TPP – where to from here (and how did we get here anyway)?

Address to NZ institute for International Affairs, Wellington, 2 September 2015 – Stephen Jacobi, Executive Director, NZ International Business Forum.

Thank you for the opportunity to be with you once again.

At a time when many seem to have made up their mind about the Trans Pacific Partnership (TPP) and TPP’s possible impact on New Zealand, it’s good to see the Institute continuing to promote informed, balanced and robust debate.

That has always been the Institute’s hallmark and long may it continue.

I was last with you two years ago on 10 September 2013 when I was still Executive Director of the NZ US Council.

Re-reading the address I gave leaves me reassured that what I said then requires little revision, but more than a little dismayed that I am giving much the same speech two years later.

Back in 2013 I quoted US Trade Representative Mike Froman that the ‘end-game’ of TPP was before us, but I also cautioned that, in the absence of fast track in the United States Congress and with Japan only having just joined the negotiation we needed to be prepared “for a little more water to flow under the bridge”.

That turned out to be a mastery of diplomatic understatement – a lot of water, a flood in fact, has flowed under the TPP bridge, but for reasons I’ll indicate, I believe that we are now very much in the middle of that elusive end-game.

Today I’m speaking to you from the perspective of the NZ International Business Forum rather than the NZ US Council.

NZIBF brings together the leaders of some of the country’s largest and most internationally oriented companies and the peak business organisations.

Our key concern is the way in which New Zealand connects and integrates with the rest of the world and our advocacy of TPP reflects that with the arrival of Japan in particular TPP is about a whole lot more than a free trade agreement with the United States.

As we look at where we have got to with TPP, we see a deal which is at last coming together in its final form.

To un-pack all this today and to help explain ‘where to from here’ I’d like to focus on three areas – why we set out on this journey, where we are now, and where things might take us in coming months.

Why this journey?

There’s a well known joke about a tourist in Ireland (or was it Southland?) who asks one of the locals for directions to Dublin. The Irishman replies: ‘Well sir, if I were you, I wouldn’t start from here’.

In the same way if we were going to start all over again, to build a better framework for trade and investment, one which lays a foundation for growth and jobs, which puts to rest the trade issues of last century and addresses those of the current century at the same time, which tries to link in important new disciplines in the environment and labour, and reflect the way business is actually being done, then maybe TPP wasn’t the right solution after all.

Certainly the time it has taken to negotiate TPP – not quite as bad as the WTO but heading in that direction – would lead you to that conclusion.

The problem is finding that place to start.

But what other place was there? And how else can governments address the range of issues between them than through negotiation which requires them in different ways to surrender some aspects of their sovereignty in exchange for the greater benefits of inter-dependence.

We negotiate trade agreements primarily not out of ideology or because a text book tells us to but because we seek advantage for New Zealand.

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.

Trade brings you the car you drive, the clothes you wear, the medicine you take, the device you use and a lot of the food you eat.

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

International markets are not always been kind to New Zealand.

Ludicrously high tariffs in a number of markets continue to impact negatively on New Zealand, and the most developed economies especially Japan, Canada and the United States who are among the worst offenders when it comes to agriculture.

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.

It’s more than a little ironic to hear those challenging TPP say they are not ‘anti-trade’.

The fact is that trade ain’t what it used to be.

Trade is being replaced by integration.

Ultimately the path to more and higher paying jobs, more hip operations, a world class education system and better infrastructure can only be found through greater integration in global markets.

Where are we with TPP?

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

It remains an open question at this point whether TPP will live up to this vision.

Certainly the most recent meeting of TPP Ministers in Maui was unable to bring the negotiation to satisfactory conclusion.

But it is not true that Ministers made no progress.

In fact they did rather better than all the other meetings held to date in narrowing the range of differences to a handful – a big handful to be sure, but a handful none the less.

For much of this year in fact TPP has been in the doldrums – that is until the US Congress granted President Obama the fast track authority he needed to be able to complete the negotiation without risking it could be undone by Congress at the ratification stage.

