Building on AANZFTA – RCEP, TPP, FTAAP and many other acronyms Address to the Annual General Meeting of the ASEAN NZ Business Council, Auckland, 19 June 2014 Stephen Jacobi, Executive Director, NZ International Business Forum

Thanks very much for the opportunity to be with you this evening and congratulations on another AGM for the ASEAN NZ Business Council.

I want to salute your efforts to build the relationship with the dynamic markets of ASEAN, which today is our fourth largest trading partner for goods, behind only China, Australia and the European Union,  representing 13% of total trade (or NZD $13.3 billion).

I’m quite sure I need not remind anyone in this room about the importance of ASEAN and collectively you know a lot more than me about doing business there.

What I can do however is share with you some thinking on the development of the broader framework of rules within which this trade and investment take place.

By that I mean the various initiatives for free trade (for want of a better word) that are under negotiation in the region ? these are what are now being called the “mega-lateral” deals like the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP).

Those deals are a level above the very good and comprehensive FTA New Zealand and Australia have with ASEAN ? one, which I know the Business Council supported to achieve and continues to support to turn into business success.

Those deals are also a level below an even bigger vision for a Free Trade Area of the Asia Pacific (FTAAP) for which TPP and RCEP are considered “pathways”.

Changing business environment

Some of you may have seen a very interesting interview with Trade Minister Groser on the TVNZ programme “Q&A” last weekend.

In that interview the Minister said that he couldn’t be sure that TPP would succeed but if indeed it did not “it would live on in other negotiations”.

Now I think that reports of TPP’s imminent demise are greatly exaggerated, as I’ll explain later.

But it’s worthwhile thinking for a moment about the big picture against which all these negotiations are taking place.

The fact is that all these negotiations build upon each other and seek to continuously improve the business environment by making it cheaper, faster and easier to do business in the Asia Pacific region.

That’s important because as you know very well business never stays the same.

This is particularly true today when more and more business is being done through increasingly complex supply and value chains.

Some of the data coming available is pointing to the increase in trade in what are called “intermediate goods” ? that is to say things that are used to make something else.

The WTO has found that 55 percent of world trade today is represented by goods which are used to make other products.

Over a quarter of the content of goods traded internationally comes from the rest of the world .

This is the background against which trade policy is being made today and which gives rise to a new agenda based on market integration rather than market access.

That agenda sees policy makers moving beyond border issues like tariffs to behind the border issues like domestic regulations.

It sees a focus away from goods to services and investment and new attention being paid to the speed and cost of doing business.

Trade agreements need to move with the times, which is why so much effort is being devoted to improving the operation of existing agreements and moving on to negotiate new ones.

Building on AANZFTA

AANZFTA is a case in point.

Last month I was very pleased to meet with officials attending the 6th AANZFTA Joint Committee and to join with you at the business networking event.

I spoke to the officials about the importance of FTA implementation, about what business wanted to see from FTAs and about the need for continuous improvement.

I was pleased to note that AANZFTA is a living agreement ? good FTAs are not signed and forgotten, they are continually updated.

In Auckland it was good to see that in addition to the peak committee, there were meetings focused on Trade in Goods, Rules of Origin, Sanitary and Phytosanitary (SPS), Competition Policy, Trade in Services, Investment and Economic Cooperation (technical assistance).

There were some good outcomes from these meetings.

A new Protocol to Amend AANZFTA has been concluded and should come into force by the first quarter of 2015.

The Protocol will streamline a number of administrative procedures, particularly relating to certificates of origin and rules of origin.

Progress was made also on economic cooperation where a number of capacity building projects are under way to improve the way in which ASEAN officials can administer the agreement in areas such as customs and standards.

On non tariff measures, a business survey will be undertaken in the second half of the year and there will be an opportunity to involve Business Council members in generating responses so that a real life picture of problems can be reported.

On investment financial assistance is being made available to ASEAN economies including Myanmar and Malaysia to undertake reviews of their investment regimes using OECD processes.

A variety of other workshops on services and regulation were held, all aiming to improve the contribution that AANZFTA can make to business success and economic growth in the region.

The importance of active business engagement and consultation was stressed at several points.

These are good, practical outcomes which can have real benefits for businesses.

It’s pretty clear that the FTA is already having the desired effect of transforming the environment and accelerating trade and investment between New Zealand, Australia and ASEAN.

Prior to AANZFTA, on average only around 36% of NZ’s exports to Indonesia, 2% of NZ’s exports to the Philippines and 28% of NZ’s exports to Vietnam entered duty free.

