ADDRESS TO THE HAWKE’S BAY BRANCH OF THE NZ INSTITUTE OF INTERNATIONAL AFFAIRS – “TRADE SECURITY – FINDING NEW BASKETS”

TUESDAY 15 AUGUST 2023

STEPHEN JACOBI, EXECUTIVE DIRECTOR, NZ INTERNATIONAL BUSINESS FORUM

It’s a pleasure to be with you once again.

This is an address about trade but also about baskets and eggs – in particular how many eggs and how many baskets we need to prosper as an economy.

It’s also about the risk of chickens coming home to roost if New Zealand does not manage very carefully the international pressures bring brought to bear on us.

I’d like to speak about three things this afternoon:

• First, the situation of New Zealand’s external trade
• second, about whether diversification of our trade effort is already a thing or should even be more of a thing
• third, about a trade mission to India which leaves next week.

As always, I’m speaking to you on behalf of the NZ International Business Forum, an organisation now in its sixteenth year of operations, which brings together the larger exporters and business associations.

If you’d like to find out more about us, please go to our website www.tradeworks.org.nz or follow us on Facebook, Linked In or X.

Situation of trade

Last week I was honoured to attend the Export NZ ASB Hawke’s Bay and Tairawhiti Export Awards, held at the impressive Toi Toi Event Centre.

The commitment, resilience and innovation of the finalists was impressive to see.

Equally impressive was the determination of companies and industries affected by the devastation of Cyclone Gabrielle which all of you here will also have felt.

Amidst the grief, loss and hardship were some inspiring stories which speak volumes about this region’s ability to face the future.

The supreme winner was Pultron Composites, a Gisborne based manufacturer of composite structural materials.

Pultron Composites has 600 staff in Gisborne and manufacturing sites also in the United States and Saudi Arabia – a great kiwi company doing great things in global markets.

Other winners on the night were local companies Senator Boats and T&G Global.

What the diverse range of finalists and winners had in common was a belief that overseas markets hold the key to future growth in sales, revenue and employment.

They are among the thousands of companies currently involved in exporting – it’s hard to be precise about the number, but NZ Trade and Enterprise works with 6,000 or so and there are doubtless many more besides.

Together they employ over 600,000 Kiwis[1] and contribute over 22 percent of GDP.

Today however they face an extremely challenging international market.

We’ve become used to challenges in recent years – the global pandemic, uncertain geo-politics, Russia’s illegal and immoral war in Ukraine, global inflation and the very real and growing climate catastrophe.

I was introduced recently to the term “poly-crisis” to describe the multiple risks to security, prosperity and sustainability we see around the world.

Some even use the term “perma-crisis” to capture the idea of compounding and permanent impact.

All of this doom and gloom weighs heavily on the prospects for New Zealand’s trading economy.

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.

A report issued by MFAT in March of this year pointed to surprisingly strong growth in two way trade in 2022.[2]

Total exports of goods to all destinations rose 16% to $89.9 billion, while imports rose 25% to $107.1 billion. 

With goods exports then 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 in 2023 as global inflation began to bite and China, our largest market, struggled to throw off the after-effects of the pandemic lockdown.

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 scale of impact on the export sector is only just starting to appear.

But by way of example exports from the port of Napier fell $62 million (20 percent) in January 2023, $103 million (34 percent) in February 2023, and $112 million (29 percent) in March 2023 compared with their respective 2022 months[3].

A lot of this of course is due to the cyclone, but it is none the less indicative.

Globally the economy remains subdued.

The International Monetary Fund in its latest forecast last month suggests growth will fall this year to 3 percent this year from 3.4 percent in 2022.[4]

That’s slightly better than the April forecast but confirms that the post pandemic recovery is faltering.

The outlook is not universally bad – some economies, like India, to which we’ll return later, are bucking the trend.

The point is though that while global inflation remains at high levels the situation will remain precarious and trade will continue to be subdued.

Indeed, the World Trade Organisation, is forecasting only modest 1.7 percent growth in trade in 2023[5].

It’s worth adding that it is not inflation alone which is the problem.

The situation is certainly compounded by a delicate geo-political context.

There is Putin’s war which is taking a huge toll in Europe.

