set by others mostly in the Northern Hemisphere.

Today, while growing protectionism is a problem, New Zealand exports to a wider range of markets than ever before – markets which want to buy the products we have to sell and are prepared to pay the market price.

We can also thank another significant development for this – the continuing growth in Asian economies and the spectacular rise of China which joined the World Trade Organisation (WTO) in 2001 and implemented a free trade agreement with us in 2008.

The point here is that trade agreements, both multilateral and bilateral providing better market access and trade rules, combined with growth in purchasing power in our Asian neighbourhood, have materially impacted on our ability to export and on farmers’ livelihoods in New Zealand.

Of course, today there are other developments to note.

That same rise in purchasing power in Asian markets has led to increasing sophistication on the part of consumers.

Consumers have choices and increasingly are prepared to choose for quality, safety and sustainability – that works well for New Zealand: our brand image in Asia is high, but in other parts of the world, especially in Europe, we see contrary currents.

Last week, for example, a coalition of European health, environment and animal welfare organisations published a report calling for a 25% tax on meat consumption to compensate for so-called environmental “damage”. 

Such calls are not new, nor should any right-minded person apply them to New Zealand products with a completely different carbon footprint, but they are increasing in intensity.

It makes little difference what you might think about climate change (I for one am convinced it is real and needs to be addressed) – the growing interest amongst consumers in knowing more about the environmental profile of the things they eat, about where they come from and how they are produced, along with their carbon profile, needs to be addressed, even more energetically than previously.

I believe New Zealand farmers have a good story to tell here: this story now needs to be placed at the forefront of our strategy and we need to tell it better.

One last thing to mention:  New Zealand’s agriculture sector is being impacted by the technological and digital revolution that is all around us.

There are benefits to be had for on-farm productivity and I know the sector is rising to this challenge.

There are benefits too in the international market-place as producers can engage more easily with consumers, including around those provenance and sustainability concerns I mentioned a moment ago.

Like everything else, trade today is becoming digitised and the implications of this need to be thought through by producers and policy makers alike.

Trade war or peace? 

It would be great if all this could happen without politicians getting in the way.

Unfortunately, that is not the case –  some 25 years since the Uruguay Round was concluded exporting from New Zealand remains frustrated by a range of tariffs and increasingly non-tariff trade barriers in all our external markets.

That includes those who style themselves as the most open.

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

That disagreement has spilled over to the WTO, that great life-boat for international trade which is now on the rocks and taking on water.

How did it come to this ?

It’s fair to say that there are some deep-seated problems in the global economy that have existed for some time and have now come to a head.

We are reaping the bitter harvest of the failure to conclude the Doha round of multilateral trade negotiations which the late Mike Moore was instrumental in starting in 2001.

The rules of the multilateral system have simply not kept up with the pace of change in global markets and the result is the creeping protectionism we see around the world.

This isn’t just confined to the United States, but President Trump has certainly raised protectionism to an art form – “trade wars are good and easy to win”, he has said.

In fact, they are not so easy to win and they have enormous implications for a small, open and outward-looking economy like New Zealand.

This is what we know:

The US departed the “fellowship of the ring” in the Trans Pacific Partnership (TPP) which has nonetheless continued as the Comprehensive and Progressive Agreement on Trans Pacific Partnership  (CPTPP) – a veritable mouthful of an agreement.

Tariffs have also been applied on bogus “national security” grounds to New Zealand’s tiny 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 it is the trade war between the United States and China that has caused the real damage.

At the height of the trade war tariffs were applied by both sides to around $700 billion in two-way trade.

Both economies have been severely impacted – one analysis I have seen has shown that the cost of increased tariffs amounts to about $2000 per year for each American household.

The President has promised $28 billion over two years in trade-distorting subsidies to American farmers to compensate them – around $19 million has already been paid out.

Global markets have been unnerved and supply and value chains disrupted.

Last October the WTO  downgraded its forecast for trade growth to 1.2 percent, down from 2.6 percent last April.

It’s not yet clear whether the “phase one” trade deal announced in mid-January will bring a new dawn in relations between the US and China.  

I have described the deal as a “truce ending hostilities rather than a treaty ending a war”.

That’s because the rivalry between the two nations is about more than just trade – it’s a strategic competition for dominance in the global economy between a declining power and a rising one.

The deal is a partial one, which covers only certain aspects of the trade relationship and is almost certainly not in keeping with WTO rules.

