Making Trans Pacific Friends – New Zealand, China and the United States

Address to the Conference of The New Zealand Contemporary China Research Centre “China Us Relations In A Global Perspective” Wellington, 9 October 2015 – Stephen Jacobi, Executive Director, New Zealand International Business Forum.

Thank you for the opportunity to join such an impressive gathering of scholars and experts at a conference that is both timely and significant for New Zealand’s future.

I congratulate the organisers on bringing us together and I’m delighted to be able to offer a business perspective on the theme of China US relations.

As I’m entering this conference through the tradesperson’s entrance, so to speak, I hope today to focus on three key issues:

• how business in New Zealand sees the two critical relationships in an economic and commercial context
• what the Trans Pacific Partnership (TPP) has to do with all this; and
• how the TPP and, more importantly, what might flow from it, could lead to a new framework for trade and investment across the Pacific encompassing both these key partners for New Zealand.

I’m speaking today from the vantage point of the New Zealand International Business Forum, an organisation which brings together the leaders of New Zealand’s largest and most internationally oriented companies and peak business associations.

NZ-China-US relationship in a commercial context

Having spent the larger part of my professional life involved in trade and trade negotiations, I still find it surprising that New Zealand has for the last seven years enjoyed the benefits of a free trade relationship with China while a similar set of arrangements with the United States has continued to elude us.

The situation is all the more surprising if you think that New Zealand shares fundamental values and principles with the United States as well as shared history as an erstwhile ally and still a ‘very, very, very’ good friend to use the terminology of former Secretary of State Colin Powell.

As we know, the reason for this anomaly has to do largely with factors in the political relationship between New Zealand and the United States, which meant that we were unable, as had been the expectation at the time, to follow in the footsteps of Australia in securing an FTA in 2004.

In the period 2005-2014 I personally led the work of the NZ US Council, a non-partisan organisation funded by business and government to strengthen the relationship with the United States and prepare the way for a future FTA negotiation.

I am delighted that those past political difficulties have now been overcome, the political relationship is now in a better space than it has ever been and TPP appears poised to deliver the free trade relationship we have sought for so long.

None of this has stopped New Zealand from actively pursuing a closer economic relationship with China – building on the famous “four firsts” and culminating with the successful conclusion of an FTA in 2008.

Much of the academic discourse around these important relationships seems to be focused on whether New Zealand might one day be forced to choose between one of these partners, but this tends to overlook that an important choice has already been made.

A generation ago New Zealand faced some difficult re-balancing of our external economy as a result of the consequence of Britain joining the European Economic Community in 1973.

At that time we made the inevitable but nonetheless conscious choice to diversify our exports and seek to align ourselves economically with the Asia Pacific region.

Today that choice sees over 70 percent of our exports going to a region whose economic pulse to a large extent is determined by both China and the United States.

In the last decade also the nature of trade has changed considerably.

Models based on import and export are slowly being replaced by much more complex global value chains and networks.

Trade in goods is being supplanted by trade in services and by both inward and outward investment particularly as firms seek to be closer to their customers and to benefit from innovation on a global scale.

New Zealand is not immune from these developments.

We connect to global value chains in different ways, we increasingly incorporate services into our trade in goods and we actively seek new foreign investment and, although in my view at too slow a pace invest ourselves in other economies.

Many of these value chains incorporate both China and the United States – think for example of Pumpkin Patch designing clothes in Auckland, manufacturing them in China and selling them in New York.

Or Fisher & Paykel Appliances linking innovation teams in Auckland and China to manufacturing dishwashers in Mexico and selling them throughout the United States.

It should come as no surprise therefore that to ask business to make some sort of choice between China and the United States is a question that simply does not make sense in the light of the reality of these global business networks.

Rather business in New Zealand seeks the best possible environment for doing business with both partners.

That is unquestionably the sort of environment that a high quality FTA seeks to create.

New Zealand is fortunate to have enjoyed the benefits of the NZ/China FTA for a number of years now.

