Stephen Jacobi, NZIBF Executive Director, speaks to the Confederation of Indian Industry Partnership Summit in New Delhi about The Future of Multilateralism.
Everything you ever wanted to know about TPP but were too afraid to ask
Address to U3A, Wellington, 15 April 2016
Stephen Jacobi, Executive Director, New Zealand International Business Forum
It’s good to be with you today.
I was pleased to join you last year before the Trans Pacific Partnership (TPP) was concluded to draw your attention to this agreement in the making; now it is completed I am glad to be with you again.
At its simplest level, TPP is really a debate about how New Zealand connects with the rest of the world – how, and under what rules.
The world today is more inter-dependent than ever before.
No countries by themselves can find the solutions to the world’s pressing problems – whether peace and security, poverty alleviation, climate change, sustainable development.
Countries need to work together.
The same is true for economic development, trade and growth.
Some larger countries have choices in this that smaller ones do not.
The United States, for example, with its huge domestic market can possibly – at least for a time – ignore trading with the rest of the world.
That’s not the case for New Zealand.
Trade is our lifeblood, as the next Secretary General of the United Nations Helen Clark once reminded us.
We depend on trade and investment for our economic security and social progress.
We can’t eat all we produce, we can’t make all we use in everyday life.
Trade brings you the car you drive, the medicines you take and the clothes you wear.
If we want to see more money spent on transport infrastructure, new generation medicines or free tertiary education, then trade is the way to pay for it.
TPP once implemented would link New Zealand to the eleven other member economies representing 36% of the world’s GDP, markets taking 40% of our exports and 812 million consumers.
Some of these markets we already have good trade arrangements with; others like the United States and Japan, we do not.
To come into effect TPP requires members representing 85% of the area’s GDP to ratify – these means both Japan and the United States.
Japan is moving ahead with the ratification process but in the United States this has become complicated by the current election.
The key point is this: if we were to decide not to ratify, but TPP comes into effect with the others, you can be sure of one thing – it would proceed without us and our competitors would for a moment pause to wonder and then carry on to occupy the place we ceded to them.
Of course we would not be excluded immediately from trading with those markets, but over time the combination of a tilted playing field and changes to rules which are made without us at the table would leave us increasingly on the outside.
That’s why a lot of business interests in New Zealand support TPP.
Because like the world as a whole business is also becoming increasingly inter-dependent and integrated.
Because as I outlined when I met with you last time business too is changing rapidly.
The way of doing business is changing.
Think of the I-phone or the 787 Dreamliner and where the products that make up these complex machines come from.
They are made in the world, not just in one country.
Think of the way we find out about the things we buy, how we make choices about them, how we pay for them.
A new world of e-commerce and digital technology is upon us.
We’ve become used over the years to the free flow of goods, services and capital, even labour – now we need to adjust to the idea of the free flow of data.
New Zealand is not immune from these developments.
Think of Fisher and Paykel designing whiteware, integrating Chinese componentry, manufacturing the appliances in Thailand or Mexico and selling them in the United States.
Think of Pumpkin Patch designing clothes, manufacturing them in China and elsewhere and selling them around the world.
But not just manufacturers.
Think of Fonterra operating farms in China, being one of the largest exporters of dairy products from the United States, establishing processing operations in Europe.
Think of Zespri becoming the importer of record of kiwifruit in China, investing in growing fruit in Korea, entering into joint ventures in Italy.
Think of the manufacturing, creative and IT companies in the greater Wellington area which are developing business in all corners of the globe.
This is the new world of global value chains and networks – it’s the environment of what we call “intermediate goods” trade, trade in services services and investment that TPP seeks to facilitate.
Today more than ever before doing business needs to be faster, lower cost and seamless across multiple economies and jurisdictions.
That’s the 21st century agenda that TPP tries to advance.
TPP is really a set of rules for this new environment.
Some claim it is not a trade agreement.
I submit they under-estimate the reality of trade today.
This is not your grandfather’s trade, this is a new business model.
So how does this agreement stack up for New Zealand?
I want to focus here on the big picture and am happy to discuss the detail in the Q&A to follow.
First, TPP advances New Zealand’s economic interests by opening up new markets especially in the five economies with which we do not already have free trade arrangements – the United States, Japan, Canada, Mexico and Peru.
Some improvements are also made to existing FTAs with Malaysia and Viet Nam.
