ADDRESS TO THE FONTERRA ALUMNI GOVERNANCE DEVELOPMENT WORKSHOP

ADDRESS TO THE FONTERRA ALUMNI GOVERNANCE DEVELOPMENT WORKSHOP

 AUCKLAND, 29 JUNE 2022

STEPHEN JACOBI

EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

THE GLOBAL GOVERNANCE CHALLENGE

Thanks to my friend Janine Smith for inviting me to speak to you today.

It’s always good to be here at Fonterra which, together with the farmers in the co-operative, contribute so much to New Zealand’s economy and to providing nutrition to consumers around the world.

It could be asked why you’re spending this valuable time on geo-politics rather than for example how to use innovation to feed the world sustainably.

Perhaps that’s because more than any other industry Fonterra knows just how much geo-politics weighs in on the business and conditions the extent to which the industry can respond to other global challenges.

The world today is far from a happy place.

The pandemic is by no means 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.

No, these are not happy times.

For many, especially in Ukraine, they are perilous times.

I’ve been asked today to focus on three key topics which form the broad context against which you, from a governance perspective, will be working to lead the development of competitive and sustainable business.

First, the importance of free trade and free trade agreements for the dairy industry and why relationships with government and other organisations working in this space really matter.

Second, the current geo-political landscape and what international businesses like Fonterra need to bear in mind.

And third, how your key market in China plays into these considerations.

Why FTAs matter

Last month the World Health Organisation reported that in 2021 the full death toll associated directly or indirectly with the COVID-19 pandemic was approximately 14.9 million[1].

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

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 against Ukraine.

In April the World Trade Organization (WTO) revised downwards its forecast for global trade growth this year to 3% from 4.7%.

In New Zealand’s case, 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[3].

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.

Of course, in services, especially the ‘people-intensive’ sectors where we are strongest, such as tourism and international education, the news was even worse.

Despite this gloomy outlook, what is clear is that New Zealand’s ability to withstand continuing economic disruption will continue to depend in large part on our ability to do business with the rest of the world.

This is where the dairy industry comes in.

The dairy industry is sometimes likened to a lonely shag sitting on a rock.

The seas of global protectionism rage all around it.

That’s because, despite the industry’s importance to the New Zealand export economy, and despite our success in negotiating new free trade agreements in recent years, the dairy industry still faces the most trade restrictions around the world.

And that includes the huge amount of production and other subsidies offered to competitors in various economies.

Admittedly, a bright spot has been the FTA with China, which has given rise to the development of substantial new dairy trade, but even there, safeguard tariffs apply to whole milk powder exports until 2024.

The much heralded (including by me) Comprehensive and Progressive Agreement on Trans Pacific Partnership (CPTPP) resulted in only marginal gains for dairy in Japan and Canada – the latter now subject to a formal dispute.

The world’s largest FTA, the Regional Comprehensive Economic Partnership (RCEP), resulted only in some new access for dairy to Indonesia only.

Today the dairy industry enjoys access to around 12 percent of the global market at tariffs of less than 10 percent.

There is some better news on the horizon – the newly minted FTA with the UK, once implemented, will result in the elimination of all dairy tariffs within 5 years.

As I just noted, trade with China will be completely free by 2024.

Your colleagues are in Brussels right now to encourage a robust outcome from the NZ/EU negotiations, although, it has to be said, the chances of achieving anything like the UK outcome are remote indeed.

Alas too, we are no further forward with the United States or India, being the two largest stand-outs from our network of FTAs, which today covers almost 70 percent of our global exports.

What all this serves to underline, is that, for the dairy industry in particular, efforts to open markets and put in place better trade rules remain fundamentally important.

They provide some mitigation against the impacts of an uncertain, disruptive and protectionist world.

A friend of mine once told me the term “free trade agreements” was something of a misnomer.

They are hardly ever free, they’re not just about trade and no-one ever completely agrees.

I have to say he was right, but without the level of rule-making provided by FTAs we would be even worse off.

The problem for the dairy industry is not just tariffs, but non-tariff barriers, which have become even more difficult as tariffs have declined.

There is a distinction to be made between non-tariff measures (“NTMs”) which are often applied to exports, and which may not be harmful and non-tariff barriers (“NTBs”), which are basically non-tariff measures which are more trade restrictive than necessary.

Whereas NTMs can facilitate trade, NTBs are often protectionist in nature.

A recent report by Sense Partners for the Ministry of Foreign Affairs and Trade found that NTMs are applied to 83 percent of New Zealand’s global trade with a compliance cost of $12 billion annually[4].

NTMs can be such measures as labelling and packaging requirements, compliance documentation, and quantity limits or related to sanitary and phytosanitary requirements.

NTM compliance tends to present even more of a challenge to small and medium sized exporters than larger entities like Fonterra, but when NTMs are more trade restrictive than necessary, they can be a blunt instrument.

Sense Partners estimated the cost of compliance with NTMs for dairy to be $5.4 billion each year.

Ironically the highest concentration of NTMs is found in the land of the free and the brave, the United States.

The dairy industry has therefore a strong commercial interest in eliminating or reducing not only tariffs, but also discriminatory non-tariff barriers as well as finding ways of ensuring lower cost compliance with otherwise justified non-tariff measures.

