Trade And Health – A Business Perspective

Address to Otago University Trade and Health Seminar, Wellington, 16 February 2016 by Stephen Jacobi, Executive Director, New Zealand International Business Forum

Thank you for the invitation to be with you today and to participate in this important seminar.

I am interested not only to share a business perspective on the important nexus between trade and health but also to learn from you in your own areas of expertise.

Public debate on the implications of trade agreements is important and I welcome the opportunity to join this discussion alongside government and civil society stakeholders.

Today I’m speaking to you 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 and the peak business organisations.

We represent turnover of more than $20 billion and a large slice of New Zealand’s exports.

Our key concern is the way in which New Zealand connects and integrates with the rest of the world.

As business people we are also very concerned with the health and well-being of our customers, our employees and the society in which we and our families live.

I’d like to explore the relationship between trade and health in three ways:

  • First, by asking the question, why do we negotiate trade agreements in the first place
  • Second, by attempting an assessment of the Trans Pacific Partnership as the most topical of the agreements now before us
  • And lastly by drawing this together in some concluding thoughts about the health-trade nexus.

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 are not always kind to New Zealand.

Ludicrously high trade barriers in a number of markets continue to impact negatively on New Zealand and the most developed economies are among the worst offenders particularly when it comes to agriculture.

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

For some years now we have been waiting for that same penny to drop in the United States, Japan and Canada.

The most immediate problem is high tariffs – the duties applied to goods at the border – which can make trade uneconomic.

Successive global rounds of multilateral trade negotiations in the General Agreement on Tariffs and Trade (GATT) which later became the World Trade Organisation (WTO), have mostly done away with tariffs for manufactured goods but they still apply to agricultural products.

Beyond tariffs there are also quotas, or quantitative restrictions on the volume of imports: these too may appear to some like last century issues but they have not gone away.

If that is not bad enough countries can be highly inventive, when it comes to erecting new non-tariff barriers, which take the form of a variety of discriminatory regulations of differing types and tend to kick in once tariffs and quotas are eliminated.

More than ever before there is a need to finish off these old tariff and quota issues and address issues more relevant to a 21st century trade agenda like investment, supply chain connectivity, regulatory alignment and innovation.

We need to do this because business is changing – your grandfather’s (or grandmother’s) trade is not trade today.

Old business models based on import/export are giving way to increasingly complex value chains and networks.

This in turn 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 quotas and rules of origin to those 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 has been an enthusiastic participant in the process of signing free trade agreements, especially as progress in the WTO has stalled.

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 agreements.

There has been criticism of the proliferating nature of FTAs as a ‘noodle bowl’ of over-lapping and sometimes even contradictory agreements, which make for a complex landscape for business to navigate.

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 the Trans Pacific Partnership (TPP).

But TPP is not an end in itself – TPP is a pathway to a wider agreement amongst all 21 member economies of APEC, the Free Trade Area of the Asia Pacific (FTAAP).

With the signing of TPP on 4 February we are much closer than ever before to this long term goal of regional economic integration, but there are some important steps to take before TPP can become a reality.

Assessing TPP

TPP has been around for some time and New Zealand has been at the forefront of leadership of this initiative which was initiated in the last days of the Shipley Government but developed considerable steam under Helen Clark and Phil Goff.

Things moved decisively forward when the United States joined the negotiation in 2008 and when Japan joined in 2013.

What has emerged from this process is a new framework of rules for trade and investment amongst the 12 partners – rules which New Zealand has had a direct hand in making.

The 12 partners make up a significant economic entity – 36% of GDP, 800 million consumers and 40% of New Zealand exports.

TPP delivers new FTAs for New Zealand with five countries (the United States, Japan, Canada, Mexico and Peru), extends our existing FTAs with Malaysia and Viet Nam and updates our already highly integrated relationships with the remaining four partners – Australia, Chile, Singapore and Brunei.

The negotiation of TPP was complex, lengthy and controversial.

Now we have an outcome, we can begin seriously to assess the impact for New Zealand.

The debate is about whether the agreement is good enough, whether a better outcome could have been achieved and whether any downside risks have been mitigated.

Our assessment is that TPP delivers a substantive, if imperfect, outcome for New Zealand and real trade advantages across most but not all sectors.

Importantly too this agreement has been concluded – somewhat against the direst of predictions – without the need for significant domestic policy change.

That last comment, I suspect, is the area where we will have the greatest debate today.

A number of issues proved difficult throughout the negotiation and continue to be contentious.

I have time today to touch briefly upon five of these – and I hope we can have some further discussion about them in the Q&A or in the break.

I am referring here to:

  • agricultural market access
  • investment
  • intellectual property
  • pharmaceuticals; and
  • the Treaty of Waitangi.

Agricultural market access

Back in 2011 TPP Ministers agreed that TPP would be a high quality, ambitious and comprehensive’ agreement.