With fast track secured – the first time an American President has had this since 2007 – the US Administration has brought some new energy to the negotiation.

This has led it to complete a series of important bilateral discussions with Japan, including relating to agriculture, but it was these discussions that ultimately derailed the Maui meeting, because the content was revealed to other participants only late in the piece.

American and Japanese negotiators appeared to forget that TPP is a negotiation amongst twelve parties and it was the Mexican Government, alarmed at the direction of negotiations on motor vehicles, which brought an end to the Maui meeting.

New Zealand was no happier about the direction of travel on dairy products than Mexico was on motor vehicles and was disappointed by the less than adequate tariff offers made by Japan, Canada and the United States.

Trade Minister Groser made clear in the final press conference that New Zealand, one of the principal architects of TPP, was not about to agree to conclude a deal on dairy which did not bring benefits to New Zealand farmers.

Maui therefore was an important turning point in the TPP negotiations.

From a long list, we now have a short list and it is this short list of outstanding issues to which Ministers and negotiators are currently turning their attention.

I have time today to touch upon only a few of these outstanding issues – market access, intellectual property and investment.

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

That this outcome should continue to be contested by some 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 there should be no exceptions.

Minister Groser has said that he is confident about the quality of what’s on offer for other products but for New Zealand it’s clear the real crunch point comes in dairy products, which constitute around 25% of our exports.

The question is not that dairy products are to be excluded – it’s rather more about the extent of their inclusion.

Again Minister Groser has suggested that the negotiating realities make the goal of tariff elimination unfeasible and so the question is whether New Zealand is able to gain access to a meaningful share of dairy consumption in Japan, Canada and United States and under what conditions.

Dairy is to New Zealand what motor vehicles are for Japan, wheat and grain for Canada, textiles for Viet Nam but with one major difference – global dairy markets are even more plagued by high trade barriers.

New Zealand cannot reasonably be expected to accept an outcome on dairy that is significantly inferior to what others receive for their products of major export interest.

I have no doubt that the Minister and his negotiators are deploying every effort to secure the strongest possible outcome and they deserve our full support.

It should be remembered of course that the value of agricultural exports outside dairy is not insignificant.

Tariffs paid to TPP economies in just four sectors – beef, horticulture, seafood and wine – amount to well over $130 million a year – that’s just the value of duties paid not any new business that could be created.

It’s also worth pointing out that other participants have their own market access issues – Australia on sugar, Viet Nam on textiles – which have yet to be completely resolved, not to mention other product areas like rice and motor vehicles, which are problematic.

If favourable outcomes can be achieved in other ‘sensitive’ areas, why not agriculture and why not dairy?

Intellectual property is an area where a lot of concern has been raised in New Zealand.

New Zealand’s interests in intellectual property are mostly defensive – we want to avoid higher costs and we want to make sure that the system for the protection for rights’ holders upholds and does not impact negatively on the innovation process.

At the same time we like others want to make sure that our own intellectual property is appropriately protected in international markets.

The advice of New Zealand negotiators to the information technology industry, which has been circulated on the internet, is that TPP by and large upholds the status quo in New Zealand except in the area of copyright where some extension to the current term of life plus 50 years might be agreed.

The wild rumours that have circulated about software patents, harsh penalties for illegal file downloading and a threatened end to parallel importing have largely been found to be mis-information.

On the question of medicines, the Prime Minister has said that the role of Pharmac will be protected and that where increased patent terms or longer protection of data for new generation biologic medicines results in increased costs there will be additional funding and New Zealanders will not pay more for prescriptions.

I doubt this will satisfy some in the community who have expressed concerns about this aspect of TPP – they will need to wait until the final text is released and to participate fully in the ratification process if they have continuing reservations.

On the question of investment, where as we understand TPP negotiators are close to consensus, we are again reassured by the Government that there will be protections for the continuing right to regulate in the areas of public health and the environment and the Treaty of Waitangi will be fully protected.

