“Old friends, new opportunities – the potential for a UK NZ FTA”

“Old friends, new opportunities – the potential for a UK NZ FTA”

Presentation to Russell McVeagh/BNZBA Brexit Seminar, 28 November 2018

Stephen Jacobi, NZIBF Executive Director

Kia ora tatou and congratulations to Russell McVeagh and the British NZ Business Association for organising today’s seminar.

It’s good to be talking with you from the perspective of the New Zealand International Business Forum about the opportunities for New Zealand in post Brexit Britain.

For those of you who may not know us, NZIBF is a coalition of senior New Zealand business leaders working together to promote New Zealand’s engagement in the global economy.

Many of our members are large, internationally engaged New Zealand exporters as well as the peak business organisations, BusinessNZ and the NZ Chambers of Commerce.

Research project

Today I’m pleased to release the results of a research project looking at the potential benefits of a future FTA with the UK.

All credit to my colleague Stephanie Honey who prepared this report – Stephanie regrets she can’t be here but she is today in Barbados teaching at a trade policy seminar for our Caribbean friends.

The project was generously sponsored by a range of NZIBF members, including Business New Zealand, Beef + Lamb NZ, the Dairy Companies’ Association, NZ Apples and Pears, NZ Winegrowers, and the Meat Industry Association.

We interviewed a range of New Zealand companies and business organisations who shared their thoughts on the importance of the UK relationship for their businesses, as well as potential opportunities that an FTA could create and their planning for Brexit.

Businesses came from across the spectrum of agriculture, food, agritech, services, digital and investment and the financial sector.

They include a range of large and small businesses.

We also talked to a number of commentators and thinktanks both here and in the UK, as well as having informal conversations with officials from both sides.

I am going to share with you some of our insights from that research – but I’ll later also talk about the potential we see for a bilateral FTA, which is the focus of the final report.

The paper has today been uploaded to our website and we will email around a link following this meeting for anyone who may be interested in looking at the detail.

I should also add the caveat that the views in the paper are those of the New Zealand International Business Forum as a whole – none of the views expressed in the report necessarily reflect the views of any of the businesses and commentators who kindly offered their insights.

Old friends, still important

I thought it would be good to start with a quick recap of how important the UK still is for New Zealand.

These days the Asia-Pacific quite rightly attracts a lot of the trade attention, but a quick look at the trade figures reveals that in fact the UK – which was, after all, the bedrock of our earliest trade as a nation – is still very important.Two-way trade in goods and services is worth $5.55 billion, with a slight trade surplus in New Zealand’s favour.The UK accounts for around one-third of our exports to the EU (and 43% of our services exports to the EU).

It is our fifth-largest market overall (or sixth, if you count the overall EU in the tally) – and we sell slightly more services than goods, something which is quite unusual for New Zealand.

The UK is also our fifth-largest export destination for agri-food products, especially for sheepmeat, meat products, wine, apples and a range of others.

The UK is our fifth-largest investor (and our largest European investor), and our fourth-largest ODI destination.

People to people links are also key – there are deep family, business, academic, cultural and other ties.   We welcome lots of UK visitors and permanent migrants, and of course there is a healthy two-way flow of people.

Getting ready for Brexit

Turning to Brexit, we are worried about the general level of knowledge we found in the business community as we undertook our research.

The big primary sector exporters are certainly very well across the detail of Brexit. That is not surprising.

A so-called “no deal” Brexit would have a very significant negative impact in terms of border processes – in other words, actually being able to get your product in to the market – and disruption within the market, including for prices.

In a worst-case scenario, British agriculture exports may in effect find themselves cut off from the EU market, and so there could be a huge downwards pressure on prices in the UK itself which requires contingency planning.

Many others we talked to were not deeply across the detail of Brexit, and seemed to be operating on the assumption that everything would carry on fairly much as normal – of course this would indeed be the case if we move seamlessly into the Withdrawal Agreement and transition period.

But there was not a high degree of awareness of the risks of a no-deal outcome.

I think it’s fair to say that a lot of New Zealand businesses will be taken by surprise if the UK crashes out in a no-deal outcome on 29 March.

Many however did report that they were already seeing effects in the market from Brexit-related uncertainty – for example, customers or clients scaling back investment plans, and a general slowdown in consumption.

Unfortunately, under many Brexit scenarios that uncertainty is likely to continue for some time – at least a period through to the end of 2020 and possibly beyond, depending on the timing for leaving the Customs Union and the sort of future FTA negotiated with the EU.