Equally as important are ways to increase the speed with which goods can pass through supply chains – here the savings in time and therefore cost can be even greater than tariffs, particularly when digital technologies can be used to promote end to end paperless trade.

All this leads the industry to co-operate closely with government agencies, like MFAT and MPI, which negotiate directly on behalf of the Government, with sector groups like DCANZ, and with multi-sector organisations like my own, the NZ International Business Forum, who support these processes.

This in turn requires investment – Fonterra’s Trade Strategy team, led by Simon Tucker, is dedicated to this task and to improving the market access and profitability of dairy exports.

They liaise closely with our own Government and with other governments around the world, work alongside other industry and business organisations, multilateral organisations and other key stakeholders to improve the trading environment for dairy.

Sometimes this work can take time.

For example, New Zealand is a member of the grouping known as Asia Pacific Economic Co-operation or APEC.

APEC brings together 21 economies on a voluntary and non-binding basis to promote economic co-operation.

APEC Leaders are advised by the APEC Business Advisory Council (ABAC).

Some years ago, ABAC developed, with leadership from New Zealand, a set of principles to ensure that NTMs do not become NTBs.

ABAC was successful in ensuring that these principles were adopted officially by APEC.

This doesn’t mean our problems are over, but the moral argument for avoiding unnecessary NTBs has been further advanced, and we see now a number of FTAs in the region, which are binding, incorporate NTM disciplines.

The dairy industry ultimately benefits from initiatives such as this which are supported and informed by Fonterra’s Trade Strategy team.

Complex geo-politics

This work is not made any easier by the current geo-political environment which can be likened to a dangerous “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 the Chinese Government’s policies both at home and abroad are causing deep concern on the part of the liberal democracies, including New Zealand, and most particularly the United States.

You’ll recall Trump’s “trade war”, which had little to do with trade and which mostly penalised America – so much so that now US officials are pondering whether Trump’s tariffs have contributed to inflation !

That trade war didn’t leave New Zealand unscathed – not only were markets de-stabilised for a period, we have been caught in the cross-fire with tariffs applied on bogus “national security” grounds to our tiny exports of steel and aluminium.

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

The discourse may be a little more polite, but tensions have only been heightened by China’s apparent tolerance of the Russian invasion of Ukraine and by recent 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, although with strong energy exports especially to Europe.

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

It has recently been announced that New Zealand would join the US-led, 14 member Indo Pacific Economic Framework (IPEF), which seems to specifically exclude China.

There are of course very good reasons why New Zealand would want a closer economic relationship with the United States and given our like-mindedness on many aspects of economic policy why US engagement in the wider region could also be beneficial.

The absence of an FTA between us has not prevented the development of robust two-way trade and investment including in dairy products, but it does leave our trade somewhat exposed as the case of the steel and aluminium tariffs, exempted for other FTA partners, shows.

IPEF is not a free trade agreement and disappointingly will not contain market access commitments, at least not for tariffs.

It may contain disciplines on NTBs, but this has yet to be confirmed.

If IPEF can help to make progress on commercially meaningful matters by engaging the US and other partners, then all well and good.

If on the other hand, it serves only to entrench the geo-political stand-off and cause further disruption to an already disrupted world, then it will have done very little to improve the environment for trade and investment.

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

Certainly the war in Ukraine has seen New Zealand come closer to the United States, Europe and NATO than at any other time in recent memory.

In fact, that’s not so surprising:  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.

China

We need to do this because, 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”.

Are we overly trade-dependent on China ?

Another recent report from Sense Partners, this time prepared for the NZ China Council, sought to address this question head on[5].

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 (and justified) criticisms of China’s human rights record.

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.

There is no doubt that exporters need more options, and New Zealand’s trade negotiations seek to provide them with these, but diversification needs to take account of market realities.

Conclusion

So where does all this leave us ?

If I had to reflect on the state of the world, I’d have to say things have got worse in the last six months.

We are like a ship in the midst of a powerful storm and we’re 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.

New Zealand’s free trade agreements and other aspects of international co-operation provide some mitigation against the worst effects of economic disruption.

Opening markets, keeping them open and putting in place effective rules which allow trade to flow and minimise compliance costs are of vital interest to the dairy industry and to the country as a whole.

That’s because trade will continue to underpin the performance of the NZ economy as it has done throughout the pandemic.

The complex geo-politics are far from easy to manage, but manage them we must, especially as Chinese consumers continue to want to buy the products we have to sell.

Exporters like Fonterra will need to pay attention to risk management and to make sure they can benefit from options opened up by new free trade agreements including with the UK and hopefully (fingers crossed here) also the EU.

When you’re that lonely shag on the rock you need all the help you can get when the storm really blows.

[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.mfat.govt.nz/en/trade/mfat-market-reports/market-reports-global/an-overview-of-new-zealands-trade-in-2021/

[4] https://www.mfat.govt.nz/assets/Trade-General/Trade-stats-and-economic-research/Non-tariff-measures-Impacts-trends-and-effects-on-exports-from-New-Zealand-January-2022.pdf

[5] https://nzchinacouncil.org.nz/wp-content/uploads/2022/04/China-trade-report-2022-update.pdf