ADDRESS TO THE 54TH ONE STOP UPDATE FOR THE ACCOUNTANT IN BUSINESS – GLOBAL ECONOMIC UPDATE

AUCKLAND, WELLINGTON, CHRISTCHURCH, MAY 2024

STEPHEN JACOBI, EXECUTIVE DIRECTOR – NZ INTERNATIONAL BUSINESS FORUM

Introduction

Thanks once again to Brightstar for the opportunity to address you today.  I’m sorry I can’t be with you in person as I am travelling overseas.

“It was the best of times, it was the worst of times” – so wrote Charles Dickens.

Anyone working in the trade space at this time knows very well that these are far from the best of times.

The global economy remains lethargic, further complicated by wars in Ukraine, Gaza, the Red Sea and – if that weren’t enough – now the risk of a full-scale Iran-Israel conflict.

Export values out of New Zealand have continued to decline – even at the height of Covid we managed to keep export values constant or growing.

Back at home our chickens are coming home to roost as we face up to the inevitable if unavoidable economic implications of the Covid response.

But maybe, just maybe, there are some more positive signs.

Global inflation is being brought slowly under control.

The tone of the relationship between the United States and China has improved.

Back home, we have a new FTA with the European Union poised to deliver at least for some sectors and earlier than expected.

Growth in China, our largest market, is picking up again.

And our still new-ish Government is ambitious for trade, promising a new FTA with India and to double export value over ten years.

Today I’d like to talk about:

• The big picture facing New Zealand in the global economy;
• Some recent trade policy developments; and
• What’s on the horizon for us this year.

My comments are, as always, informed by the views of the members 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!

The big picture

Sometimes, when talking about the global economy, it’s hard to shake off the gloom.

The less gloomy news is that global inflation has begun to decline.

The not-so-good news is that the global economy is still weak. 

Economic growth

The IMF expects the global economy to grow 3.2 percent this year – the same as last year and next year[1].

That’s still lower than the long-term average of 3.8 percent.

What’s more, new uncertainties have arisen with the conflict in the Red Sea, which since the end of last year has pushed up the price of shipping, including between New Zealand and our markets in Europe.

And now a new or rather expanded conflict is breaking out between Iran and Israel – this one is as dangerous as Russia’s aggression in Ukraine as it has the capacity to turn into a global conflict.

Whether it’s the actions of Israel, Hamas, the Houthis or Iran, risk and danger will remain as long as there is instability in the Middle East.

A lasting solution to the crisis in Gaza and to the future of the Palestinian people is doubtless what is needed for sustained peace in the region.

Beyond their impact on the lives of millions, these multiple conflicts pose enormous risks for the recovery of the global economy.

The UN Secretary General has said that the world cannot afford more war[2], and he is undoubtedly right.

The growth projection I mentioned just now masks different scenarios for different economies.

Generally speaking, emerging markets and developing economies especially in Asia and Africa are doing better than advanced ones.

And some economies including those of the United States and Europe are propped up by massive government spending and borrowing which will one day have to be paid for.

Why do these figures matter?

They matter because they form the back-drop against which business is done around the world.

And ultimately, they affect countless commercial decisions in international markets which drive the prices which New Zealand businesses can receive for their goods and services.

Trade growth

The World Trade Organisation has just released its annual trade survey[3].

Last year the WTO was predicting goods trade growth of 3.3 percent in 2024 – up from just 0.8 percent in 2023.

It is now saying that goods trade dropped by 1.2 percent in 2023 but should grow by 2.6 percent in 2024 and 3.3 percent in 2025.

While better than previously these are not great numbers and interestingly the WTO’s estimates for global economic growth are less than those suggested by the IMF.

One bright spot is that services trade – driven by a surge in digitally-delivered services – things you can buy over the net – and other services like tourism – has expanded significantly.

Here in New Zealand tourism numbers were up by 9 percent in 2023 as flight capacity increases and tourists return.

For the year ending December 2023, there were 2.96 million overseas visitor arrivals, spending $9.9 billion[4].

This is around 76 per cent of the overseas visitor arrivals for the year ending December 2019.

Tourism spend remains high, with the median spend per international visitor approaching 2019 levels, with German visitors spending the most during their stay. 

There are now more Chinese airlines serving New Zealand than pre-Covid.