The FTA has given rise to an extra-ordinary increase in two way trade due as much to what are called the ‘dynamic gains of trade’ as to the progressive elimination of tariffs and other trade barriers.

Those ‘dynamic gains of trade’ have to do with the increased commercial attention that an FTA tends to focus on the relationship as well as the framework that an FTA provides to improve the relationship over time.

New Zealand has experienced these same dynamic gains arising from the CER relationship with Australia over the last 25 years.

I fully expect to see these dynamic gains arising from TPP once it is signed, ratified and has entered into force.

In the case of China the two governments are about to embark on an upgrade of the FTA in an effort to continue to sustain the momentum of trade growth in recent years.

The upgrade is of great interest to business because FTAs always need continuous improvement and because trade agreements are always lagging behind market realities.

Some of the elements of the China FTA urgently require updating such as the safeguards applied to dairy exports, which no longer reflect the growth of the market in recent years, and the rather cumbersome bureaucratic arrangements around the issuing of certificates of origin, which are out of step with the direction of trade growth.

There are likely to be a range of issues on both sides that will be brought to the table to ensure that the FTA remains a driving force in the economic and commercial relationship.

This is all the more necessary now that our other good friend and competitor Australia has concluded a ground-breaking FTA with China – that agreement is a very good one for Australia and will mount a challenge to New Zealand over time as Australian exporters enjoy similar and in a few areas better arrangements than New Zealand.

And what of the United States ?

As I mentioned earlier Australia has enjoyed an FTA with the United States since 2004 and has used this agreement to good advantage in developing its commercial relationship, although primarily in areas that have not disadvantaged New Zealand.

Meanwhile the United States has clearly been disadvantaged in the New Zealand market as our arrangements with China have led to a loss of market share – while this might not cause much lost sleep in Washington it does reflect the impact FTAs can have on trade flows.

The rise of China’s economic profile in New Zealand has also led to calls for a new diversification of the economy, which would allow the risks of dependence to be spread across a range of partners.

Somewhat ironically in the light of history since 1973 that diversification needs to include the European Union, with which we hope soon to start a new FTA negotiation.

The fact of the matter is that both China and the United States matter to New Zealand – as markets for goods as well as services, as import sources, as partners for investment, as sources of innovation, entrepreneurship and business ideas.

It follows also that the relationship between them matters as well, particularly in the new global economic context in which we now operate.

The significance of TPP

This is where TPP comes in.

The organisers of this conference must have had incredible foresight in choosing the timing of this gathering – the week following the decisive Ministerial meeting in Atlanta at which the conclusion of the long-running TPP negotiations was achieved.

The time taken to conclude TPP – not quite as bad at the WTO Doha round – reflects the complexity of the issues under negotiation by the twelve parties including the United States and New Zealand.

It’s worth remembering that TPP was essentially a New Zealand idea – a vision of a more seamless environment for trade and investment in the Asia Pacific region – which was born in the early 1990s towards the end of the Uruguay Round and pursued with resolve over the last 20 years.

Decisive steps forward were taken in the conclusion of the first TPP between New Zealand, Brunei, Chile and Singapore in 2006 and when the United States joined the enlargement process in 2008.

New Zealand’s vision from the very beginning has always been for open regionalism – the widest possible membership of economies, the greatest possible coverage of issues, the highest quality of agreement.

In its earliest stages TPP was open for any economy within APEC to join: at the APEC Summit in Peru in 2008 this brought in Australia, Peru and Viet Nam (at first in an observer capacity).

Later Malaysia joined and then very late Japan, Canada and Mexico – by that stage the processes to join what was already an advanced negotiation had become a lot more complicated.

I repeat this history to underline an important point – the idea that TPP has been devised to somehow contain China or that China has been prevented from joining simply does not hold water.

It is completely understandable of course that the Chinese Government felt unable to commit to such an ambitious negotiation at an early stage but it has been very clear throughout the TPP process that China has followed the negotiations closely and in no doubt has been kept informed by New Zealand.

