TPP and the primary industries Address to the Primary Industry Summit, Wellington, 27 May 2014 Stephen Jacobi, Executive Director, NZ International Business Forum

Thank you for the opportunity to be with you today and to talk about the Trans Pacific Partnership (TPP).

Mention of TPP causes different reactions – fear and loathing in some quarters, unbridled optimism in others.

Today we meet against the backdrop of the most recent gathering of TPP Trade Ministers in Singapore.

In a pattern that has been repeated several times in recent years, Ministers declared themselves to have made great progress but without announcing an end to the negotiations.

Today I’d like to provide some further background on TPP and its significance for the primary industries.

I’d like to give you a sense of where I, as business observer, think the negotiators are up to.

I’d also like to venture some thoughts about what might happen next in this long-running saga.

I make these comments from the perspective of the NZ International Business Forum.

NZIBF brings together the leaders of some of the country’s largest and most internationally oriented companies, mostly from the primary sector.

Their key concern is the way in which New Zealand connects and integrates with the rest of the world – further information about our organization can be found on our websites.

The significance of TPP

Any discussion of the significance of TPP for some of the industries in which many of you here today are directly involved has to start with an appreciation of the growing demand for food in a world whose population already exceeds 7.3 billion.

In saying this I’m conscious that I risk suggesting that primary production in New Zealand equals food production, which is clearly not the case.

The effects of growing global population and growing needs for energy, housing and for infrastructure of all kinds apply to all the primary industries.

I’m grateful to the NZIBF Chairman, Sir Graeme Harrison, for drawing my attention to the FAO’s projection of food demand.

Simply put we are going to need to feed a whole lot more people in the next fifty years.

FAO and the World Bank estimate that only 10 percent of new demand can be met by new cropland, and only 20 percent, from better use of existing cropland using existing technology.

70 percent of new demand must come from new technology and policy innovation.

Among this important new policy innovation must be trade and investment as we seek to link more effectively demand and supply around the world.

That must be good news for New Zealand farmers and for New Zealand as a nation of traders.

New Zealand has been built on trade.

That is as true for Maori, who traded between the two islands and even with Australia as it is for later arrivals, who developed our most productive and competitive natural resource based industries.

It’s also true for those newer industries in the technology and creative sectors.

Our domestic market is small, our access to local capital is limited, so we need to look externally for growth and development.

Yet international markets have not always been kind to New Zealand.

It is only fairly recently that the terms of trade – the ratio of export prices to import prices – has begun to work in New Zealand’s favour.

It still takes a lot of kiwifruit to buy a Boeing 787, but rising commodity prices and growth of global demand for the things we have to sell have transformed the industries represented today.

Policy innovation in the form of trade liberalisation has played a big role here.

It was the conclusion of the GATT Uruguay Round in 1994 that brought about reductions in export subsidies and import tariffs and disciplines in domestic support and that ushered in greater rationality in global agriculture markets.

The point is that trade policy matters – it matters especially to New Zealand and it matters especially for the primary industries.

But the process of policy innovation is not yet complete.

Today’s trade negotiators are increasingly focused on 21st century issues but the issues of the 20th century have not gone away.

Ludicrously high tariffs in a number of markets continue to impact negatively on New Zealand, and the most developed economies are among the worst offenders particularly when it comes to agriculture.

In New Zealand we learned a generation ago that the protection is the worst enemy of innovation and competitiveness.

That same penny is beginning to drop in the United States, Canada and Japan.

Change is being driven also by the new way that business is being done today – that is to say through increasingly complex supply and value chains.

Business and the market tend to operate far out in front of governments and policy makers.

Much of the public discourse today is still about trade in the traditional sense – country A selling product X to country C – and all too often, somewhat illogically, about the merits of exports and the evils of imports.

The Iphone and the 787 have focused new attention on the increasing role of intermediate goods in world trade.

The WTO has found that 55 percent of world trade today is represented by goods which are used to make other products.

26 percent of the content of goods traded internationally came from the rest of the world ¹.

This is the background against which trade policy is being made today and which gives rise to a new agenda based on market integration rather than market access.

That agenda sees policy makers moving beyond border issues like tariffs to behind the border issues like domestic regulations.

It sees a focus away from goods to services and investment and new attention being paid to the speed and cost of doing business.

The framework for this policy innovation is fuzzy at best – a noodle bowl of free trade agreements presents a puzzling array of contradictory instruments which business finds hard to navigate.

Too often also existing FTAs fail to concentrate on the right things.

The vision to which policy makers are working today is of a more seamless economic space – one where the noodles can be untangled and supply chains optimized.