But goods trade shows a different story: exports in December 2023 were down by 5.5 percent over the previous year to $68.7 billion.

Some have seen the economic difficulties in China as a contributing factor.

It’s true that the Chinese market has continued to be problematic over the last year, reflecting a slow rebound from Covid and other structural problems in the economy.

Meat exporters have been particularly hard hit, but other sectors like dairy and kiwifruit still have considerable optimism for a rebound in the market in the medium term. 

It’s important to remember that New Zealand is not supplying “the whole of China”: there remains a lot of growth potential in the middle class, which is our target market, variously estimated to be between 500 and 700 million people.

What’s more China continues to open its market to New Zealand as is shown by recent decisions to remove the last remaining dairy safeguard tariffs, to licence new meat plants to for export to China and to explore new ways of further upgrading our FTA.

Geo-political risks

I’ve spoken before in this gathering about the geo-political risks facing our world.

They are present not just in Europe and the Middle East, but also in our Asia Pacific region too, as the United States and China continue their tussle for economic power and political influence.

There has been some alleviation of geo-political tension between the US and China following the meeting in San Francisco of Presidents Biden and Xi last November.

It is an improvement in tone, rather than in substance, but it is welcome in terms of ratcheting down tensions.

New Zealand maintains close strong relationships with both and tries hard to maintain some sort of balance, while remaining faithful to our values and history.

That’s really what an independent foreign policy is all about: making our own decisions about what we say and when we act, quite often in concert with our traditional partners, but from time to time acting on our own.

It’s not easy and it’s getting harder all the time.

Our traditional relationships matter, but so do our economic interests particularly at times like these.

The political risk is rising of an impact on our trade from an unforeseen event or some new policy direction, which disturbs the balance we have tried hard to maintain.

Exporters need to be alert to these risks.

It’s not simply a case of rushing to other less rewarding markets (if indeed these can be found) but taking steps to mitigate risk by shoring up key relationships and where possible diversifying product offerings in market.

And by encouraging the New Zealand Government to be alert to the potential unintended economic consequences of big changes to our independent foreign policy.

Recent trade policy developments

New Zealand’s Chief Trade Negotiator Vangelis Vitalis often talks about “the end of the golden weather” for trade policy”.

By this he means that the period over the last thirty years which saw a large expansion in free trade agreements and market access has come to an end.

Today, protectionism on the rise everywhere as the number of trade restrictive measures increases.

Free trade is giving way to “industrial policy and friend-shoring”.

There are a large number of elections this year, leading to one really big one in the United States.

It’s hard to see a second Trump Presidency as being anything other than a disaster for trade with his proposal to raise tariffs of 10 percent to all goods as well as further measures against China.

A 10 percent tariff applied to New Zealand’s $14.5 billion worth of exports to the United States, which is not protected by any free trade agreement, could prove even more problematic for our economy than the impact of economic uncertainty in China.

In fact, even under the Biden Administration, the United States has moved away from their traditional role of global trade leadership.

This was seen clearly last November when the United States withdrew, without warning, from negotiations on trade issues in the Indo Pacific Economic Framework (IPEF) – its own initiative for economic co-operation in the region.

While other IPEF elements were agreed, it seems unlikely these negotiations can be revived before the Presidential election.

WTO

It was also seen at the recent World Trade Organisation Ministerial in Abu Dhabi, where very little in the end was achieved, despite the strenuous efforts of our own Trade Minister McClay and his officials.

The US was not the only WTO member at fault, but the heft it can normally bring to such negotiations was sorely lacking.

The tragedy for the WTO today is that even if a number of the things on offer at the Ministerial had been agreed, they would have been unlikely to impact significantly on the downside risks currently facing the global economy.

As the ultimate keeper and arbiter of the rules of international trade, the WTO must remain our top trade priority, but it is now in a severely weakened state, just when we need it most.

The WTO is ultimately the creature of its 166 members: they control its destiny, but the world is not in the open, outward looking frame of mind it once was.

NZ/EU FTA

More positively for New Zealand a big new free trade agreement, the NZ/EU FTA is to enter into force on 1 May.

This FTA seeks to connect our exporters to 450 million European consumers and it delivers some significant new openings especially in horticulture, wine, honey and seafood.

Unfortunately the gains for the goods we sell in volume (dairy and meat) are much smaller – when these products are not fully included, the numbers generated in terms of new trade are likely to be less.

