Realising the Trans Pacific opportunity – a look ahead to APEC Honolulu Address to the Hawke’s Bay branch of the NZ Institute for International Affairs Stephen Jacobi – 2 November 2011

My last address to this Branch of the Institute of International Affairs was in May 2006: a large amount of water has flowed under the bridge of international affairs since then!

Some things have changed for the better, including New Zealand’s relationship with the United States about which I spoke to you last time – today that relationship has been fully restored, not to the allied status we once enjoyed but certainly, as the Wellington Declaration signed last November outlines, to a strategic partnership on which both countries are eager to build.

That includes the negotiation of a free trade agreement now underway in the context of the Trans Pacific Partnership (TPP) about which I will speak further today.

Some things on the other hand have changed for the worse, notably the global economic situation which looked a lot brighter in 2006 than it does now even if back then we tended not to notice the worrying signs.

And inevitably some things haven’t changed at all ? we are still trying to negotiate a conclusion to the Doha round of WTO negotiations, the world has still not reached a consensus on how to address climate change, and global inequality remains a persistent affliction.

When I spoke to you in 2006 I had just returned from Washington; next week I am about to leave for the forthcoming APEC Summit in Honolulu.

APEC stands for Asia Pacific Economic Co-operation, a grouping of 21 economies from around the Asia Pacific region including New Zealand whose leaders meet annually to discuss the economic challenges facing the region.

Today I’d like to paint a picture of the major trends that we can see in international politics and the economy that form the backdrop to the Honolulu meetings and discuss what these meetings might mean for New Zealand in the future, particularly in the critical area of trade and investment.

Global trends

First of all I’d like to highlight six trends in international affairs which I believe are shaping the way in which states and economies and businesses are interacting today.

The first of these is the impact of a series of financial and economic crises that have plagued the world over the last five years.

The signs of these were already evident when we met five years ago.

Changes to regulatory settings for financial markets in the United States were already leading to innovative borrowing and lending and significant growth in home finance.

This quickening expansion in lending was fuelled by imbalances in the global economy – surplus savings in parts of the more advanced developing world especially in China and elsewhere in Asia were funding the deficit spending of governments and citizens in the developed world especially in the United States and Europe.

Five years ago these were clouds on the horizon: today they have turned into an economic storm, or rather a series of storms, as we have gone over the last five years from a borrowing crisis, to a global financial crisis, to an economic crisis and now a sovereign debt crisis.

This has left the economic livelihoods of many in the world threatened and governments seemingly powerless to act as retrenchment takes hold.

The second global trend I see is the advent of a multi-polar world.

By this I mean that power in the world has become more diffuse as the influence of the United States begins to wane.

I am not about to proclaim here, today the end of the American dream ? the sun has not yet set on the American empire but we can certainly see the pink clouds appearing.

Whereas American power and influence dominated much of the last century, today we see the rise of competing economies such as China and India who together with the United States, the European Union and Japan make up a tight five, with a range of others including Brazil and Russia knocking on their door.

The United States remains for the time being the only super-power in a military sense but the threats to peace and security today come not from opposing armies (although this can never be ruled out) but from more subtle challenges to order and stability like terrorism, global crime, civil disorder and breakdown and environmental degradation.

These threats require different responses ? no one country can address them adequately and  they require groups of countries to work together using tools and processes which are different from armed forces, nuclear weapons and strike capability.

This is the age of soft power ? warriors have become peacekeepers,  weapons have been replaced by development assistance, soldiers by police, alliances by coalitions of countries coming together to address common challenges.

In an economic sense the tight five cannot out-compete each other and in any case through globalization their economies are tightly inter-linked ? prosperity or poverty in one ultimately affects them all and all of us as well.

The third trend which is really a subset of the second one is the rise and rise of Asia.

This is not new ? Asia had long been a force in the global economy before the Industrial Revolution saw Europe break away from the rest of the world and develop at unprecedented speed.

Today the burgeoning populations of China, India and Indonesia and their thirst for development are driving global economic growth and fuelling global competition for increasingly scarce natural resources.

We are now eleven years into an Asian century – some people describe it as an Indo-Asian century ? and over the next period we can expect Asian powers, Asian businesses and Asian citizens to claim for themselves a greater role in global governance and a greater share of global development.

