Opportunity: Japan – 29 May 2019

Hosted by Baker Tilly Staples Rodway, NZTE, JETRO and ATEED

CPTPP: A Big Deal

Remarks by Stephanie Honey, Associate Director, NZIBF

Ohayōgozaimasu, ata mārie, and good morning!  Thank you for the opportunity to spend some time with you this morning looking at CPTPP.   I have been asked to talk to you about the impact of the agreement, five months in.

Now, CPTPP has a big name – in its full glory, the “Comprehensive and Progressive Agreement on Trans-Pacific Partnership”.   But it is also a big deal.    And nowhere is that more true than for our good friend and trading partner, Japan.

This morning I’d like to share with you some reflections on just how big a deal the CPTPP is:

• First, I’ll talk about how the agreement is shaping up, a few months in;
• Second, I’ll talk about new CPTPP opportunities, some which are not even on the radar of Kiwi businesses;
• And finally, I’d like to situate CPTPP in the global context, to underscore what a very big deal this is in strategic terms too.

My name is Stephanie Honey, and I am the Associate Director of the New Zealand International Business Forum.   We are a group of New Zealand businesses and business organisations who want to help grow New Zealand’s global trade and investment connections.

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NZIBF and Japan

NZIBF has taken a close interest in Japan for well over a decade.  We founded the Japan-New Zealand Partnership Forum.  Our members have made regular visits to Tokyo.  And we have long spoken in support of freeing up trade and investment in both directions.  

NZIBF has also tirelessly championed the CPTPP and its forebear TPP – in fact, if you Google the term “TPP” and the name of our Executive Director, Stephen Jacobi, you get 33,000 hits!

So it was a real thrill, as fans of both CPTPP and Japan, to see the agreement kick off at the end of last year.  New Zealand had a big hand in that achievement, of course, but it could not have happened without Japanese leadership.

Benefits of CPTPP for Japan and New Zealand

I’m going to talk about some of the early impacts of the agreement, nearly five months in.   But let me start by briefly refreshing your memories about what exactly CPTPP is.    This ‘big deal’ is a free trade agreement involving 11 countries in the Asia-Pacific.  Those countries account for 13.5% of world GDP – a combined economy of nearly US$11 trillion.  CPTPP markets are the destination for nearly one-third of New Zealand’s goods and services exports.    Two-way trade was worth $49.6 billion last year.[1]

So far, seven countries have ratified the agreement. They are New Zealand, Japan, Singapore, Canada, Australia, Mexico and Viet Nam.   We are already reaping the benefits.   We are hoping that the other four participants – Chile, Brunei, Malaysia and Peru – will ratify quickly for their own sake, and also so that we get the dynamic gains of an even bigger integrated market.

The question of benefits is particularly salient when it comes to trade with Japan.   New Zealand has never had a trade agreement with Japan.   Despite that, Japan has always been among our top 5 markets, with goods exports worth nearly $3.5 billion last year and services exports around $930 million – that’s nearly $4.5 billion overall.[2]  Japan is among our top five investors.

So why bother with a new deal?

For New Zealand exporters, high tariffs and red tape, especially on food and beverage, and regulatory barriers for professionals and other services suppliers, have always made the market challenging.   So one of New Zealand’s big goals for CPTPP was to get, in effect, an FTA with Japan.

Looked at from the other direction, Japanese businesses are increasingly finding themselves at a disadvantage relative to ASEAN, China, Korea and Taiwan, where New Zealand has already struck FTA deals.   So Japan wants to level the playing field too.

Thanks to CPTPPP, tariffs will be reduced or eliminated over time on our key exports.  CPTPP also tries to tackle so-called “non-tariff barriers”.  I’m thinking here of things like overly-complex technical regulations, onerous labelling requirements, standards that aren’t based on good science or international norms, or other costly regulations.  CPTPP tries to streamline the way these policies are designed, and even puts in place specific rules in some sectors, like wine labelling, pharmaceuticals and medical devices, to help trade to flow.

CPTPP also recognises that the modern economy isn’t just about goods, but also services like logistics, consultancy, finance, education, software or computer services, as well as digital trade and investment.  So CPTPP tries to set trade-friendly rules in those areas too.

CPTPP impacts

So – what has been the impact of the CPTPP since 30 December?   Obviously it is very early days.  CPTPP has only been in force for a little under five months.   It only applies to handful of members so far.   Despite that, we are already starting to see some tangible benefits in some key products, which I’ll talk about shortly.

Now, I do need to sound a note of caution – it’s not really possible to draw any meaningful conclusions at this stage, less than five months in, and the statistics that I’m quoting, drawn from Statistics New Zealand and some industry figures, may include quirks that will turn out not reflect the broader trade trend when we are able to take a longer view, in a year or two.    But let’s take a quick look at the general picture.

