The case for trade Address to the Nelson branch of the New Zealand Institute of International Affairs Nelson, 10 February 2015 Stephen Jacobi, Executive Director, NZIBF

It’s great to be with you and I am grateful to my friend and former colleague Hugo Judd for the invitation to join you this evening.

I’m here to make the case for trade but in some respects there is no need to make such a case here in Nelson.

This region lives by its exports of seafood, wood, horticulture, wine, meat and dairy products.

Can there really be any debate about trade in a place like this?

In another sense it is important that we continue to make this case because trade is changing – trade today is not trade as it once was.

What’s more trade requires a different set of accompanying policies and initiatives if it is to continue to provide an economic livelihood for regions like this one and for the rest of New Zealand.

It seems to me therefore that there is no better place than Nelson to outline the changes in the international market place, the challenges faced by New Zealand exporters and what is required today particularly in the trade negotiating sphere to ensure trade delivers for New Zealand.

Changing nature of trade

Few New Zealanders, I suspect, would have difficulty with the idea that companies and we as a nation 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 which determines national competitiveness, that is to say the ability with which an economy can do business with others.

Through the process of integration economies can bring down barriers to trade and investment, reduce costs and make it easier to do business.

The pace of economic integration is affected by a number of things.

Chief among these are the ups and downs of the global economy.

We’ve had a roller coaster ride in the last ten years or so.

Accelerating prosperity in the earlier part of this century gave way to the economic crisis and then to the so-called “dead cat bounce” as the global economy improved, got worse again and then started to rise.

More recently we have seen wide disparity in terms of economic performance in the major economies – lingering contraction and even recession in the United States, Europe and Japan, contrasted with a rapid rebound in developing Asia led by China.

Now we face a slowing of the Asian growth rate – albeit in China from a high level and still with growth that seems a dream for Europeans and Americans – along with signs of new recovery in the United States and stabilisation but with problems in Europe.

New Zealand, it must be said, has fared pretty well throughout this period: although our exchange rate has been significantly over-valued, and that has been very difficult for exporters, our bacon has been saved largely by rising commodity prices, which are only now starting to fall.

Now we have the spectre of deflation in a number of major economies and a new source of instability and imbalance is evident globally.

Instability and imbalance mean uncertainty and that’s bad for policy and bad for business.

It seems there’s no good time for governments to take the steps they mostly know are required to reform and revitalise their economies.

In times of prosperity there seems to be a lack of urgent need to drive political will.

In times of crisis, well, there’s a crisis, so everyone is busy.

There’s an old saying in economics – “when you’re up to your neck in crocodiles it’s a bit late to start thinking about draining the swamp”.

But even during these times of economic uncertainty and policy indecision business continues to adapt and change.

Imperceptibly to many, there has been a major revolution in the way international 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 Sealord, Nelson Pine, Zespri, Fonterra, Anzco, 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.

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

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 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 the way business is being done has changed and continues to change dramatically and in this imbalanced, uncertain and financially constrained world governments are looking for ways to do more business so that this can contribute to economic recovery and growth.

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

Ultimately it’s a question of jobs.

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

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 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.

Challenges facing exporters

New Zealanders perhaps more than any other people know the importance we attach to international markets.

Quite simply “we can’t eat all we produce and we can’t produce all we need”.

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

These are simple assertions that are difficult to contest.

But it is far from given that New Zealand can continue to trade internationally, can connect more effectively to the global supply and value chains that dominate world commerce and can attract the offshore capital needed to fund business expansion or invest offshore to get closer to consumers.

New Zealand exporters face a dizzying array of barriers in other markets, high tariffs, unclear procedures, discriminatory standards, regulations of varying quality and unclear purpose – not to mention the cultural and commercial impediments that frustrate business on a day to day basis.

Some of these barriers operate at the border – like tariffs  – others across the border – like customs requirements – and others behind the border – like the raft of regulations that impact on business.

The simplest barriers to understand are tariffs or duties applied to imported products to make them less competitive in the market than locally produced products.

Some simple examples are the tariff applied to butter in Canada – 298.5 percent – or beef in Japan – a (comparatively) modest 38.5 percent.

For some exporters, particularly services exporters – like education, finance, consulting – the barriers are directly connected to market regulation in other countries, not really a matter of “trade” at all.

An example of this could be a country requiring only national suppliers from that country to provide legal, consulting or insurance services, or preventing students from that country studying offshore or using qualifications gained overseas to gain employment in their country.

The application of such measures in an arbitrary or discriminatory way is known as protectionism.

