Reflections of a travelling salesman – what progress in opening new markets for New Zealand? Address to the Hawke’s Bay branch of the New Zealand Institute for Iternational Affairs Stephen Jacobi, NZIBF -12 February 2013

It’s good to be with you again and I’m grateful for the invitation to speak to you one last time before Helen and I leave Hawke’s Bay.

I hope this won’t be the very last time ? it’s certainly very good to know that the legendary Ken Aldred has passed the mantle of leadership of the branch to someone as distinguished as Dick Grant: I’m pleased to regard both Ken and Dick as good friends and colleagues in the pursuit of advantage for New Zealand.

Pursing advantage in international markets is the theme of what I have to say to you today ? the title of my address “Reflections of a Travelling Salesman” speaks to the many trips I’ve had these last eight years in my role as a consultant to some of the country’s leading businesses.

Much of my travel has been to the United States, where I’m heading on sabbatical in a few months time, but increasingly the focus of my travel has been in Asia reflecting the ever increasing importance of this region for New Zealand’s economic future.

Just two weeks ago I was in Manila and Jakarta for meetings of the APEC Business Advisory Council.

It was hard to escape the feeling of dynamism and optimism in these populous countries despite the obvious challenges of development.

The Philippines expects to grow at the rate of 6 % this year assisted by the ongoing attention paid to combating corruption and reforming the economy on the part of President Aquino, whom we were privileged to meet in a roundtable discussion.

Indonesia is the Chair of APEC this year and is becoming ever more conscious of the position of influence it holds in the region and the prospects for development made possible by even stronger growth rate ? 6.3% this year.

What is most encouraging is that both the Philippines and Indonesia, along with their partners in the Association of South East Asian Nations (ASEAN) are seeking greater connections with New Zealand ? this will be assisted by a new regional trade negotiation, the Regional Comprehensive Economic Partnership (RCEP), about which I’ll speak shortly.

A recent survey of public opinion by the NZ US Council showed that over 60 percent of New Zealanders subscribe to the idea that we need to do more to connect with global markets.

But, the issue isn’t simply about exporting more, as if often suggested: the real issue is the extent to which our economy as a whole is integrated with the rest of the world.

That means exports and imports of services as well as goods, investment and the movement of capital and technology and importantly also the movement of people and the skills and ideas they bring with them.

Economic integration is rather a mouthful, but it’s important because today it is the extent of this integration what determines national competitiveness, that is to say the ability with which an economy can do business with others.

This in turn is because through the process of integration economies can bring down barriers to trade and investment, reduce the cost of doing business and adopt greater coherence when it comes to regulation behind the border.

But enough of the dry economics – what I’d really like to do today is illustrate the importance of all this, and its relevance to a travelling salesman like myself.

I’ll look firstly at what’s changed and what’s stayed the same since I first spoke to this group in May 2006; secondly I’ll explain why trade and investment is so important to New Zealand and lastly I’ll look at the state of play with the two most significant free trade agreements now under negotiation in the Asia Pacific region.

What’s changed and what hasn’t

In international affairs it hard not to be reminded of that French saying “plus ça change, plus c’est la même chose.

It’s true that some things never seem to change.

The World Trade Organisation’s Doha Development Agenda remains unfinished.

The international community is still seeking a truly global solution to the problem of climate change.

Peace in the Middle East is as far off as ever.

And although the relationship with the United States ? the subject of my address in 2006 – has improved by leaps and bounds in the last six years New Zealand still does not have a free trade agreement and a rules-based framework for the economic relationship with our third largest trading partner.

Some things however are different.

In 2006 the United States was New Zealand’s second largest trading partner ? China occupies that place today.

In 2006 the economic climate was noticeably stronger than it now appears ? while some confidence has returned to the global economy, the situation in the United States and the Eurozone remains precarious.

Asia and Australia saved New Zealand’s bacon during the global financial crisis but in the past year growth in both slowed while New Zealand’s currency has appreciated making life very difficult if not impossible for exporters.

By way of illustration in February 2006 the NZ dollar exchange range against the US dollar was 67.4c[1] – today the rate is 85c.

This makes a huge difference in export business: it wipes out for example the effect of rising commodity prices which might otherwise benefit New Zealand farmers.

Unfortunately I don’t believe much can be done to effect a reduction in the exchange rate ? all the options appear either doomed to fail or very costly.