There is the increasingly sharp stand-off between the United States and China in the Asia Pacific region.

(I realise there is a tendency these days to speak about the “Indo Pacific” region but I’m old fashioned – I prefer the use of Asia Pacific to describe the geographical area which we consider to be New Zealand’s home).

The costs of geo-political risk are hard to reflect in a balance sheet and even harder for companies to do anything about.

The problem is the uncertainty this risk creates – uncertainty is the enemy of investment, which is invariably needed to stimulate growth.

It is extraordinary in the least to think that there is now serious policy discussion about a future conflict between the United States and China over Taiwan.

War is not inveitable, but a conflict is certainly more likely now than it ever has been, mostly as a result of an accident or miscalculation, despite recent attempts to cool down the rhetoric.

There’s no doubt that such a conflict would be catastrophic for New Zealand’s trade (and apocalyptic for the people of Taiwan).

New Zealand companies, whether they like it or not, are increasingly having to think about these issues in a way they have not done before.

None of it makes for a good night’s sleep.

Diversifaction or not ?

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

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.

I need to acknowledge that 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 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[6].

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.

Increasingly 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?

This is where the question of eggs and baskets comes in.

Do we have too many eggs in one basket ?  How many other baskets do we need ? Do we have enough eggs ?

And what is the likelihood that China might take some (unspecified) action against New Zealand’s exports?

Judging by the Prime Minister’s recent visit to Beijing, bilateral relations with China are cordial and productive.

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.

It is growing precisely because New Zealand finds itself – along with many other countries – in the middle of this “game of thrones” between China and the United States.

To date we have 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.

China may be used to our criticism of its human rights record in Xinjiang and Hong Kong, of its actions in relation to the South China Sea and Taiwan.

It routinely rejects outright our accusations of interference in New Zealand’s domestic affairs.

But it positively bristles at the idea of AUKUS, the new nuclear-based agreement between Australia, the UK and the US, which appears to be aimed at China.

New Zealand officials are currently considering the case joining for Pillar Two of AUKUS which focuses on technological co-operation outside the nuclear sphere.

It is early days yet but it is that sort of action that might be a step too far.

That’s when the eggs could start to fall out of the basket and our chickens come home to roost.

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

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 are said to cover 70 percent of exports which is an impressive figure.

What this means is that 70 percent of exports are subject to these agreements but it does not mean that 70 percent of exports can enter overseas markets without impediment.

Now we have an excellent FTA with the UK, one of the best, with tariff free access for dairy within five years and beef within fifteen years, but the market is so much smaller than China.

With the EU, while the FTA is good for some sectors, it has opened up less than 1 percent of the enormous EU market to our dairy and beef.

You’d have to sell a lot more kiwifruit and honey to the EU to make up for the loss of dairy or meat exports to China.

There are certainly other markets in South East Asia that could be expanded with greater investment and attention, taking advantage of the very good market access we now enjoy there.

We can also seek improve and upgrade existing agreements and seek to negotiate new ones with new partners.

The task of diversification is an ongoing one, as is the need for ongoing careful management with China.

What we really need is a strategy of “China plus”, not “China minus”!

India beckons

I left out two markets from the possible diversification targets above – the United States and India.

On the US, which is a key partner for us, we have tried hard to seek an FTA over the last 20 years.

While the US is relatively open to our exports and investment, there is always the risk that we will get caught up in one or other of the many trade actions the US takes against its partners.

Our steel exports, small in volume, are currently caught up in one such action on the bogus grounds of their threat to US national security.

Right now there are moves afoot in Congress to take action against our lamb exports.

As the US continues to turn inwards, the risks to our trade will grow.

We thought we had the FTA in the bag when the original Trans Pacific Partnership (TPP) was finally signed with US membership in February 2016, but Trump took the US out of TPP in his first day on the job the following year.

The politics have turned against trade in the US and there is no chance in the short term that the US will re-join CPTPP.

We continue to engage with the US through other instruments like the Indo Pacific Economic Framework (IPEF) in the hope that we can one day seek a comprehensive agreement.

India is another market which has eluded our FTA charms.

It has not been for the want of trying.

We spent five years in negotiations between 2010 and 2015.

Further negotiations were held in the context of the Regional Comprehensive Economic Partnership (RCEP), from which India finally withdrew.