As of this year around 64% of NZ’s exports to Indonesia and 82% of NZ’s exports to the Philippines had duty-free access.

By the end of the AANZFTA phasing period (2020-2025) over 98% of New Zealand’s current exports will be duty-free to eight of the eleven other members of AANZFTA (100% to Singapore, Australia and Brunei, 99% to Indonesia, Malaysia and Viet Nam and 98% to Philippines and Myanmar).

Realising RCEP

ASEAN of course is also at the heart of other key initiatives in the region.

Let me start with the Regional Comprehensive Economic Partnership (RCEP).

I’ve often heard RCEP described as sort of Chinese-inspired counter to TPP.

In fact RCEP was and remains an ASEAN idea, and starts with ASEAN and all its existing FTA partners.

It’s true that RCEP is certainly less advanced than TPP ? the fifth round of RCEP negotiations takes place in Singapore next week (23-27 June).

We understand some solid progress has been made in Working Groups on Goods, Services and Investment.

Discussions on rules of origin have been fruitful.

New working groups were established in the last round on Intellectual Property, Competition, and Economic and Technical Cooperation.

What is clear though is that the pace will need to quicken quite substantially if RCEP is to be completed in 2015 and by the time that ASEAN moves to inaugurate its Economic Community by the end of that year.

RCEP is also sometimes regarded as a plan B to TPP ? a slower, possibly less ambitious arrangement, particularly given the involvement of the big three in North Asia and India, none of whom have FTAs with each other.

On paper though, in its Guiding Principles, RCEP holds out a quite high level of ambition.

That’s something which my NZIBF colleague Fiona Cooper Clarke is busy working to strengthen right now in Bangkok, with our colleagues in the East Asia Business Council.

The EABC includes representation from business organisations throughout the RCEP membership including the New Zealand International Business Forum.

EABC is about to finalise its recommendations to RCEP Ministers.

While there are some dissenting views we are hopeful of securing a strong vision for RCEP.

Such vision would for example see each participant country making initial tariff elimination offers starting substantially above 90% with a view to final results that are as near as possible to comprehensive,  providing between 90% and 100% tariff elimination on imports from each RCEP participant.

We will see how close to the 100% goal we can come ? in any event we need to aim for the maximum ambition to guide the negotiating process.

Completing TPP

Meanwhile in other parts of the region TPP grinds inexorably on with its so-called 21st century agenda, some of which is beginning to look distinctly last century.

TPP also has a solid ASEAN core.

TPP began with an agreement reached between four parties ? New Zealand, Brunei, Chile and Singapore.

That P4 agreement forms the basis of a negotiation between 12 economies, including four from ASEAN, which has been underway for some time now.

Nineteen rounds of formal negotiations have been held, countless inter-sessional gatherings between thousands of officials, at least four separate Ministerial meetings and annual get-togethers by TPP Leaders, the last one chaired by Prime Minister Key at APEC in Bali last year.

Where exactly all this has got us is hard to pinpoint.

There are certainly some high level understandings of what TPP will look like:  the so-called “broad outlines” agreed in Honolulu back in 2011 commit the parties to concluding a “high quality, ambitious and comprehensive” agreement.

There is, as we understand, quite a lot of agreed text, which will feature in the treaty once finalised ? we get to see this only when it is leaked and if what we have seen is to be believed there is also quite a lot of text which is not agreed.

At their recent meeting in Singapore Ministers said they had “cemented their shared views on what is needed to bring negotiations to a close”  and committed themselves to continuing the negotiation process.

Right now TPP is very much a “live” negotiation.

President Obama’s meeting with Prime Minister Abe in Tokyo in April appears to have unblocked the negotiating process, despite the rather confusing signals it sent about the ambition of the agreement.

Negotiators are engaged in a flurry of negotiations prior to a further meeting of Lead Negotiators which is to take place in Vancouver 3-12 July.

TPP is now on a knife-edge as participants try to work out the end game of this complex negotiation.

Most commentators agree that a number of issues continue to hamper progress.

I have time today to touch upon only a few of these.

The first is the perennial problem of market access for agriculture ? it is this that is taking us right back to the 20th century.

TPP has been promoted from the very beginning as an ambitious and comprehensive agreement.

From a New Zealand perspective this equates to an agreement, which, over time, results in tariff elimination for all products for all participants with all participants sharing equally in the benefits.

Unfortunately some participants especially Japan and Canada appear to want to continue to exempt some products from this goal.

