NZ EU FTA COMING DOWN TO THE WIRE – HOLD THE LINE, SAYS BUSINESS FORUM

As negotiations accelerate to conclude an ambitious free trade agreement between New Zealand and the European Union, the NZ International Business Forum (NZIBF), representing a cross section of major exporters, urges the Government and its negotiators to hold out for a commercially meaningful deal which expands market access for all exports and does not disadvantage or penalise any one sector.

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Address to the 50th One Stop Update for the Accountant in Business

by | Jun 7, 2022 | Speeches

ADDRESS TO THE 50TH ONE STOP UPDATE FOR THE ACCOUNTANT IN BUSINESS

CHRISTCHURCH, WELLINGTON, AUCKLAND, MAY 2022

STEPHEN JACOBI

EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

ONE STOP GLOBAL ECONOMIC UPDATE

 

Thanks to Brightstar for once again inviting me to address this 50th One Stop Update event.

I’ve just returned from a holiday in the South Island where the calm of the amazing places we visited contrasts markedly with the chaos in the world today.

The pandemic is far from over, there is war in Europe (who would have thought we would be using that phrase in the 21st century), global markets are disrupted by supply chain bottlenecks and inflation is taking its toll on the global economy.

These are not happy times.

For many they are indeed perilous times, and our hearts go out to the people of Ukraine suffering a horrendous, callous and needless war.

The Russian invasion of Ukraine has upended many of the certainties we felt we had secured about the global political order.

And the continuing pandemic has cast into doubt some of the old certainties about the global economy.

I’ve been asked today to focus on three key topics which form the broad context against which you are advising your clients:

  • First, the economic fall-out from the pandemic – to which we must now add the war in Ukraine
  • Second, the impact of recent trade deals with the UK and the one we are negotiating with the EU; and
  • Third, the outcome of big international meetings in 2021 – APEC and COP26.

In case you’re wondering, the theme that binds all these three together is how New Zealand can make its way in the world, primarily through trade and investment.

 

Economic fall out

 

Here’s the major take away of the day – even though the pandemic is not yet over, Putin’s war in Ukraine has wrecked the chances of an early recovery in the global economy.

Earlier this month the World Health Organisation reported that in 2021 the full death toll associated directly or indirectly with the COVID-19 pandemic – which they describe as “excess mortalities”- was approximately 14.9 million[1].

That is a massive loss of human life and human potential.

We see today the effects of the continuing pandemic here at home as well as in China, where several major cities remain in lockdown and in the least developed countries especially in Africa which lack the access to vaccines which have helped the rest of us weather the storm.

In April the IMF forecast that global growth would slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023[2].

Back in October the IMF was forecasting growth for 2022 of 4.9 percent.

This dramatic reversal of global economic fortune can be attributed to Putin’s war.

Even before the invasion, the effects of inflation and supply chain disruptions were beginning to be felt: these were largely pandemic-induced – the result of huge government spending to support distressed economies and successive lockdowns in major ports around the world.

And now, even before the global economy has recovered, the war has cast an even larger shadow – as well as the humanitarian impact, the effect of sanctions on the Russian economy, the loss of Ukraine’s agricultural production, surging grain prices and fuel prices all combine in a toxic mix.

Some developing economies already struggling with the pandemic have been hit again: the IMF forecasts inflation for advanced economies to reach 5.7 percent in 2022, but for developing economies the forecast is 8.6 percent.

(Interestingly New Zealand’s own recent inflation figure of 6.9 percent is curiously in between these – you can ask the next speaker about that !)

Trade has not been immune from these developments.

In April the World Trade Organization (WTO) revised downwards its forecast for global trade growth this year to 3% from 4.7% because of the impact of the Russia-Ukraine war[3].

Trade had dropped by 5% in 2020 but had grown by 9.8% in 2021 but now these gains have been offset: although Russia and Ukraine are comparatively small exporters, they are key producers of food, energy, and fertilizers.

