We write this open letter to express the strong support of the New Zealand business community for ambitious outcomes at the Twelfth World Trade Organization (WTO) Ministerial Conference (“MC12”).
Remarks to Waiheke Rotary Club
Monday 18 May 2020
Stephen Jacobi – Executive Director, NZ International Business Forum
“Trade in the Time of Covid”
This is not how I thought we would be meeting when my friend and colleague John Waugh earlier invited me to speak with you !
I’ve missed that leisurely trip across the harbour and the relaxing atmosphere on your island paradise – instead I’m speaking to you from Lower Hutt, having burst our bubble and come, as Jacinda told us, to visit our Mum !
We are living in times which we have never experienced before.
Things we thought we knew about the world have been upended; what we do not know is how long this extraordinary situation is going to last and what will be final cost.
Also unknown is whether this time might usher in what the Indian writer Arundhati Roy calls a portal or ‘gateway between one world and the next’, or simply a blip – a horrendous, potentially protracted blip in the course of human history.
This evening I’d like to share some thoughts about trade amidst the turmoil of Covid, to address the question of whether our current trade profile can continue to sustain our faltering economy and to bring you up to date on a few recent trade developments.
The good, the bad and the ugly
Our recent economic lockdown is in many ways the antithesis of the open, globally connected and regionally integrated economy we’ve come to know.
The good news is that our external economy has held up reasonably well in this incredibly difficult period; the bad news is that doing business has become a lot more difficult; and the really ugly news is that some sectors like tourism and international education have suffered severe body blows.
The latest trade statistics for the week ended 6 May tell us that exports are down by around 8 percent to all destinations, with exports to China showing a drop of 9.6 percent over 2019.
Looking behind the statistics we see that exports of dairy, meat and horticultural products are continuing to flow and that exports of forest and wood products and even crayfish are starting to resume again.
Volumes to China are still above 2018 levels, which shows how significant the growth in that business has been in recent years.
It’s not an exaggeration to say that our traditional land-based exports and the Chinese market are saving our bacon at this time.
The even better news is that, somewhat contrary to expectation, there have been no formal restrictions on market access imposed by our trading partners on the majority of our goods exports as a result of Covid-19.
What’s more, a number of statements from members of the World Trade Organisation (WTO), the G20 and APEC have called for markets to remain open, especially for essential goods and services, including medical equipment and food.
That is particularly pleasing because the world has been increasingly protectionist in recent years.
Had I been giving these remarks in March, I would have pointed to these worrying trends, to the smouldering US/China trade war and to unprecedented challenges to the WTO dispute settlement system as evidence of a much less than benign outlook for trade.
These challenges have certainly not gone away.
For a time in March, a number of economies had started to limit access to the essential tools to fight the pandemic, imposing export restrictions on medical equipment and drugs; some also had started to stockpile food.
By and large there seems to have been a change of heart in early May as economies realised these “sicken your neighbour” policies did not help in containing the spread of the virus.
Even so the outlook for world trade is pretty woeful – the WTO forecasts a decline of between 13 and 32 percent in 2020, even more than the expected drop in global GDP.
If this were not bad enough, doing business around the world has just become significantly more difficult.
Supply chains for all types of goods and services have been significantly disrupted with airfreight and shipping schedules impacted, bottlenecks at ports caused by unavailability of personnel and production processes affected by worker absences.
The “made in the world” business model – whereby final goods are made up by production processes in a number of jurisdictions – has been called into question even though these global value chains are believed to contribute around 20 percent of the global economy – 50% of them come from Asia.
Some economies are actively looking to onshore production or to shorten supply chains and “buy local” campaigns gathering momentum.
Where all this might end is quite unknown at this point and much will depend on how long it takes for economies to re-open and for trade to be able to be undertaken with confidence.
An obvious problem is that business people cannot move as freely as before – customer relationships are having to be managed virtually and more traditional methods of trade promotion through trade fairs, expos and other business gatherings have been curtailed.
It’s also clear that some businesses have been affected more than others.
Those that rely on people exchange like tourism and international education are on life-support right now and many businesses may simply not be able to recover.
Those businesses that had already developed digital or e-commerce solutions are well placed to expand their offerings in the current environment provided the physical distribution issues can be sorted out.
In New Zealand’s case that applies to a wide variety of food, natural health, creative and IT products.
These are all sectors, along with high tech or specialised manufacturing, on which I believe we should be focusing our attention in this period to identify barriers to their further development, whether in relation to infrastructure, research or investment.
