Global trade trends impacting New Zealand’s Rural Economy

“Global trade trends impacting New Zealand’s Rural Economy”

Speech to the ‘Marketing to the Rural Sector’ Conference, 29 August 2018

Stephanie Honey, Associate Director NZIBF

Good morning, Ladies and Gentlemen.

I’m here today to talk to you about risk, opportunity and feelings.

Risk, because the global trading scene is facing very turbulent times, and that may affect New Zealand’s primary sector exports. Opportunities, because there are a number of ambitious new trade agreements and associated initiatives on the horizon which offer great new business potential to the New Zealand rural sector.  But above all, I’m here to talk about how the rural sector might be feeling right now about those risks and opportunities. Because, let’s face it, marketing is as much about psychology, about understanding people’s deepest desires and fears, as it is about advertising spend or social media design.

Ladies and Gentlemen, my name is Stephanie Honey. I’m speaking today on behalf of the New Zealand International Business Forum, or NZIBF. Most of our members are the large, globally-connected firms and organisations who are the backbone of the rural sector and your core constituency.   For the best part of 20 years I was a trade negotiator for New Zealand, including eight years on agriculture in the World Trade Organisation in Geneva.   These days, along with my work for NZIBF, I support the New Zealand members of the APEC Business Advisory Council, advising Asia-Pacific governments. And I run a small trade policy consulting business on the side.

You might be wondering what someone who is clearly obsessed with trade is doing at a marketing conference! Well, I have three main messages for you today:

• First, the prosperity of the rural sector is directly linked to global trade. If you want to win rural hearts and minds, you can’t afford to ignore what is happening on the world stage.
• My second message is that the economic architecture that has underpinned our prosperity for seventy years is in danger. So far, the New Zealand farm sector has largely dodged the bullets, but we are likely to be in for a rough ride for a few years – and that may be causing a sense of anxiety out there in rural New Zealand;
• And third, there are some exciting new opportunities out there, which are genuine cause for optimism – but it will take smarts and determination – and no doubt lots of the good products and services that you are hoping to market to the rural sector! – to succeed.

Let me start with the basics – why trade? Well, if you’re New Zealand, blessed with a great climate and lots of fertile land, water and a creative mindset, you are going to be able to produce a lot of high-quality primary products and associated knowledge-rich goods and services. We clearly can’t eat all we produce, and nor can we make everything that we desire.   Trade gives us a huge market for all the wonderful dairy, beef and lamb, kiwifruit, wine, apples, wool and wood that we grow, along with our brilliant agritech, smart agriculture-related services and other innovative commercial products.

So trade brings jobs and livelihoods to the rural sector. But the benefits don’t stop there. Trade brings farmers the tractors that they drive, the seeds they grow, the software that they use on-farm, the iPhone they call their bank manager on.   Trade brings productivity gains, competitiveness, innovative new ideas, skilled workers, capital and a whole lot more besides.

The output of the rural sector dominates New Zealand exports, as you can see from this slide. Dairy is the star, along with the red meat sector. Forest products, fruit and wine also do some heavy lifting.   As for the rural Māori economy, more than 50 per cent of Māori exports are food and beverage, and Māori are big players in agriculture, forestry and rural tourism.

Prices for some of our key exports such as lamb, kiwifruit, beef and even dairy are performing pretty strongly, particularly against historical benchmarks.   The dollar has fallen by nearly 12 percent since the start of this year, and that means higher export returns. So there is cause for optimism in our rural communities when they think about trade.

Now, I should note that when we talk about “trade” these days, we’re not really talking about where the farm sector began – loading up frozen legs of lamb onto a ship bound for Mother England.

Trade has changed out of all recognition. The world is becoming ever-more globalized and integrated.   Goods and services are increasingly “made in the world”, in so-called global value chains across multiple countries.   Cross-border investment means production can take place where it makes the most economic sense.