Grain shipments through Black Sea ports have already been halted, with potentially dire consequences for food security in poorer countries.

In this incredibly bleak global environment New Zealand’s goods trade has continued to hold up reasonably well, as it did during the height of the pandemic.

Trade managed to hold its own in 2020 but last year exports of goods grew by 6% meaning that goods exports are well above 2019 levels[4].

High prices for dairy, meat and wood all contributed to this growth.

Goods imports grew even more strongly – a whopping 22% increase over 2020 as Kiwis tried to shop themselves out of the pandemic.

Both exports and imports remain hampered by continuing bottlenecks at our ports and an exponential rise in shipping rates which makes getting products to and from market exceptionally difficult and expensive.

In 2021 the cost of transporting goods to and from New Zealand actually doubled.

Most commentators seem to think these supply chain challenges are likely to continue for some time, not helped by the lockdowns of major ports like Shanghai and a growing shortage of containers.

Of course, in services, especially the ‘people-intensive’ sectors where we are strongest, such as tourism and international education, the news is not as positive.

Services exports fell a further 25% in 2021, and are now 49% lower than pre-pandemic 2019 levels.

Tourism and international education combined registered a 51% drop in 2021 which the end of lockdown and resumption of air travel and tourism will take time to address.

It is unclear how long it will take to return to something like normality for these sectors.

What is clear is that as we continue to strive, with varying degrees of success, to get out of the mess that has been created by the pandemic, our economic recovery will continue to depend in large part on our ability to do business in both goods and services, with the rest of the world – but here too there are risks to take into account.

Two way trade across almost all of New Zealand’s top 10 markets grew in 2021, but one market stands out from the rest.

Whereas goods exports to the world grew by 6% in 2021, exports to China grew 21%, driven by strong growth in dairy (up 31%), meat (up 25%) and wood (up 35%).

It’s no exaggeration to say that trade with China helped keep New Zealand afloat during the pandemic.

China now takes 32% of New Zealand’s exports and while other countries like Australia and Chile have an even larger exposure to China, New Zealand’s trade with China is growing very rapidly – ten years ago in 2011, the figure was only 12.8%.

The reason for this astonishing growth can be put down to several factors:

  • First, China has continued to grow even during the pandemic
  • Second, the landmark free trade agreement signed in 2008 has given us excellent market access; and
  • Third, and perhaps most important, Chinese consumers want to buy what New Zealand has to sell, especially our safe, sustainable and secure food and beverage products.

Despite this success, there is a growing debate about whether this trade concentration on China poses risks and whether New Zealand should be taking steps to “diversify”.

The argument is somewhat ironic as trade with China and with Asia more generally is the result of a trade diversification strategy that has been pursued since Britain joined the European Community in 1972 –  that same Britain which has now left the EU and with whom we have just negotiated a free trade agreement …. Sometimes it doesn’t pay to look at these things too deeply !

In fact this concern about trade with China is not just to do with economics, but with geo-politics, and the competition that exists between the world’s largest and second-largest economies.

I’ve  described this at earlier One Stop Update events as a dangerous, geo-political “Game of Thrones”.

China’s rise as an economic power has continued to drive growth and recovery across Asia even during the pandemic.

China’s success in lifting millions of people out of poverty cannot be denied, but their policies at home and abroad are causing deep concern on the part of the liberal democracies, including New Zealand, and most particularly the United States.

The Biden Administration has largely continued his predecessor’s policy of trying to contain China’s rise.

Tensions have only been heightened by China’s apparent tolerance of the Russian invasion of Ukraine and by this week’s comments by President Biden that the US would intervene militarily to defend Taiwan.

It is worth remembering that while increasingly Russia and China are cast as very similar autocracies, they are really very different countries.

In particular China’s rise has been fuelled by trade and investment with the rest of the world, whereas Russia has since Soviet days been more of an outlier state.

That means the cost to China of anything like sanctions applied by the United States and its allies would be very great indeed, as would the cost for the rest of us.