Overall, goods trade growth has been relatively modest – an uptick of only around 2 percent for the first four months of this year compared to the same period last year, although if we compare April this year with April last year, goods exports were up 8 percent for that month.   It is also true to say that in some cases, the figures are static, or have even gone down a bit.

But – as I’ll discuss a little later on – there is enormous potential for more growth. 

Beef

Let’s start with the poster-child for CPTPP success – beef.  Prior to CPTPP, the beef tariff could potentially snap back as high as 50%, as happened in August 2017.  More usually, though, New Zealand beef exporters faced a tariff of 38.5%, which is of course plenty high enough.    As if the dollars involved were not painful in and of themselves, our exporters have also found themselves on the back foot relative to Australia and Europe, who had struck bilateral FTAs with Japan already, with others waiting in the wings, like the US.   Thanks to CPTPP, however, the tariff will fall to 9% over sixteen years.  This will level the playing field and eventually save us over $60 million in tariffs once the agreement is fully implemented.

We have had two rounds of tariff cuts, the first on 30 December and then on 1 April.  The tariff is currently at 26.6%.   Now, this matters because Japan is New Zealand’s fourth largest beef market by value, worth $166 million last year.  It is also our second largest chilled beef market, just edged out from first place by China. In the year ending March 2019, New Zealand beef exports to Japan increased 30% by value, and by an even bigger jump if you look at some individual products and just at the first three months of the year relative to the same period last year.    New Zealand exporters saved $5.3 million in tariffs from the first three months of this year alone, and that figure could add up to $19 million in savings for the year overall.[3]

That is great news for New Zealand beef producers.   US ranchers, by comparison, are starting to see the full competitive disadvantage play out from President Trump’s withdrawal from TPP – they are still paying 38.5%.

Dairy

In the case of dairy, Japan has always been strategically important for New Zealand, and last year was our third biggest dairy export market.  Despite our negotiators’ strenuous efforts, a number of high tariffs and volume limitations in the form of tariff quotas will continue, including for butter and milk powders, and trade-friendly implementation of the tariff quotas will be important to make full use of those new opportunities. 

But there is some useful market opening, including for cheese – where tariff reductions are especially important to keep parity with our competitors in the Japanese market, notably the EU which has just concluded an ambitious FTA with Japan.  Eventually protein products, ice cream and infant formula will mostly enjoy tariff free access to Japan. 

How has that played out in the trade statistics? It is really a little early to say for most products, although one winner has been cheese, where exports are up by nearly 9 percent on the same period last year, and for milk fat, where the growth has been even higher, up 16 percent, albeit from a much lower base.

And again, the consequences of being ‘out of the tent’ are starting to be felt by the US industry.   The US Dairy Export Council has recently released a study on the economic impact of CPTPP and the recent Japan-EU Economic Partnership Agreement.  The report predicts that competitors, including New Zealand, could gain $1.9 billion in sales from the US industry over the next decade, climbing to $7.8 billion once the two trade agreements are fully implemented.[4]

Horticulture

For horticulture, the agreement includes commercially-valuable tariff reduction and elimination across the sector either in the short or longer term, including on important export products like buttercup squash, onions, buttercup squash, avocados, cherries and apples.

The overall impacts since 30 December are modest – and we have even seen a slight decline in exports of onions and squash.   But the star of the show is kiwifruit.   Zespri currently pays $26 million in tariffs each year on kiwifruit.   Thanks to CPTPP, tariffs were eliminated on entry into force. In the first four months of this year, there was a jump of 31 percent, or $25 million, in gold kiwifruit compared to the same period last year.  Those exports were worth $102.5 million.  Green kiwifruit also grew, by around 25 percent, although from a smaller base.[5]

Fish and seafood, wine and other products

As for the seafood sector, another big success story is mussels.    Overall mussel and squid exports have jumped by an impressive 78 percent relative to the same three-month period last year, with frozen and cooked mussels and squid all seeing a large rise.

Wine has grown by 12 percent relative to the same period last year, and exporters enjoy a new streamlined set of rules for wine labelling and practices, saving on compliance costs.

And tariffs have been or will be eliminated on a host of other products of commercial interest, including honey, although the impacts have been modest so far.

Services

Looking beyond the goods sector, the negotiators of CPTPP put a lot of effort into trying to tackle barriers to services trade, such as discriminatory or excessive regulation.    The impact of freeing up opportunities in this sector can have a multiplier effect on goods trade, as many are central to manufacturing value chains and goods exports.

CPTPP has meant improved predictability and transparency for doing business in Japan.   For professional sectors, including accounting and legal services, the requirements on in-market registration and local presence rules have been clarified and locked in, giving greater certainty.   If Japan relaxes any of these rules further in the future, those more relaxed rules will also apply to New Zealand lawyers and accountants.

Access has also been guaranteed for management consultants, environmental services suppliers, computer and related service suppliers, tourism and travel related services and ground handling services, along with providers of some types of education services.

