Trade and resilient agri-business Address to Federated Farmers Conference, Wellington, 2 July 2015 Stephen Jacobi, Executive Director New Zealand International Business Forum

Thank you for the opportunity to join this timely discussion on resilience and the agri-business sector.

I’m speaking to you today 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.

We work very closely with organizations like Beef + Lamb NZ, Fonterra, the Dairy Companies Association and Zespri.

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

I can’t claim myself to be a farmer, but I do chair the Te Aute Trust Board, which operates two farms – one sheep and beef and one dairy – in Hawke’s Bay so, like you, I see very clearly the relationship between international markets and farm profitability.

It’s often said that New Zealand has been built on trade.

It’s true that there are no magic wands to be waved to build the conditions for growth and prosperity – farmers know that more than most.

I’d therefore like to start today by asking a fairly fundamental question – how do trade and trade agreements underpin the resilience of the sector?

The Trans Pacific Partnership (TPP) is one prospective agreement that has the capacity to enhance resilience even further – I’ll give you a sense of where I, as business observer, think TPP is up to.

I’d also like to venture some thoughts about the next big trade opportunity for New Zealand – the prospect of an FTA with the European Union (EU).

How does trade underpin resilience?

Resilience is about equipping farmers to survive and prosper in the face of external shocks and stresses – be they climate-related, or pests and diseases, or to do with currency or some other economic factor.

Trade agreements that level the playing field have enhanced New Zealand farmers’ international competitiveness, and greatly expanded our options in terms of diversified markets.

More open trade has given New Zealand farmers strength and flexibility to withstand the shocks of drought, or events like PSA, or a high dollar, or going head to head with massively subsidised competitors.

It is trade that links food supply from New Zealand with rising demand in global markets and the changing needs of global consumers.

I’m grateful to the NZIBF Chairman, Sir Graeme Harrison, for drawing my attention to the FAO’s projection of food demand in a world whose population already exceeds 7.3 billion.

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.

These trends should provide some comfort for an agri-business sector coping with some recent shifts in prices.

They also explain why successive New Zealand governments have been active in negotiating agreements to provide a rules-based framework against which trade and investment take place.

We negotiate trade agreements to seek advantage for New Zealand.

These agreements ensure goods flow freely, costs are reduced and value chains are optimised.

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

But that process of policy innovation is not yet complete.

 Ludicrously high tariffs in a number of markets continue to impact negatively on New Zealand, and, as you see here, 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 Canada as well as in the United States and Japan.

Tariffs may appear to some like 20 ^th century issues but they have not gone away.

More than ever before there is a need to finish off these old issues and focus on those more suited to the 21 ^st century like investment, supply chain connectivity, regulatory alignment and innovation.

We need to do this because business is changing – old models based on import/export are giving way to increasingly complex value chains and networks.

This applies in the agri-business sector as well as elsewhere as farmers supply products into food processing and retail distribution around the world and as companies invest in offshore production and processing.

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.

New Zealand has been an enthusiastic participant in the process of signing free trade agreements, especially as progress in the World Trade Organisation (WTO) has stalled.

The WTO remains important – critically so – as the arbiter of global commerce, but its trade liberalising function is alas today much diminished.

Increasingly as a consequence countries are looking to the bilateral and plurilateral route for trade and investment growth.

New Zealand was an early adopter back in 1983 with CER – well ahead of the pack and still one of the world’s most comprehensive and successful trade agreements.

There has been criticism of the proliferating nature of FTAs as a ‘noodle bowl’ of over-lapping and sometimes contradictory agreements.

There is some truth to this and so gradually in the Asia Pacific region we are  seeing a move to negotiate what are sometimes called ‘mega-regional’ deals like the 12-member TPP and its companion, the Regional Comprehensive Economic Partnership (RCEP) under negotiation with 16 economies in Asia.

Both TPP and RCEP are seen as pathways to a wider agreement amongst all 21 member economies of APEC, the Free Trade Area of the Asia Pacific (FTAAP).

Where to with TPP?

TPP is both complex and controversial.

TPP represents an attempt by twelve partners to find a consensus both in terms of a schedule of commitments to reduce and eliminate tariffs and to put in place a body of rules governing economic and regulatory co-operation.

The TPP “text” is a treaty which is being built from bottom up and for the time being remains a work in progress.

TPP has been around for some time, but has taken a decisive step forward in recent weeks as the Congress, after much debate, has finally granted the authority to President Obama to conclude trade negotiations such as TPP and another mega deal under negotiation with Europe.

This is the “fast track” authority, which means that FTAs once concluded can be the subject of a single up or down vote, without giving Congress the right to re-open the negotiated outcome.

The need for fast track arises because trade policy is a shared responsibility in the United States – the President negotiates treaties but the Congress regulates commerce.

It was Winston Churchill who once said that “Americans will always do the right thing… after they’ve exhausted all the alternatives”.

And so it has proved with fast track, which was indispensable for getting the TPP negotiations into the real “end game” but not sufficient for actually concluding those negotiations.

That’s because however much the Americans might now want to get on with it, the agreement of all 12 parties will be required to bring TPP to a close.

Back in 2011 TPP Leaders committed themselves to concluding a “high quality, ambitious and comprehensive” agreement.

It remains to be seen whether TPP will live up to this vision.

From a New Zealand perspective an ‘ambitious and comprehensive’ agreement means one which, over time, results in tariff elimination for all products for all participants with all participants sharing equally in the benefits.

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

Trade Minister Groser has said publicly in recent weeks that the United States, Japan and Canada have yet to make meaningful offers to New Zealand for agricultural products.

