ADDRESS TO THE 52nd ONE STOP UPDATE FOR THE ACCOUNTANT IN BUSINESS

CHRISTCHURCH, WELLINGTON, AUCKLAND, MAY 2023

STEPHEN JACOBI, EXECUTIVE DIRECTOR,NZ INTERNATIONAL BUSINESS FORUM

GLOBAL ECONOMIC UPDATE

Thanks to our friends at Brightstar for having me back again to provide the global economic update.

I’ll be talking at a macro level but that is the background and context against which your organisations and clients do business around the world.

As I’ve said here many times before that context is decidedly unstable and worrying.

Earlier this year I spoke to a business conference in Delhi and I was introduced to a new term – “poly crisis”.

The term is used to describe the multiple crises we see around the world today – a health crisis, a geo-political crisis, an economic crisis, a food security crisis, an energy crisis, a climate crisis and now even a banking crisis.

But wait there’s more – some are even talking about a “perma crisis” to describe what we face around the world right now.

To be sure there is good news buried in this rather dismal commentary.

We may be able to say, with fingers and toes crossed, that the pandemic is gradually subsiding, that inflation is very slowly being brought under control and the banking situation in the US is not as bad as it might have been.

But we cannot be so optimistic about Russia’s immoral and illegal war in Ukraine, about geo-politics more generally or about the impacts on food and energy security.

In unpacking this with you today, I’d like to focus on three topics:

• The global economic impact of this poly-crisis
• How the world is not helped at all by the crisis in relations between the USA and China; and
• What’s ahead for New Zealand’s trade in the coming year.

My comments are informed by the views of the NZ International Business Forum – an organisation which brings together our larger exporters and peak business associations.

You can find out more about us at www.tradeworks.org.nz.  Please follow us on Twitter, LinkedIn and Facebook !

Global economy

At the end of last year there was a slight uptick in projections about the global economy.

Yes, inflation – largely as a result of massive government stimulus during the pandemic – was rising but central banks were responding (noticeably so here in Aotearoa) and growth was showing if not a rebound then at least signs of resilience.

In October the IMF forecast growth of 3.2 percent in 2022 and 2.7 percent in 2023.

The latest IMF forecast from April shows only slight change – 3.4 percent in 2022, 2.8 percent in 2023 and 3.0 percent in 2024[1].

So, we’ve done slightly better but the idea that we might see a “soft landing” for the global economy in 2023 looks highly unlikely.

Why is that?

There’s the obvious of course – that “toxic mix” I’ve talked about previously of Putin’s war, the lingering pandemic effects and inflation.

Inflation in particular has proved even more problematic than expected and may now not return to a more normal scenario until 2025 at the earliest.  (My friend Tony Alexander can talk more authoritatively about how this might play out for us here).

The response of central banks has had an impact on the financial sector – it’s not quite that the cure has killed the patient but side effects from a rapid rise in interest rates are becoming more pronounced.

Some economies – and this does apply to us – continue to face underlying price pressures exacerbated by tight labour markets.

These problems seem to be affecting the more advanced economies more than developing ones.

The growth outlook in the US, the Eurozone and Japan is anaemic at best.

But in the developing world it’s a different picture.

Growth is returning to China at forecast 5.2 percent in 2023 as it emerges rapidly from lockdown.

Something called “emerging and developing Asia”, which takes in the economies of the Association of South East Asian Nations, or ASEAN, is expected to experience growth of 5.3 percent.

India is bucking all trends – 5.9 percent growth forecast for 2023 – which was certainly very apparent when I visited in March.

This has very real implications for the outlook for New Zealand’s trade as I will outline a little later.

Globally trade continues to be in the doldrums – the World Trade Organisation forecasts 1.7% growth in 2023, a bit better than their forecast of 1% last October[2].

Things look a little better for 2024 at 3.2%.

The causes of the low rates continue to be the war in Ukraine and the general economic situation I just outlined.

Happily, for New Zealand strong demand continues to exist for our export products internationally.

A report issued by MFAT in March pointed to surprisingly strong growth in two way trade in 2022.[3]

Total exports of goods to all destinations rose 16% to $89.9 billion, while imports rose 25% to $107.1 billion. 

Behind these statistics is the story of how New Zealand managed to weather the economic storm of the pandemic.