It is sometimes claimed that New Zealand risks being forced to choose between China and our more traditional allies.

In fact, New Zealand chose a long time ago to be an open, liberal democracy, which naturally leads us to identify with others sharing similar values.

A growing economic relationship with China need not change that, nor has it done so to date.

It does however require New Zealand, particularly in these difficult economic times, to manage carefully our relationship with China.

It remains to be seen whether this week’s announcement about New Zealand joining the US-led Indo Pacific Economic Framework, which specifically excludes China, may have made that more complicated.

So are we overly dependent on China ?

A recent report from Sense Partners, prepared for the NZ China Council, sought to address this question head on.

First, the report looked at New Zealand compared with other countries.

As noted earlier New Zealand’s trade exposure to China is greater than some but less than others.

And it is nothing like the exposure we had in 1972 to the United Kingdom.

Next, the report considered the risk of trade disruption which can come in many forms, as we have seen during the pandemic.

As a small, open economy it has to be said that New Zealand is particularly vulnerable to these shocks.

Looking at the possibility of political risks to the relationship it has also to be said that bilateral relations with China are cordial, despite New Zealand’s continuing criticisms of China’s human rights record.

Even in the case of Australia, where the bilateral relationship is markedly less positive, the impact of China’s trade actions have really been felt in two specific sectors – wine and timber – and exports from these sectors have been redirected to other markets.

Third, the report took a deeper dive into the New Zealand sectors that could most likely be affected by (future, unspecified) Chinese action to restrict our exports.

It found that four sectors – lobster, logs, cream and infant formula – carry particular risk, these all being sectors where New Zealand is not a major supplier and where China has plenty of choice about where to buy from.

While exporters would face a serious problem if they were unable to switch product to other markets (more difficult, for example, for lobster and logs rather than cream and infant formula), they represent only a small proportion of trade with China.

This is not to dismiss the risk, but to see it in context.

Diversifying New Zealand’s export profile is a lot easier to talk about than do.

Exporters face daily decisions about where to send products – often this has as much to do with customer relationships than anything else.

As I said before Chinese consumers want to buy the things we have to sell.

I want now to turn to consider two more positive developments – the free trade agreement we have just completed with the United Kingdom and the slow but steady progress we are making with another key partner the European Union.

Both these agreements would provide some new options for exporters, but let me be clear; they will not replace China and the rest of Asia in our export strategy, where the demand for our products is much larger and where we have invested significantly in market development.

The FTA with the UK is a very good agreement from New Zealand’s point of view – one of the best I would say we have ever negotiated.

The FTA with the EU, if it can be concluded and we are not there yet, would likewise be an important addition, but for reasons I will explain it may not be as commercially meaningful as some would hope

That the NZ UK FTA was achieved in record time, amidst significant global uncertainty and through negotiations held entirely virtually, was no mean feat.

This speaks to the close alignment of the two nations – never strangers to each other and building on shared history and deeply held values.

Shared values are great for starting trade negotiations but finishing them requires a joint assessment of shared benefits.

In the case of this newly minted FTA, both sides can be happy with the result.

The agreement delivers tariff elimination on all products from day one for the UK and for NZ with commercially meaningful outcomes from day one, backed up by world-class trade facilitation and mechanisms that can address any problems that might arise.

That is very good news for NZ wine, horticulture, honey and fish, but also for butter, cheese, lamb and beef.

The agreement covers not only goods but also services as well as investment, ensuring in large part that New Zealand and the UK treat each other’s firms as if they were their own.

It makes it easier for example for British suppliers of telecommunications and financial services to operate in New Zealand and gives British investors the same protections we give to other partners like China, Japan and Korea, although not as good as Australia.

The agreement factors in new and innovative commitments in the areas of sustainability and inclusion – for Māori, for women and for small and medium sized enterprises.

In the case of Māori, the Agreement includes the first ever stand-alone chapter on Indigenous co-operation we have put into an FTA.