Unfortunately ,in many sectors, Japan will still maintain licencing and commercial presence requirements that require suppliers to be resident in Japan and/or establish a local office.  In other sectors Japan has retained the right to impose restrictions on the number of licences issued to suppliers.

It is a little too early to say if there has been any impact on exports to Japan – the quarterly figures are due out next week – but the potential is clearly there.

Unrealised opportunities for New Zealand business

At first blush, it might be disappointing not to see a rapid uptick except in a few areas.   However, we must remember that change in this space doesn’t occur simply with the signing of a new agreement.  To harvest the benefits of an FTA, we need governments to implement it wholeheartedly, and for business to actually take up the opportunities.

What we are seeing in the trade stats is the beginning of businesses recognising new opportunities and revisiting their focus.   What will be important now is for business to make the most of the door that New Zealand negotiators have opened.   Easier said than done, perhaps.  It can be daunting for firms, especially small firms, to find out about new opportunities and trade requirements.  

The CPTPP negotiators recognised that too, and the agreement includes specific commitments to make it easier for SMEs to do business, including by ensuring that they have the information that they need.

New Zealand is leading the way in that area with a fantastic resource, the user-friendly “Tariff Finder”, which you’ll find at tariff-finder.govt.nz.  

You can see an example on the slide here.  The tool allows you to input your product name in plain English, and easily establish the tariff you might need to pay – in this case on a white sauce exported to Japan.    The Tariff Finder not only gives the tariff but also points exporters to other important documentation or rules that might apply, including rules of origin and certification.

MFAT also offers an exporter advisory service, to help round out that advice – send your email enquiries to exports@mfat.net, or phone 0800 824 605.

And of course our friends at NZTE are on standby to help.

Looking to the future, and as the full dynamic benefits of all 11 economies come onstream, CPTPP should create opportunities for innovative Kiwi firms in the food and beverage sector, where Japan’s demand for sophisticated, high-quality and convenient products is only likely to grow.  

Given Japan’s ageing population and sophisticated healthcare system, there is also increasing demand for pharmaceuticals, nutritional supplements, health IT and medical devices, all of which are sectors where New Zealand firms have excelled.

And Japan’s profile as a large manufacturing, electronics, and IT and software producer and importer provides opportunities for New Zealand firms to take part in value chains.

Beyond the world of direct-to-consumer exports, however, businesses should think creatively about other commercial opportunities.

CPTPP opens up the possibility of New Zealand businesses to win government procurement contracts, by ensuring that competition for contracts is more open, fair and transparent.  Japan’s government procurement market is sizable, about 16% of GDP, and there are likely to be new opportunities for established industries as well as more niche exporters. [6]

New Zealand business travellers will have greater flexibility to work and travel in Japan.  Engaging more closely in-market can add value to existing business.

And with an eye to the future digital world, CPTPP also includes rules to promote an open digital economy.   This means  a more certain and lower-cost data and digital environment for New Zealand firms involved in e-commerce and digitally provided services. 

The strategic dimension

I’m nearly at the end of my time, but I cannot finish without talking about the strategic dimension of CPTPP.   When Japan joined the TPP process, it expanded the size of the potential deal.  That meant that all of a sudden, TPP became a much more viable pathway for wider integration.  There was a sense of excitement that it could one day serve as a building block to a broader Asia-Pacific or even global free trade zone.    The departure of the United States certainly shook that vision.   But Japan showed true global leadership, strongly supported by New Zealand and Australia, in continuing to make the case for TPP.

Time has proved that judgment to be prescient.  

You do not need to be a trade policy expert to be aware that the trade environment is marred by rising protectionism, a mounting trade war and a slow-down in global growth.      In that turbulent environment, the opening up of new markets through CPTPP serves as a hedge against closed and closing borders.   It should come as no surprise that a number of other economies, including Thailand, Korea and the UK, are all keen to join.

CPTPP also serves as a demonstration of how deep economic integration can be achieved across both advanced and emerging economies, from Japan and New Zealand right through to Peru and Viet Nam.    That is salient at a time when other models, including the WTO, are struggling to reconcile the positions of participants at different levels of development.

Finally, the existence of CPTPP serves as an affirmation of our collective commitment to more open and integrated markets, and the benefits that those things bring our communities – despite the countervailing forces of economic nationalism that we see emerging in the world.   Above all, it is to be hoped that this affirmation will help others to see the benefits of deeper integration and follow that same path.   

At the end of the day, though, it is not countries that trade.  It is business.  What we make of this big CPTPP deal is really up to you.    Thank you!

[1] https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/cptpp/

[2] Statistics New Zealand figures

[3] Figures in this section from Statistics New Zealand, Meat Industry Association and Beef & Lamb

[4] https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12200015

[5] Statistics New Zealand figures.

[6] https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-in-force/cptpp/