New Zealand, with our location and strong political and economic links into Asia is well placed to capitalise on this new Asian prominence, but we will have to learn how to deal more effectively with this region.

The fourth trend is the pressure which development is now putting on the environment.

Climate change, extreme weather, environmental disasters, food, water and energy shortages ? all of these have specific causes but all are complicated by the development which a burgeoning global population, now 7 billion strong, requires to sustain itself.

There are a range of responses ranging from the more philosophical, community based initiatives to the more technological or market based.

Finding practical ways to address these issues without exacerbating the problems and while ensuring that the burdens are spread fairly and equitably will be a major preoccupation for the global community for years to come.

The last global trend concerns the changing way business is now being done.

Globalisation and the impact of technology and communications have transformed the way business is organized.

Global business is now conducted through supply chains ? these complicated chains link supply of goods and services to market demand with design, production and final consumption often taking place across several geographies.

New Zealand companies participate actively in these supply chains whether as farmers, fishers or fruit producers supplying safe, sustainable food into supermarkets or food processing operations; foresters supplying sustainably harvested wood for manufacturing or re-manufacturing; manufacturers supplying design or componentry; software producers linking into wider operating systems.

Companies like Fonterra, Anzco, Sealord, Zespri, Pan Pac, Fisher and Paykel Appliances, Orion Health are all operating in this way developing strategic partnerships, building stronger links with offshore customers and some of them investing in distribution or offshore manufacturing.

Just as significant, it is the success of different supply chains in competing against each other that can determine national economic success ? think for example the Airbus supply chain competing against the Boeing supply chain, or the i-phone against the android, or Nestle against Fonterra.

Optimising these supply chains ? making them work better, faster, cheaper, requires a different set of policy responses than we have seen in the past as I will demonstrate shortly.

So these are some of the global trends I see impacting on next week’s APEC meetings in Honolulu:

•  The impact of continuing financial and economic crisis
•  A move towards a multi-polar world
•  The rise and rise of Asia
•  Risks arising from the interface between development and the environment
•  Changes in the way business is being done

Opportunity of APEC

These global trends form the broad canvas against which next week’s APEC meetings in Honolulu take place.

In Honolulu Leaders, Ministers, officials, business, academic and community representatives from 21 APEC economies will come together to  discuss the implications of these global trends for the region.

APEC members are referred to as economies rather than countries because not all members are states (like Hong Kong and Chinese Taipei) and the APEC process is predominantly concerned with trade and economic issues.

APEC links both sides of the Pacific and is home to 40 per cent of the world’s population.

APEC economies account for close to 44 per cent of the world’s trade, 54 per cent of global GDP and around 80 percent of New Zealand’s exports.

APEC works by consensus and its decisions are voluntary and non-binding.

Member states take turns to chair the APEC process: this year’s Chair is the United States and in 2012 Russia will assume the Chair.  New Zealand last chaired APEC in 1999.

APEC is not a one-off encounter ? the Honolulu meetings are at the end point of a whole series of preparatory meetings held during the year.

My role is in relationship to the APEC Business Advisory Council or ABAC – we have met three times already this year in Guangzhou, Seoul and Lima to develop our work programme and our recommendations to APEC Leaders.

In Honolulu we get the opportunity to provide our perspective on what should be APEC’s agenda for change direct to the Leaders ? that will happen in a dialogue over an hour and a half on Sunday 13 November.

My dialogue group includes the Presidents of Korea and Peru as well as the Prime Ministers of Australia and Papua New Guinea.

Most attention at APEC will be focused on the Leaders’ meeting to be chaired by President Obama.

This is where the impact of the financial and economic crises, the rise of the multi-polar world and the rise and rise of Asia will be most acutely felt.

This year’s Leaders’ meeting will be attended by Deputy Prime Minister Bill English as John Key is on the campaign trail.

The meeting will be concerned with discussing collective measures to hasten the region’s economic recovery in the light of the continuing economic crisis, sovereign debt and currency issues.

Job creation, regulatory reform and energy efficiency will all be on the agenda.

