Address to LEANZ (I)

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“The Future of Global Trade Institutions – The Context”

Address to the Law and Economics Association of New Zealand

Stephen Jacobi, Executive Director, NZ International Business Forum

Auckland, 18 March 2021 & Wellington, 29 April 2021

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It’s a pleasure to be with you this evening and to be joined by my colleague Stephanie Honey.  Our thanks to Richard Meade/Brett Woods for the invitation.

We’re delighted with the theme of this evening’s seminar.

Much of the commentary about trade in this country revolves around the pros and cons of particular trade agreements, which sometimes seem to come out of nowhere – like the recent Regional Comprehensive Economic Partnership or RCEP – or which seem to take so long to negotiate – like the Trans Pacific Partnership – that everyone has forgotten why we got into them in the first place.

In particular, there is a real lack of discussion about anything to do with the World Trade Organisation (WTO), which may seem so arcane and distant that it has very little to do with New Zealand.

Nothing of course could be further from the truth.

As a small, geographically distant trading nation, New Zealand relies on the global rules for trade and investment which underpin our national economy.

That alone should make the WTO our top trade priority.

If there is one thing we have learnt from this pandemic, it is that the ability to trade really matters.

In our session this evening we’d like to explore this in a little more detail.

I’ll focus first on the current situation and context for global trade. 

I’ll look at the impact of the pandemic, the spread of protectionism, the complex geo-politics at play, the rise of bilateral and plurilateral agreements, the expansion of new business models, including in the digital space and the ever-present danger of climate change, which risks bringing the whole shooting match to a premature close.

Stephanie Honey, who is one of New Zealand’s foremost experts on the WTO, will look at the impact of all this on the WTO, how the current problems of the WTO can be understood and what can be done to address them.

The impact of the pandemic

Harry Truman’s two-armed economist is never far away from debates on trade: on the one hand, this; on the other, that.

When it comes to the pandemic there’s no escaping that things have been very bad and for many around the world they still are.

In some places they are getting worse.

The human toll has been incalculable, along with a massive loss of human life and human potential.

The impact on the global economy and trade has been pretty dire.

The economic downturn in 2020 was the worst peacetime global contraction since the Great Depression.

Over 150 economies are expected to have per capita incomes that are below their 2019 levels in 2021.

In April the IMF released its World Economic Outlook, in which it projected global growth for 2021 to be 6 percent, which is 0.7 percentage points above the previous forecast in February.

Growth is expected to moderate to 4.4 percent in 2022.

The WTO is forecasting a growth in world merchandise trade of 8 percent this year, after a decline of  5.3% in 2020, less than the 9.2 % drop predicted earlier.

Much of course will depend on the success with which economies are able to get on top of the pandemic and to hasten the vaccination effort.

The IMF describes this as a race between the virus and the vaccine.

In this difficult global environment New Zealand’s goods trade held up reasonably well, especially during the height of the pandemic, but has begun to fall back this year.

Exports and imports were both down in February, with exports declining to all markets except China, which saw an increase of $369 million compared to February the previous year.

This fall-off in goods exports is possibly a result of the resurgence of the virus in some markets and increasing difficulties experienced with shipping and airfreight.

There are increasing bottlenecks at our ports, shipping rates are rising exponentially and airfreight is both expensive and facing capacity issues with airlines reducing flight schedules.

Of course, in services, especially the ‘people-intensive’ sectors where we are strongest, such as tourism and education, the news continues to be bad.

In 2019, our services exports were worth $26.4 billion: in 2020, that figure had fallen to $18.3 billion, with the travel category (which encompasses tourism and education) dropping by 40 percent.

The pandemic has a long tail and we may be living with an unstable environment for some time to come.

Yet what is clear is that as we work to get out of the mess that has been created by the virus, our economic recovery will continue to depend on our ability to do business with the rest of the world.

Spread of protectionism

In a recent media interview New Zealand’s Chief Trade Negotiator, MFAT Deputy Secretary Vangelis Vitalis said that during the pandemic there had been the sharpest spike in protectionism since the establishment of the WTO.