Over time tariffs are reduced and eliminated on New Zealand’s key export products – meat, horticulture, wood, wine, seafood, manufactured products like agricultural machinery and medical devices.
Attention has been focused on the TPP outcome for our major export product – dairy.
That outcome is not as good as it could have been, but dairy also benefits from some new if limited access in the United States and Japan and the industry will be materially better off than it would be if TPP did not proceed.
Beef to Japan is another good example of an imperfect outcome which delivers benefits to New Zealand.
The Japanese beef tariff drops from 38.5% to 9% – not zero admittedly– but it puts New Zealand on a level playing field with Australia which has an FTA with Japan.
TPP is not just about tariffs.
TPP also includes disciplines relating to non tariff barriers which today, as tariffs come down, are even more problematic.
Identifying and addressing NTBs is not easy, but TPP helps this process by improving implementation around technical barriers to trade and promoting sound regulatory practices.
Much of this draws on practices and experience we have become used to in CER and APEC.
Nor is TPP just about goods – a range of measures to open services markets and are designed to assist our services exporters in sectors like consultancy and education.
Services represent an increasingly important part of international trade and are often directly connected with the export of goods.
New Zealand sold $8.3 billion worth of services to TPP markets in 2014.
The services outcome is particularly important for the creative hub that is located in Wellington.
TPP provides for better conditions for services trade including the right to establish operations in other markets, to obtain visas to visit the market and to engage in cross border e-commerce.
A second advantage lies in those rules for trade and investment that TPP puts in place.
The rules cover all aspects of business from flexible rules of origin for goods, to rules for services and investment, intellectual property, state owned enterprises, customs co-operation, e-commerce and the digital economy and issues relevant to small and medium sized business.
Most of these rules codify existing WTO disciplines and provide for better implementation especially by TPP’s developing members.
TPP, for the first time in a plurilateral agreement, contains enforceable disciplines on the environment and labour, which should improve sustainable development and good work-place practices again especially among TPP’s developing members.
The environmental disciplines contain a commitment to better conservation practices and to the elimination of fishing subsidies.
The labour disciplines uphold worker rights enshrined in a number of ILO conventions.
The third big advantage of TPP is that it provides better protections for foreign investors while preserving governments’ ability to regulate in important public policy areas.
There has been extensive discussion about TPP’s provisions on investment.
But here’s the thing – New Zealand needs more, not less, foreign investment to expand the capacity of our domestic industries to develop world class enterprises of scale and to move up the value chain.
Those same enterprises also to need to invest more overseas to get closer to their customers and to connect to global value chains and networks.
So much as in all the other FTAs New Zealand has signed in recent years including with China, ASEAN and Korea, TPP seeks to ensure a minimum standard of treatment to foreign investors and the right to seek compensation when investors’ property is expropriated.
The latter of course is the investor state dispute settlement or ISDS that often figures prominently in criticisms of TPP.
ISDS is not about suing the government for loss of profits.
ISDS is not about overturning regulations or usurping the role of governments or legislatures.
ISDS cannot force a government to change a regulation or a law.
ISDS is about arbitration and compensation.
In fact New Zealand- with a history of fair dealing with investors – has little to fear, but everything to gain, from these provisions.
Investor state dispute settlement has been seriously miscast by those opposed to TPP, but the agreement significantly improves on past practice by raising the threshold for taking cases, creating a clear set of exemptions for public policy and increasing the transparency of the process.
Actions to protect public health, the environment, the Treaty of Waitangi and a range of other public policy measures are all clearly safeguarded.
Tobacco control measures are also excluded.
ISDS will not apply between New Zealand and Australia, excluding from coverage 50% of foreign investment to this country.
But what TPP will do is make it safer and more predictable for New Zealand companies to invest overseas.
The fourth and final advantage from TPP I want to highlight is that very little policy change will be required in New Zealand to implement this agreement.
That’s because most of TPP’s disciplines already form part of the policy approach in New Zealand.
In one area only – intellectual property – will change be required but the impact should be marginal.
For the record – there is no change required to patents for software, parallel importing or use of the Internet.
There is minor change required to patents for medicines where in some specific cases, where approval processes have been slow, patent term extensions will be required.
The Government has been quite clear that there is no change required to the current data protection term of 5 years for biologic medicines, but, as there is a requirement to provide further market protection through “other measures”.