At the TPP Leaders meeting held on the margins of APEC in Honolulu in 2011 it was agreed that the final agreement would be “high quality, ambitious and comprehensive”.

This wording reflected the original vision of the negotiating parties and the opportunity to create a new framework for trade and investment that would have a significant impact on sustainable growth and job creation.

Over time that vision appears to have been diluted – to the point that what we see coming out of Atlanta, while undoubtedly a major step forward, is something not quite as amitious than the architects of TPP had in mind.

Perhaps we should not be so surprised about that.

The forces of protectionism and anti-competition are alive and well in many economies, including our own.

The Asia Pacific region’s economy has been subject both to rise and fall during this period, affecting the willingness of politicians to embrace significant reform – reforms are inevitably put off in the bad times and seen as unnecessary in the good times.

And, it must be admitted, the time taken with TPP and the unavoidable limits on transparency in the negotiating process, have given rise to deep distrust on the part of civil society, even here in free trade loving New Zealand.

What we see coming out of Atlanta is very positive indeed but still something less than what was on offer in Honolulu four years ago.

It is disappointing from a New Zealand perspective that the final deal falls short of the goal of comprehensive tariff elimination – all duties on all products – even if no sector is completely off the table.

One might have thought that a deal focused firmly on the 21st century might have found a way to deal with issues from the 20th (or even 19th) centuries but agricultural protectionism runs deep in the United States, Japan and Canada especially when it comes to dairy products.

The TPP outcome on dairy marks the beginning of a further process to address wrong-headed protectionism, but on other agricultural products there are some very positive gains.

On another product of key interest to New Zealand – beef – the goal of complete tariff elimination in Japan continues to elude us but there are very significant cuts to tariffs from 38.5 % to 9 % which should make a material difference to New Zealand exports.

In horticulture, wine, seafood, forestry and manufactured products there are also extremely useful advances which can be welcomed.

But TPP was always meant to be about more than agriculture.

In that respect what TPP does is set up a more contemporary framework of rules for trade and investment that will lower costs, reduce the time of doing business, provide greater certainty and security for business and ensure that over time there is a more consistent approach to setting regulations and standards across the region.

That this has been achieved without the likelihood of significant adjustment for New Zealand in areas like medicines, investment or intellectual property or the management of state owned enterprises reflects both the skill of our negotiators and the fact that New Zealand is already at the level of world’s best practice in these areas.

On medicines TPP preserves the operations of Pharmac, albeit with some modifications to the way Pharmac interacts with industry.

On investment TPP retains the right to regulate in areas such as public health, the environment and the Treaty of Waitangi and provides an exemption for New Zealand’s existing approach to regulating investment through the Overseas Investment Act.
TPP also limits the scope of investor state dispute settlement to measures affecting tobacco – an extraordinary facing down of the powerful tobacco lobby in the United States.

On intellectual property TPP upholds existing policy settings except in relation to the copyright term – where in New Zealand the term will rise from fifty to seventy years – and the period of data protection for biologic drugs – where we understand the term will stay at five years as presently.

On state owned enterprises TPP’s disciplines are likely to be close to what we already have here and should not call into question government ownership of entities in New Zealand.

The Government is on record as saying that the costs and any risks arising from these changes can be managed.

The final text of the TPP treaty will be released to the public in the next month or so and will undoubtedly be poured over by stakeholders of all persuasions.

This will hopefully enable a robust debate about the implications for New Zealand on the basis of facts and should enable conclusions to be drawn in the context of the Select Committee process that will precede the ratification by the Government.

Release of the text will also be useful for partners like China and others not yet part of TPP to enable them to judge their ability to join TPP at a later date.

This was always the strategy – build on each agreement incrementally to expand the vision of freer trade and investment across the whole region: in that sense TPP is not just about the twelve but about the whole 21 members of APEC, eventually including China.

Towards a new framework across the Asia Pacific

When the earliest moves to expand TPP got underway there was a debate particularly in the United States about not wanting to build a wall down the middle of the Pacific ocean.

The aim of TPP was therefore to link both sides of the Pacific and also developed and developing economies.