That 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 for example concluded a bilateral FTA that sets a low benchmark for liberalisation and the United States and Japan may well have agreed, although we don’t know for sure, that some tariffs will continue to remain.

Now that the negotiation is resuming our negotiators will need more than ever before to make common cause with allies amongst the 12 to hold fast to the original vision of TPP.

Only a robust outcome on market access will encourage the 12 participants to make concessions on other aspects of the future agreement which in some economies are problematic, such as intellectual property, investment, state owned enterprises, the environment and labour.

Some commentators are of the view that TPP is little more than a pipe dream.

I hope they are wrong.

It’s true that the negotiations are complex.

It’s true too that agricultural sectors in the Japan and Canada, and even some in the United States, are notoriously reluctant to contemplate liberalisation of any kind.

But it’s also true that TPP has significant momentum.

Many thought that President Obama was instinctively as anti-trade as many in his party seem to be but he has found common cause with the Republicans to push this trade agenda through.

Many thought economic reform in Japan was impossible but Prime Minister Abe has shown greater courage than his predecessors in taking on the entrenched and powerful farm lobby.

Many despair at Canada’s bipolar approach to trade but Prime Minister Harper is very conscious of the high stakes for Canada in allowing supply management of the dairy and poultry sectors to prevent inclusion in a major Asia Pacific trade agreement.

Trade negotiations are always the art of the possible.

We need to let TPP run its course before pronouncing on its demise.

Similarly we will need to await the release of the final text, as will happen when the negotiation is concluded, before predicting the dire consequences some see from TPP.

The question to ask ourselves at this point is whether it is feasible for a highly trade dependent economy like New Zealand not to play a role in seeking better rules for trade and investment in the region to which it belongs.

And importantly also whether we would be happy to see our competitors like Australia and Chile enjoy better access to markets like Japan, the United States, Canada and Mexico.

At its most fundamental level TPP is about shaping the future environment for New Zealand’s trade and investment in the Asia Pacific region.

It’s far better for New Zealand to participate actively in writing the rules for this engagement rather than having them written for us by someone else.

We may or may not be more or less successful in comprehensively opening markets currently closed to us, but we should be significantly advantaged if costs are reduced, it is easier to do business and markets are more secure.

That is what will help underpin the resilience of the agri-business sector.

Towards a NZ/EU FTA

A similar set of considerations apply to what we hope will be the next cab off the rank in terms of New Zealand’s trade negotiating effort – the European Union.

In a major trade policy speech two weeks ago EU Trade Commissioner Cecilia Malmstrom said that the EU needed “to deepen its Asia Pacific strategy” and in that context singled out Australia and New Zealand as “important regional players”[1].

This is a welcome recognition that New Zealand’s relationship with the EU needs to be updated.

This applies regardless of the current preoccupations about the future of Greece in the euro and the wider challenges this poses for European integration.

The fact of the matter is that Europe is already a very significant trading partner for New Zealand: it is a top export market for many New Zealand companies, both large and small; it is a very important source of imports, and it is our second-largest source of investment.

New Zealand companies are already engaging in strategic partnerships with European food processors and manufacturers and service providers in addition to supplying consumers directly.

We have a long history of shared culture and economic engagement, and Europe has 500 million consumers, who earn a lot, spend a lot and are interested in consuming the kinds of products and services that New Zealand produces best.

But although the relationship is in reasonable shape, many New Zealand exports still face barriers, at the border or behind it, which add costs, generate uncertainty or in some cases even make trade uneconomic.

Our trade arrangements, dating from the Uruguay Round, are thirty years old, and in some areas may leave New Zealand at a disadvantage compared to competitors with their own preferential access.

And there are missed opportunities:  New Zealand has a lot to offer but may not even be on the radar for European companies who could provide essential capital inflows, or European manufacturers engaged in high value-added production.

The opportunities are in Europe but also linking in to value chains potentially spanning from Europe into the Asia-Pacific.

That is why an FTA with New Zealand would be in the interest of European interests as well.

An FTA could offer significant and exciting new opportunities to both sides to expand business in agriculture and food as well as technology, services (including tourism and education), niche manufacturing, research and investment.

New Zealand is one of a handful of countries today with which the EU does not have FTAs but the others include Australia, China, Hong Kong and Taiwan – we have FTAs with all of these.

An FTA could link European companies with partners in a country that is already deeply embedded in the economic architecture of the Asia-Pacific, offering dynamic new opportunities to both sides.

That’s why we in NZIBF strongly encourage the EU and New Zealand to negotiate a modern, cutting-edge FTA.

No trade negotiations are easy – all involve necessarily each participant to be willing to explore issues of interest to the other parties –  but that is no reason not to begin to explore how such an agreement could help consolidate the new global trade architecture and enhance the prosperity of both sides.

Conclusions

Trade has been the foundation stone of the resilience of the modern agriculture sector.

And the new trade agreements that New Zealand is negotiating are a solid underpinning to a sustainable future.

Trade agreements help foster resilience because they provide rules for the game and disciplines, which help reduce the cost of doing business and provide greater transparency and security.

TPP, if it can be concluded successfully, will mark another step forward in securing the future environment for agri-business in the Asia Pacific region.

An FTA with the EU could do the same for the important business we have with Europe and will enable European partners to join us in developing new business in our region and beyond.

You can find further information about these developments at our website www.tradeworks.org.nz.

New Zealand farmers’ incomes and livelihoods are inextricably linked to the international market.

That’s why it is important that we continue an active policy of looking ahead and developing the rules-based framework against which resilient agri-business takes place.