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.

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.

As it transpired in TPP an ambitious and comprehensive outcome was achieved for most sectors – tariff elimination was secured over time for beef (except in Japan), kiwifruit, other horticultural products, wine and forest products.

The outcome on dairy was significantly less ambitious – much to our great regret: on dairy TPP is neither ambitious nor comprehensive.

Dairy benefits from some useful tariff cuts and some new access, perhaps greater in value than any other sector, but it would gild the lilly to describe the outcome as a major win.

Dairy has a chance to try to improve the outcome over time – as we did when we negotiated CER in 1983 and dairy was excluded – and when other countries seek to join TPP.

At the end of the day the protectionist and anti-competitive forces in the United States, Japan and Canada proved stronger than the collective ambition of 12 negotiating partners.

It is the view of our negotiators that continuing the TPP negotiation would not, at this time, have delivered any better outcome for dairy or other sectors.

Investment

The second difficult issue I want to mention is investment.

All countries are locked in a struggle to attract foreign investment and New Zealand is no exception.

To connect with global value chains and get closer to customers, New Zealand companies themselves also need to invest more overseas – think of Fonterra’s farming operations offshore, Fisher & Paykel’s manufacturing operations in Mexico or even a small consultancy or software company needing to build a base in bigger markets.

TPP seeks to improve the climate for foreign investment by ensuring governments treat foreign investors much as they would their own local companies (‘national treatment’) and do not discriminate against them because of their country of origin (‘most favoured nation’).

Because governments do not always live up to their commitments, TPP, like all of New Zealand’s other recent FTAs, provides for compensation to be provided where there is proof of poor treatment and where this amounts to expropriation of the foreign company’s assets.

This is not the same as “suing for loss of profits” as is often claimed.

Even so TPP tries to mitigate the risks arising from investor state dispute settlement (ISDS) by setting up some high hurdles before such actions can be launched and by ensuring that a range of safeguards, exemptions and carve outs – including specifically in relation to tobacco – which upholds the Government’s right to regulate in important areas like public health[1].

I expect we will have more discussion about this and its specific relevance to health policy – for the time being, let me just say that we believe the risk to New Zealand from challenge under ISDS is low.

Intellectual property

The third problematic area – intellectual property – was the source of significant concern when sections of the negotiating text, which had not been agreed were leaked prior to the negotiation’s conclusion.

TPP generally applies and in some cases extends the disciplines of  WTO Agreement on Trade Related Aspects on Intellectual Property Rights (TRIPS) and seeks to strike a balance between the holders of these rights (the creators) and the users of intellectual property.

With one exception, the final text revels no major change to the status quo in New Zealand on a range of issues – patent term, patent coverage of software, parallel importing or the downloading of material from the Internet.

The one major change is the increase in the copyright term from 50 years after death of the author or release of a movie or music to 70 years, along with some other technical changes[2].

The Government estimates the cost of these changes to be $55 million across the whole economy by 2030: some such as the publishing industry are already questioning these figures.

Pharmaceuticals

In the case of medicines, which are obviously a concern for us all here today, there is no change to patent term, although the Government will be required to extend the term of a patent to compensate for any unreasonable delays in the patent examination process.

TPP will also require the Government to put in place a system that enables a pharmaceutical patent holder to be notified that a generic version of their product has been submitted to Medsafe for regulatory approval.

The status quo is preserved for new generation biologics medicines where the exsting 5 year protection for data is preserved, even though the United States sought 8 years or longer in the course of the negotiation.

The commitment on biologics requires the Government to apply the 5 years of data protection along with unspecified “other measures…taking account of local circumstances” but the Government is adamant that this will result in no change in New Zealand.

There is also little change to the way Pharmac operates, beyond a requirement to increase the transparency of decision making.

Pharmac’s operations also remain outside the scope of dispute settlement (either state-to-state or investor-state) and the TPP parties have agreed that it is up to governments to determine health expenditure priorities.

This together with the outcome on patents, data protection for biologics and the entry of generics make it hard for me to understand why the price of medicine should rise under TPP.

Doubtless others more knowledgeable will in the course of today challenge my thinking on this aspect.

As I noted earlier there is also a clear exemption for public health measures in the investment chapter that make it very unlikely that any New Zealand policies will be challenged under ISDS.

Treaty of Waitangi

The last problematic area relates to the Treaty of Waitangi.

There can be little debate that the Treaty is fully protected in TPP – the exclusion clause is very clear and applies to the whole agreement.

It extends previous practice by asserting that the interpretation of the Treaty is not subject to dispute settlement.

Maori are concerned that the right to invoke this aspect of TPP rests with the Government – this is because TPP is a treaty between nation states.

The way the Government honours the Treaty is a legitimate matter of public debate in New Zealand and TPP has no role in the debate.