Most worryingly the deal marks a return to “managed trade” of previous generations: it contains a commitment on the part of the Chinese to buy a large quantity of US agricultural products – even before the virus, to buy that much in two years was going to be a challenge even for China.

And the deal is apparently backed up by a dispute settlement process which is feeble at best.

Maybe “phase two” of the deal will deal with a number of the US remaining complaints such as the role of state owned enterprises (the same ones doubtless that will be buying all those agricultural goods!), cyber and investment issues.

New Zealand’s experience of China has of course 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 and prior to the phase one deal have – somewhat astonishingly – become the largest foreign food supplier to China.

Yet we too continue to face challenges in the Chinese market – which is why the FTA upgrade announced earlier last November is so important.

When it comes to the trade war, what we know is this: using increased tariffs to promote market openings is a blunt instrument which does far more harm than good.

Our strong preference would be for the United States to join with others and deal with problems through the WTO.

But there too, American concerns about the operations of the Appellate Body – an appeal process for disputes – have led to the serious weakening of the dispute settlement system that, despite some imperfections, has served the international community well since it was established in the Uruguay Round.

New Zealand strategy

In this rather depressing context, what’s a free trade loving country like New Zealand to do ?

Fortunately, our trade negotiators are eternal optimists.

We have several new opportunities before us, which deserve our continuing attention.

Time allows me to mention just a few.

Last November it was announced that the long-running Regional Comprehensive Economic Partnership (RCEP) – the most important FTA you’ve never heard of – is close to completion.

RCEP is an opportunity to bring a number of our other trade agreements in Asia together and to get India on board.

That last bit – getting India on board – might yet elude us, but RCEP will send a powerful signal to the rest of the world about our region’s willingness to embrace better trade rules.

More significant for the agricultural industry is the prospect of the NZ/EU FTA.

For the longest time, we have tended to see the EU as a competitor rather than a partner.

This has tended to obscure both the continuing economic importance of Europe even as we have 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 now 27 member states of the European Union constitute a 450-million strong consumer market, ranking, at least prior to Britain’s departure, 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 this negotiation provides an opportunity to demonstrate openness to trade at a time when others are turning inwards, and to fashion some next generation commitments in areas like digital trade that can address today’s trade challenges. 

From a New Zealand perspective, it’s also a chance to promote 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 – no European farmer and many of the member states are going to want to expand agricultural market access for New Zealand and no New Zealand farmer or government (we hope) is about to give in toe European demands for greater protection of generic names for cheese like feta, parmesan or mozzarella.  

There is doubtless a deal to be done with the EU but it will in the end come down to political will and an assessment of how important the “strategic” gains might be compared to the more tactical issues.

It might be tempting for some to see the prospect of a future deal with post Brexit Britain as an alternative to a deal with the EU, but it should not be seen in that way.

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

Britain has now left the EU but until the end of the transition period remains a member of the Customs Union and the Single Market.

Until the final divorce is completed Britain cannot implement any FTA with New Zealand, even if negotiations can get underway.

And Britain will have its hands full this year negotiating its future relationship with the EU including an FTA.

New Zealand’s interest has always been in an orderly Brexit – that is to say one where any risks to our continuing business are minimised.

One area where risk has arisen is in relation to New Zealand’s country specific tariff quotas for sheepmeat, butter and beef.

I don’t want to dwell on this today, other than to say a right royal fight with both the EU and Britain is being set up if they truly think they can simply divide these quotas in half.

The broader point, I think, is that we should not necessarily assume that “global Britain” will be any more sympathetic to our agricultural interests than previously.

We hope they might be and want to encourage them to that end – Mel Poulton’s work will be critical in this effort – but there are no guarantees.

There are opportunities from a future FTA and from future British membership of TPP, but there is a lot of water to flow under the bridge until this can become a reality.

Conclusion

Trade negotiations are rarely straightforward, and, somewhat like this speech, can go on and on.

In today’s uncertain world New Zealand is not without choices when it comes to possible partners, but the one choice we really have no choice but to make, is to participate as best we can in processes which bring down trade barriers and put in place better trade rules.

And if the terrible virus that is now threatening the world teaches us anything, it is that we are more globally connected than ever before: solutions to global problems, whether in relation to epidemics, climate change or trade, require global solutions.

That means that to capture those opportunities that exist we need to work even more closely together as an industry, as a country and as a global trade community.