Address to the 51st One Stop Update for The Accountant In Business, 25 October 2022

ADDRESS TO THE 51^st ONE STOP UPDATE FOR THE ACCOUNTANT IN BUSINESS

AUCKLAND, 25 OCTOBER 2022

STEPHEN JACOBI

EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

GLOBAL ECONOMIC UPDATE

Thanks to Brightstar for inviting me back to address this conference once again.

When I spoke to the 45^th Update back in May 2019 – ah, those were the days … – I said something must have got into the water for the world to become so crazy about trade.

In the land of the free and the brave, the (then) President had declared a trade war on China – whatever happened to that guy?

Brexit was drawing closer – and we know now how that is turning out.

The World Trade Organisation was on the rocks and taking in water – there’s been some positive news since then which has plugged some of the holes.

The European Union was fast becoming our BFF – we have now finished the trade deal which is, as I’ll explain later, good at least in parts!

And, for all that, no-one was talking about pandemics, a war in Europe, inflation or supply chain disruption!

Some things have definitely changed, others not so much.

The question on everyone’s minds these days is “when are things going to get better?”.

I don’t have a lot of good news on that score, but I’ll try to unpack the current situation by talking about:

• The ongoing effect of the pandemic and Putin’s abominable war in Europe
• Our newly concluded free trade agreements with the UK and the EU, which offer some light on the horizon
• What might be the disruptors in the years to come and what can be done to mitigate the risks and maximise the opportunities.

I’m speaking to you, as always, from the perspective of the NZ International Business Forum, a business organisation which brings together the leaders of key sectors in the export economy and the major business associations.

You can find out more about us at our website – www.tradeworks.org.nz  – and sign up to receive our regular updates.

Continuing economic fall out

When it comes to the effects of the continuing pandemic the situation is not much changed since I addressed the 50^th Update back in May.

While here in Godzone and in much of the rest of the world, normality has returned, and the worst may be over, the pandemic lingers on with new and potentially dangerous variants presenting every week causing significant economic uncertainty.

That is particularly the case in China, our largest trading partner, where continuing lockdowns are putting the economy under serious strain.

I said this in May (and several times since): even though the pandemic is not yet over, Putin’s war in Ukraine has wrecked the chances of an early recovery in the global economy.

Global economic activity is today experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades.

The cost-of-living crisis, tightening financial conditions in most regions, the war and lingering pandemic all weigh heavily on the outlook, according to the IMF’s October report.

Global growth is forecast to slow from 6.0 percent in 2021 (down by 0.1 percent since July) to 3.2 percent in 2022 (no change) and 2.7 percent (down by 0.2 percent) in 2023[1].

In October 2021 the IMF was forecasting growth for 2022 of 4.9 percent.

This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the pandemic.

Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024.

Behind these global statistics lie some very worrying trends.

They reflect some significant slowdowns for the largest economies: a US GDP contraction in the first half of 2022, a Euro area contraction in the second half of 2022, and prolonged COVID-19 outbreaks and lockdowns in China with a growing property sector crisis.

The developing world is a tale of two halves – a higher rate of growth and stronger bounce-back for the more advanced developing economies and a slower growth rate and bounce-back for the less advanced developing economies.

Because New Zealand trades with the whole world, these trends also signal troubling times in some of our more important markets.

World trade is expected to lose momentum in the second half of 2022 and remain subdued in 2023 as multiple shocks weigh on the global economy.

WTO economists now predict global merchandise trade volumes will grow by 3.5 percent in 2022—slightly better than the 3.0% forecast in April[2].

For 2023, however, they foresee a mere 1.0 percent increase—down sharply from the previous estimate of 3.4 percent.

It’s worth pointing out that whereas trade had dropped by 5 percent in 2020 it had grown by 9.8 percent in 2021 but now these gains have been offset.

The toxic mix of pandemic + war + inflation have got us to this point.

It’s what Singapore’s Prime Minister Lee has called the “perfect storm” or what our own Chief Trade Negotiator Vangelis Vitalis calls “the end of the golden weather”.