I’ve gone into all this background because this is why TPP is so significant.

TPP provides a means to complete the 20th century trade agenda and move onto the 21st century agenda.

TPP enables us to focus more specifically on market integration and what is needed to ensure supply chains build the foundations of growth in our economies.

TPP enables us to untangle those noodles and present a more coherent framework for trade and investment.

Where are we up to?

This brings me to where we find ourselves today.

TPP has in fact been with us for some time but in the form of a limited agreement reached between four parties – New Zealand, Brunei, Chile and Singapore.

That P4 agreement forms the basis of a negotiation between 12 economies, which has been underway for some time now.

Nineteen rounds of formal negotiations have been held, countless inter-sessional gatherings between thousands of officials, at least four separate Ministerial meetings and annual get-togethers by TPP Leaders, the last one chaired by Prime Minister Key at APEC in Bali last year.

Where exactly all this has this got us is hard to pinpoint.

There are certainly some high level understandings of what TPP will look like:  the so-called “broad outlines” agreed in Honolulu back in 2011 commit the parties to concluding a “high quality, ambitious and comprehensive” agreement.

There is, as we understand, quite a lot of agreed text, which will feature in the treaty once finalized – we get to see this only when it is leaked and if what we have seen is to be believed there is also quite a lot of text which is not agreed.

At their recent meeting in Singapore Ministers said they had “cemented their shared views on what is needed to bring negotiations to a close” ²;  and committed themselves to continuing the negotiation process.

Most commentators agree that a number of issues continue to hamper the conclusion of the negotiation.

I have time today to touch upon only a few of these.

The first is the perennial problem of market access for agriculture – with this, we are right back to the 20th century.

TPP has been promoted from the very beginning as an ambitious and  comprehensive agreement.

From a New Zealand perspective this equates to an agreement, which, over time, results in tariff elimination for all products for all participants with all participants sharing equally in the benefits.

Unfortunately some participants especially Japan and Canada appear to want to continue to exempt some products from this goal.

That this should continue to be an issue at this late stage of the negotiation is deeply disappointing.

Comprehensive treatment does not mean that all products need to be treated equally – there can be differing timetables for tariff reduction and elimination, there can be safeguards, there can be compensatory actions – but the end point – zero – should be clear.

Some TPP economies have already departed from the consensus around these issues – Australia and Japan have concluded a bilateral FTA that sets a low benchmark for liberalisation and the United States and Japan appear to have agreed that some tariffs will continue to remain.

Trade Minister Groser has been quick to respond that if this is the best that can be done, the onus is on others to demonstrate how this meets the objective of a high quality and comprehensive agreement.

A second problem area is intellectual property.

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

The United States is generally pushing for higher standards of intellectual property protection – that is to say stricter patent rules and longer copyright terms, the extension of patents to software, more rights for pharmaceutical rights holders and tougher penalties for illegal file sharing and downloading.

The New Zealand Government faces a very difficult balancing act in this aspect of the negotiation particularly as much of our domestic legislation in these areas has only recently been settled.

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.

Higher levels of protection could also impact on New Zealanders’ access to information and literary works especially through the Internet.

Some key points need to be borne in mind.

The first, as I just mentioned, is that not all the United States wants will prove to be acceptable to the other parties.

The second point is that the New Zealand Government and its negotiators are well aware the risks arising from this negotiation for New Zealand’s current intellectual property regime.

The third point is that the vigorous discussion of these issues we see at present here in New Zealand is taking place in all the other TPP economies including the United States.

The fourth point is that as in any negotiation the most likely outcome will be a compromise acceptable to all parties.

These issues are not without relevance for the primary industries.

As these industries seek to move up the value chain, to move away from commodity exporting and to increase domestic processing, they are faced with the inevitable problem of adding value rather than cost.

Adding value is certainly assisted by tariff elimination because tariffs are usually higher on processed products.

But adding value also requires innovation and the climate for investment in innovation is a major factor.

It is sometimes argued that New Zealand as a net importer of IP is not interested in an overly restrictive framework.

It is worthwhile to remember that New Zealand’s primary industries have IP to protect in production systems and in processing methods.

One IP issue of particular relevance relates to geographical indications for food products.

New Zealand, Australian and American producers are keen to continue to use geographical terms like mozarella, feta and parmesan – some TPP partners have concluded FTAs with the European Union which restricts the use of these terms.

A third problem area relates to investment and to the provision whereby foreign investors might be able to seek binding arbitration in disputes with the host government.

These provisions attract a lot of criticism but in fact they are nothing new – they exist already in the NZ/China FTA and the ASEAN-Australia-NZ FTA.

