Speech to Governance NZ Annual Conference, Auckland
Thursday 21 September 2017
Stephanie Honey – Associate Director, New Zealand International Business Forum
Good morning. My name is Stephanie Honey.
I am an Associate Director of the New Zealand International Business Forum. We are a group of senior business leaders concerned with New Zealand’s engagement in the global economy. I also run a small business offering trade policy strategy and education. And for nearly twenty years prior to that, I was a trade negotiator at the Ministry of Foreign Affairs and Trade.
You may wonder why I have been asked to come and talk to you about trade when the theme of this conference is about “stronger governance for better business”.
I’m here to make the case that, in this increasingly globalized world, those concerned with governance and better business simply must keep a close watch on the international arena. And that’s true whether or not your organisation is directly involved in the business of trade.
It has often been assumed that trade is the purview of management, not governance – the mundane operations of loading containers onto a ship, for example, or the fine details of how to take cost out of supply chains, rather than big strategic issues.
Good governance obviously helps a firm to know where it is going, to improve performance, and to find the right balance between short-term gain and building long-term wealth. It requires not just thinking about strategic issues but also finding that sweet spot between risk and opportunity.
Today we are facing a series of profound changes to patterns of business, trade and global economic governance. And those changes bring governance into the mix. Why?
These changes offer some fantastic opportunities, of course – but also some large risks for long-term prosperity – for businesses, for nations, and for the global system itself. That makes finding the sweet spot even more challenging than usual.
In fact, earlier this year, the Governor of the Reserve Bank identified the international trading environment as the single biggest threat to New Zealand’s prosperity.
So let’s start with that international trading environment. Most economists would agree that trade is a pretty big deal, particularly for New Zealand. If you think about your day so far – the coffee you drank, the iPhone you checked the international news on, the car that got you here – all of that is thanks to trade.
Beyond simply generating export returns, trade has huge benefits for our economy. It offers us things that we simply cannot produce ourselves. It brings new ideas, new technologies, capital flows, skilled people and high quality inputs, along with enhanced competitiveness for firms and productivity gains for our economy overall.
It’s especially important for New Zealand. We are tiny, and distant from markets. For firms to grow, and for our country to prosper, and for your businesses to keep thriving we need to export to generate returns that will help both to raise living standards and give us access to those things we can’t produce ourselves.
New Zealand firms are only too aware that they come from a small and geographically isolated base. Clearly global markets are where their fortunes lie in many cases. But global markets can be intimidating. Exporting and offshore investment are risky, unpredictable and costly. Our exporters need a solid system of global economic governance to create the optimal environment for international activity.
The current systems originated some seventy years ago with the GATT. Originally, those global trade rules covered only industrial goods – not a great scenario if you’re a big producer of butter and meat.
That situation was partly fixed with the establishment of the WTO in 1995. It set new rules for agriculture, services, intellectual property and a host of other areas. To put it another way, it has really only been for the last twenty years that global economic governance has become more secure, more comprehensive and more predictable.
The WTO is often described as the “multilateral rules-based trading system”. Let’s unpick that. “Multilateral” meaning many parties – currently 164 and counting. That represents virtually all of the active participants in the global trading system. “Rules” are transparent, predictable and legally enforceable – and for the most part, followed by everyone.
Those global rules are absolutely critical for New Zealand and other small players. Without the rules, it would be the Wild West – and that’s clearly not a comfortable place for the little guy. To put it another way, the huge value of the WTO system lies in reducing the risk of our trading partners unilaterally using harmful policies such as subsidies or tariffs against our exports.
The actual market opening involved in those twenty-year-old WTO agreements was pretty limited, and painful to achieve. So it’s probably no surprise that over the last two decades, countries – including New Zealand – have rushed to negotiate bilateral and larger free trade agreements. Countries became frustrated that the rules had not kept pace with their enthusiasm for opening up markets, or with the evolution of business models.
The world is now a very different place to twenty years ago.
We are seeing huge demographic changes, including an enormous new wealthy middle class. In 2011, the global middle class was 1.7 billion people. By 2030, it is estimated to be 4.9 billion, and two-thirds of that total will be in the Asia-Pacific. It is clear that the centre of economic gravity for the foreseeable future will be in our backyard – which is great news for a country used to being very far away from markets.
We are also seeing real changes in the way that business is conducted. With globalisation and the freeing up of markets, we have seen the development of sophisticated supply chains and “global value chains”. In these value chains, production takes place across multiple countries before delivery to a final customer. Again, lots of opportunities for New Zealand, for goods and services.