In this incredibly bleak global environment New Zealand’s goods trade has continued to hold up reasonably well, as it did during the height of the pandemic.

In August the value of goods exported to all major markets increased.

Annual goods exports were valued at $69.0 billion, up $7.9 billion (13 percent) from the previous year.

Annual goods imports were valued at $81.3 billion, up $17.2 billion (27 percent) from the previous year.

It’s a different story of course for services sectors like tourism and international education where returns remain depressed, although starting to pick up.

For much of the last year both exports and imports of goods were hampered by continuing bottlenecks at ports around the world and an exponential rise in shipping rates which makes getting products to and from market exceptionally difficult and expensive.

In 2021 the cost of transporting goods to and from New Zealand actually doubled.

There is some good news to report here – the Drewry World Container Index, which measures the price of a range of 40-foot containers across major shipping routes, has fallen sharply after peaking at over US$10,000 ($17,300) in September last year[3].

The rate of decline has continued in recent weeks, with the index now sitting at US$3483.

Anecdotal evidence suggest that the impact of these declining prices has yet to be seen in New Zealand.

The continuing slide in the exchange rate – while helpful for selling into overseas markets – tends to offset the decline in the cost of shipping.

Over time a low exchange rate will also feed into higher costs for imported inputs and start to impact on competitiveness.

Recent trade developments

Some further light in the tunnel has been shone by two recent trade agreements New Zealand has concluded.

Let’s start with the very good news of the NZ/UK FTA.

The FTA with the UK is a very good agreement from New Zealand’s point of view – one of the best I would say we have ever negotiated.

Ministers and negotiators deserve congratulations on this achievement.

That the deal was achieved in record time, amidst significant global uncertainty and through negotiations held entirely virtually, was no mean feat.

This speaks to the close alignment of the two nations – never strangers to each other and building on shared history and deeply held values.

Shared values are great for starting trade negotiations but finishing them well requires a joint assessment of shared benefits.

In the case of the NZ UK FTA, both sides can be happy with the result.

The agreement delivers for NZ commercially meaningful outcomes from day one, backed up by world-class trade facilitation and mechanisms that can address any problems that might arise.

For dairy the UK will eliminate tariffs after five years with useful quotas from year one.

For beef and sheepmeat, the timeframe is longer (16 and 15 years) but there are commercially meaningful quotas put in place from day one.

For other primary products like wine, horticulture, honey and fish there is tariff elimination from day one.

These commitments are backed up by world-class trade facilitation, including in the digital space, and by agreed processes to address non-tariff barriers.

The agreement is good for the UK as well:  alongside tariff elimination on all UK exports, it also covers services and investment, ensuring in large part that New Zealand and the UK treat each other’s firms as if they were their own.

It makes it easier for example for British suppliers of telecommunications and financial services to operate in New Zealand and gives British investors the same protections we give to other partners like China, Japan and Korea, although not as good as Australia.

The agreement factors in new and innovative commitments in the areas of sustainability and inclusion – for Māori, for women and for small and medium sized enterprises.

In the case of Māori, the Agreement includes the first ever stand-alone chapter on Indigenous co-operation we have put into an FTA.

In some key areas like the environment and climate change and the digital economy the Agreement’s provisions go much further than previously.

In a move that is already subject to some controversy, it expands by twenty years copyright on creative works – moving New Zealand closer to global practice.

The agreement provides a useful basis for the UK to join the Comprehensive and Progressive Agreement on Trans Pacific Partnership (CPTPP).

Future UK membership of CPTPP would provide a great platform for the UK and New Zealand to work even more closely together on global trade rules.

That’s the agreement on paper, we now have to make it work.

First step is ratification by both governments which it is hoped will be completed before the end of the year or early next year.

If the news is good on the UK front, I’m sorry to say it is not quite as good with the EU.

This was a long and arduous negotiation, calling on the highest skills of our talented negotiators.

There are some very good reasons why New Zealand went into this negotiation with the EU.

The 27 member states of the European Union constitute a 450-million strong consumer market, ranking as our third-largest export destination[4].

