Remarks by Stephen Jacobi to the NZIIA Conference: The major economic & foreign policy issues facing New Zealand 2012-2017 Wellington – 20 October 2011

It’s good to be with you today and at out the outset let me congratulate Brian Lynch and the NZ Institute of International Affairs for once again having the foresight to bring us together not just to think about the future but to envision how we want that future to be.

I’m pleased to represent the NZ International Business Forum which brings together the leaders of New Zealand’s largest internationally oriented companies and leading business organizations.

Those of us in the International Business Forum are all united in the belief that the future economic success of our country lies in the extent to which we are better integrated into the global economy.

It’s tempting when talking about trade policy to think that things never change.

Will the Doha round ever be brought to a conclusion?

When will the Japanese finally liberalise their agricultural sector?

When will Democrats and Republicans in Congress finally come together to ratify important pieces of trade legislation?

Well, here’s some good news:  last week the Congress, both House and Senate, ratified the three trade agreements with Korea, Panama and Colombia which had languished in a non-man’s land for the last five years.

The passage of these three FTAs has important consequences for the future of American trade policy and for the Trans Pacific Partnership (TPP) currently under negotiation and about which I’ll talk about a little later on.

The fact of the matter is that markets, business and economies change all the time.

In the five years since these three FTAs were negotiated – including the Korea/US FTA, the largest FTA since NAFTA in 1994 – the way business is done has continued to evolve.

It is this changing nature of business and the implications for trade policy – even the name sounds a little outdated, as I will demonstrate – over the next five years that I would like to address this afternoon.

This change is already reflected in the TPP negotiations which have the potential to go far deeper into domestic policy settings than any other trade negotiation and for good reasons.

More broadly this change calls for a fundamentally new approach for conducting trade policy, the implications of which all of us in this room will need to grapple with over the next period.

The context

Any sensible discussion about business today needs to start with the global supply chain.

Today  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,

This past year the APEC Business Advisory Council (ABAC) has spent a lot of time developing a greater understanding of how these supply chains operate.

Supply chains link supply to demand the world over.

This is how business is transacted.  This is how businesses meet customer demands.

The supply chain for goods begins with primary resources such as land, water, minerals being processed through many stages and finally delivered as products to end-consumers.

The supply chain for services begins with sets of knowledge and skills which are transformed in different ways and offered directly or indirectly either to businesses producing goods or to end consumers.

In fact the distinction between goods and services trade is becoming increasingly blurred as embodied and embedded services  are becoming an important part of manufacturing processes.

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 chokepoints along the way which can add further complexity, cost and wastage.

By identifying and addressing these chokepoints, it should be possible to make it easier to do business, lower costs, increase productivity and provide a higher range of value-added goods and services to the benefit of customers, producers and the economy as a whole.

But if business and the global economy today rely on global supply chains, global production, and global consumption, our trade agreements are not keeping pace.

Many trade agreements focus on the old agenda of market access and less on this new agenda of market integration.

That is not to say the old market access issues are not important – they are, and they need to be addressed, so that we can move forward to the next stage of business development.

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.

In recent years all the APEC economies have been negotiating free trade agreements mostly on a one-to-one basis.

New Zealand has been an enthusiastic participant in this process.

What we see today across the region is a patch-work of agreements which present a confusing picture for businesses operating supply chains across multiple locations across the region – a noodle bowl of truly epic proportions!

So today we are confronted with a dual challenge:

• the challenge of making supply chains work better, faster and more economically
• the challenge of factoring in this new agenda into what we still call trade negotiations but which need to become broader instruments for economic co-operation, trade and investment facilitation while retaining their liberalizing character.

Significance of TPP

The Trans Pacific Partnership (TPP) provides one opportunity to meet this dual challenge.

TPP is an important first step towards untangling the noodles, to adopt a common approach to addressing the main 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 pathway nor may it yet prove the best but it is certainly the most advanced.

The other models for regional economic integration are focused around ASEAN with which as you know New Zealand and Australia have concluded a ground-breaking FTA.

The ASEAN processes – ASEAN + 3, ASEAN and the North Asian economies and ASEAN + 6, which extend the process to Australia, New Zealand and India – are slowly evolving.

New Zealand is actively involved in these alternative pathways and that is a good thing.

There is in my view no conflict in operating in both camps as it were, one deriving from a pan-Asian vision and one a broader Asia Pacific one.

But as of today TPP is the only initiative in the region which combines

• a pluri-lateral approach amongst the nine partners on both sides of the Pacific
• an advanced negotiating framework for trade and investment liberalization as well as facilitation; and
• through its agenda of regulatory coherence and other so-called “horizontal issues” an ambition to address both market integration as well as market access.

To my mind this puts TPP, for the time being anyway, ahead of the other pathways under consideration in the region.

In the next few weeks we will know the extent to which TPP is making progress.