The only answer seems to me to ensure that we are paying attention to the other costs faced by exporters including both here in New Zealand and overseas, and that we continue as fast as we can to open new markets and pursue new ways of doing business.

That’s the other major change since 2006 – the acceleration of a trend that was already underway back then – a change in the way business is being done today.

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.

Supply chains now link supply to demand the world over.

This is increasingly how business is transacted. This is how businesses are meeting customer demands.

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 & Paykel Appliances, Fisher & Paykel Helathcare, 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,

What is noticeably different about these business processes today is that they are increasingly spread over different locations and jurisdictions.

Whereas processing operations once happened in country A or B, today they might happen in country C, D or E before finally getting to the consumer in country F.

This gives rise not only to significant complexity in management but also to a number of barriers and chokepoints along the way which can add further complexity, cost and wastage.

As I mentioned a moment ago, one way of overcoming the risks posed by appreciating currencies, is to make it easier and cheaper to do business ? that requires serious attention to issues that impact on business operations and affect the cost and time in which business can be done.

An often quoted figure is that a one day delay in exports can lead to a loss in export value of 1%.

Finding practical ways to address these problems cannot only help businesses, they can ensure the consumers get ready access to the goods and services they need at affordable prices ? that the includes food on your dinner table, the components you need to fix your car, the technology required to make the cell phone with which you keep in touch with your family and friends.

So, since we first met in 2006, the way business is being done has changed dramatically and in this financially constrained world governments are looking for ways to do more business so that this can contribute to economic recovery and growth.

Importance of trade and investment

What has not changed since 2006 is the fundamental importance to New Zealand of its international business.

Ultimately it’s a question of jobs.

Today New Zealand’s unemployment rate stands at an unacceptably high level of 7.3%.

In November 2005 the unemployment rate was 3.7 %[2].

This shows you the extent of the challenging times we are facing.

New Zealand is not alone in this problem – the ILO has forecast that, in 2013, some 7 million people will become unemployed around the world in addition to the 200 million already without a job, including a large proportion of youth.

The problem today is that job supply, here in New Zealand and around the world, is failing to keep up with demand.

Despite pockets of optimism, markets are down, governments mostly broke and consumers reticent.

It’s worth thinking for a moment about what leads to job creation.

Jobs are created when businesses take risks and invest their money to make a return.

Investment happens when the environment is right, when the rules are clear and there is a degree of certainty about the future ? the more uncertainty there is, and the harder the investment process, the less investment and fewer jobs there will be.

New Zealanders more than any others around the region know that our country’s economic success is driven by returns from overseas markets.

To put it very simply “we can’t eat all we produce and we can’t produce all we need”.

Or another way, “it takes a lot of kiwifruit to pay for a Boeing”.

According to BusinessNZ, two out of three jobs depend in some way on trade and investment.[3]

Export income, capital inflows through foreign direct investment and the remittance of dividends from New Zealand’s offshore investments ? these are what plug the gap in domestic spending and government deficits.

So ultimately e the path to more and higher paying jobs, more hip operations, a world class education system and better infrastructure can only be found through greater integration in global markets.

That’s why New Zealand continues to be involved in global and regional initiatives to eliminate trade barriers, reduce costs and make it easier to do business.

Regional trade negotiations

Two such initiatives stand out from others because of their potential impact ? the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

Both TPP and RCEP aim to put in place a new set of rules for trade and investment in an effort to promote growth and jobs.

New Zealand is involved in both but TPP includes eleven economies including the United States whereas RCEP includes sixteen economies excluding the United States.

TPP has been described as a “next generation trade agreement” one which can link both sides of the Pacific.

RCEP is more modest in scope but potentially even bigger in impact than TPP because it includes all of ASEAN, China, Japan, Korea as well as India, Australia and New Zealand and represents a pan- Asian vision of economic integration.

TPP has been well underway for some time now ? the 15th round of negotiations was held in Auckland last December.

RCEP is just getting underway ? the first round of negotiations will not take place until May this year.

TPP is also highly controversial and opposed by a number of civil society groups.

Some concerns arise because the negotiations are conducted between officials without the direct participation of stakeholders.

It is true that the TPP negotiations, like any other international treaty negotiation or other sensitive negotiations like collective employment agreements or commercial deals, are conducted behind closed doors.

