Progress and success in the Japan NZ relationship – the Trans Pacific Partnership and the case for Japan Stephen Jacobi, NZIBF – 7 November 2012

Address by Stephen Jacobi to the 39th Joint Meeting of the Japan New Zealand Business Council, Auckland, 7 November 2012

It’s a pleasure to be with you in Auckland and to welcome Chairman Yano and our guests from Japan.

I would also like to congratulate Brian Martin and Tony Boot for their hard work in preparing this important conference.

When I last spoke to the Business Council in October 2010 I did so just after the second round of the Trans Pacific Partnership (TPP) negotiations which included eight economies.

I urged the conference to express strong support for Japan’s membership of TPP.

We meet today before the fifteenth round of TPP negotiations which will be held here in Auckland next month. There are now eleven economies involved.

Unfortunately Japan is still not a member.

This afternoon I’d like to talk to you about the potential of TPP, if successfully concluded, to transform the way business is done in the Asia Pacific region.

I’m going to talk first about the context in which TPP is being negotiated, about the progress in negotiations thus far.

I also want to consider the prospects for Japan to join TPP and what we can do as a Business Council to support this goal.

I am speaking on behalf of the NZ International Business Forum which brings together the leaders of New Zealand’s largest internationally oriented companies and leading business organizations.

We in the International Business Forum continue to attach the highest importance to the relationship between Japan and New Zealand and we will continue to work through the Business Council and through the Japan New Zealand Partnership Forum to build the basis for a closer trade and economic relationship between our two countries.

The context

We need to start with the big picture against which TPP is being negotiated.

There’s no hiding the fact that while the global economy has successfully withdrawn from the brink of a financial crisis, a number of significant risks remain not the least ongoing instability in the Eurozone, a sluggish recovery at best in the United States, a continuing difficult situation in Japan, and some slowing growth, albeit from a very high base, in China.

The APEC economies have out-performed the rest of the world in recent years ? even so growth dipped from 5.9 percent in 2010 to 4.1 percent in 2011 largely because the European financial situation impacted negatively on trade and investment with Asia.

The good news is that this year growth in APEC is expected to climb to 4.3 percent and to 4.7 percent in 2013, and that’s particularly good news for New Zealand since over 70 percent of our exports go to APEC economies.

The not-so-good news is that persisting financial uncertainty, stubborn government deficits, continuing restrained spending by global consumers all translate into a sense of global unease which is generally bad for business.

Reflecting this unease the WTO is already predicting that world trade growth will slow to 3.7 percent this year, well below the twenty year average of 5.4 percent.

When it comes to the way in which business is done, we also see significant change underway.

Increasingly exports are not coming from one country alone but are “made in the world” ? more than half the world’s trade in manufactured goods is represented by what are called “intermediate goods” ? goods that require further finishing and manufacture before re-export.

This reflects the advent of the global supply and value chain which was pioneered by Japanese companies.

Supply chains now link supply to demand the world but a number of barriers and chokepoints along the way which can add complexity, cost and wastage.

Making it easier to do business requires serious attention to issues that impact on business operations and affect the cost and time in which business can be done.

It is well known that a one day delay in exports can lead to a loss in export value of 1%.

The World Bank has identified that improving trade-related transparency in the region could increase trade by 7.5 percent or $148 billion.

To help address these issues, in recent years all the APEC economies have been negotiating free trade agreements mostly on a one-to-one basis.

New Zealand and Japan have been enthusiastic participants in this process.

What we see today across the region is a patch-work of agreements which present a number of benefits for exporters particularly in terms of market access but risk also presenting a confusing picture for businesses operating supply chains across multiple locations across the region ? a noodle bowl of truly epic proportions!

Significance of TPP

This is where TPP comes in.

TPP provides one opportunity to meet these challenges.

TPP is an important first step towards untangling those noodles, to adopt a common approach to addressing the main barriers and chokepoints ? in short to adopt a seamless economic space around the region.