That’s quite something!

Certainly protectionism had been growing since before the pandemic with a certain President in the White House announcing that “trade wars are good and easy to win”.

The sheer magnitude of the tariffs applied not just to US/China trade but on various partners – including tiny New Zealand’s exports of steel and aluminium – served to destabilise markets, encourage tit-for-tat responses and, as Stephanie will explain further, poison the atmosphere in the WTO.  

Even so US and Chinese trade war measures are responsible for only around one-quarter of all the trade-restrictive measures that have been deployed, including not just tariffs but also trade remedies and especially, subsidies.

The US has resorted to large-scale subsidisation to compensate farmers’ lost incomes which penalises unsubsidised players like New Zealand.

The early onset of the pandemic saw the general climate of protectionism worsen with import and export restrictions applied to a number of goods including essential health supplies and food.

In the course of 2020 statements from various international organisations such as the G20, APEC and the WTO all served to lower the temperature as countries sought to work more together.

Latterly however, as countries have started to move on vaccinations, new protectionist pressures have reared their ugly head once again.

Both the EU and the US, despite signing up to those numerous international statements to the contrary, have introduced measures to restrict the flow of vaccines or associated goods.

Numerous economies also continue to maintain tariffs on goods like vaccines, soap and syringes – all of which impose costs on economies when they are trying to fight the pandemic and develop and distribute vaccines.

Fortunately New Zealand’s markets remained largely open during this period and the Government was able to negotiate a number of agreements with partners to keep supply chains open and keep trade flowing.

Unfortunately the threat of protectionism continues to overshadow the global economy just at a time when we will want trade and investment to be making the maximum contribution.

Complex geo-politics

Behind some of the protectionism that we see around the work lurks a dangerous geo-political “Game of Thrones”.

It’s a story of a rapidly rising power, a slowly declining power and a whole bunch of players with limited or no power at all.

It takes place in the region we call our home and involves some key friends and partners of New Zealand.

China’s rise as an economic power is driving growth across Asia even during this pandemic.

China’s success in lifting millions of people out of poverty cannot be denied, but their policies at home and abroad are causing deep concern on the part of the liberal democracies.

The United States has described China as a “strategic competitor” and the EU has described China as a “strategic rival”.

The former US Administration went out of its way to raise the temperature in the relationship, seeking overtly to contain China’s rise and citing problems in both economic and political areas.

The trade war between the two had little to do with trade and mostly served to penalise the United States, but had grave global consequences.

The United States has drawn together a new coalition to give more shape to its vision of  a “free, open, secure and prosperous” Indo Pacific.

Key allies and partners may come under increasing pressure to “pick sides” and for some, such as Australia and Canada, there have already been significant consequences in terms of lost economic opportunities.

The inauguration of the Biden Presidency has seen a degree of change in the rhetoric, but it is interesting to note that by and large the tone on China remains combative, the tariffs have not been removed (neither on China nor New Zealand for that matter) and the Indo Pacific strategy seems to have been elevated – the first international meeting President Biden has attended was for the “Quad” group of countries – the US, Australia, Japan and India.

There’s little doubt that American commitments to Asia have underpinned an ‘age of peace” in the region, but the outlook is increasingly menacing.

New Zealand may be reluctant to be asked to choose between our largest trading partner and our “very, very, very good friend”.

As the old adage goes, when elephants fight, it gets tough on the grass.

Rise of bilateral and plurilateral agreements

Against this background, trade policy has not stood still in recent years.

New Zealand like many others has been negotiating a number of bilateral and plurilateral agreements of which the NZ/China FTA, the NZ/ ASEAN FTA, CPTPP and now RCEP are the most significant.

Partly this has been a response to the slow pace in the WTO Doha Round and to the business community’s continuing push for more open and effective trade arrangements which can remove tariff and non-tariff barriers and reduce the cost of doing business.