Goods exports are now running at 20% above pre-pandemic levels with dairy, meat, wine and seafood leading the way but with horticulture and wood having a mixed year.

Supply chain problems, while not completely resolved, are beginning to ease.

The Drewry World Container Index, which measures the price of a range of 40-foot containers across major shipping routes, has continued to fall and now stands at U$1709 (as at 27 April) having peaked at over $10,000 in September 2021.

But there are still those downside risks.

The impact of Cyclone Gabrielle is likely to weigh heavily on some sectors in 2023, especially apples and pears – 70% of the apple industry’s $900 million worth of exports are located in Hawke’s Bay[4].

Dairy output will also be affected in Northland.

Add to this continuing tight labour supply and the infrastructure deficit.

More optimistically, trade in services grew significantly for the first time since the pandemic, although remain 37% below pre-pandemic levels.

As air services, tourists and international students return to New Zealand we will see continuing improvement in services trade numbers.

US and China

Despite these positive developments, New Zealand’s trade does not remain immune to the world’s prevailing economic and political problems.

Chief among these is the widening rift between the world’s largest economy and its second largest, between the United States and China.

It’s a situation which is rapidly deteriorating and is causing the region’s leaders to worry.

Take this for example from Prime Minister Lee, speaking at the recent Boao Forum in China:

“any clash between (the US and China) would have grevious consequences, for themselves and for the world”^[5].

Those “grevious consequences” are most profound in political and security terms but they are also economic.

That’s because these two economic giants maintain the world’s largest economic relationship in terms of trade and investment – whether they like it or not, they are both partners and competitors.

Two-way trade between them is valued at around US$700 billion and the stock of two way investment is US$160 billion.

Yet the two countries are finding it increasingly difficult even to talk to this other in this emerging multi-polar world order.

Whether or not bilateral relations are at the lowest point ever is hard to say – think back to the time of the tragic events at Tiananmen Square or to the height of Trump’s not-so-easy-to-win trade war.

Things have moved beyond the bluff and bluster of the Trump years with a more level-headed Administration in Washington, but the problem is that the trajectory of the relationship seems to be on a downward spiral.

The US points, not without justification, to continuing human rights repression in Xinjiang, Tibet and Hong Kong, to bellicose behaviour in the South China Sea and Taiwan Strait and to apparent economic coercion in a number of countries.

China points to US rallying of democracies in G7, Quad and now AUKUS to seek to contain China, to instruments like the CHIPS Act[6] and its $52 billion worth of unhelpful subsidies which seem directed to undermine their economic development and to apparent abandoning of long held positions related to the “One China” policy.

Throw into the mix the occasional balloon, sharply differing views on the war in Ukraine and on the origins of the pandemic and you have a long list of litanies on both sides.

The really worrying thing is that, despite a promising discussion between Presidents Biden and Xi in Bali in November last year, both sides appear far off from finding an effective way of managing these polarised points of difference.

There is right now a very real risk of a serious miscalculation or an accident that could have terrifying consequences as each side feels feels compelled to respond to each other’s actions in an effort to have the last word.

Even co-operation on something as globally critical as climate change has been impacted.

To quote Prime Minister Lee again at Boao:

“Progress on tackling urgent problems such as climate change, energy and food security, and pandemic preparedness has been severely impeded. … The bifurcation in technological and economic systems is deepening. And this will impose a huge economic cost on countries, as well as further exacerbate rivalries and frictions”.

For New Zealand of course this “game of thrones” presents a particular dilemma.

As a developed, market economy and democracy, history and heritage lead us to support our partners seeking to uphold important norms, rules and principles of international law, including respect for human rights.

Yet the development of our economy has led us to develop close trade relations with China which has been willing to open their market to us far more readily than our traditional friends.

This is a dilemma which is not ours alone.

Most members of ASEAN have strong political ties with the United States and strong economic ties with China.

China is ASEAN’s largest trading partner while ASEAN is China’s third largest trading partner after the EU and US.

The United States is ASEAN’s second largest trading partner.

All ten ASEAN economies are participants in China’s Belt and Road Initiative with major infrastructure projects underway, further enhancing integration with China.

When it comes to security, ASEAN members have long lived alongside China and some of them are involved in difficult territorial disputes.

The US has traditionally performed the role of upholding peace and maritime security in the region.