There are two stumbling blocks.

First, India is unwilling to include dairy and beef in the scope of the negotiation.

Second, New Zealand is unwilling to relax its immigration settings.

For the time being the idea is best described as being “on hold”.

New Zealand will always be interested in an FTA when the time is right.

The absence of an agreement restricts our ability to grow the market – today India is only our 16th largest trading partner despite its huge and growing population and its robust economy.

The IMF has forecast India to grow by over 6 percent this year and next.

India is also on track to become the world’s third largest economy.

So what can be done in the interim ?

In two weeks’ time a delegation of 50 New Zealand business people from multiple sectors will be in Delhi to put the case for an expanded relationship to our Indian friends.

Five business organsations, including the NZ International Business Forum, are working together under the leadership of the India NZ Business Council to co-ordinate the visit.

This will be the largest business delegation to have visited India.

It follows the release of a major report by the India New Zealand Business Council published in April advocating greater commitment and focus to the relationship which it describes as being “ready for the next phase[7].

Even in the absence of an FTA, there is much that can be done to boost our economic ties.

New Zealand has much to offer: we have world-leading resources, expertise and technology to share in several sectors. 

We have technology and manufacturing companies prepared to take a long-term strategic approach to the Indian market, which have built successful business there.

Companies that could expand co-operation with India include those in the agriculture, agritech, education, fintech, forestry, horticulture and renewable energy sectors.

Becoming an efficient and sustainable food producer, achieving more intensive land use, educating a population where half of all people are under the age of 25, and reaching world leadership in green energy are all strategic priorities for the Indian government.

New Zealand companies that clearly explain what they can offer and are willing to adapt their goods and services to match the needs of Indian customers may discover exciting opportunities.

Being prepared to learn all we can, building long-term partnerships and staying the course will all be important.

A genuine “New Zealand Inc” approach, blending private sector skills and the door-opening ability of our diplomatic team in New Delhi, is essential.

The trade mission is not about coming home with an FTA: it is just one step in the implementation of a longer term strategy.

Conclusion

Times are tough for kiwis doing business overseas.

The world is facing a poly-crisis:  global inflation and complex geo-politics are major challenges.

The climate crisis is undoubdtedly the greatest of them all.

Our country lives by trade and while the world is changing, that is not about to change.

New Zealand is fortunate that we have a range of trade agreements and relationships that sustain our trade effort.

Our eggs are spread across a number of baskets, but some baskets are bigger and fuller than others.

Some of these relationships are under pressure, none more so than the critically important relationship with China.

We need to continue our careful management – giving voice to our values, while maintaining and even expanding co-operation in areas where there is interest to us both.

Navigating these shoals is not easy – it never has been.

At the same we need to look for new partners.

India is a major opportunity which has been under-served for far too long.

That is about to change when the business delegation visits in two weeks’ time.

It is precisely these sorts of efforts – careful political management, negotiating new or expanded agreements, exploring new opportunities, remaining open and outwardly focused  – that can sustain us in difficult times.

It’s a matter both of finding new baskets and keeping our existing ones full.

The winners and finalists of the Hawke’s Bay and Tairawhiti Export Awards know this.

Their work – that of their leaders, workers and the community at home that supports them – is what makes this great region and our whole country more resilient and more successful.

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[1] https://www.mfat.govt.nz/assets/Trade-General/Trade-stats-and-economic-research/MFAT-working-paper-Estimating-employment-in-NZ-producing-goods-and-services-for-export.pdf

[2] https://www.mfat.govt.nz/en/trade/mfat-market-reports/nz-economic-performance-in-2022-and-future-prospects/

[3] https://www.stats.govt.nz/information-releases/overseas-merchandise-trade-march-2023/.  Exports from the Port of Napier do not necessarily represent all exports from Hawke’s Bay.

[4] https://www.imf.org/en/Publications/WEO/Issues/2023/07/10/world-economic-outlook-update-july-2023?CID=sm-com-bl-WEOET2023004

[5] https://www.wto.org/english/res_e/booksp_e/trade_outlook23_e.pdf

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

[7] https://www.inzbc.org/_files/ugd/df219d_9f2404018cef444e93c757a47a85290b.pdf