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 Address to World Affairs Forum, 22 August 2022

by | Aug 24, 2022 | Speeches

ADDRESS TO THE WORLD AFFAIRS FORUM

AUCKLAND, 22 AUGUST 2022

STEPHEN JACOBI

EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

TURBULENCE IN GLOBAL TRADE

Thanks to Greg Thwaite for inviting me to speak to you this evening.

It’s good to be back in the habit of meeting in person to discuss topical issues.

In times like these groups such as this can form a valuable support mechanism.

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, inflation is taking its toll on the global economy and people are hungry.

No, these are not happy times.

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

This is the backdrop against which our exporters are doing business around the world today.

This evening I’d like to unpack this a little more, by focusing first on the global economy, second on geo-politics and its impact and third about some of the recent trade agreements New Zealand has signed.

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.

In May 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 July the IMF released what it described as a “gloomy and uncertain forecast”: global growth is expected to slow further from an estimated 6.1 percent in 2021 to 3.2 percent in 2022 and 2.9 percent 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 fully recovered, the war has cast an even larger shadow – as well as the humanitarian impact, the effect of sanctions on the Russian economy, the sharp reduction in Ukraine’s agricultural production, surging grain and fuel prices all combine in a toxic mix.

Some developing economies already struggling with the pandemic have been hit again: the IMF forecasts growth for advanced economies to reach 5.2 percent in 2022, but for developing economies the forecast is 3.6 percent.

When it comes to rising inflation, the disjuncture between developed and developing economies is equally acute – 6.6 percent for advanced economies but 9.5 percent for developing economies.

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.

Russia and Ukraine are key producers of food, energy, and fertilizers.

Grain shipments through Black Sea ports have only recently been re-started -if these do not continue there will be  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.

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.

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.

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, albeit at a much reduced rate, 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”.

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.

Geo-politics

I’m sure later tonight you’ll all be glued to your favourite streaming channel to watch “House of the Dragon”.

There’s another dragon on the rise and not just in Game of Thrones !

China’s rise as an economic power has been a game-changer in the first quarter of the 21st century.

It was not unexpected – the centre of gravity in the global economy has been shifting from the Atlantic to East Asia for some time.

China’s success in lifting millions of people out of poverty cannot be denied, but in more recent years Chinese policies at home and abroad have caused 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 largely futile 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 developments in Hong Kong, Xinjiang and Taiwan.

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

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 that China has a lot to lose in any geo-political contest with the West.

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, market  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.

So are we overly dependent on China ?

A recent report from Sense Partners, prepared for the NZ China Council, noted that 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.

But even though bilateral relations with China are for the time being cordial, despite New Zealand’s continuing criticisms of China’s human rights record, it is true that the political risk from trade disruption is growing.

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.

In these sectors 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), but they still 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 it stands today Chinese consumers want to buy the things we have to sell.

Recent trade developments

I want now to turn to consider recent trade agreements New Zealand has concluded.

These agreements while providing some new options for exporters, 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.

I’m tempted to ask if you want the very good news or the not-quite-as-good news first?

Let’s start with the good news of the NZ/UK FTA.

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.

Ministers and negotiators deserve congratulations on this achievement.

That the deal 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 well requires a joint assessment of shared benefits.

In the case of the NZ UK FTA, both sides can be happy with the result.

The agreement delivers for NZ commercially meaningful outcomes from day one, backed up by world-class trade facilitation and mechanisms that can address any problems that might arise.

For dairy the UK will eliminate tariffs after five years with useful quotas from year one.

For beef and sheepmeat, the timeframe is longer (16 and 15 years) but there are commercially meaningful quotas put in place from day one.

For other primary products like wine, horticulture, honey and fish there is tariff elimination from day one.

These commits are backed up by world-class trade facilitation, including in the digital space, and by agreed processes to address non-tariff barriers.

The agreement is good for the UK as well:  alongside tariff elimination on all UK exports, it also covers services and 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, I’m sorry to say it is not nearly as good with the EU, where agreement was reached in the context of the Prime Minister’s visit to Europe.

This was a long and arduous negotiation, calling on the highest skills of our talented negotiators.

There are some very good reasons why New Zealand went into this negotiation 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.

New Zealand and Australia, which is negotiating separately with the EU, are almost the last cabs off the rank with the EU which, with a new Commission in place, has now adopted a shiny new trade policy to put into effect.

This is the first FTA the EU has signed in three years.

Of course it was always going to be hard to secure ambitious outcomes for dairy and meat and so it proved.

Agricultural protectionism is still alive and well in Europe and appear to trump the so-called shared values with Europe, very much on display when the Prime Minister was at the NATO Summit.

Shared values are good for starting trade negotiations but not it appears for finishing them.

The outcome of this negotiation was a mixed bag.

The good stuff first – the deal delivers tariff free access for a range of important export products, including apples, kiwifruit, other horticulture, honey, fish and wine, as well as better access for services and manufactured products.

There are a range of other positives too – including a chapter on Māori economic co-operation, enhanced and enforceable provisions on sustainability and climate change and commitments on the digital economy including steps to promote paperless trade.

The undertaking of both parties to be held accountable for meeting Paris Climate Change commitments is largely a symbolic undertaking, as how such a broad undertaking could be made actionable in a trade agreement is unclear. 

On intellectual property, the agreement does not extend patent protections for pharmaceuticals, something the EU would really have wanted, but the copyright term will be extended.

The EU will enjoy tariff free access to the NZ market, better conditions for investment, including a higher investment screening threshold similar to other FTA partners, and better access to government procurement.

And now the not so good – unfortunately the not so good is not very good at all.

Quite simply, despite the best efforts of negotiators, the agreement in principle does not deliver commercially meaningful outcomes for our largest exporters, dairy and meat.

Dairy and meat exporters will gain access to only a marginal proportion of EU consumption, which is a missed opportunity and a really disappointing result.

Even after full implementation, the dairy and beef sectors will face small quotas and high tariffs, restricting their ability to grow the market in a commercially meaningful way. 

Yes some new access is granted for butter, cheese, milk powders and for beef and sheepmeat but for nearly all these the levels are very small and the quota arrangements likely to be difficult to meet.

That means that the agreement’s usefulness in terms of trade diversification will be strictly limited and could set an unhelpful precedent for future negotiations.

And that’s not all.

The  EU has convinced New Zealand to adopt new 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.

An agreement of this type was always going to be part of an NZ/EU FTA – that’s a bottom line for the EU and they made that clear from the beginning – as indeed, New Zealand did, about access for agricultural products.

What is disappointing is that the agreement will include some names which have become generic rather than related to a certain geography.

I’m talking particularly here about feta and prosecco – the use of which will be prohibited – and parmesan – the use of which will be limited to existing producers.

Now these rules are perhaps not as onerous as we might have feared but they are at best anti-competitive if not protectionist and will restrict innovation, particularly for our artisanal cheese makers.

Of course the Government will claim that the best deal was obtained in the circumstances and there was a risk of continuing negotiations might have led to a worse outcome.

That is a judgement call for the Government to make but while there are undoubtedly positives for New Zealand overall, when it comes to the dairy and meat sectors, there is understandable disappointment that a once-in-a-lifetime opportunity to set the future conditions of trade has not been realised.

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.

The title of this talk is “turbulence in world trade”.

To switch metaphors slightly 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 – when they address our key interests – and other aspects of international co-operation and engagement can provide some mitigation against the worst effects of economic disruption.

That after is why we seek to negotiate them.

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 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.

In a world full of turbulence and risk, our exporters need all the help they can get.


[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/2022/07/26/world-economic-outlook-update-july-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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