After nine rounds of negotiations the “broad outlines” of an agreement are expected to be announced on the margins of the APEC Leaders Meeting in Honolulu chaired by President Obama.

The President can be expected to have a particular interest in TPP – now that the three FTAs have been ratified by Congress, TPP is not just the Administration’s priority trade liberalisation initiative, it is the only one!

There is no prospect that TPP will be finished by the time of the APEC meeting but four criteria can help us assess the extent to which TPP can live up to its high expectations.

First, comprehensiveness – does TPP cover all sectors with no a priori sectoral inclusions?

Second, ambition – does TPP go beyond what has already been achieved by the partners in liberalisation and take a step further towards the goal of free and open trade in the region as espoused by the APEC Bogor goals?

Third, scope of the agenda – does TPP embrace a market integration/ supply chain perspective, one which can address the needs of business both today and tomorrow?

Fourth, openness – does TPP provide for further accessions by other parties and thus constitute the accelerated pathway for the achievement of the Bogor goals leading ultimately to the Free Trade Area of the Asia Pacific (FTAAP)?

For the time being of course TPP remains a work in progress.

Negotiations are likely to continue in 2012, ratification by the parties may not be on the cards until 2013, and entry into force in 2014 ? that means effectively that TPP could occupy the minds of trade negotiators, regulators, business people and other stakeholders for the greater part of the timeframe under discussion in this conference.

That is why TPP and its ambitious agenda are so significant for framing the future business environment in the next five years.

Implications

TPP is significant in another way too.

TPP points to a number of implications for the way trade policy – if we can continue to use that term – is conducted.

Just as supply chains are changing the way business is being done, the new trade policy agenda is changing the art and science of trade negotiation.

First this new market integration agenda will require the greater involvement of domestic agencies.

We see this already in TPP where agencies like the Ministry of Economic Development are playing an increasing role particularly in relation to regulatory and intellectual property issues.

There is a certain irony in that over 20 years ago now the decision was taken to move the trade negotiating functions from the former Department of Trade and Industry and place them within the Ministry of Foreign Affairs and Trade.

As the new trade policy takes shape it is inevitable that international economic negotiations will need to be driven if not conducted by agencies directly connected with promoting competitiveness and innovation.

That in turn will require a change in the operating style of domestically-focused agencies who will need to become even more internationally oriented.

Second, the new market integration will require even greater collaboration between government agencies and industry.

We have come a long way down this path here in New Zealand where there is already close co-operation between officials, sector groups and business leaders.

The NZ International Business Forum was established precisely to bring greater focus to this work on the part of our leading sectors.

Even so I still see all too often officials who do not appreciate the contribution business can make and business representatives who under-estimate the commitment and ability of official processes to addressing and solving business problems.

Third, the new market integration agenda will need to be informed by a new national conversation about what business today needs to be successful in global markets.

We see this need most clearly in the area of intellectual property which has become controversial in the context of TPP.

This debate has been captured to a large extent by domestic considerations focused on complex areas of legislation and regulation like the Patents Bill and the Copyright Infringement Act.

Of course it is right and proper that there should be robust internal debate about the policies which shape and drive innovation.

My point is simply that the broader international context should not be overlooked.

Is it a concern for example that New Zealand’s intellectual property regime risks becoming seriously out of step with that of Australia with whom we have – or are supposed to have – a single economic market?

Whereas we want to ensure that over-zealous regulation does not stifle innovation do not New Zealand’s companies as the creators of intellectual property need patent and copyright protection when operating internationally?

We see the need for more informed debate also in terms of foreign investment.

Increasing foreign direct investment is critical to attracting the capital required for economic growth.

Expanding New Zealand’s overseas direct investment must play a part in a supply chain dominated future.

Currently our national debate revolves around whether Chinese ownership of land is a good thing and whether, under investment treaties or TPP, foreign companies might be able to sue governments.

These are significant issues that will need to be discussed and debated in the next five years and probably beyond and each has a significant international dimension.

Conclusion

This is a timely conference about the future economic and foreign policy challenges facing New Zealand.

One conclusion to be drawn is that the distinction between economic and foreign policy will continue to be blurred.

While it is tempting to think that things don’t change, the next five years are going to be marked by:

•  continuing change in the way business is done with further rapid evolution of global supply and value chains
•  change in the specific needs of business within an environment which requires flexibility, lower cost and greater certainty and security
• change inevitably in the way trade policy is conducted with greater involvement of domestically focused agencies, a heightened role for business working along-side government and an ongoing conversation about the interface between domestic policy and the needs of business operating in global markets.

It’s always risky to try to predict the future but let me say here and now that when Brian Lynch brings us together again in five years time:

• TPP will be concluded, ratified by the US Congress and other legislatures, and expanded to a range of new members including Japan
• Doha will be concluded (you see I am a born optimist); and
• The All Blacks as twice reigning champions will be the favourites to win the World Cup in 2019!