That this should continue to be an issue at this late stage of the negotiation is deeply disappointing.

Comprehensive treatment does not mean that all products need to be treated equally ? there can be differing timetables for tariff reduction and elimination, there can be safeguards, there can be compensatory actions ? but the end point ? zero ? should be clear.

Some TPP economies have already departed from the consensus around these issues ? Australia and Japan have concluded a bilateral FTA that sets a low benchmark for liberalisation and the United States and Japan appear to have agreed that at least some tariffs will continue to remain.

Trade Minister Groser has been quick to respond that if this is the best that can be done, the onus is on others to demonstrate how this meets the objective of a high quality and comprehensive agreement.

This is something that Prime Minister Key will be discussing actively with President Obama in Washington this week.

A second problem area is intellectual property.

We are talking here largely about laws and regulations relating to patents, copyright, pharmaceutical issues and the use of the Internet.

The United States is generally pushing for higher standards of intellectual property protection – that is to say stricter patent rules and longer copyright terms, the extension of patents to software, more rights for pharmaceutical rights holders and tougher penalties for illegal file sharing and downloading.

The New Zealand Government faces a very difficult balancing act in this aspect of the negotiation particularly as much of our domestic legislation in these areas has only recently been settled.

On the one hand a higher level of protection could benefit the creators of intellectual property such as the movie or music industry or those companies, which are producing extensively for overseas markets.

On the other hand higher levels of protection might serve to limit innovation especially in the software industry where new developments tend to be built very quickly on the top of earlier applications.

Higher levels of protection could also impact on New Zealanders’ access to information and literary works especially through the Internet.

Where this might land is hard to predict at this stage but New Zealand negotiators are very focused on the potential risks from this aspect of the negotiation.

For example, in a recent response to health professionals who raised concerns about TPP Health Minister Ryall said that “ while there may be some compromises, I am satisfied any changes will not only be manageable but will complement the Government’s objective of improving, promoting and protecting the health of all New Zealanders”.

Other contentious areas in TPP include investor-state dispute settlement ? already a feature of AANZFTA -, environment, labour and state owned enterprises.

Compromises will need to be found on all these issues but this is likely only to be possible if there is a solid outcome on market access in the offing.

Towards FTAAP

I said earlier that TPP and RCEP were both seen as pathways to even wider liberalization in the region.

Clearly for the Asia Pacific region to become a seamless economic space, where goods and services, capital and people can move freely, we need all 21 members of APEC to aspire to, and achieve, something bigger.

This is the ultimate prize of the Free Trade Area of the Asia Pacific (FTAAP).

FTAAP was first mooted by the APEC Business Advisory Council (ABAC) in 2004 and adopted by APEC Economic Leaders as a formal goal for APEC in 2006.

The gains estimated in a study by Peter Petri, Michael Plummer and Fan Zhai for the East West Center suggests that full free and open trade and investment in the Asia Pacific region could be worth US$5.8 billion for New Zealand alone and around US$2 trillion for the region as a whole.

Now these studies are only as good as the assumptions that go into the modelling.

They also remain subject to the quality of the outcome and the depth of the integration that occurs.

You would think that these numbers would encourage progress towards FTAAP as a matter of urgency, particularly in the financially constrained world we have lived in over the last few years.

Yet, despite all this, FTAAP remains elusive.

Certainly FTAAP, as a top down approach to creating regional economic integration will not be achieved through a conventional negotiating process.

So economies have had to go back to a bottom up approach and are pursuing agreements which are seen as “pathways to FTAAP”.

What is interesting at this time is the new attention that China, as Chair of APEC this year, is focusing on FTAAP.

If the emphasis at this point is on achieving coherence between the negotiating pathways, my pick is that in the next few years, hopefully with TPP concluded and RCEP well on the way, we will start to talk about convergence and what needs to be done to realise the broader vision of FTAAP.

Conclusion

The world is awash with acronyms.

But behind them lie some extremely important trade and investment initiatives that will impact directly on New Zealand’s future as they will determine the pace and the extent to which our small, outward looking economy can integrate with the region we call our home.

New Zealand is fortunate in that we have some successful initiatives on which to build, including AANZFTA, whose full implementation and extension remain a work in progress.

Between them TPP and RCEP offer mutually reinforcing pathways to the broader vision of regional economic integration which is the final expression of FTAAP.

Business has a direct stake in all of this and your Business Council plays a valuable role in channeling business input into these processes and facilitating trade and investment with our partners in ASEAN with whom our future is inextricably linked.