We are also seeing a huge expansion in global trade in services – which were once largely considered “non-tradable”. And we are seeing more and more cross-border investment.
But perhaps the biggest change – and challenge – confronting the global economic system is the digital revolution. It’s hard to remember these days that there was a time when the internet did not exist – here’s a map of the entire internet in 1973. Compare that with this next slide – a much more recent visualisation of the internet, and it’s probably virtually “unmap-able” today. Digital connectivity has come to dominate the way that we buy and sell and consume and trade and even live.
The rise of automation, disruptive technologies, artificial intelligence, augmented reality, the Internet of Things – even down to the relatively unglamorous business of supply-chain connectivity through blockchain – these are all changing the way that business, and trade, take place.
If we use data as a proxy for “digital trade”, it is startling to compare how flows of data stack up against trade flows. Where global trade growth bottomed out at 1.7% last year after a seven-year period of dismal performance, data flows increased 45 times between 2005 and 2015. They are projected to increase by another nine times by 2021. The Economist magazine has described data as “the new oil”.
Thanks to digital connectivity, we are seeing the rise of ‘micro-multinationals’, as SMEs are able to engage with customers easily, instantaneously and at low cost on the other side of the planet. This has enabled huge additional participation in global trade, by emerging economies, small firms, women entrepreneurs – perhaps even potentially your own firms. It has led to dramatic improvements in connectivity of all kinds. But the fact of the matter is that the market is moving faster than the regulatory system. Models of global economic governance have struggled to respond.
Unfortunately, progress also comes with its challenges. Trade liberalisation and globalisation have lifted billions from poverty and unquestionably improved living standards around the globe. But economic development has not always happened evenly. And trade liberalisation has not always been done well with the right complementary and supportive adjustment policies and safety nets in place.
In many Western economies we are seeing signs of a retreat from globalization. We are seeing the rise of populist politics, Trump, and Brexit, and fears about immigrants. We are seeing new protectionist trade barriers being thrown up, and the rejection of big trade deals.
This “shifting of the tectonic plates” has some important implications for governance – for governance of the global system, of course, but also for all of you, in relation to your own firms.
New Zealand was described as having a “rock star economy” not so long ago. But we are small, and distant, and open. That makes us uniquely vulnerable to any downturn in the global economy, or global geopolitics – whether or not you are actually trading. And there are some tangible threats out there.
The most alarming threat for a “tradie” like me is that there has been a loss of appetite for big trade-liberalising deals. The WTO Doha Round of trade negotiations got underway with a hiss and a roar in 2001, but is now effectively on ice, although nominally it is still being negotiated. It is crucially important for New Zealand that the integrity of the WTO remains intact, and in particular that its credibility as a legally-enforceable framework of rules continues.
Equally, mega-regional trade deals have struggled. I’m sure you will all be aware that one of President Trump’s first acts of office was to announce US departure from the Trans-Pacific Partnership, or TPP. The NZIBF, and I’m sure many others in the Asia-Pacific business community, were dismayed at that decision.
One of the central ideas driving the TPP was to update the regional economic governance structures to reflect that changing world I talked about earlier. It was one way that governments could play catch up and try to future-proof the regulatory environment to enable trade to flow, and to grow. That’s why TPP was styled as a “next generation” or “21st century” agreement. TPP covers not just tariffs but non-tariff barriers, not just goods but services, not just trade but investment, not just border measures but behind-the-border measures, not simply regulatory harmonisation, but processes for regulatory coherence and convergence.
So the US decision to withdraw seemed like a massive missed opportunity to help safeguard our continued prosperity. However, it now appears that reports of the TPP’s demise were exaggerated. It is true of course that as things stand, TPP cannot enter into force without the United States. This is because of the provision whereby a threshold of 85 percent of the GDP of the original twelve members must be met.
Latterly however the remaining eleven members have been exploring whether it might be possible to bring the substance of the agreement into effect. A number of Ministerial and officials’ meetings have been held, and are taking place with increasing intensity. It’s never a good idea to be too optimistic about trade negotiations, but the signs are modestly positive. The Parties are aiming to reach consensus on a way forward by the time APEC Economic Leaders meeting in Da Nang in November. But of course there is still a significant risk that the politics just won’t come together in the end.
More broadly, many economies in the Asia-Pacific like to assert that the region is “open for business” – but how much that is reflected in concrete action remains to be seen.
The progress that is being made is probably best described as “patchy”.