Take the iPhone – commonly thought to be “made in China”, but in fact designed in the US, assembled in China and Brazil with components from Korea, Japan, Taiwan and Europe, using back-end inputs from Singapore, Malaysia, Thailand and the Philippines, warehoused in California and distributed globally. “Made in China” maybe, but China’s share of the iPhone’s value is a trivial $8.50 per phone, according to one estimate I’ve read.

These new models are being used by New Zealand, too. Fonterra operates farms in China, exports milk powder from the US and processes innovative dairy ingredients in Europe for export to Asia. Zespri grows kiwifruit in Korea and Italy to enable year-round supply to its customers around the globe.

The digital revolution is changing everything, including the way that farming happens and the way that agriculture products are traded. A farmer can keep an eye on exactly where fertiliser might be needed using drones and cloud computing.   Autonomous fruit-picking machines could solve seasonal labour shortages. A bottle of Anchor milk can be shipped to a Chinese supermarket using blockchain technology, ensuring that consumers can be 100% confident that the product is safe.   A customer in Shanghai can order fresh New Zealand lobster online and get it delivered practically in time for dinner.

These new models mean that doing business needs to be more streamlined, faster, cheaper and more seamless across multiple markets, and with the right infrastructure at home and abroad.   And that means we need good trade agreements – which I’ll come back to later.

And what of our markets? We are seeing huge demographic changes. Global economic gravity is shifting from the wealthy economies of the Northern Hemisphere, like Europe and the US, into the Asia Pacific. There is a vast new middle class with plenty of disposable income eager to buy the high-quality and innovative products that we produce best.

Our markets are changing too.   China has rocketed up the rankings to become our top trading partner, with two-way trade growing more than three-fold over the last decade. The tiger economies of South-East Asia are not all that far behind.

So – my first message for you today is that even if your focus is on Eketahuna or Katikati, you need to lift your eyes to global horizons.

Now, unless you’ve been in a media blackout for most of this year, you’ll probably have at least a vague notion that all is not rosy in the world of global trade right now. You may have seen media articles about the new approach to trade that US President Donald Trump is taking.   Over the course of this year, President Trump has introduced a lot new tariffs on a lot of products, affecting a lot of trading partners.   Mostly without much heed to what the WTO rules allow.

It has been hard to keep track of the threats and counter threats and tariffs and counter-tariffs – every week seems to bring a new announcement.   Tariffs have been slapped on imports of steel and aluminium, on a whole range of products from China, and threatened on imports of cars.

The justification for these tariffs mostly comes down to President Trump’s view that everyone else is indulging in “unfair” trade.   Without getting in to the merits of those arguments – because there really aren’t too many – suffice it to say that trading partners haven’t been too pleased about these new tariffs, and have retaliated with tariffs of their own. President Trump has returned the favour.   So far the US has imposed tariffs on around $100 billion worth of goods. That’s over 4% of US imports.   There are processes underway to decide if more tariffs should be imposed in the coming months. Trading partners have retaliated on nearly the same volume of trade – often on iconic or sensitive US products like bourbon, soybeans and Harley-Davidsons.

If you tally up all the tariffs that President Trump has threatened to impose, that would bring the total up to around 25% of US imports. In the case of China, President Trump has recently threatened to impose tariffs on $500 billion of trade – that is, on everything that China sends to the US.   President Trump himself even famously tweeted back in March that “trade wars are good, and easy to win”.

So far the damage from this trade war on New Zealand’s rural sector has been relatively limited. But there is a risk that, as the Chinese and US markets become increasingly disrupted, displaced product will go looking for a home elsewhere. Others may take defensive action to avoid their own markets being flooded.

Certainly, there may be short-term windfall gains, including for New Zealand agricultural exports into the Chinese or US markets. But longer term the outlook for distortions in global markets and for currency stability is much more gloomy.

Tariffs are a very blunt instrument for problem-solving, as the US farm sector can now attest.   About 20% of total US farm exports are being affected by retaliatory tariffs, including on key products like pork and soybeans. China has been the destination for around one-quarter of the US soybean crop, for example. But now, thanks to Chinese retaliatory tariffs, US farmers have been left scrambling to find alternative markets. By contrast, China has been able to switch to imports from Brazil and others. And export markets, once lost, will not be easy to regain.