TPP is one of the identified pathways to the ultimate goal of regional economic integration encapsulated in the concept of a Free Trade Area of the Asia Pacific (FTAAP) which has been endorsed by APEC Economic Leaders.

TPP is not the only such initiative ? as you know there is also a pathway under development known as the Regional Comprehensive Economic Partnership (RCEP), which is set to be launched by ASEAN and six other economies including both Japan and New Zealand, later this month.

We in this Business Council should welcome RCEP: it has wide membership; it promises some significant liberalization and potentially bigger gains than TPP and could lead to a further opening of trade between Japan and New Zealand.

For the time being however TPP is the more advanced instrument.

Some fourteen negotiating rounds have been held to date, with the next round scheduled for Auckland next month.

At present there are eleven participants ? Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Viet Nam and the United States.

Canada and Mexico are the newest members ? they will only formally join the negotiating process at the Auckland round in early December.

Some of these participants already have FTAs with each other, such as the NAFTA members (Canada, Mexico, USA) or Australia and the United States.

Each of the eleven can be expected to have different aims and objectives but all ? in theory at least ? have subscribed to the overall vision of TPP as an ambitious, high quality and comprehensive agreement.

This was expressly agreed by TPP Leaders meeting at APEC in Honolulu last year when they released the broad outlines of the future agreement and reaffirmed by TPP Ministers who met at APEC in Vladivostok in September.

The negotiation is taking place across twenty nine “chapters” reflecting the range of issues under discussion and covering all aspects of the commercial relationship between the participants.

This includes the more traditional issues of market access for goods and services, commitments relating to foreign investment and competition, undertakings on labour and the environment and a range of so-called “new generation” issues which are of particular relevance to small and medium size business and to the health of regional supply chains.

Of particular interest is what is called the “regulatory coherence” agenda ? not an attempt to reduce regulation but to improve the way regulations are made and implemented and to promote co-operation between regulators.

While the aim is not “one size fits all” when it comes to regulation it is obvious that greater alignment of regulatory practice across the region could serve to improve regulatory outcomes for both consumers and business, reduce costs and make it easier and faster to do business.

Business interests in New Zealand and other TPP economies would like to see the negotiation concluded as soon as possible in 2013 but we realise that substance needs to drive the negotiating agenda.

For New Zealand of course “substance” means not only the new agenda I have just been talking about but also the full inclusion of agriculture, especially dairy and beef in the final agreement.

This is certainly implied by the description of TPP as a comprehensive agreement which we can expect to pose a challenge for Japan as it does for other participants including the United States and Canada.

The significance of the agriculture issue ? or sugar for Australia, or textiles for Viet Nam ? is that the United States and Canada cannot expect others to proceed to engage on issues of interest to them unless they engage fully on issues of interest to others, including agriculture.

It’s important to remember that comprehensiveness does not mean equal treatment ? that is to say we fully expect some sectors to take longer to reach tariff elimination.

Not everything will be liberalized or move to zero over night.

This is also why TPP is taking time to deliver ? the fact of the matter this is a complex undertaking that needs to be got right.

Even so there is now a considerable momentum behind the negotiation.

There is a high degree of attention focused on the negotiation by governments, business and other stakeholders and a number of other potential members are waiting in the wings ? including of course Japan.

Even China is watching the negotiation with interest which is important because while TPP can be concluded amongst the eleven it will need China and all 21 member economies of APEC to be a pathway to a broader agreement.

In the United States, since the ratification last year of three FTAs by Congress, TPP is not just the Administration’s priority trade liberalisation initiative; it is the only one and directly aimed at giving the United States a direct stake in the success of the region.

The gains for growth and jobs from a successful conclusion to the negotiations are substantial ? independent and credible economic modelling suggests annual global income gains of US$295 billion by 2025 leading to broader gains from FTAAP of US$1.9 trillion ? that’s bigger than the benefits expected from the WTO’s Doha Development Agenda .

These potential gains are simply too big to be left on the table.

Negotiating challenges

At the same time it must be acknowledged also that there are plenty of challenges in the negotiation and plenty of concern about what TPP might or might not eventually contain.