New Zealand is part of the ASEAN-led Regional Comprehensive Economic Partnership, or RCEP. While RCEP continues to make progress, that progress – at least to a business observer – seems frustratingly slow. There are vastly different levels of trade-liberalising ambition among the parties. So we cannot be sure how ambitious the final agreement will be, even when it is concluded.
Looking beyond RCEP, New Zealand is actively engaged in seeking to broaden our options on the global stage, supplementing our existing range of trade agreements with new or deeper versions. In some cases this is as much about level-pegging with others who are striking their own trade deals with important partners as it is about new market access per se.
We are now in the early stages of a negotiation with the ‘Pacific Alliance’, a grouping of Latin American nations including Mexico, Peru, Chile and Colombia, and MFAT has just put out a call for submissions on this proposition. The significance of the Pacific Alliance should not be overlooked. It already represents 221 million consumers, equal to the world’s sixth largest economy. Internally, the Pacific Alliance is deepening its own economic integration in a high quality, comprehensive and ambitious way. It is now taking a step across the Pacific Ocean, to New Zealand but also to Australia, Canada and Singapore. All of its new associate members are of course TPP participants too. The Pacific Alliance may make faster progress than RCEP and is certainly one to watch.
Further afield, we are close to launching FTA negotiations with the EU – one of the world’s most significant trading nations, and home to over 500 million wealthy consumers.
And closer to home, we are looking to upgrade our very significant and high-quality FTA with China. While that FTA was famously the first by a developed nation with China, back in 2008, the world has changed since then, and we need to ensure that the trade architecture keeps pace.
Ultimately, of course, it would be great to see a move back to the most widely-applicable rules possible. One of the big downsides of the huge explosion of FTAs that we have seen in the last twenty years has been the creation of a “noodle bowl” of conflicting rules and levels of market openness. The mega-regional FTAs like TPP and RCEP would go some way to streamlining that muddle. They themselves are seen as pathways to a region-wide FTA, known as FTAAP. If it could be realized, FTAAP would be the largest and most diverse trade zone ever conceived. Aggregate benefits are believed to range from $1.3 to $2.4 trillion per year by 2025 and show the region’s trade to grow by a conservative estimate of over 25%.
These are gains that obviously should not simply be left on the table – but the challenges of getting to that point should not be underestimated.
Likewise in an ideal world we would see all 164 WTO members come back to the WTO negotiating table too, to develop a “global update” of current trade architecture, but again the climate does not seem favourable to that right now.
Indeed, it is clear that at least some countries are giving thought to other ways to approach the next seventy years.
We are seeing from China in particular some thinking on this topic. President Xi Jinping has made some hugely inspiring statements in support of globalisation and trade liberalisation and decrying rising protectionism over the last year. But it is clear that at the practical level, China’s focus is more strongly on the “Belt and Road Initiative” rather than more trade deals per se.
Belt and Road seeks primarily to build capacity and infrastructure, and deepen links from the South Pacific all the way through Asia to Europe, following the path of the ancient ‘Silk Road’. There would seem to be huge potential for New Zealand to partner in that exercise with China and others, to share our knowledge, particularly around supply chains, and to deepen connectivity with some very important markets. There are some great potential opportunities. But equally there is a challenge for New Zealand in remaining relevant, engaged – and in ensuring that the focus does not swing completely away from the trade rules that have helped us to be that rock-star economy I mentioned earlier.
More broadly, it is clear that the “social licence” for further trade liberalisation needs shoring up. Certainly in New Zealand we have seen public discontent over TPP in particular. Collectively the government and the business community needs to do a much better job of making the case for the benefits of trade. Trade has even featured in this election campaign – trade is coming into the national consciousness in a major way.
What does all of this mean for you? In short, the key message is that, whether you are directly involved in trade or not, what is happening in the international arena is something that you need to watch, in the interests of better governance and better business.
There are lots of new opportunities on the horizon, whether you are currently exporting and interested in new or better markets, or simply looking for new inputs, new ideas, new technology, new money or outstanding people to grow your business at home.
But there are also some serious risks. Many of those risks are outside of our control. But it is also the case that creating the most favourable and enthusiastic supportive environment for trade, in New Zealand and in the region, is critically important. I urge you to speak up and support further trade liberalisation where you can. It can only enhance the chances of finding that sweet spot between risk and opportunity to advance the strategic interests and long-term success of your own organisations.
Here are some questions you might want to take your next Board meeting:
- How does trade impact on our business?
- What’s our policy on trade? AND
- How do we stay informed and ensure that we are thinking strategically about these issues?