Thus TPP today includes dynamic economies in both Asia and Latin America.

The broader vision of which TPP is a key part is for a future Free Trade Area of the Asia Pacific or FTAAP.

In 1994 the APEC economies proceeded to adopt the famous Bogor goals, which committed them to achieving free trade and investment in the region by 2010 for developed economies and 2020 for developing economies.

It was envisaged that these goals would be achieved through a mix of unilateral, bilateral and multilateral efforts.

It took another ten years before the APEC Business Advisory Council (ABAC) first started to think seriously about developing a more ambitious proposal to achieve comprehensive free trade in the region.

Business leaders in ABAC were even then impatient at the time being taken to put making meaningful progress to achieving the Bogor goals.

The FTAAP concept also arose due to the lack of progress in the Doha round of WTO negotiations, which has not improved in the intervening period.

By 2006 at the APEC Leaders’ Summit in Hanoi President Bush proposed that APEC adopt the vision of FTAAP.

After much debate Leaders decided that FTAAP would be achieved through a range of practical and incremental steps – something that the trade negotiators in the room will be quick to assure you means no progress whatsoever.

In 2007, APEC Economic Leaders endorsed the report Strengthening Regional Economic Integration, which contained no less than 53 agreed actions aimed at strengthening work among APEC economies.

These included reference to FTAAP, but as a “long-term” prospect.

In Japan’s year of APEC in 2010, it was agreed that FTAAP would be achieved through a series of negotiating pathways including TPP and the recently launched Regional Comprehensive Economic Partnership (RCEP), linking sixteen Asian economies including New Zealand and Australia.

The achievement of FTAAP remained hostage to the conclusion of these negotiating pathways with all their attendant difficulties.

It was not until China’s leadership of APEC in 2014 that some real momentum was injected into FTAAP with strong Chinese advocacy of a work programme to complete the broader vision.

It was more than a little ironic that China’s advocacy received a lukewarm reception from the United States whose legislative processes remained fixed on securing TPP in the first instance.

Other economies like New Zealand were more appreciative, suggesting it was possible to chew gum and walk at the same time – ie continue to work to conclude TPP as a bottom up approach while initiating work on FTAAP from the top down.

This is essentially what is happening now as APEC pursues a “collective strategic study” to prepare the ground for FTAAP.

The study is to be completed by the end of 2016 – by then hopefully TPP will be about to enter into force and RCEP hopefully too will have made significant progress.

Both agreements will contribute to achieving FTAAP, bearing in mind of course that the A in FTAAP stands for Area rather than Agreement.

What that means in effect is that FTAAP may not take the form of a conventional FTA negotiation but may be achieved by a merging and docking of existing arrangements.

In that way FTAAP may serve to bring together the two largest economies in the region – the United States and China – building also on the progress made between them in the interim such as through the bilateral Investment Treaty currently under negotiation.

The point is that the launching of the APEC collective strategic study process and the conclusion of TPP in Atlanta bring the prospects of a future arrangement between the United States and China that much closer.

What once seemed an impossible dream, now seems an achievable goal.

Commitment, perseverance and a long term vision are all indispensable elements in this journey to unite both sides of the Pacific.

Conclusion

The US baseball player and part time philosopher Yogi Berra, who died last month, once said “the future ain’t what it used to be”.

That observation is most certainly true when it comes to the future architecture for trade and investment in the Asia Pacific region.

It is also true in describing the way business is being done today through complex global value chains and networks.

New Zealand has a major stake in the success of the region and in closer economic relations with the region’s two major economic powers, China and the United States.

What we have achieved with China through our FTA we now – at last – have the prospect of achieving with the United States through TPP.

And TPP together with the collective strategic study underway within APEC provide a means to move forward with the even broader vision of linking both sides of the Pacific in a new area of economic opportunity.

Making trans Pacific friends is something that comes naturally to New Zealanders.

We hope that this habit of expanding friendship across the region will become a means of achieving economic and social progress right across that great ocean which is our common home.