Commercial and economic potential of future FTA

Let me turn now to talk about the major focus of our paper – which is the commercial and economic potential for a future FTA.

New Zealand has been selected among the first group of possible FTA partners, along with Australia and the US. The UK has also indicated it is interested in joining CPTPP.

I should note that of course the UK is at the same time working hard both to seek a roll-over of the existing EU FTAs for itself, and will soon be very focused on its future relationship with the EU, assuming the Withdrawal Agreement goes ahead.

The UK side held consultations on an FTA from July to October. NZIBF made a submission into that process which is on our website.

The New Zealand Ministry of Foreign Affairs and Trade has just announced its own consultation process, which will run through to 1 February next year.

I encourage you to send in a submission to this process.

Clearly, both sides are very keen to launch negotiations as soon as possible after 29 March.

That said, it is likely that even at that point, there will be uncertainty about the nature of the future UK-EU relationship, and that will have implications for our possible FTA, and in particular the extent of the trade-liberalising flexibility that the UK will be able to offer.

There are strong commercial, economic and strategic reasons to pursue an FTA.

Commercially, there are clearly still barriers to trade that erode margins and add costs to business, and can undermine competitive positions in each other’s markets – that goes for the UK too, particularly as we both negotiate ambitious FTAs with other competitors.

One opportunity for the UK in New Zealand is to catch up with other partners like China, ASEAN, Korea, the CPTPP countries with whom we have negotiated high quality FTAs.

Economically, there are strong trade synergies and we can look to generate dynamic gains as well as more inclusive and sustainable trade – both sides are keen to incorporate approaches that enable small business, women, Maori, and the regions to participate more successfully – and to ensure that it is sustainable.

And strategically, it can be seen as a building block to CPTPP membership for the UK, and an eventual Commonwealth-wide trade network.

On the plus side

Overall, we found that people like dealing with the UK and find it an easy place to do business, with few major barriers – outside of the primary sector, where sadly barriers are still very high indeed.

Across the board, however, we also heard that the UK visa system was cumbersome, opaque, slow, expensive and rather “unfriendly” for business.

We also heard a surprising number of complaints about the banking system – even something as simple as opening a bank account!

Most were keen to see the current arrangements, or something similar to them, continue – which of course is not necessarily a certainty in the post-Brexit world.

Agri-food barriers

But unfortunately there are of course still lots of barriers in agri-food trade:

• High tariffs and TRQs (some with prohibitive in-quota tariff rates)
• Even where tariffs are lower, competitors have preferential access, meaning the playing field is not level
• Non-tariff measures and private standards on “sustainability” and SPS measures are a big factor in market access and can quickly erode margins and make trade very difficult.

New economy

There was enthusiasm to deepen the relationship in services and digital – there are certainly still some barriers there, particularly in the area of recognition of qualifications and licensing.

Current EU approaches to digital trade had the potential to add costs to New Zealand business – for example through requiring data to stay within the geographical territory, necessitating the cost of an in-market server – we would want to encourage the UK to be more liberal and open in this area, for example along the lines of the CPTPP.

There was one major area of real potential, which is global value chains – these business models where inputs of goods and services can be sourced from wherever it makes economic sense, in order to offer final products to customers around the globe.

Some global value chain activity already takes place, drawing on the best of UK and New Zealand resource and know-how.

Examples are in the dairy and horticulture sectors, to provide customers with year-round high-quality shelf supply, but our research suggested that there was potential to deepen this and take even better advantage of counter-seasonal production to supply global customers.

There were some interesting ideas about global value chains in the services area – ironically, turning the disadvantage of the distance and time difference between our two nations into an advantage!

Some businesses talked about the potential to leverage the time distance to supply services to global customers, for example in Asia and the US, out of the UK and NZ in partnership.

This is already happening in a small way in some legal and tech firms.

There was enthusiasm for greater two-way people flows: intra-corporate transfers, skilled professionals working temporarily in the other market etc. – this would have benefits for both economies.

Conclusion

You’ll find lots more detail in the report itself and we are very keen to have feedback from any here today.

Please do take the opportunity to make a submission to MFAT as part of the official consultation process.

Certainly, the NZIBF believes there is a strong case for an ambitious, high quality and comprehensive FTA with the UK.

There are opportunities in a range of sectors – agri-food, niche manufacturing, specialized services and the digital economy.

And not just in terms of two-way trade and investment, but also in developing new partnerships and global value chains to help take our goods and services to the world.

Much depends of course on the way in which the UK finally leaves the European Union.

We need to watch that space closely, develop contingency planning as well as prepare for the future!