In short, US farmers are hurting. In response, President Trump has recently announced that he is going to give the farm sector US$12 billion in subsidies. Those subsidies might provide a bit of instant relief, but they will end up distorting global markets even further.   Meanwhile US farmers are pleading to get their markets back again, not subsidies.   One farmer in Minnesota reportedly described any subsidy package as “a Band-Aid on an arterial bleed”.

In a recent podcast, former US WTO agriculture negotiator Joe Glauber has described the situation as being a bull in a china shop – you don’t solve the problem of a bull in a china shop, he says, by adding more china.

It is also sobering to recall that most current US agriculture subsidies have been in place since the last trade war in the 1930s.   If you ask unsubsidized, efficient New Zealand beef or dairy farmers what they think of trade-distorting agriculture subsidies, you will get a pretty quick and unvarnished response.

The trade war story is really about self-inflicted wounds and collateral damage to the rest of the world. US farmers are hurting. US consumers will pay more for consumer goods.   US inflation has started to rise.   We may see a longer-term loss of investor and business confidence.   Trading partners in global value chains, like Japan and Singapore, are being hit at least as hard as the intended targets. According to the OECD, foreign value-added amounted to about one-third of China’s gross exports – so tariffs on “China” are actually having a much broader impact.

So where does the trade war end?

Most trade problems are solved through negotiation, rather than brute force.   However, talks between the US and China have not gone well. The most recent round, just a couple of weeks ago, reportedly yielded no progress towards a cease-fire.

But if the end-game isn’t clear, the medium-term impacts are pretty obvious.   The IMF has calculated that global GDP could fall by half a percentage point by 2020 as a result of the tariffs. There are likely to be big hits on foreign exchange markets – which is a central concern for New Zealand exporters, of course.

 More broadly, we may see a knee-jerk rise in so-called non-tariff barriers such as new red tape, procedural obstacles or unjustified new technical requirements. That would be a real concern. We have already seen a big increase in protectionist measures around the world since the Global Financial Crisis.   Over 3,000 new measures have been put in place since 2009. Since 2015 alone, there has been a 30% increase in trade-restrictive measures.

The New Zealand Institute of Economic Research has calculated that the New Zealand primary sector already pays around US$4.7 billion a year in non-tariff measures in the Asia-Pacific. Now, some of those are legitimate, like science-based biosecurity requirements.   But many are straight out protectionist. So anything that adds to that tally is cause for real anxiety.

That increase in protectionism has been one factor in the generally poor performance of the global economy over the last decade. For most of the post-war period, trade has led broader economic growth. But since the GFC, trade has struggled. Economists have been worried about where this trend is heading.   For the last year, we have seen the green shoots of a fragile recovery in both trade and GDP.   We would not want to see the trade war undermine that.

The tariff war has overshadowed a separate but equally worrying threat to the global system.   The US is also very unhappy about the WTO’s dispute settlement mechanism.   In short, the WTO system has something called the Appellate Body – a little bit like the Supreme Court of the trade world. As the existing members of the Appellate Body have retired, the US has refused to allow the appointment of replacement judges. The US considers that the judges have been overstepping their boundaries and their solution seems to be to paralyse the system rather than to fix it.

The Appellate Body is absolutely essential to the functioning of the rules.   If you can’t appeal and get a final ruling, the whole system breaks down.   By October of this year, the total number of members will have fallen to three, the absolute minimum necessary to hear appeals. By December next year, it will fall to one.

You might be wondering why I’m boring you with talk about a dull legal mechanism.  In fact, this is a particularly acute point for a small, open and distant economy.   We do not enjoy the economic heft of a China, or a United States, to make our way in the world. To put it another way, without the WTO rules, it would be the Wild West. And that’s not a comfortable position for a little country that’s not big on gunslinging.