New Zealand in contrast is only the EU’s 49^th largest trading partner.

New Zealand and Australia, which is negotiating separately with the EU, are almost the last cabs off the rank with the EU which, with a new Commission in place, has now adopted a shiny new trade policy to put into effect.

This is the first FTA the EU has signed in three years.

Of course it was always going to be hard to secure ambitious outcomes for dairy and meat and so it proved.

Agricultural protectionism is still alive and well in Europe and our standing shoulder to shoulder with Europe in Ukraine doesn’t seem to be able to dent it.

As I said earlier, shared values are good for starting trade negotiations but not it appears for finishing them.

The good stuff first – the deal delivers tariff free access for a range of important export products, including apples, kiwifruit, other horticulture, honey, fish and wine, as well as better access for services and manufactured products.

There are a range of other positives too – including another welcome chapter on Māori economic co-operation, enhanced and enforceable provisions on sustainability and climate change and commitments on the digital economy including steps to promote paperless trade.

The undertaking of both parties to be held accountable for meeting Paris Climate Change commitments is largely a symbolic undertaking – how such a broad undertaking could be made actionable in a trade agreement is unclear. 

On intellectual property, the agreement does not extend patent protections for pharmaceuticals, something the EU would really have wanted, but the copyright term will be extended.

The EU will enjoy tariff free access to the NZ market, better conditions for investment, including a higher investment screening threshold similar to other FTA partners, and better access to government procurement.

And now the not so good: quite simply, despite the best efforts of negotiators, the agreement in principle does not deliver commercially meaningful outcomes for our largest exporters, dairy and meat.

Dairy and meat exporters will gain access to only a marginal proportion of EU consumption.

Even after full implementation, the dairy and beef sectors will face small quotas and high tariffs, restricting their ability to grow the market in a commercially meaningful way. 

Yes, some new access is granted for butter, cheese, milk powders and for beef and sheepmeat but for nearly all these the levels are very small and the quota arrangements likely to be difficult to meet.

That means that the agreement’s usefulness in terms of trade diversification will be strictly limited and could set an unhelpful precedent for future negotiations.

And that’s not all.

The  EU has convinced New Zealand to adopt new regulations about the way certain geographical names are used in international trade – especially names associated primarily with dairy products, wine and some meat products. 

This new strict regime would not just apply in New Zealand, but also to our exports into other markets.

An agreement of this type was always going to be part of an NZ/EU FTA – that’s a bottom line for the EU and they made that clear from the beginning – as indeed, New Zealand did, about access for agricultural products.

What is disappointing is that the agreement will include some names which have become generic rather than related to a certain geography.

I’m talking particularly here about feta and prosecco – the use of which will be prohibited – and parmesan – the use of which will be limited to existing producers.

Now these rules are perhaps not as onerous as we might have feared but they are at best anti-competitive if not protectionist and will restrict innovation, particularly for our artisanal cheese makers.

Of course the Government will claim that the best deal was obtained in the circumstances and there was a risk of continuing negotiations might have led to a worse outcome.

That is a judgement call for the Government to make but while there are undoubtedly positives for New Zealand overall, when it comes to the dairy and meat sectors, there is understandable disappointment that a once-in-a-lifetime opportunity to set the future conditions of trade has not been realised.

Looking ahead

Trade agreements are by no means the whole answer to securing New Zealand’s future in global markets but they are important because they can provide some mitigation against the worst effects of economic disruption by reducing or lowering trade barriers and putting in place more effective trade rules.

Disruption is going to be the name of the game in the years to come and certainly for as long as pandemic, war and inflation co-exist.

I’d like now to talk further about some of this disruption by focusing on three key elements – geo-politics, climate change and protectionism.

Geo politics

Perhaps like me you’ve been glued to your favourite streaming channel to watch “House of the Dragon”.

There’s another dragon on the rise and not just in Game of Thrones !

China’s rise as an economic power has been a game-changer in the first quarter of the 21^st century.

It was not unexpected – the centre of gravity in the global economy has been shifting from the Atlantic to East Asia for some time.