Again I understand the view of those who have concerns about this aspect, but I am convinced that provided the text is well drafted as we have seen in our past FTAs, the risk to New Zealand from future investor state dispute settlement is minimal.

I’d like to make a few comments on 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 vested 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 constitutional practice for all treaties is that the text is concluded and signed by the Government.

In this way TPP is no different from any other treaty including the World Trade Organisation, Kyoto Protocol or international labour standards.

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 as had often been claimed in secret or without prior discussion.

In the case of TPP we are likely to see the text well in advance of the signing.

This is because the US fast track legislation requires the President to advise the Congress 90 days before signing a treaty and to release the text to the USTR website within 60 days of doing so.

So TPP is already contributing to changing practice in the way treaties are made.

Where to next?

If I’ve learnt anything from the best part of ten years of speechifying about TPP, it is to be cautious when predicting where TPP might head in coming months.

TPP has been notorious for setting deadlines, which are then missed.

Substance needs to drive this negotiation and on that score there are reasons for optimism.

President Obama needs and wants TPP. The President’s legacy and his pivot to Asia are in the balance.

Prime Minister Abe also needs and wants TPP. His third arrow of structural economic reform is desperately in need of a target.

In different ways all other participants need and want TPP and others beyond the twelve are waiting in the wings.

But when this can be brought together in a way, which is satisfactory for most participants, is quite simply unknown at this point.

The forthcoming APEC Leaders meeting in Manila in November is an obvious target as all parties will be together and at the most senior levels.

Meantime all governments and supporters of the negotiating process need to redouble their efforts to convince a weary and skeptical public that TPP can still bring benefits despite some uncertainties.

In that context it’s useful to compare TPP to another big multilateral negotiation currently underway.

In Paris in December the global community will gather to consider how best to address the problem of dangerous climate change, reshaping and extending past commitments under the Kyoto Protocol.

Climate change is remarkably like trade. We know what needs to be done, we just have difficulty doing it.

We know we will be better off once we have done it, we’d just rather someone else did what was necessary, so we can continue doing what we’re doing right now.

It seems very likely that a political-level agreement will be reached in Paris – one which both developed and developing countries can ascribe to – but it remains to be seen whether the negotiation will deliver a set of meaningful, verifiable and legally binding commitments such that will reduce and limit the extent to which greenhouse gases can pollute the atmosphere.

Even if the goal of meaningful environmental action falls short – with disastrous consequences for low-lying, island nations and severe weather impacts for all of us – it will doubtless be argued that the global community will have taken another step forward and therefore the effort will have been at least worthwhile.

This in no way should prevent the parties, particularly at this stage, for seeking the most ambitious outcome possible.

I expect the same story will be told about TPP: perhaps not the long hoped for ‘big bang’ for trade and investment liberalisation, not the definitive answer to protectionism, but some really useful reductions in trade barriers across a range of industries – including dairy – and a better set of rules than we had previously.

And certainly not the Armageddon for our domestic sovereignty and policy making that some would have us believe.

Conclusion

When it comes to seeking a global solution to the danger of climate change or a new trade architecture in the Asia Pacific region, there is little other practical way to foster inter-dependence than through inter-governmental negotiation.

And negotiations are complicated. Their outcomes are often uncertain. And there are inevitably risks and trade offs.

TPP represents an extraordinary attempt on the part of twelve governments to deliver a more seamless environment for business and one that fulfills the promise of growth and jobs.

Yet entrenched protectionism and anti-competitive behaviour may yet stymie the best of intentions.

That would be a shame, for New Zealand and for the wider region.

For TPP is more than the sum of its parts: beyond dairy products, beyond motor vehicles, beyond intellectual property, what is at stake is the future of economic integration in the region.

That makes the potential prize of TPP continuing to be worth the effort and why the members of the NZ International Business Forum continue to support the negotiating process.