For New Zealand, the WTO disputes system has enabled us to win cases against a range of much larger trading partners, such as Indonesia, Canada, the EU and even the United States. Many of those disputes have been about defending our agriculture interests against others’ subsidies or non-tariff barriers. If we hadn’t had the WTO mechanism, we would have been in deep trouble.

A faltering WTO Appellate Body, along with swathes of new unilateral tariffs that have not been sanctioned by the WTO, raise grave risks to the system itself.

So – my second message to you is that the global trading system is under threat.

That means the rural sector is likely to be feeling a little anxious about what the next few years might bring. Will we still be able to get into valuable markets? Will the rules continue to protect us? What will happen to the dollar? Will we be able to get the investment we need for business success?    Unfortunately, as you will all know, negative famer sentiment has been at the forefront of the slump in business confidence in the past year, thanks to issues like Mycoplasma bovis and the drought in some areas.  A threat to the WTO system is the last thing our farmers need.

Now that I’ve sent you all spiralling into a depression, let me tell you about some of the good news!

New Zealand is not just sitting back and waiting for the blows to fall.   First, New Zealand trade officials are deeply focused on trying to shore up and strengthen support for the global rules-based trading system in the WTO. That system has underpinned 70 years of prosperity. It has raised the living standards of hundreds of millions of people.   So we have been pleased that many countries, including China and the EU, have chosen to continue to respect the WTO rules in the face of the tariff war. Ironically, in fact, US actions have seen more passionate defence of the WTO from most quarters than we have seen for years. A number of countries, including New Zealand, are trying to come up with creative ideas to reform and save the WTO.   So that’s good news.

Second, New Zealand negotiators are working hard to keep building opportunities through free trade agreements, or FTAs.   Greater economic connectedness is essential to creating the kind of world we would all like to live in, and the opportunities for business that we all make our living from.   Trade agreements, whether bilateral (between two countries), or regional, for example in the Asia-Pacific, are the foundation for that. They lock in those opportunities. If we can broaden and deepen our portfolio of FTAs, we greatly increase the prospects for weathering the current storms.

We have a reputation for being smart, principled and nimble.   Despite our tiny size, New Zealand negotiators have been very successful in selling the idea of high-quality FTAs with a range of trading partners.   Some of the high-points of these efforts have included our FTAs with China, the first for any developed country in the world, and now eight years old. We also struck a ground-breaking trade deal with the nations of South-East Asia, known as ASEAN, along with Australia – the so-called “AANZFTA” agreement.   You’ll recall from the graph I showed you earlier that our exports to both China and South-East Asia have grown significantly.   We are in the process of reviewing and/or updating both agreements. And we have a range of others, including FTAs with Korea and a number of other economies in Asia.

But, even where an agreement might be pretty good on its own merits, exporters can find it very difficult to understand and apply the rules across multiple different markets under multiple different trade agreements.   This is a phenomenon we trade geeks like to call the “noodle bowl”. Untangling the rules across a big region, especially where you might be in the global value chains game, is not easy.

The solution is to try to get the same rules across as many markets as we can. In trade agreement terms, we try to get what are called “mega-regional” trade agreements.   The most important of these big agreements for New Zealand is CPTPP, the FTA formerly known as TPP – or the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Quite a mouthful! CPTPP involves New Zealand and ten others, including Australia, Japan, Canada, Mexico and Peru – though sadly no longer the US.

Those are high-value markets for the agriculture sector. Before CPTPP, in some cases we had struggled to secure bilateral trade deals, leaving us on the back foot. Take beef to Japan. Several of our closest rivals, including Australia and Europe, had already negotiated better terms of access for beef with Japan.   But thanks to CPTPP, which gives us the same conditions as those other countries, we have been able to level the playing field.

CPTPP will see tariffs reduced and in most cases eventually eliminated for horticulture, wine, wood, meat, seafood, processed foods, dairy and agricultural machinery. Some of the outcomes, especially for dairy, were a little disappointing, but overall it should be a huge boon to the rural economy.

