ADDRESS TO THE 53rd ONE STOP UPDATE FOR THE ACCOUNTANT IN BUSINESS – GLOBAL ECONOMIC UPDATE

AUCKLAND, 16 OCTOBER 2023

STEPHEN JACOBI – EXECUTIVE DIRECTOR, NZ INTERNATIONAL BUSINESS FORUM

Watch the full speech here.

It’s a pleasure to be back with you for the 53^rd edition of the One Stop Update and my thanks to Brightstar for giving me this opportunity once again.

When I spoke to the 52^nd Update back in May, I used a new term – “poly crisis” – to describe the situation we find ourselves in today.

As we meet here in Tāmaki Makaurau, in the aftermath of a general election, we are confronted with another evolution of this continuing “poly crisis”.

The outbreak of renewed terrorism and war in Israel/Palestine combined with Russia’s illegal and immoral war in Ukraine, and persistent global inflation are further setbacks to economic recovery from the pandemic.

Where this latest ghastly conflict may lead us, is hard to say, but no good will come of it, of that we can be certain.

In unpacking the global situation with you today, I’d like to focus on three topics:

• The situation of the global economy and the trade right now
• The intersection between trade and geopolitics, how this might impact, what if anything can be done about it
• What are some of the other big global disruptors coming at us – apart from war and pestilence that is.

My comments are informed by the views of the member of the NZ International Business Forum – an organisation which brings together our larger exporters and peak business associations.

You can find out more about us at www.tradeworks.org.nz.  Please follow us on Twitter, LinkedIn and Facebook !

Global economy

It’s often been said that it’s difficult to make predictions, especially about the future.

How true that time-honoured quote is in these last few years of the first quarter of the 21^st century !

No-one predicted the pandemic – except they did, and no-one bothered to listen.

No-one predicted the economic disruption of the post-pandemic world – except the risk was clearly there, but we were too busy saving lives to worry too much.

No-one predicted that the world would be beset with not one, but now two horrendous conflicts – yet each in different ways was the result certainly of cynical and deranged people, but also of long term political problems left unresolved.

What we do know, from bitter experience, is that the overhang of global problems can take much longer than expected to work through, which is the problem that now confronts our new government.

The global economy remains in the doldrums.

The latest IMF forecast in July shows only slight change over April – 3.0 percent growth in 2023 (up from 2.8 percent) but no change for 2024[1].

So, no soft landing, few green shoots, not a lot of bounce of dead cats or otherwise.

To be sure there has been a degree of resilience, and some potential mini-crises, like a banking meltdown in the US, have been effectively nipped in the bud.

Yet the challenging economic conditions continue as governments and central banks try to rein in inflation which is expected to fall from 8.7 percent to 6.8 percent this year – still a very high level.

As we saw earlier this year, these problems continue to affect the advanced economies more than developing ones with our own neighbourhood Asia leading the recovery such as it is.

China’s economic headache is much talked about, but the IMF is still expecting 5.2 percent growth in 2023 dropping to 4.5 percent in 2024.

India is bucking all trends with 6.1 percent forecast for 2023 and 6.3 percent in 2024.

I visited India with a 50-strong trade mission in August and the upbeat mood we saw there is not one seen elsewhere around the world.

I’m looking forward to my first visit to China since Covid next month.

Globally trade continues to decline – this month the World Trade Organisation revised downwards their growth forecast to 0.8 % in 2023 – less than half of the growth of 1.7% forecast in April.

Things look a little better for 2024 at 3.3%.

The causes of this continue to be the war in Ukraine and the impact of inflation – of course further shocks like war in the Middle East have not yet been applied to these forecasts.

These statistics do not capture services trade which had rebound quite strongly once borders were open but now seems to be slowing:  the WTO reports that World commercial services trade was up 9% year-on-year in the first quarter of 2023 compared to a 19% year-on-year rise in the second quarter of 2022.

We are seeing that rebound in New Zealand through increase in air traffic and tourism.

Unfortunately, and for the first time in many years, New Zealand’s goods trade has also been caught in the downward slide.

Trade had held up pretty well during the pandemic – despite some early concerns, markets remained open to us and were keen to carry on business despite the very real supply chain issues.