Our experience of the financial crisis was that protectionism started to increase as governments, usually without much thought, sought to insulate themselves from wider problems.

Ultimately such protectionism is usually self-defeating and can lead to a downward spiral or even a fully-fledged trade war.

The arbiter of such developments is the World Trade Organisation (WTO), which is a process for reducing and eliminating trade barriers, a body of international law governing trade and investment and a method of resolving trade disputes.

The WTO today counts 160 members but its ability to reduce trade barriers has been called into question by the ongoing stalemate in the Doha round of negotiations and differences between developed and developing nations about the way to liberalise trade.

I don’t intend to talk further about the WTO today other than to say that the global trading system would be very well served if a way could be found to finish the Doha round.

New Zealand’s trade negotiations strategy

Confronted with the urgent need to use business as a means of developing sustainable economic growth, and to address trade barriers and other problems, many nations have in the light of the impasse in the WTO sought to negotiate solutions directly with others either bilaterally or in regional groupings.

New Zealand has been an enthusiastic participant in such processes, which started with the ground-breaking agreement with Australia concluded in 1983 – CER.

CER was ahead of its time and today has led to significant integration between the New Zealand and Australian economies and the emergence of a trans -Tasman market.

New Zealand has negotiated similar agreements with a range of partners including Singapore, ASEAN, China, Hong Kong, Taiwan and Korea.

The NZ Korea FTA was concluded at the end of 2014 and will be signed by the Prime Minister in March.

The agreement with China – the first by a developed nation – has led to an extraordinary increase in trade and investment to the point that China rivals Australia as our leading trade partner.

All these agreements contain similar approaches.

They seek to be high quality in terms of scope, covering all issues relating to two way trade and investment; ambitious, in terms of the liberalisation outcomes especially market access and the progressive elimination of tariffs; and comprehensive, that is to say covering all products including from New Zealand’s perspective agriculture.

They are notoriously difficult to negotiate, take ages to complete and can sometimes be highly controversial.

A case in point is the Trans Pacific Partnership (TPP).

Rather than a corporate plot to take over the world, TPP aims to put in place a new set of rules for trade and investment in an effort to promote growth and jobs.

New Zealand along with Singapore, Chile and Brunei, was a founder member of TPP but today the expanded negotiation involves twelve economies in the Asia Pacific region including both the United States and Japan, important partners for New Zealand and with whom we have no FTA.

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

TPP has been well underway for some time now and is believed to be drawing to a close but it is vigorously opposed by a number of civil society groups.

Now I happen to believe that public debate about trade is important so I am more than happy to debate the pros and cons of TPP.

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 vested interests seeking to undermine the negotiation, as has been the case for example in the WTO or even the Kyoto Protocol.

But practice is evolving and the call for transparency is being heard, albeit too slowly for some.

The European Union for example has published a lot of information about the negotiation underway with the United States – a sort of Atlantic companion to TPP, known as the Trans Atlantic Trade and Investment Partnership (or TTIP).

The EU’s effort is commendable and could in my view be considered for TPP.

The EU is not publishing the full negotiating text but rather background papers written in plain language and copies of negotiating proposals made by the EU in the course of the negotiation.

This will enable the public at least to be better informed about TTIP and to see what their government is proposing in the negotiation.

In the same spirit New Zealand and Korea have released the text of the completed FTA in advance of the signature and ratification process.

That’s a first for us and another commendable development.

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.

That understandably makes people nervous.

The New Zealand Government will need to decide what best meets New Zealand’s interests in the negotiation.

There are many challenging issues from market access for agriculture products to investment and investment disputes, intellectual property provisions including patent, copyright and Internet file downloading, pharmaceutical issues, the role of state owned enterprises, labour and environment provisions.

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.

Let’s remember though that the reason we embark on such complicated negotiations in the first place is because we are seeking advantage for New Zealand by trying to improve the environment in which our businesses can work internationally.

The demands of today’s international market are such that we need to continue to update the rules governing international trade and investment.

There are both opportunities and risks but New Zealand needs to be a player in this process – not just an observer on the side-lines.

Conclusion

The case for trade relies on a simple premise: our companies’ ability to connect and integrate globally remains vital for our economic success.

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

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

The global economy continues to present challenges and a very uneven playing field for our businesses.

This requires the Government to pay attention to the speed and costs of doing business and to bring down barriers through trade negotiations with our major partners.

Improving transparency and public understanding of these challenges is important.

The case for trade bears repeating often – whether in trade-dependent regions like Nelson or in places which have yet to feel trade’s positive benefits.