CPTPP is on track to come into force next year, once six of the eleven members have ratified it.   New Zealand is due to do so in the coming months. And that should serve as a great confidence-booster for the rural sector.   There will be lots of new markets opening up, and new opportunities for high-value partnerships, networks and innovative new approaches.

Another important agreement currently on the table is the Regional Comprehensive Economic Partnership, or RCEP, involving New Zealand and Australia and Japan, along with China, India, Korea and ASEAN – accounting for nearly a third of the global economy.   Gaining access to the Indian market in particular, where we don’t currently have a trade agreement, would be opening up a huge new opportunity for the New Zealand farm sector.

We are also looking to new FTAs, especially with Europe, the UK and with four countries in Latin America in the so-called “Pacific Alliance”.   Again, these include some important markets for our primary exports, but equally importantly have the scope to grow new partnerships and business through global value chains into other markets too.

These agreements are game-changers. Many, especially CPTPP, are deliberately designed to create the optimal conditions for modern models of business and trade, like global value chains and the digital economy.   And most of them open up agriculture opportunities that otherwise would be closed to us.

Regional bodies play an important supporting role in these efforts. Foremost among them is APEC, the Asia Pacific Economic Cooperation organisation. New Zealand will be chairing APEC and hosting a range of APEC meetings here in 2021.

One of the hats I wear is as the policy staffer to the New Zealand members of the APEC Business Advisory Council, or ABAC. ABAC is a group of senior Asia-Pacific business leaders which advises the governments of the APEC region about business concerns.

One of the major pieces of work that we have led in ABAC is around non-tariff barriers. I talked earlier about this catch-all category of red tape and unjustified measures that hurt trade.

In ABAC, one of our New Zealand members Katherine Rich has led the development of a set of cross-cutting principles to ensure that non-tariff measures do not become non-tariff barriers.   These principles have been taken up by business organisations around the region, and most recently have been adapted by officials from APEC economies.   If we could now see them more widely adopted, that would have a big payoff for the rural economy.

So, to sum up, my third message to you is that there are plenty of opportunities to be had for the New Zealand rural economy, thanks to the hard work of countless New Zealand trade officials, Ministers and Prime Ministers, and even farmers and business groups.    But although the door has been opened, it will take a certain amount of courage, determination and good advice for the New Zealand farm sector to walk through it.

I will finish with the observation that understanding trade has never been more important. But we do not only need to understand trade better.   We also need to broaden its support. In short, what trade needs is some good marketing!

The populist politics we have seen from President Trump and even in Brexit, that cheer on closing down markets and borders, reflect a widespread feeling – in the West at least – that globalisation has failed everyday people. So we need to develop a more compelling narrative about the benefits of trade. We also need to ensure that the benefits of trade and globalisation can be more widely shared. We need to get smarter about designing our own domestic economic policies to help with that.

You may have seen references over the last few weeks to a new policy approach that the New Zealand Government is developing, “Trade for All”. This emphasises the need the for global trade rules and agreements, of course. But it also argues that trade should become more accessible to those who have struggled to succeed in trade in the past, including SMEs, women, Maori and of course, the regions.  That work is only just beginning, but it has a huge promise for the rural economy. So again, there should hopefully be a renewed sense of optimism and excitement among your target markets about what the future may hold.

So there you have it – risk, opportunity and feelings.

In sum, if you want to win the hearts and minds of the rural sector, you have to care about global trade. The current turbulence will probably, quite justifiably, be causing anxiety out there in the rural economy.   There are big risks to the system, even though we can be proud of how the rural sector has been performing.

But it’s not all doom and gloom. There are lots of exciting new connections being made, and opportunities being opened up, thanks to a suite of new trade agreements that the Government is working on. And ABAC and others are also trying to make life simpler, easier and more profitable for the rural sector.   On balance I’m rather hopeful about what the next few years may hold for the rural economy, if we can keep the fundamental structures intact, and together do some good work telling the story of the benefits and opportunities of trade.

Thank you!