With goods exports in 2022 running at 20% above pre-pandemic levels we thought we had weathered the storm of the pandemic.

Even the supply chain problems, while not completely resolved, were beginning to ease.

But things took a turn for the worse earlier this year as global inflation began to bite and China, our largest market, struggled to throw off the after-effects of the pandemic lockdown.

In August In August 2023, compared with August 2022:

• goods exports fell $296 million (5.6 percent), to $5.0 billion
• goods imports fell $639 million (8.1 percent), to $7.3 billion

The terms of trade are now running very much against New Zealand with the prices of export commodities like dairy and meat declining while the cost of much-needed imports continues to rise.

The impact of Cyclone Gabrielle is also weighing heavily on some sectors in 2023, especially horticulture.

It is worth noting what a big impact China’s economy now has on New Zealand.

China trade kept us afloat during the pandemic and our major sectors like dairy and meat have certainly felt the draught of a cooling economy in recent months.

Both sectors remain however bullish about prospects in China.

The country still manages to add significant amounts of growth, although not on historical levels.

The country also has considerable capacity to change economic direction if the Government so wishes – China’s application to join the CPTPP should be seen in that light.

I for one am certainly not about to give up on China – I’ll talk further about this in a moment.

Trade and geopolitical pressures

What we see very clearly is that New Zealand’s trade does not remain immune to the world’s prevailing economic and political problems.

Chief among these is the rift between the world’s largest economy and its second largest, between the United States and China.

It’s a situation which may have been slightly improving in recent months as the pattern of diplomatic contact between the two has increased.

That’s important because these two economic giants maintain the world’s largest economic relationship in terms of trade and investment – whether they like it or not, they are both partners and competitors.

Two-way trade between them is valued at around US$700 billion and the stock of two way investment is US$160 billion.

For much of this year and last the relationship appeared to be on a downward spiral as the US accused China of human rights offences, bellicose behaviour in the South China Sea and Taiwan Strait and apparent economic coercion in a number of countries.

For its part China accused the US of seeking to convince fellow democracies to decouple and contain its economic growth, and of abandoning its long held positions related to the “One China” policy.

There are a long list of litanies on both sides, many of which it has to be said have some element of truth to them.

Fears have risen about a future military confrontation between the two, if not by design than by accident.

There are clear signs too that the economic relationship is beginning to fracture and fragment as both US and China try with varying degrees of success to reconfigure global supply chains and look to other partners.

The more hopeful aspect is that the US, while not stepping back from public criticisms, seems to want to  find an effective way of managing these polarised points of difference.

A veritable parade of senior US government representatives has visited China in recent months and there is hope that President Xi might travel to San Francisco in November to attend the APEC Summit.

If President Xi were to attend, he would have to be convinced that he would be treated respectfully as the leader of the world’s second largest economy.

This will be a real litmus test of this attempt to place the relationship on a better footing.

In the face of this game of thrones, what is a small, open and trade-oriented economy in the South Pacific to do ?

After all we have close political and defence ties with the United States and a huge economic relationship with China.

In recent years we’ve heard a lot more use of the D word – diversification – mostly in association with what some see as “over-exposure” or to use a more loaded word “dependence” on China.

Diversification is about both markets and products, both goods and services – where we sell and what we sell.

Product diversification is really about economic development.

We certainly need new industries in New Zealand to sit alongside our traditional sectors like agriculture, hoticulture, forestry, fishing, tourism, mnufacturing and international education.

That’s a topic in itself and I don’t have time to consider it fully today.

It’s important too to remember that market diversification is not a new thing.

We have been working to diversify our oversas markets ever since the UK started the process of joining the European Economic Community.

That was real dependence:  the UK accounted for between 70 and 90 percent of New Zealand’s goods exports between the 1870s and the 1940s, dropping steadily to around 35 percent by 1970 and 27% percent by 1973[2].

In part the relatively high proportion of our goods exported to China today reflects the success of this diversification effort.

Clearly China’s extraordinary growth in the 15 years since the signing of our ground-breaking free trade agreement in 2008 has driven an equally extraordinary expansion on economic ties.

Chinese consumers want to buy what we have to sell, especially our high quality and sustainably produced food and beverage products.