Maori are also concerned that they were not properly consulted about TPP.

I personally believe this concern is justified and it is only right and proper to hold the Government to account.

But Maori opposing TPP also need to remember that TPP incentivises Maori asset holdings in farming, forestry and fishing, which, as the Federation of Maori Authorities (FOMA) has pointed out, is critical for Maori economic development.

TPP also safeguards Maori traditional knowledge by improving the way such knowledge is addressed in the intellectual property system.

These provisions are further evidence of the way TPP preserves the Government’s right to regulate in relation to the Treaty of Waitangi.

Next steps

TPP is now entering the ratification phase.

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 – all this process is now in train.

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

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

President Obama needs to convince the Congress to pass the implementing legislation under the fast track procedure that was approved last year.

Other countries need to complete their own processes but TPP cannot come into force unless both the United States and Japan ratify.

Even while these processes continue other economies are stepping forward to announce they too would like to join the TPP train, including Korea, Thailand, The Philippines, Taiwan, Colombia and Indonesia.

Trade and public health

I’d like now to address the heart of the matter before us today – how can the requirements of trade and business be reconciled with the health needs of society?

The first point to make I think is that trade and health need to be mutually supportive.

A nation’s citizens are customers and workers – and quite likely shareholders and business owners as well.

The second point is that a growing economy promotes better public health outcomes – if we as a society make choices for public health, as surely we should, then trade is a way to pay for it.

The route to more money for medical research, vaccination programmes and hip operations comes through expanding trade and growing the nation’s revenue.

The third point is that trade policy does not exist in isolation – trade negotiations are part of a wider government machinery which seeks to achieve coherent outcomes across the range of government policies.

In the case of TPP for instance the trade negotiating team has included officials from the Ministry of Health – it is their job to safeguard this policy coherence to ensure that policies to promote trade do not run counter to policies to promote health.

The fourth point is likely more controversial – balanced intellectual property rights provide incentives for manufacturers of medicines to make these available to us.

New Zealand does not have a medicines industry able to develop the sorts of medicines that our people need or to undertake the research necessary to take account of local circumstances and the needs of Maori and Polynesian citizens.

These medicines are supplied through trade, which is why intellectual property rights formed part of the TPP negotiation.

But these IPRs need also to be balanced – and so TPP like TRIPs seeks to strike that balance in ways, which largely uphold New Zealand’s current practice.

The last point is the only one that can be drawn in the light of the current debate about TPP’s impact on health:  more needs to be done to explain these impacts so that transparency can increase public confidence.

Conclusions

Trade agreements matter because better and fairer trade arrangements confer advantage to New Zealand producers and suppliers, which is important for the nation’s economic security and well-being.

Trade agreements establish a framework of rules for trade and investment which apply to all parties, big and small.

In the case of TPP these rules will extend to a large part of New Zealand’s trading base, with a vocation to expand even further in the Asia Pacific region.

Despite its complexity, TPP is a good agreement for New Zealand – one, which achieves a significant economic outcome with a small price to be paid in terms of adjustment of existing policy.

Importantly too, TPP contains safeguards, checks and balances that help mitigate the risks of any challenge to New Zealand policies.

This is the case in relation to public health where exemptions restrict the application of dispute settlement whether with foreign investors or other economies.

There is no doubt that trade and public health need to be mutually supportive.

Expanding public understanding and support for trade agreements, which seek balanced, coherent outcomes across the entire negotiating agenda is also critical.

I welcome this opportunity today to contribute to that process.


[1] See Annex 9-B (Expropriation) to the Investment Chapter. The Expropriation Annex sets out guidance for Tribunals as to what constitutes an indirect expropriation. In particular, paragraph 4 says that: “Non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health (footnote 37),  safety and the environment, do not constitute indirect expropriations, except in rare circumstances.”  Paragraph 4 reflects that there are some activities so fundamental to the working of government that they do not constitute expropriation, even where an investor has been deprived of their property.  Footnote 37 in paragraph 4 sets out an understanding that the term ‘regulatory actions to protect public health’ includes certain things (namely: “measures with respect to the regulation, pricing and supply of, and reimbursement for, pharmaceuticals (including biological products), diagnostics, vaccines, medical devices, gene therapies and technologies, health-related aids and appliances and blood and blood-related products”). This understanding is noted as being “for greater certainty”, and it is specifically stated that this understanding does not limit the scope of paragraph 4.
[2] In one area related to circumvention of technological protection measures (TPMs) – eg, digital locks that protect copyright works such as video games – TPP will require New Zealand to establish a criminal offence for those who deliberately set out to circumvent such measures: until now New Zealand law has only targeted devices or software that permit such circumvention.  TPP will not require a change to existing law where circumvention is permitted for non-infringing uses (such as for research or after copyright has expired) and will not put an end to circumventing video zoning which is currently permitted under New Zealand legislation.