In some key areas like the environment and climate change and the digital economy the Agreement’s provisions go much further than previously.

In a move that is already subject to some controversy, it expands by twenty years copyright on creative works – moving New Zealand closer to global practice.

The agreement provides a useful basis for the UK to join the Comprehensive and Progressive Agreement on Trans Pacific Partnership (CPTPP).

Future UK membership of CPTPP would provide a great platform for the UK and New Zealand to work even more closely together on global trade rules.

That’s the agreement on paper, we now have to make it work.

First step is ratification by both governments which it is hoped will be completed before the end of the year.

If the news is good on the UK front, it is not quite as good with the EU.

This negotiation is proving more difficult to conclude, even though it has been underway for much longer.

There are some very good reasons why New Zealand should want to negotiate an FTA with the EU.

The 27 member states of the European Union constitute a 450-million strong consumer market, ranking as our third-largest export destination[5].

New Zealand in contrast is only the EU’s 49th largest trading partner.

The rules governing our economic relationship are now over 30 years old and that puts our exporters at a distinct disadvantage especially when compared to competitors like Chile and others which have concluded FTAs with the EU.

By the way it also puts EU exporters to New Zealand at a disadvantage as we have concluded FTAs with China and others which have resulted in a loss of market share for the EU in New Zealand.

New Zealand and Australia, which is negotiating separately with the EU, are almost the last cabs off the rank with the EU which has had a very active negotiating agenda in recent years.

From a New Zealand perspective, this negotiation is an opportunity to grow exports of high-quality food products including horticulture and wine, services such as tourism, education, creative sector and digital exports, and well as high-tech and niche manufacturing.

But we should not see this simply in two way trade terms.

There is also huge scope to develop and deepen global value chains spanning from Europe through New Zealand into the Asia-Pacific.

Then there are the more geo-political strategic factors – an FTA would help bolster the economic ties between close partners in the response to Putin’s war.

So far so good, all of this is marvellous – but as I said, shared values are great for starting trade negotiations but not so good for finishing them.

When it comes to shared benefits, the picture is not quite so rosy.

In the case of the EU, the European Commission negotiates on behalf of the Union but behind it, every step of the way, sit the 27 member states which all have their own interests to protect and advance.

Some of those interests in the EU’s agricultural producing nations are not necessarily enthusiastic about the detail of what might be included in an FTA with New Zealand.

In fact the conclusion of the negotiations was already put on hold until the outcome of the French Presidential election was known.

The fact of the matter is that despite our shared values this negotiation has thrown up some difficult issues.

Let me mention briefly just two of them.

First, the EU has been very slow to table a comprehensive market access package on agriculture – specifically meat (beef and sheepmeat) and dairy.

It has tabled what we understand to be (although we haven’t seen the detail) of a comprehensive market access package for horticulture including kiwifruit and honey.

The EU and New Zealand are old sparring partners when it comes to agricultural trade but it is inconceivable that New Zealand could finalise an FTA which did not include commercially meaningful market access for our two largest export items.

Second, the EU wishes New Zealand to adopt strict regulations about the way certain geographical names are used in international trade – especially names associated primarily with dairy products, wine and some meat products.

This new strict regime would not just apply in New Zealand, but also to our exports into other markets, especially of cheese like feta, mozzarella and parmesan.

New Zealand’s view is that these names have become generic rather than related to a certain geography.

Fonterra currently supplies large amounts of mozzarella cheese to China – every second pizza in China is covered with it, that’s a lot of pizza and a lot of cheese.

The EU has proposed the restriction of a large number of geographical indications: some of them may not pose difficulties, others certainly will.

It is equally inconceivable that the EU would do a deal with New Zealand without an agreement on geographical indications but the devil is in the detail about what this regime might include.

It is precisely this sort of complexity which is delaying the conclusion of this agreement despite the best intentions of governments.

So for the time being New Zealand and the EU continue to negotiate.