No-one really wants to choose between these two partners but as positions harden the discomfort increases.

It is hard at this point to see how this situation might resolve itself, if at all.

To my mind anyway New Zealand much like ASEAN has every interest to keep playing a careful hand.

Doing so does not mean resiling from standing up for our values when required.

Nor does it mean that our economic relationship with China and our significant partnership with the United States need to be mutually exclusive.

It was interesting that In Washington just a few weeks ago Treasury Secretary Janet Yellen, in a speech notable for its somewhat more positive tone, said that the US “does not seek to decouple our economy from China’s. A full separation of our economies would be disastrous for both countries. Rather we know that the health of the Chinese and US economies is closely linked”[7].

The same comment can be made for New Zealand.

This is why we pursue involvement in the US-led Indo Pacific Economic Framework for Prosperity (IPEF) while exploring China’s future membership in the trade agreement known as the Comprehensive and Progressive Trans Pacific Partnership (CPTPP).

It is also why we should remain cautious about involvement in the second pillar of the AUKUS Alliance which offers in my assessment very little if anything to secure our future security, prosperity or sustainability.

The risks to New Zealand’s trade from future conflict between China and the United States are growing, so what are exporters to do?

New Zealand companies doing business with China need to keep an eye on developments, maintain contact with government agencies on the ground and shore up their key customer and distributor relationships.

All this is good business practice in a time of growing uncertainty.

I for one am tired of the repeated idea that we have “too many eggs in one basket”.

Sure, China takes 30 percent of our exports but that is not all our eggs – 70 percent of our eggs go to other baskets.

Exporters will always be looking to alternative markets but developing them takes time and money.

They will invest in exploring other markets when these exist – the simple fact is that it is not possible to find elsewhere the level of demand that exists for our products in China.

The US has long refused to give us the sort of market access for our major export products including dairy and meat that China gave us in 2008.

The European Union, in our recently concluded FTA, has certainly opened up in some areas like horticulture but not in dairy and beef which would make it a viable alternative to China.

The UK has done better by us in our FTA – very well in fact – but their market while important is distinctly smaller.

More could definitely be made of our relationships in ASEAN, which could also help us navigate our own path though these choppy geo-political seas.

Our high-quality relationships with ASEAN economies can assist in deepening our understanding of change and risk in the region.

Our access to ASEAN through an upgraded ASEAN NZ Free Trade Agreement (ANZFTA) and a fully implemented Regional Comprehensive Economic Partnership (RCEP) can provide new options for trade and investment.

In some ways we have only scratched the surface of these opportunities in Asia  open to us – we need not necessarily look to far off Europe for these, they are at our door step.

Looking ahead

This brings me to the third area I wanted to talk about with you today.

As we look ahead, we can see fairly clearly that the environment for our trade policy is changing.

By trade policy, I mean government to government action which takes the form of agreements, arrangements and co-operation, , which provide the regulatory backdrop to the work of companies and sectors.

We can see that today our exporters enjoy better access to more markets than ever before – our network of free trade agreements “covers” over 70 percent of trade.

Yet a number of problems continue to exist – a number of sectors like dairy are not fully included in some of our FTAs and new barriers are popping up all the time.

Protectionism is definitely on the rise.

Today you will often hear reference to “industrial policy” which is really codeword for subsidies and protection.

In the land of the free and the brave the Inflation Reduction Act and the CHIPS Act are channeling literally a trillion or more dollars of subsidies for products which are made in America.

The US is not alone in this – China and the EU are also in this game: the difference is that the US once knew better.

These actions are causing considerable dissatisfaction among US trading partners.

The point is that, as economies become more inward looking, it will become harder for New Zealand to negotiate comprehensive and ambitious FTAs like CPTPP or those with China, ASEAN or the UK.

We still have work to do – those FTAs with the UK and EU should be ratified by year end at the latest.

We are exploring new accessions to CPTPP – the UK will be the next member; China, Chinese Taipei, Ecuador, Costa Rica and Uruguay are lining up.

We are negotiating new instruments like the Digital Economy Partnership Agreement (DEPA) which China, Canada and Korea want to join – it will help us advance the digital economy including moving towards end to end, trusted and secure paperless trade.

Two big economies – the US and India – do not want to enter into FTAs with us.

