The Implications of Free Trade Agreements for the Wine Industry

Notes for an address to international wine law association (Australasian section) conference Blenheim, 21 November 2015

Thank you for the opportunity to share some thoughts about the implications of free trade agreements for the wine industry in Australia and New Zealand.

I’m speaking on behalf of the New Zealand International Business Forum (www.tradeworks.org.nz), a grouping of senior business leaders committed to promoting New Zealand’s integration in global markets.

We very much appreciate the support of New Zealand Winegrowers as an associate member and are keen to take opportunities like this to provide a view-point on developments affecting your industry’s positioning in global markets.

The wine industry today in both countries faces some significant opportunities and challenges:

• the rise of an enormous global middle class in the coming decades is forecast to bring with it a new appetite for high-quality, higher-value products such as wine
• markets have been difficult to access – wine exports do not just face tariffs but must also overcome a range of substantial non-tariff barriers such as requirements relating to wine-making practices or labelling
• international markets are evolving, with increasing sophistication from other producers and a highly competitive trading environment
• the development of global value chains are requiring new ways of doing business and strengthening the role of services in association with the sales of goods including wine.

Governments in both Australia and New Zealand have actively sought to improve the conditions for exports with a series of modern free trade agreements, which emphasise the creation of the most transparent, fair and rules-based trading environment possible.

I’d like to talk today about three big and topical trade negotiations that have some pretty major implications for the wine industry:

• the Trans Pacific Partnership (TPP)
• a future EU-New Zealand FTA
• and finally the WTO Doha Round.

Trans Pacific Partnership

Today trade and investment are changing as economies become increasingly integrated and inter-connected. 


The way we do business is also changing – old models based on import/export are giving way to increasingly complex value chains and networks. 


This gives rise to an urgent new agenda based on market integration rather than simply market access. 


The wine trade is as deeply affected by this evolution as other sectors.

The integration of markets for wine has seen a major expansion in so-called “new world wine” trade, involving a group that the New Zealand industry has helped to drive – the World Wine Trade Group.

That trade has been fostered thanks in part to two new agreements in this formerly highly prescriptive and regulated sector that mean WWTG countries will accept each others’ wine for sale, despite differences in winemaking practices, and wine exporters are able to sell wine into WWTG markets without having to redesign their labels for each individual market.

The Group has also lobbied the WTO, the World Customs Organisation and APEC for more open markets and more transparent and equitable rules governing wine trade.

This work has been particularly significant given that the markets of the Group – Australia, Argentina, Canada, Chile, South Africa, and USA – represent a large share of our exports and include three of our top five markets.

This integration imperative is at the heart of TPP, which links 12 economies making up 40 percent of global GDP.

TPP aims to set up a more contemporary framework of rules for trade and investment that will lower costs, reduce the time of doing business, provide greater certainty and security and ensure that over time there is a more consistent approach to setting regulations and standards across the region.

TPP advances an integration agenda by focusing not just on tariffs and border measures but on issues like investment, services, supply chain connectivity, regulatory alignment and innovation.

For the New Zealand wine industry, TPP will provide enhanced access for exporters to some of our most important markets, accounting for over 60% of New Zealand wine exports overall.

All wine tariffs will be eliminated, including in Malaysia and Viet Nam where access was not earlier granted under the Australia NZ ASEAN FTA.

This represents a saving for the New Zealand industry of $10 million a year by the time the agreement is fully implemented, on exports to TPP markets in 2014 of $839 million.

There will be $1.5 million of tariff savings at entry into force, including immediate elimination of tariffs on bottled wine into the United States, and on all wine into Canada, New Zealand’s third and fifth-largest wine markets respectively.

In Mexico, we will see elimination of tariffs that currently run at 20% in between 3 and ten years. In Peru, current 9% tariffs will be eliminated within 5 years. Malaysia will see removal of tariffs on wine within 15 years. And in Viet Nam, its existing tariffs – some up to 54% – will be removed within 11 years.

TPP will also help to restore New Zealand competitiveness against others with FTAs into those important markets.

A Wine and Distilled Spirits Annex will simplify sale and export of New Zealand wine in TPP countries, with a particular focus on labeling requirements.

TPP also provides scope for overseas investors to provide much-needed capital to help develop our wineries and vineyards.

At the TPP Leaders’ meeting held on the margins of APEC in Honolulu in 2011 it was agreed that the final agreement would be “high quality, ambitious and comprehensive”.

This wording reflected the original vision of the negotiating parties and the opportunity to create a new framework for trade and investment that would have a significant impact on sustainable growth and job creation.

From a wine industry perspective it can certainly be argued that the goal has been achieved.

Unfortunately not all sectors have been treated as well as wine.

For dairy products, for example, TPP is something not quite as ambitious as the architects of TPP had in mind and less than what was on offer in Honolulu four years ago.