The value of the agreement is further eroded by the costs of implementing legislation to restrict the use of names of certain wines and cheeses, including prosecco and feta and by the risks of increasing environmental regulation in the EU.

On the other hand the FTA is also accompanied by the application of the EU’s Horizon Fund for scientific research and development is very significant and could prove a real boost for innovation in this country.

There is no doubt that the NZ/EU FTA is a significant agreement, but it may well turn out to be somewhat less than transformational.

Certainly the EU is unlikely to replace China any time soon.

Both it and the earlier NZ/UK FTA are quite possibly the last in a line of larger agreements, like NZ/China, NZ/ASEAN and the Trans Pacific Partnership (TPP), which New Zealand has been able to secure during the period of “golden weather”.

But the cause of freer trade is not completely dead and nor have we reached “peak FTA”.

CPTPP

There is a still a range of agreements which can be further upgraded as China was in 2022 and ASEAN in 2023.

New Zealand’s main opportunity lies in the deepening and expansion of the renamed Comprehensive and Progressive Trans Pacific Partnership, or CPTPP. 

CPTPP now has twelve partners once again now that the United Kingdom is in the process of completing its accession.

There are others waiting in the queue including China and Chinese Taipei and several Latin American economies.

Even Ukraine wants to join.

The opportunity is less in expanding market access than in spreading around the world the CPTPP rulebook.

That would also be assisted by the general review of CPTPP rules which is now underway, led by Canada which is the current Chair.

New Zealand has been part of the CPTPP journey from the very beginning – in fact, it was our idea!

Trade agreements need to be continually updated as business models change and new issues arise.

Deepening and expanding CPTPP at the same time is no easy undertaking, but if this is not successfully completed, with new rules and new members within the next two years, the value of CPTPP could be significantly eroded.

In case you were wondering, there is little if any hope that the United States would re-join TPP, which it left in 2017, or negotiate a bilateral FTA with New Zealand.

The agreements signed under the umbrella of the Indo Pacific Economic Framework (supply chain, clean economy and fair economy) provide an opportunity to maintain engagement with the United States, but it is still not clear what they can deliver.

They certainly will not survive Trump’s return but while the mood in the United States is not in favour of freer trade, who knows how this might develop in the future. 

Other negotiations

Some smaller FTA negotiations also remain on the books.

The Government is consulting on a possible FTA with the United Arab Emirates.

A wider negotiation with the Gulf Co-operation Council has spluttered along with no breakthrough in recent years.

The Government has also expressed interest in picking up again the opportunity to join the Pacific Alliance linking Chile, Colombia, Mexico and Peru – Colombia is a a missing piece of our coverage through CPTPP.

Sri Lanka, a sizeable market for dairy exports, is seeking membership of the Regional Comprehensive Economic Partnership (RCEP), to which New Zealand also belongs.

So our trade negotiations’ dance card, while not exactly overflowing, is fairly full, but we need to keep working to implement and expand the agreements we have signed up to and to develop the pipeline of new negotiations coming forward.

What’s ahead

Our newishGovernment is ambitious on trade, promising to double export value within 10 years, a new FTA with India within the first term and more trade missions, like the one the PM led recently to Singapore, Thailand and the Philippines.

It’s good to be ambitious on trade – without ambition, we can quickly fall behind others who are out there in the global market.

Doubling export value is not a simple task.

Economist Cameron Bagrie has estimated this would require a compound growth rate of 7.2 percent a year[5].

Conceptually, he says, it’s achievable – inflation should get you one-third of the way,

more value added could take that to 50 percent, but to achieve a further 50 percent you need more volume.

Others have also pointed out that New Zealand has often failed to meet similar growth targets in the past.

Trade agreements can and do help but their impact is generally a slow burn.

India

India is a case in point.

There’s no doubt about India’s growing political and economic importance.

India is bucking all the global growth trends – the IMF forecasts growth of 6.5 percent this year and next.

India may have well and truly arrived on the world stage, but New Zealand’s relations are still quite restricted especially in the economic space.

We export to India about a tenth of what we export to China.

In past years we have already been down the FTA route with India both bilaterally and in the context of RCEP without success.

Unhooking a fresh start will require a large amount of investment and some new ideas on the part of the Government and business.