China’s success in lifting millions of people out of poverty cannot be denied, but in more recent years Chinese policies at home and abroad have – justifiably – caused deep concern on the part of the liberal democracies, including New Zealand, and most particularly the United States.

The recent Congress of the Chinese Communist Party will only have deepened this concern – China today is not the same as it was even five years ago and certainly not as when we signed our FTA.

Chinese leadership is embracing a big vision of transforming their country and ensuring it finds what they see as its rightful place as a global leader.

This however is running bang into the position traditionally occupied, for better or worse, by the United States  and the Biden Administration has largely continued his predecessor’s policy of trying to contain China’s rise.

Recent decisions which serve to restrict China’s access to semi-conductor chips and other technology, and even to prohibit Americans working in Chinese industry, are a case in point.

These restrictions do not seemed aimed at any particular Chinese policies or behaviours but rather to ensure the continuing dominance of American industry.

The Administration also increasingly casts Russia and China as very similar autocracies, but in fact they have very different economies.

In particular China’s rise has been fuelled by trade and investment with the rest of the world, whereas Russia has since Soviet days been more of an outlier state.

While China has a lot to lose in any geo-political contest with the West, tensions have only been heightened by China’s apparent tolerance of the Russian invasion of Ukraine and by developments in Hong Kong, Xinjiang and Taiwan.

The risk of an accident in the Taiwan strait is rising every day – this can only be reduced I would suggest if all countries stick to the established protocols and guidelines.

I recognise this puts Taiwan in an very difficult position as a thriving democracy and robust market economy, but these guidelines, which provide for ongoing contacts, have kept the peace for decades much like the Berlin Wall once kept apart the forces of East and West.

I see also disturbing trend in the public commentary about China in New Zealand: China is increasingly cast as a threat or even as a future enemy.

That seems somewhat at odds with China’s position as our largest trading partner and the respectful and largely cordial tone of our bilateral relations.

China now takes 32% of New Zealand’s exports and while other countries like Australia and Chile have an even larger exposure to China, New Zealand’s trade with China is growing very rapidly – ten years ago in 2011, the figure was only 12.8%.

The reason for this astonishing growth can be put down to several factors:

• First, China has continued to grow, albeit at a much reduced rate, even during the pandemic and has the capacity to do so in the future
• Second, the landmark free trade agreement signed in 2008 and its recent upgrade have given us excellent market access; and
• Third, and perhaps most important, Chinese consumers want to buy what New Zealand has to sell, especially our safe, sustainable and secure food and beverage products.

Despite this success, there is a growing debate about whether this trade concentration on China poses risks and whether New Zealand should be taking steps to “diversify”.

It’s hard to say whether we are “over dependent” on China:  if that were the case what can we do about it ?

A recent report from Sense Partners, prepared for the NZ China Council, noted that New Zealand’s trade exposure to China is greater than some but less than others.

And it is nothing like the exposure we had in 1972 to the United Kingdom.

But even though bilateral relations with China are for the time being cordial, despite New Zealand’s continuing and justified criticisms of China’s human rights record, it is true that the political risk from any possible trade disruption is growing.

Diversifying New Zealand’s export profile is a lot easier to talk about than do.

There is no way that our most recent trade agreements with the UK or EU will displace the Chinese market.

The UK, while important, is simply too small and the EU has not opened up to our largest exports.

You’d have to sell a lot more kiwifruit and honey to the EU to make up for the loss of dairy or meat exports to China.

So what’s a good exporter to do in the face of continuing geo-political tension?

Exporters have every interest in diversifying their product mix within any large market – looking at different types of customers, different market sectors.

They also need to shore up key customer relationships and keep an ear to the ground and in touch with government agencies about key developments.

At the national level, it is sometimes claimed that New Zealand risks being forced to choose between China and our more traditional allies.

In fact, New Zealand chose a long time ago to be an open, liberal, market  democracy, which naturally leads us to identify with others sharing similar values.

A growing economic relationship with China need not change that, nor has it done so to date.

It does however require New Zealand, particularly in these difficult economic times, to manage carefully our relationship with China.