Today China takes just over 30 percent of our exports – which means of course that 70 percent go elsewhere, notably to Australia, the European Union, the United States, the UK, Japan and other Asian markets.

But how much “dependence” is too much, particularly at a time of geo-political uncertainty?

Managing such a complex relationship between partners of different history, values and outlook is tricky at the best of times and even more so in the light of geo-political conflict.

It is true that the political risk of possible disruption is growing.

To date the Government has shown remarkable dexterity in navigating these choppy seas, remaining faithful to our values, taking issue with aspects of Chinese policy and from time to time joining with others in doing so.

It is right that we should do so – as a liberal, market democracy it is in our DNA to stand up for human rights around the world.

This is also where we need to be very careful and deliberate in our ongoing management.

Needlessly provoking the dragon can have serious consequences as our Australian friends have found out.

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

The fact is you’d have to sell a lot more to other markets to make up for the loss of dairy or meat exports to China.

Thanks to successive Trade Ministers and our superb trade negotiators, New Zealand has been very successful at negotiating a suite of trade agreements with a variety of markets.

These so called “free trade agreements” are said to cover up to 80 percent of our exports.

But this doesn’t mean that our trade with these FTA partners is completely free.

Even with our FTAs in place our exporters still face tariff and other barriers.

Our most recently concluded FTA with the European Union for example only provides a very small amount of meaningful market access for dairy and beef, our two largest export sectors.

Non-tariff barriers (NTBs) are a particular problem and are hard to address.

NTBs come in many disguises – they comprise the range of rules and regulations that apply to products to enable them to be sold in the other country.

These rules and regulations may not necessarily be bad but they most certainly are if they discriminate unfairly between imported and domestic products or they impose unacceptable or unjustified costs.

NTBs are in effect in all parts of the world as protectionism persists.

Even here our negotiators have had some success:  MFAT advises that in the last financial year some 14 NTBs affecting $1.4 billion worth of trade have been successfully addressed.

Most of these were in the food and beverage sector and the larger number were applied in the Middle East and Africa region.

We might have expected that NTBs would be covered by international trade rules established in the World Trade Organisation.

In some cases they are but addressing them effectively has proved incredibly difficult.

The WTO remains of significant importance to New Zealand.  

It is the ultimate arbiter of trade disputes as well as being the most significant negotiating forum.

Unfortunately it is in a seriously weakened state.

The dispute settlement system has been undermined by the United States unwillingness to appoint judges to its court of appeal, the Appelate Body.

A number of WTO members, including New Zealand, have set up an alternative system, while work continues to reform the process.

The WTO’s negotiating functions have continued – an agreement to end subsidies encouraging over-fishing was a particular achievement – but the large-scale negotiations that sought to eliminate trade barriers and address wider questions like sustainability have not been able to be concluded.

New Zealand, as a small and largely open trading nation, needs to continue to rely on the WTO and the rule of trade law it represents.

We also need to continue to look for new trade partners and to improve the coverage of our existing free trade agreements.

India is a case in point.

We have no FTA with a country on a path to become the world’s third largest economy.

It has not been for want of trying – we have had successive rounds of inconclusive negotiations with India.

The focus now is turning to building up the relationship with India across the board as a first step towards working out how the trade relationship can be enhanced in the future.

We will always be interested in a comprehensive FTA with India, but we need now to invest significantly more political capital and resources into working out how New Zealand can play a role in India’s future development.

Areas ripe for enhanced co-operation include agriculture, horticulture and technology exchange more generally, if we are to hitch our wagon to India’s growth engine.

A lot of thought is being given to this by both government and business, but it will take time to deliver results.

The United States is another key partner with whom we do not have an FTA.

Again this has not been for the want of trying over more than a decade.

We thought we had it sorted – that is until Trump withdrew from the Trans Pacific Partnership (TPP).

The politics are now very much against trade in the US where protectionism, subsidisation and rejection of multilateral trade rules now hold sway.

There is no chance at all of the US rejoining what is now the Comprehensive and Progressive Agreement on Trans Pacific Partnership (CPTPP), which, ironically China and a group of other economies now want to join.