The implications of these other measures continue to be disputed by some medical professionals but the Government is clearly on record as saying this can be accommodated under existing policy settings and practice.
There is minor change to Pharmac’s operations, but not to the model of public purchasing as we know it currently and it is not subject to dispute settlement.
Since there is no major change to Pharmac or to patent or data protection terms, the chance of the cost of medicines increasing under TPP is remote, although this too is contested.
In one area – copyright – major change is required: the copyright term will be extended from 50 to 70 years after the death of the author or first release of a movie or song.
This brings New Zealand practice into line with most other economies – the cost of this change has been disputed by the industry, but the impact on the price of books and DVDs is marginal at best.
To recap then, the benefits of TPP are four-fold:
- TPP conveys measurable trade advantages for goods as well as services for New Zealand
- TPP puts in place an updated and extensive set of rules for trade and investment
- TPP improves the climate for inward and outward investment
- TPP requires little policy change in New Zealand, with the major change being an extension to copyright term.
And what is all this worth?
Quantifying the expected benefits is notoriously difficult and there are a range of figures being quoted.
The Government puts the figure at an additional $2.7 billion being added to the economy by 2030.
Some say this figure is too high; others say it is too low.
To answer the question of what TPP is worth I suggest we ask the 28 business organisations, which signed a collective letter in favour of TPP at the time of the signing: they are all strongly in favour of TPP.
Or the business groups who are making submissions to the Select Committee, all of which make the point that not only does TPP convey advantage, being left out would be detrimental to our economic interests.
Some argue that the risks of TPP outweigh the benefits.
We believe that the benefits are substantial and that any risks have been well and truly mitigated by the safeguards built into the agreement.
And we need to remember the counterfactual: can New Zealand seriously afford to stand aside from an agreement with eleven partners representing 36% of the world’s GDP, 40% of our exports and 812 million consumers?
Our competitors would only be too delighted if New Zealand were to decide not to ratify TPP.
As I said at the outset TPP is about how New Zealand connects with the rest of the world – how and under what rules.
That’s not just something that is in our national economic interest.
It’s something we simply cannot afford to get wrong.
And now I’m looking forward to trying to answer some of your questions and concerns about TPP.
Some of you took up the opportunity to submit these in advance, so let’s start with these.
What would be the possible/likely effect on Pharmac?
- As I mentioned earlier, Pharmac’s operations are not fundamentally changed by TPP: Pharmac will continue to purchase medicines on behalf of New Zealanders, to prioritise its spending and use its market power to negotiate with suppliers
- There are some administrative changes required to increase the transparency of decision making including setting a time-frame for decision making and allowing an appeal process
Would New Zealand be better off striking a TPP deal without the US and Japan and then negotiating (hopefully a better deal) with them when we are part of a large trading bloc?
- The US and Japan are important trading partners with New Zealand with which we do not have free trade arrangements. While a deal without them could be easier to negotiate, the value of the deal would be significantly less. New Zealand already has FTAs with 7 other members of TPP. It would also be difficult to convince Canada and Mexico to join such a deal without their NAFTA partner
- TPP is not the end game – TPP has been designed as a pathway to a wider agreement amongst all 21 members of APEC. But you have to start somewhere
If the United Stated Senate does not, as seems likely, ratify TPP will
the Agreement fall over; or will it remain in force and bind the remaining countries?
- If the Congress (both Houses) decided not to ratify – and it is too early to assert this as a probability – then TPP cannot come into effect in its current form. The most likely scenario would be that those countries willing and able to ratify would discuss among themselves what to do next
As any country can withdraw from the Agreement on giving six months notice, there could be only a few countries left (including New
Zealand) after a few years; so it will not last long; and will be held up to ridicule by the countries who were not part of the Agreement?
- This is a highly unlikely scenario. The TPP partners have invested years of effort in negotiating TPP and all, including the US, have signed it because they believe it represents a balance of interest to all parties. While any may choose not to ratify, there are very few examples of FTA partners leaving an agreement once they have ratified, even though they are at liberty of doing so
Everyone knows that you should not “Take it as read, until you have read it”; so do you know if our Trade Minister Todd Mc Lay had read every word of this very long Agreement?
- I have no idea but that’s not really the point. This is a complex legal document – reading it from one end to the other will not be much help to you unless you do so with the proper legal context. I am very sure that the Minister will have been briefed on all aspects of the agreement by his officials.
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