Even so, it’s interesting to note that New Zealand still has no existing or planned preferential market access with almost 40 percent of the world’s economy consumers.

Around half of this is represented by exports to the United States where our decades-long quest for an FTA has not yet been rewarded.

That is not to say that all sectors are fully liberalised in the FTAs we do have.

The “shag on the rock” is the dairy industry – even with our coverage of FTAs, dairy only has access to around 12 percent of global dairy demand at tariffs of less than 10 percent.

Even our very high quality and recently upgraded FTA with China continues to see dairy exports affected by safeguard tariffs – these tariffs however will be completely removed within 3-4 years.

According to the WTO there are around 420 preferential trade agreements in force around the world.

All are not of equal quality or consistency with WTO rules and they present a rather confusing picture for exporters.

This is what we call the “noodle bowl” of overlapping requirements which plurilateral agreements like CPTPP and RCEP by bunching numerous partners together try to overcome.

Changes in business models

One area which bilateral, plurilateral and multilateral agreements have all been forced to address concerns new models for international business.

The rapid increase in services trade requires more focus on behind the border regulatory policies affecting particular sectors.

The advent of global value chains whereby production is spread over several jurisdictions requires goods to be moved more speedily through supply chains.

The rise of digital transactions requires a different approach to the flow of data across borders, protection of privacy, systems for payment and the applications of new technologies just to name a few.

There has been a tendency to regard digital and other forms of trade as quite distinct – in fact today all trade is digital as digital systems impact on the ways exporters connect with consumers, particularly through e-commerce and the way goods move around the world.

Digital has the potential to overcome that tyranny of distance that has plagued for New Zealand for so long and to facilitate the inclusion of different groups in trade including SMEs, women and indigenous entrepreneurs.

The point here is that trade continues to evolve and trade policy needs to continue to evolve with it.

The danger of climate change

Evolution is also required in relation to trade and the environment and especially climate change.

There has long been the thought amongst more progressive trade thinkers that trade and the environment need to be mutually supportive and there has been a corresponding increase in the number of environmental provisions inserted into trade agreements including both CPTPP and its first cousin the US, Mexico, Canada Agreement (USMCA).

A trade and the environment chapter has also been added to the NZ/China FTA, but disappointingly RCEP has no such provisions.

None of these agreements address trade in products with high emissions profiles or the problem of “carbon leakage” whereby industry shifts to locations where they may not face the same costs of addressing climate change, for example through less stringent regulation.

The looming real-world impacts of climate change and the growing consensus amongst both governments and business alike that something, finally, needs to be done means that the steps taken to date are unlikely to be sufficient to satisfy civil society.

Trade already suffers from an image problem, but the risks that climate change presents amount to a lot more than that.

The problem is that addressing climate change could give rise to disguised protectionism.

Measures could be conceived on the pretence of addressing climate change but are designed either deliberately and cynically, or simply inadvertently, to favour domestic producers over imports or to restrict imported competition altogether on spurious grounds.

There is a potential mine-field of dispute and litigation ahead of us if rule-making in this area is not undertaken multilaterally.

Both the EU and US are already advancing proposals for their own systems.

If past experience is anything to go by, it’s hard to see these turning out well for New Zealand.

And at the same time, many countries continue to maintain barriers to more environmentally-friendly goods and services, which could in fact help with the fight against climate change.

The devil as always is likely to be in the detail, but on the other hand (enter Harry Truman) Covid can be seen as a dress rehearsal for climate change where international co-operation and negotiation have the potential to deliver a more successful and lasting outcome than unilateral approaches.

Conclusion

It’s messy out there !

The challenges I have outlined are all bearing over the WTO and the multilateral trading system and in ways that are not always easy to predict.

That is why it is crucial, as I said at the outset, to think about the organisation at the centre of that system, the WTO, that great lifeboat for international trade.

Having played the role of Cassandra in the first act of the drama, I now turn over to Stephanie Honey who will look at what all this means for the future of the WTO.

I look forward to the discussion that will follow.