Although even dairy gains some significant new market access, it is disappointing that the final TPP deal falls short of the goal of comprehensive tariff elimination – all duties on all products within a meaningful commercial timeframe.

While TPP may not have delivered all we wanted, it is important to remember that the outcome has been achieved without the likelihood of significant adjustment for New Zealand and Australia in areas like medicines, investment, intellectual property or the management of state owned enterprises.

It is estimated that TPP will add an estimated NZ$2.7 billion to New Zealand’s GDP by 2030, a not insignificant figure.

TPP is more than the sum of its parts: it is also about the bigger strategic game in the Asia Pacific region.

TPP is designed as a pathway to a wider agreement in the Asia Pacific – the Free Trade Area of the Asia Pacific, which will also include the most significant regional economic superpower, China as well as another giant of the future, Indonesia.

New Zealand’s vision from the very beginning has always been for open regionalism – the widest possible membership of economies, the greatest possible coverage of issues, the highest quality of agreement.

Without doubt, TPP brings us immeasurably closer to that goal.

FTA with the European Union

Turning to another potential negotiation on the other side of the world, the New Zealand Government has recently announced, along with the European Commission, the intention to enter into FTA negotiations.

That is excellent news for New Zealand exporters.

The EU as a whole remains our single-largest export destination for wine, taking around one-third of our wine exports, or over $450 million last year, and of course individual Member States, notably the UK, France and Germany, are important markets in and of themselves.

We would hope that a new FTA with Europe could help to grow that market even more, by removing tariffs, placing New Zealand exports on a level playing field with competitors, and helping to modernise and streamline the terms and conditions for entry into the European market.

New Zealand will of course be well placed to engage with Europe on wine trade issues in any future FTA negotiation thanks to the introduction at the start of this month of a Bill into Parliament that will – at long last! – enable geographical indicators for wines and spirits to be registered in New Zealand, and will in turn allow exporters to protect our premium brand from misappropriation or misuse, and to secure market access in some regions.

An FTA should also help to deepen the cooperative and mutually-beneficial relationships that are becoming established between our two wine sectors – just look at the European investment to date in the New Zealand wine industry, and the cross-fertilisation of people and ideas between Europe and New Zealand since the earliest establishment of wine grapes in this country by European settlers.

There is a long road ahead to turn this political announcement in principle to an actual negotiation and an outcome that is, once again, “high quality, ambitious and comprehensive”, but the way ahead is clearly signposted and there should be interest in the wine industry in following that road.

WTO

I’d like to finish by touching briefly on another major trade effort – one that began with such vision, ambition and determination as the world reeled from the tragedy of 9/11, but has sadly had a very rough journey over the last 15 years.

I am talking, of course, about the WTO Doha Round.

I will not dwell on the broader prospects for Doha, which frankly are not good.

But there is a reasonable chance that one of the deliverables of the WTO Ministerial Meeting scheduled to take place in Nairobi in the middle of December will at long last be an end-date for export subsidies – those most noxious of all trade-distorting measures.

Europe is entitled under current WTO rules to outlay 42.9 million euros each year in so-called “export refunds”, to subsidise up to 680 million litres of wine.

Over recent decades, subsidised European wine has accounted for between 10 and 20 percent of EU exports and theoretically could have been even higher had Europe used the full extent of its allowance.

Export subsidies undermine competitive exporters like New Zealand even in markets where we may have preferential access thanks to an FTA.

So if we were indeed able to secure an end to export subsidies at Nairobi, that would be a great day for the New Zealand wine industry as well as the global trading system more broadly.

An agreement to re-energise the Doha process so we could start once again to negotiate these issues in a multilateral context would be even better.

Conclusion

Governments negotiate trade agreements to secure advantage – advantage for their businesses, consumers and economies as a whole.

That advantage can only be secured by business taking steps to go through the new doors that have been opened and to benefit from the new rules put in place.

Despite its contradictions, TPP remains a singular achievement and one, which will have profound impacts on the region’s economy as markets and investment flows react to the increasing economic integration TPP promotes.

Likewise an FTA with Europe has the potential to set new benchmarks for a modern trading relationship.

TPP will need ongoing strong support from business leaders both to help the public understand the benefits especially during the ratification process and to turn the final agreement once entered into force into economic and commercial success.

Likewise any new negotiation we enter into with Europe will need strong support from the business community, including the wine industry.

We need collectively to take every step to advocate for both of these agreements and the New Zealand business sector’s uptake of them, as we go through the processes of negotiation, ratification and implementation.

Twenty years after the WTO was formed, over 30 years after New Zealand struck its first FTA, with Australia, advocates of more open trade sadly remain small in number.

For these important initiatives to advance, we need all the friends we can get.