All this is somewhat premature as TPP is a work in progress and nothing will be agreed until everything is agreed.

It’s not possible for me to address all of these challenges this afternoon ? they range from market access for goods and services, investment, intellectual property, pharmaceutical issues, state owned enterprises, environment and labour, to mention just a few.

I might just single out intellectual property as an example of where divergent views amongst the parties need to narrowed so some consensus about the final outcome can emerge.

We are talking here largely about laws and regulations relating to patents, copyright, some pharmaceutical issues and the use of the Internet.

From what we understand the United States and Australia are generally pushing for higher standards of intellectual property protection ? that is to say longer patent and copyright terms, the extension of patents to software, more rights for pharmaceutical rights holders and tougher penalties for illegal file sharing and downloading.

Other participants including New Zealand face a very difficult balancing act in this aspect of the negotiation.

On the one hand a higher level of protection could benefit the creators of intellectual property such as the movie or music industry or those companies which are producing extensively for overseas markets.

On the other hand higher levels of protection might serve to limit innovation especially in the software industry where new developments tend to be built very quickly on the top of earlier applications.

These issues are not easy to resolve and need to take account of policy formulation within the member economies.

The fact that they are on the table at all shows why TPP has an ambitious vision to craft an agreement fit for the 21st century.

The case for Japan

This brings me to the case for Japan’s involvement in TPP.

There is no doubt that Japan’s involvement would help strengthen TPP’s credentials as a pathway to a wider agreement in the Asia Pacific region and would increase the gains to the region’s economy.

TPP could also be the catalyst for a new significant opening of the Japanese economy which would help address the persistent economic difficulties and help get the economy growing again.

That would benefit not only Japan but the wider region.

This is of course a decision that only Japan can make and we understand the very serious process of reflection about this sensitive matter which has been underway in Japan for some time now under the leadership of Prime Minister Noda.

If Japan were to decide to seek to join TPP it seems to me that Japan should do so only if shares the vision which has been set for the future agreement.

As I mentioned Japan is already one of the world’s leading champions of the global supply chain.

Japan will need to decide for itself whether it is in Japan’s interest to be part of or stand aside from the move towards greater economic integration through TPP and FTAAP.

The implications of engagement are very clear: TPP aims to be an ambitious, high quality, comprehensive agreement and all the parties need to be able to live with that level of ambition.

The question is how we in New Zealand can assist Japan’s process of reflection.

I suggest we can do this primarily by sharing our views of progress in the negotiation as we have been doing in recent months with the Japan Chamber of Commerce and Industry and other business contacts in Japan.

Events like this joint Business Council meeting and the Japan NZ Partnership Forum are also great opportunities to exchange views.

The Japan NZ Partnership Forum has on three occasions brought together an influential audience of leaders from government, business and the wider community in an effort to strengthen the relationship between the two countries.

I should like to place on record today deep appreciation for the role played by former Ambassador Ian Kennedy and Mrs Setsuko Kennedy in establishing the Partnership Forum and strengthening the relationship between New Zealand and Japan.

We are planning for a fourth Japan NZ Partnership Forum to be held in Tokyo in the latter half of 2013.

By that time we expect TPP to be substantially concluded so whether Japan ultimately joins this first phase of TPP with the eleven other partners or seeks to join a second phase is something that remains very much in the balance.

Conclusion

TPP is a bold undertaking.

It is an initiative that seeks to respond both to the need for stronger and more sustainable growth in the Asia Pacific region, and to reflect the new ways in which business is being done.

TPP is moreover a work in progress.

Nothing will be agreed until everything is agreed.

Success is not guaranteed ? much will depend on the negotiating process and the extent to which negotiators can maintain the momentum that has been set over the last two years.

I hope that the communiqué from this 39th Business Council meeting will reinforce the message that Japan should decide to join TPP as soon as possible.

High quality and forward-looking agreements like TPP are necessary for business to play its part in building a stronger and more resilient global economy on which the economic livelihood of both New Zealand and Japan ultimately rely.