International experience is that recourse to these provisions is much less than threatened, governments tend to win more often than lose and any damages awarded are less than sought and represent only a fraction of total foreign investment.

These provisions specifically recognise the government’s ability to regulate in the national interest to protect the environment and public health and in New Zealand’s case to uphold the Treaty of Waitangi.

Furthermore these provisions seek to limit the areas in which foreign investors can seek redress.

It is not simply a matter, as is sometimes suggested, of policies or regulations foreign investors don’t like or which impact negatively on profits, but rather actions which are contrary to specific agreements or which constitute the expropriation of assets.

Even then the provisions would not prevent such actions being taken, they simply would require any government actions found to be in breach to be addressed by compensation.

Compulsory arbitration is not an alien concept even within the New Zealand legal system and in this case the arbitration would be carried out by a specialist international tribunal established within the UN system.

There is the criticism that such actions restrict national sovereignty yet in this respect a trade agreement is no different from any international treaty like the Kyoto Protocol or the international labour conventions.

New Zealand investors offshore, like a farm or a processing or manufacturing facility, need this sort of protection to prevent their assets from being expropriated by foreign governments, which may not necessarily have the same sorts of legislative and regulatory processes we have here in New Zealand.

While at any time it is always open for corporations whether domestic or foreign to take actions against the New Zealand Government, the likelihood of such actions being successful in a TPP context seems rather small.

The last problem area I want to mention relates to transparency.

It is true that like any international treaty the TPP negotiations 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.

This also makes it difficult to release the text prior to the conclusion of the negotiations.

In New Zealand established practice for all treaties is that the text is concluded and signed by the Government.

The ratification process includes the publication of the text and national interest analysis, scrutiny of the text by Parliament, a Select Committee process including public submissions and implementing legislation where this is required.

Only after this process is complete does the Government complete the ratification.

Where to next?

I want to conclude by talking briefly about where TPP might head in coming months.

It seems pretty clear that a lot more water needs to flow under the bridge before the negotiation is completed.

Politics is a complicating factor.

In Japan Prime Minister Abe, whose government is more stable than any of his predecessors, faces a significant debate within his own party about the merits of agricultural liberalisation.

In the United States President Obama also needs to convince his own party in the Congress to give him the “fast track” negotiating authority to complete the negotiations without risking they might be re-opened during the ratification phase.

Governing parties in other economies need to adjust to the new negotiating realities which have been set by the United States and Japan and march these with their own national interests.

All governments need to redouble their efforts to convince a skeptical public and an energized anti-globalisation movement that TPP can bring benefits despite some risks.

Meanwhile other economies presently outside TPP are beginning to explore membership ? Korea and the Philippines are probably the keenest, but even China is examining how trade liberalisation might encourage its own process of structural reform.

At this month’s APEC Trade Ministers’ Meeting in Qingdao China pushed hard to accelerate the process of reflection about the Free Trade Area of the Asia Pacific (FTAAP), a long-held APEC goal to which TPP is considered a pathway.

And lastly, in case TPP at the end of the day proves impossible to conclude, there are other negotiating initiatives like the Regional Comprehensive Economic Partnership (RCEP) between sixteen economies which provide another pathway to the vision of a more seamless Asia Pacific.

Why, in these uncertain circumstances, we need bother ourselves at all with TPP is because there are significant gains for trade and investment to be had from a successful conclusion.

These have been estimated by Professor Peter Petri and his colleagues as reaching NZ $3.1 billion gains to welfare from trade growth by 2025 or NZ $4.7 billion when gains from investment growth are included.

Even if we only count the trade gains or even if the good Professor is only half right, these are very substantial increases at economic welfare for New Zealand.

These gains can simply not be left on the table.

Conclusion

The story on TPP is still being written.

To follow the story I invite you to consult the TradeWorks website, which contains a lot of information about trade and TPP and which is also updated regularly with monthly blogs.

Today the primary industries in New Zealand have the capacity to produce and supply more of what the world wants to buy.

To do this effectively we need eliminate barriers to trade and investment, reduce costs, increase the speed of doing business and optimize the performance of supply chains.

TPP provides a means of achieving these outcomes, which is why it is worth the effort and why it needs the continuing support of the industries represented here today.

1. http://www.wto.org/english/res_e/statis_e/its2013_e/its13_highlights4_e.pdf
2. http://www.mfat.govt.nz/Trade-and-Economic-Relations/2-Trade-Relationships-and-Agreements/Trans-Pacific/1-TPP-Talk/0-TPP-talk-21-May-2014.php