Instead the US is leading another instrument – the Indo Pacific Economic Framework (IPEF) – which pointedly excludes China.

New Zealand is a party to this negotiation which may be substantively concluded by the time APEC meets in San Francisco in November.

IPEF doesn’t deal with market access issues like tariffs but may include some disciplines on NTBs which would be useful.

The lack of an FTA has not prevented us from developing a very substantial economic relationship with the US but it does leave us vulnerable to US protectionism.

Right now there are forces in the Congress seeking to ban New Zealand lamb exports – we have fought that off before in the WTO, but this time as I just mentioned the WTO dispute settlement system has been weakened.

If IPEF helps to secure our trade with the US and if it delivers some improvements in the rules for trade in the region especially in areas like trade facilitation, decarbonisation and supply chain co-operation, then so much the better.

Future disruption

This brings me to the last area I wanted to talk about with you today.

If disruption is the norm in today’s global business environment, we can look ahead to further disruption in the future.

The greatest challenge comes from the climate crisis and the existential challenge posed by climate change.

We know how far we have to go to meet this challenge as a result of the work of the Intergovernmental Panel on Climate Change, (IPCC), [3]  which has brought together the findings of five years of reports on the climate.

With current policies, we are likely to hit 1.5 degrees global warming between 2030 and 2035 – we are already at 1.1 degrees.

By 2100, we could see 3.2 degrees. 

Many parts of the planet will become unliveable – in fact, even just above 1.5 degrees we will reach irreversible tipping points in some places. 

To keep within the 1.5 limit, global emissions need to be reduced by at least 43% by 2030, compared to 2019 levels. 

By 2035, we need to have reduced emissions by at least 60%.

Business is already leaning heavily into actions aimed at reducing emissions, which remains critically important, adapting to the current environmental reality and effecting a just transition to a low carbon economy.

Business is motivated because customers want it, shareholders want it, regulators may increasingly require it and the world needs it for business to continue.

But we face a problem in the way governments use subsidies.

Subsidising the use of fossil fuels in the current environment is just crazy – these subsidies should be immediately prohibited as the WTO and APEC are working to achieve.

Agriculture subsidies also have the effect of maintaining unproductive and carbon-inefficient agriculture sectors.

Other subsidies promoted on the basis financing a green transition can also be counter-productive.

Depending on design, they can be discriminatory and cause significant market distortion.

There’s little doubt that government actions have a key role to play but the need to accelerate the co-operation between trade and climate will become increasingly important in the years ahead.

If climate is today’s challenge, then digital is today’s opportunity.

The rapidly expanding use of digital technologies is permeating all aspects of our society.

Digital is the new black – and green.

Trade is becoming rapidly digitised – it is the way producers connect with consumers, particularly through e-commerce, the way goods are monitored as they move through complex supply changes, the way data is exchanged between regulatory agencies and business can revolutionise paperless trade.

New digital services like video-streaming, gaming and digital health are being developed all the time.

Some of these defy the so-called “tyranny of distance” which has long bedevilled our economy.

New technologies are just round the corner if not coming down the driveway.

The best way to regulate the digital economy is already a key topic of discussion amongst governments and business – this work is going to accelerate in years to come.

Conclusion

In a world of poly crisis, small, open and trade dependent economies like New Zealand need to navigate carefully.

We are working against the backdrop of a decidedly dismal global economy.

Our network of trade agreements and the hard work of exporters and officials have served us well.

But the world is becoming more complex, more unstable and more unpredictable.

Some old problems like protectionism and subsidisation are still with us, exacerbated today by war and geo-political rivalry and trumped completely by climate change.

We are a small boat tossed about by some very large waves.

We need a good compass and some capable seafarers to bring us home to port.

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[1] https://www.imf.org/en/Publications/WEO/Issues/2023/07/10/world-economic-outlook-update-july-2023

[2] https://nzchinacouncil.org.nz/wp-content/uploads/2020/08/How-many-eggs-in-how-many-baskets.-An-update-on-NZ-China-trade-patterns.pdf

[3] https://www.weforum.org/agenda/2023/03/the-ipcc-just-published-its-summary-of-5-years-of-reports-here-s-what-you-need-to-know/