This is because there are sensitive economic and commercial issues under negotiation and a more open process would inevitably lead to sectoral interests seeking to undermine the negotiation, as has been the case for example in the WTO or even the Kyoto Protocol.

Other concerns arise because of the extent of what is believed to be on the table in the negotiation.

It is true that TPP is both complex and ambitious and has the potential to reach far deeper into domestic economies than other more conventional trade negotiations.

The United States for example is bringing challenging proposals to the table in terms of increasing protections for the creators of intellectual property.

Some New Zealand companies are supportive of this, particularly those involved in defending patents and copyright internationally, such as in creative and high tech manufacturing industries.

Others are concerned that too high protections across the board could penalize innovation especially if patents are applied to the fast moving software industry.

The New Zealand Government will need to decide what best meets New Zealand’s interests in this area but it is more likely to do so in the context of domestic policy processes rather than a trade negotiation.

Hence the importance of the discussion of the Patent Bill which recently passed its second reading and the ongoing implementation of the Copyright (Infringing File Sharing) Amendment Act 2011.

It’s important to remember that the United States is not the only economy bringing challenging ideas to the negotiating table.

New Zealand’s interest in freeing up agricultural trade is well known but equally challenging is our interest in aligning regulatory approaches across the region.

This is targeted especially at American regulators who are perhaps the least used to co-operating in this way.

Similarly the Australians are interested to explore new disciplines on agricultural subsidies and the Vietnamese and Malaysians want a major reform of trade in textiles and clothing.

There are many other examples of challenging issues from investment to state owned enterprises to labour and environment issues.

If the issues weren’t challenging, TPP wouldn’t be worth doing much less taking two or three years of negotiating effort.

What can be certain is that not everything on the table will be a part of the final agreement and the more ambitious proposals will be the hardest of all.

And that’s the point – TPP is a negotiation, an attempt in a structured process to find scope for consensus where none appears to exist.

It’s not for nothing trade negotiations are called the art of the possible.

Once the negotiators have finished their job the results will need to be presented to Cabinet for confirmation and then to Parliament for ratification.

All New Zealanders will be able to participate in the Select Committee process and make their views known in the public debate.

Any laws needing to be changed will require amending legislation.

That after all is how we make international treaties and change laws in this country – in this respect TPP is no different from a treaty limiting carbon emissions or establishing conventions for rights of workers.

TPP’s ambition is both its major attraction – at least for business – and its weakest point.

President Obama and other leaders have said they hope to conclude TPP in 2013 ? I have to say that looks fairly ambitious also.

If ultimately TPP becomes so complex it proves impossible to conclude ? and there is some risk of this ? then we will have to look to other initiatives – thank goodness we have the developing RCEP as another viable vehicle.

RCEP aims to be concluded in 2015 but a negotiation involving China, Japan and India may well turn out to be as complicated as TPP.

Unfortunately the consequence of failure and even delay is slower growth, less investment and fewer jobs.

That’s why business in New Zealand will continue to do all it can to encourage a timely and substantive outcome to both sets of negotiations.

Conclusion

Let me try to bring all this together.

I’m conscious that what I’ve given you is a business perspective – I am a salesman after all, and there are other perspectives on these issues to take into account.

From a business perspective the economic environment in New Zealand today is very challenging, reflecting the circumstances of the global economy.

Yet it is only through increased investment by businesses that jobs will be created and the country put back on the path of sustainable recovery.

Our companies’ ability to connect and integrate globally remains vital for our ecomomic success.

There are limits on our country’s ability to grow by focusing soley on our small domestic market.

We need more trade, more investment, more economic integration.

The way business is being done is also changing rapidly, with greater emphasis on companies connecting into global supply and value chains.

This requires governments to pay attention to the speed and costs of doing business and to bring down barriers both at and behind the border barriers.

TPP and RCEP are complex initiatives for doing just that and I believe New Zealand must continue to be closely involved, paying attention to stakeholders’ views and advancing and protecting our national interests.

Meantime salesmen like me will continue travelling to support these efforts and to seek advantage for New Zealand, its enterprises, workers and citizens, in the global market place.

[1] http://www.ird.govt.nz/resources/9/7/97c961804bbe4a549c88dcbc87554a30/ir270-2006.pdf
[2] http://www.socialreport.msd.govt.nz/2006/paid-work/unemployment.html
[3] “Export Perspectives”, BusinessNZ; Accessed 18 August 2012: www.businessnz.org.nz