Climate change

Another pressing danger to the global economy arises from increasing climate change and global warming, the effects of which, even here in Aotearoa, are plain to see.

At COP26 in Edinburgh last year it was good to see the world’s governments, international organisations and civil society including business taking steps to devise global solutions to a global problem.

What appears equally clear is that these solutions are not enough.

While the world appears to agree that we need to limit global warming to no more than 1.5 degrees by 2030 we are on track to deliver something like 1.8 or even as much as 2.7 degrees.

So alongside global commitments we need local solutions and because every country is unique we will need a lot of information exchange, capacity building and financial support, particularly in the developing world, to get this right.

Here in New Zealand we are at last stepping up to this challenge, although there is plenty of criticism that we are not going fast or far enough.

A lot of that criticism is directed at the agricultural sector which provides the lion’s share of New Zealand export revenue.

A number of NZIBF members are participating directly with the Government to find pragmatic ways to move forward without comprising livelihoods and development prospects.

Business generally around the world is moving in this direction – unleashing the power of business could be the best means we find of beating climate change.

Business is motivated because customers want it, shareholders want it, regulators my increasingly require it and the world needs it for business to continue.

All businesses need to be thinking about their carbon profile and about taking steps to achieve carbon efficiency and/or carbon neutrality.

Protectionism

And while on the subject of protectionism, something I pointed to back in 2019, this continues to be a major challenge.

Protectionism is never far from the surface.

It was with us before the pandemic but reared its ugly head when economies started to restrict the flow of vaccines and other goods and services needed to combat the health crisis.

Today the number of trade restrictive measures in the global economy continues to grow.

The principal bulwark against protectionism is the World Trade Organisation, which is the body of rules governing international trade, the forum for devising new multilateral trade rules and the arbiter of trade disputes.

Despite its importance, the WTO in Geneva has been in a parlous state for a number of years now.

You may remember the “Doha round of trade negotiations” which has never been finished.

In particular the WTO’s role in resolving trade disputes has been eroded by the US refusal to appoint judges to the Appellate Body which oversees appeals.

A lot of action has therefore shifted to bilateral or mega-regional deals, like CPTPP or those FTAs recently concluded with the UK and EU.

But some issues can only be solved by the WTO.

These include critically for New Zealand issues relating to subsidies, especially for agriculture, fishing and fossil fuels.

Here however I can report some further good news.

The WTO Ministerial held in June concluded on a high note with a package of useful outcomes. 

These included a binding agreement to limit fish subsidies, a waiver of intellectual property rights for vaccines (“the TRIPs waiver”) and the extension until the next Ministerial, of a moratorium on imposing tariffs on e-commerce.

One area where there was disappointment for New Zealand was in regard to limiting domestic agricultural subsidies, where the can once again was kicked down the road.

These decisions in and of themselves might seem rather small compared to the enormous problems the world faces.

But they show the WTO can make decisions about the future.

Restoring the WTO to a full position of primacy in international trade is critical, but a lot will depend on the willingness of WTO members and especially the leadership of the larger economies.     

Conclusion

So, are things getting any better?

Yes and no – the perfect storm continues and the golden weather is not about to return (not at all unless we address climate change).

There are some bright spots – improvement in supply chain management, new FTAs with the UK and the EU, the outcome of COP26 and the WTO Ministerial.

Against this the continuing pandemic, war in Ukraine, inflation, geo-politics, the climate challenge and protectionism are all bearing over the global economy and on the global trading system and in ways that are not always easy to predict.

What is clear for New Zealand is that trade remains the lifeblood of our economy: that’s why we need to keep on opening markets, keeping them open, putting in place effective rules and managing our key relationships.

That, and wider international co-operation, is what will keep New Zealand moving forward in these difficult times.

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[1] https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022

[2] https://www.wto.org/english/news_e/pres22_e/pr909_e.htm

[3] https://www.nzherald.co.nz/business/nz-slow-to-benefit-from-steep-slide-in-world-shipping-costs/NUO5RVMVQ5RR7GJH7QIBCPE66A/

[4] https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/new-zealand_en