Above all we need to demonstrate the value proposition for India – why would an expanded economic relationship be of interest to them?

What is the part that New Zealand can play in India’s rapidly developing economic success?

It is not simply a matter, as I sometimes hear, of “dropping dairy” – our largest export sector.

India’s objections to dairy imports are well-known, but India also has a large dairy processing industry and New Zealand technology and expertise is likely to be of interest to them.

Taking a sector-by-sector approach may prove more fruitful in the short term.

A recent solution has been found to enable the log trade to resume.

Discussions are already advanced in the horticultural co-operation space – other sectors can be added over time until the case for a more formalised partnership can be made.

The flow of Indian migrants and tourists to New Zealand continues to increase, paving the way, hopefully, for direct flights between Delhi and Auckland.

This is the work now underway: it requires significant investment from both Government and business but it will take time to mature and develop.

If India is a big task which lies ahead of us, there are two other big ideas which we think should be considered more actively.

Paperless trade

First, moving more rapidly towards paperless trade, by which we mean eliminating the vast amount of paper documentation which accompanies goods as they move through global supply chains.

There are big savings to me made here in terms of the cost of doing business – estimated to be as much as the gains from a free trade agreement.

Adopting these digital, data-driven systems can avoid the need to replace lost paper documents by sending expensive couriers around the world, something that happens more often than you might think.

What’s more by exchanging data rather than paper, clearance times through ports can be accelerated and more information can be provided to regulatory authorities and even to customers and consumers about a product’s provenance, safety and sustainability.

Our trading partners including the Australia, the UK and Singapore are moving far ahead of us and we need to catch up.

Southern Link

The second big idea is even bigger – we started exploring it at a conference held in June 2019.

This is the Southern Link – a bold concept to establish a new multi-modal supply chain from Asia across New Zealand and on to Latin America.

It starts with a simple idea – the fastest way to move goods and people between Asia and the southwestern seaboard of South America is via New Zealand.

New Zealand sits conveniently at the halfway point of the L-shape between Northeast Asia and southwestern Latin America.

That means that, whether via Auckland or Christchurch, a stop-over in New Zealand provides the shortest flight distance between certain Asian and South American cities.

These include potentially important air corridors r between Singapore, Kuala Lumpur, Bangkok, Shanghai, and Guangzhou to and from Santiago, Buenos Aires, Lima and farther afield.

With airlinks come both passengers and the goods carried in the hold – especially e-commerce and parcel post, which is growing significantly as Latin American suppliers continue to increase their use of Asian e-commerce portals. 

The Southern Link is not just about air connectivity – it is multi-modal.

The vast bulk of trade between Latin America and Asia is carried by sea, much of it today goes through North American ports.

New Zealand ports could provide an alternative for at least a proportion of those shipments.

The Southern Link has one major strategic benefit for New Zealand – it would put New Zealand in the middle of a supply chain rather than at the end of one.

New Zealand could serve as a intermediary location for warehousing and stockpiling of goods for on-shipment to multiple locations to the west and east, leveraging the significant growth in trade that is taking place between Latin America and Asia and enhancing connectivity with Latin American economies.

Big ideas like this are needed, if we are going to double export value in ten years, and building key trading relationships especially in Asia will continue to be part of that solution.

Conclusion

These times are like others – they are both the best and the worst and they are ultimately the ones we are living in and have to try to shape for the future.

Careful and deliberate management of our external engagement, nurturing existing and new relationships, big ideas to take us forward – all these are key elements, along with continued attention to productivity and competitiveness back home.

There is no shortage of challenges, but I believe the opportunities for New Zealand in global markets still outweigh the problems we face. 

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[1] https://www.imf.org/en/Publications/WEO/Issues/2024/01/30/world-economic-outlook-update-january-2024

[2] https://www.un.org/sg/en/content/sg/statement/2024-04-14/secretary-generals-remarks-the-security-council-the-situation-the-middle-east-delivered#:~:text=It%20is%20vital%20to%20avoid,concerned%20to%20prevent%20further%20escalation.

[3] https://www.wto.org/english/res_e/publications_e/trade_outlook24_e.htm

[4] https://www.beehive.govt.nz/release/tourism-sector-showing-signs-recovery

[5] https://businessdesk.co.nz/article/policy/export-goals-unmet-while-work-lags-desires