Watch out for the Prime Minister’s forthcoming visit to Brussels – she will be going either to welcome a completed agreement or to argue that the EU market access offer needs to be substantially improved !

 

APEC and COP 26

Let me finish by talking very briefly about the outcome of two international meetings which took place last year.

Last November PM Jacinda Ardern chaired a (virtual) meeting of APEC Economic Leaders.

A number of key themes were traversed.

There were strong words of support for the World Trade Organization (WTO) as the critical under-pinning of global trade.

There was agreement to use trade to respond to the continuing pandemic by facilitating the free flow of vaccines and other products.

APEC also discussed how trade and sustainability could go hand in hand by agreeing to remove barriers to trade in environmental goods and services.

And also how the benefits of trade can be expanded to smaller businesses, women and Indigenous people.

Perhaps the most important outcome was the adoption of the Aotearoa Plan of Action.

The Aotearoa Plan of Action is the implementation plan for APEC’s new strategic direction.

It lays out a set of verifiable steps to be undertaken by APEC over the next twenty years to build the foundation of an Asia Pacific community – this means that New Zealand has influenced the direction of APEC for decades to come.

Global leadership is also required in relation to climate change.

COP26 held in Glasgow was described as a last ditch attempt to save planet.

The Intergovernmental Panel on Climate Change has just released its latest report – the third and final section of its comprehensive review of climate science.

It draws on the work of thousands of scientists.

It makes for grim reading.

Emissions have continued to rise across all major groups of greenhouse gases.

Projected emissions are such that even if we were able to stick to existing commitments, warming will still exceed 1.5 degrees above pre-industrial levels.

After 2030 it will be harder to limit warming to below 2 degrees.

In short, the science shows that greenhouse gas emissions must peak by 2025, and must then be nearly halved in this decade, if we are to have any chance to limit future warming to an acceptable level.

This means that we will need, both at the international and domestic level, to go far beyond the steps taken to date if we are to avert a climate catastrophe.

COP26 was an important milestone in co-ordinating the global climate response.

The actual commitments arising out of COP26 were largely technical – somewhat like APEC they are designed to help countries fashion their climate response but they don’t compel them to do anything.

Perhaps the greater contribution of COP26 was the momentum established among non-governmental organisations including business.

There is certainly a significantly heightened awareness amongst business groups I am connected with about the need to raise our climate ambitions and work together to solve the climate problem, even if governments find it difficult.

 

Conclusion

So where does all this leave us ?

If I had to reflect on the state of the world since I last spoke to this conference, I’d have to say things have got worse.

We are like a ship in the midst of a powerful storm and taking on water.

The continuing pandemic, war in Ukraine, inflation, supply chain disruptions and geo-politics are all bearing over the global economy and on the global trading system and in ways that are not always easy to predict.

Putin’s war has wrecked our chances of global economic recovery.

The challenges faced by some countries still in the midst of the pandemic have been made seriously worse.

New Zealand may seem a long way from the conflict in Europe but we are already feeling its effects.

Trade will continue to underpin the performance of the NZ economy in this next period as it has done throughout the pandemic.

If the complex geo-politics can be managed (that by the way is a big if), Chinese consumers are likely to continue to want to buy the products we have to sell.

Exporters will need to pay attention to risk management and to make sure they can benefit from options opened up by new trade agreements including with the UK and hopefully also the EU.

There will be no lessening of the importance of international engagement and co-operation on key global issues including climate change, both with our close partners and through organisations like APEC, WTO and the United Nations.

The storm may well continue to blow for some time – I suggest you have a bailing bucket handy.

 

[1] https://www.who.int/news/item/05-05-2022-14.9-million-excess-deaths-were-associated-with-the-covid-19-pandemic-in-2020-and-2021

[2] https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022

[3] https://www.wto.org/english/news_e/pres22_e/pr902_e.htm

[4] https://www.mfat.govt.nz/en/trade/mfat-market-reports/market-reports-global/an-overview-of-new-zealands-trade-in-2021/

[5] https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/new-zealand_en

 

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