With the US and twelve other economies we are, as I mentioned earlier, pursuing the Indo Pacific Economic Framework.

It will not give us the enhanced market access for agricultural products we need in the US, but it may make some improvements in the rules for trade in the region and in areas like trade facilitation, decarbonisation and supply chain co-operation.

With India, where we have really exhausted our efforts to open the market, there is growing consensus between business and government that a new approach is required.

A recently released report by the India NZ Business Council paints an accurate and helpful picture of what we need to be doing[8].

We will always be interested in a comprehensive FTA with India, but we need now to invest significantly more political capital and resources into working out how New Zealand can play a role in India’s future development.

Areas ripe for enhanced co-operation include agriculture, horticulture and technology exchange more generally, if we are to hitch our wagon to India’s growth engine.

India can also help us by providing skilled and motivated workers for our economy.

More fundamentally, though, the time is right for a rethink of some of the trade policy settings we have been pursuing for a number of years now.

Who will be the partners of the future?

What sort of business do we want to do with them?

How do we best as a country, and as individual exporters working together, create the next phase of growth and expansion for trade?

There is a further important consideration that needs to be mentioned.

This concerns the climate crisis and the existential challenge posed by climate change.

We know how far we have to go to meet this challenge as a result of the work of the Intergovernmental Panel on Climate Change, (IPCC), [9]  which has brought together the findings of five years of reports on the climate.

With current policies, we are likely to hit 1.5 degrees global warming between 2030 and 2035 – we are already at 1.1 degrees.

By 2100, we could see 3.2 degrees. 

Many parts of the planet will become unliveable – in fact, even just above 1.5 degrees we will reach irreversible tipping points in some places. 

To keep within the 1.5 limit, global emissions need to be reduced by at least 43% by 2030, compared to 2019 levels. 

By 2035, we need to have reduced emissions by at least 60%.

Business is already leaning heavily into actions aimed at reducing emissions, which remains critically important, adapting to the current environmental reality and effecting a just transition to a low carbon economy.

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

But we face a problem in the way governments use subsidies.

Subsidising the use of fossil fuels in the current environment is just crazy – these subsidies should be immediately prohibited as the WTO and APEC are working to achieve.

Agriculture subsidies also have the effect of maintaining unproductive and carbon-inefficient agriculture sectors.

Other subsidies used to finance a green transition can also be counter-productive.

Depending on design, they can be discriminatory and cause significant market distortion.

There’s little doubt that government actions have a key role to play but the need to accelerate the co-operation between trade and climate will become increasingly important in the years ahead.

Conclusion

In a world of poly crisis or a perma crisis, small, open and trade dependent economies like New Zealand need to tread carefully.

Our trade has continued to expand even against the backdrop of a decidedly dismal global economy.

Our network of trade agreements and the hard work of exporters and officials have served us well.

But the world is becoming more complex, more unstable and more unpredictable.

Our experience of the last thirty years may not provide the model we need to follow for the next thirty, but we should not be tempted to throw out the baby with the bathwater and resort, as some have done, by looking inwards.

Some old problems like protectionism and subsidisation are still with us, exacerbated by geo-political conflict and trumped completely by climate change.

New Zealand will need every piece of wit and wisdom, and all of our friends, to continue to whether the storm and prosper.

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[1] https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023

[2] https://www.wto.org/english/res_e/booksp_e/trade_outlook23_e.pdf

[3] https://www.mfat.govt.nz/en/trade/mfat-market-reports/nz-economic-performance-in-2022-and-future-prospects/

[4] https://www.mfat.govt.nz/en/trade/mfat-market-reports/cyclone-gabrielles-impact-on-the-new-zealand-economy-and-exports-march-2023/

[5] https://www.pmo.gov.sg/Newsroom/PM-Lee-Hsien-Loong-at-the-Boao-Forum-for-Asia-Annual-Conference-2023

[6] CHIPS = “Creating Helpful Incentives to Produce Semiconductors” 

[7] https://home.treasury.gov/news/press-releases/jy1425#:~:text=As%20I%27ve%20said%2C%20the,the%20rest%20of%20the%20world.

[8] See www.inzbc.com

[9] https://www.weforum.org/agenda/2023/03/the-ipcc-just-published-its-summary-of-5-years-of-reports-here-s-what-you-need-to-know/