Environmental issues will feature in the context of discussion of APEC’s green growth agenda and of APEC’s capacity to withstand major disasters like the Japan earthquake and tsunami.

Factoring in new models of business will be important as APEC discusses how to use expanded trade and investment as an engine for growth.

Last year in Yokohama APEC Leaders reaffirmed the goal of free and open trade in the region by 2020 ? this year the focus will be on continuing steps towards that goal.

A key concern will be to determine how to take practical steps towards the proposed Free Trade Area of the Asia Pacific (FTAAP), an ambitious concept which seeks to dismantle the remaining barriers to trade and investment in the region.

Realising TPP

From a New Zealand perspective one of the most important matters to be discussed in Honolulu is not strictly speaking an APEC initiative.

I mentioned before that APEC was a voluntary, non-binding organization.

APEC works best as a forum for discussion and co-operation rather than negotiation.

In so doing it has been an important laboratory for policy change ? a sort of petrie dish for economic reform.

Policy implementation tends to happen outside APEC and that is the case particularly with trade negotiations.

Nine APEC economies including New Zealand and the United States have come together in an initiative to establish the Trans Pacific Partnership (TPP).

TPP is more than about the nine parties ? it is one of the identified pathways to that broader concept of a Free Trade Area of the Asia Pacific (FTAAP) which has been endorsed by APEC Economic Leaders.

TPP is an important first step towards creating a seamless economic space around the region by linking the more open and outward looking APEC economies in a new generation trade agreement which can serve as a model for others in the region to join.

TPP is an ambitious undertaking.

The aim is to conclude a high quality, comprehensive agreement which sets a new benchmark for liberalisation and can make a meaningful contribution to lowering business costs, making it easier to do business and expanding trade and investment.

Already negotiations to establish TPP are quite advanced.

Nine rounds of negotiations have been held and the “broad outlines” of a future agreement are expected to be revealed in Honolulu.

TPP is particularly relevant to the way business is being done in the region today.

TPP attempts to focus on identifying ways in which supply chains can be made more efficient and work better, faster and cheaper.

TPP responds to the economic crisis in the region by providing a new framework to even out the economic imbalances and get the region as a whole growing.

TPP responds to the multi-polar world by providing new rules for trade and investment and a new means for settling disputes.

TPP responds to the rise of Asia but linking economies on both sides of the Pacific.

TPP factors in the environmental and society issues by including provisions relating to trade and the environment and labour.

It is true that aspects of TPP are controversial ? because it is designed as a comprehensive agreement which means everything is on the agenda TPP has the capacity to go deep into the domestic policy agenda.

This means agricultural policy in the United States and pharmaceuticals here in New Zealand.

This require some difficult decisions on the part of governments.

Each party in the negotiation has interests to protect and others to advance.

The New Zealand Government, for example, has already ruled out a major change in the operations of PHARMAC, the national drug buying agency.

Trade negotiations are always the art of the possible.

The aim is to identify those areas where there is a consensus for moving forward.

TPP remains a work in progress ? nothing will be agreed, until everything is agreed, and the results will need to be ratified by legislatures in the participating economies.

In New Zealand that means that there will be public release of the finally agreed text, a Parliamentary and Select Committee process and the opportunity for public submissions.

It is right that there should be close public scrutiny of such issues.

But all this is some way down the track ? it will be in Honolulu that we learn how much progress has been made and what remains to be done in 2012 to conclude TPP as a groundbreaking agreement.

Conclusion

I am very fond of the saying by the American baseball player and philosopher Yogi Berra who once said “the future ain’t what it used to be.”

Predicting the future is usually doomed to fail ? how many predicted the All Blacks’ one point victory in the Rugby World Cup final?

What we do know is that change is constant and that change if it is to be understood and responded to requires dialogue, co-operation and consultation.

That is the focus of APEC where the global trends affecting the region will be very much in play.

This year’s APEC meetings will see discussion of issues critical to New Zealand’s future.

That includes the Trans Pacific Partnership as a new opportunity to develop a model for sustainable economic growth in the region.

When we next meet here at the Institute ? whether or not it takes five years ? I hope I will have something to say not just about how things have changed but about what we did to shape that change for the benefit of New Zealand and the wider Asia Pacific region to which we belong.