This work was important before the crisis, now it is vital.
Future of New Zealand’s trade profile
It’s perhaps inevitable at this critical time that New Zealand’s own trade profile should come under scrutiny.
For example, we are led to believe that we are dangerously over dependent on one market and one product and we need to diversify more.
It is quite simply a myth that New Zealand has one company (Fonterra), exporting one product (milk powder) to one market (China).
That one company, our only wholly NZ-owned multinational, is actually a co-operative of thousands of farming SMEs.
NZTE our export development agency works closely with over 700 companies which are considered strong export performers.
The recent budget will provide funding for them to work with a further 700 emerging export-ready companies.
New Zealand has a competitive advantage in exporting dairy products but some of these are highly value-added, like food ingredients, end-consumer products and even some industrial products.
New Zealand sells to over 150 different markets, but it is true that China has become our largest customer.
That’s simply because they want to buy what we have to sell and continue to do so even at the height of the pandemic.
China’s growing middle class are affluent purchasers of safe, sustainable and nutritious food products and a range of other high quality goods and services.
China buys around a quarter of our exports, about 35 percent of dairy exports, over half of our meat exports and a quarter of kiwifruit exports.
Yes, and 90 percent of crayfish exports, which while a valuable trade of $320 million, is hardly a determinant of our national economic performance.
If we look at the trade profile of other comparable economies we see a similar situation.
Australia’s concentration on China, at 35 percent is greater than ours, Chile is at 34 percent.
In a list of 183 countries’ trade concentration on China prepared by the Australian Department of Foreign Affairs and Trade in 2018, New Zealand ranked 93rd, about mid-point.
Diversifying our business away from China either for crayfish, dairy or other products is not a straightforward matter.
First, other markets may not be readily available, or they are highly protected by tariffs and non-tariff barriers, or they are not prepared to pay the premium China pays.
To ask exporters to accept lower prices in other markets while good opportunities are passed to our competitors in China is a difficult proposition at the best of times and especially right now.
Nor is it to say that New Zealand has pursued links with China at the expense of other partners.
While the FTA with China has certainly led the way in terms of export growth, we have negotiated FTAs with a range of partners – including Singapore in 2001, ASEAN in 2008 and the Trans-Pacific Partnership (TPP) in 2018, to mention just a few.
In some respects, diversification has always been the strategy and it is pursued today with negotiations underway with the Asian economies in the Regional Comprehensive Economic Partnership (RCEP) and the European Union.
Other initiatives like our long-standing quests for FTAs with the United States or India have not been able to be realised – not for want of trying, but because, unlike China, those particular economies, for their own protectionist reasons, do not want to do the deal with us, at least not on terms we would be willing to accept.
The concentration on China raises another big question – one of political risk.
China and New Zealand are quite different societies with different political cultures: we are never going to agree on everything all the time.
In an increasingly complex geo-political world, for New Zealand not be pressured to refrain from exercising its voice on global issues like human rights which New Zealanders care deeply about requires careful management at the political level.
At the commercial level companies need to mitigate political risk by building strong relationships with Chinese partners, working closely with the New Zealand Government and, certainly, exploring alternative markets where these exist.
New Zealand also needs to build up the relationship with China in areas outside trade – in research, climate change co-operation and cultural exchange to name just a few areas.
The more we can build up these other areas and enhance the partnership between our two nations, the more we will de-risk the relationship.
It follows however that the more we adopt a confrontational stance with China, perhaps under the undue influence of other partners, the more we raise the risk of biting the hand that feeds us.
Some recent developments
New Zealand’s trade policy has not been idle, far from it, in these most challenging of times.
Our government agencies and trade negotiators have been engaging with the private sector to learn about our experiences and concerns.
On the question of supply chain disruption officials are working to co-ordinate the opening up of additional air freight capacity, whether in repatriation flights or charters.
To ensure the continuing cross border movement of goods and services as well as essential movement of people, New Zealand and Singapore have been working to with others like Korea, Australia and Canada on action plans which will become operational once public health priorities permit.
The co-operation between New Zealand and Singapore has been outstanding over recent months.
To continue to look for new opportunities to diversify, negotiations with RCEP and the European Union have been continuing virtually, although both are difficult.
To reinforce the multilateral trading system, New Zealand has joined a number of other economies including the European Union and China to put in place transitional arrangements for the settlement of trade disputes in the WTO – that is important as trade begins to pick up.
To look to the future, work is continuing to prepare for New Zealand to chair APEC in 2021 – this will give us a major leadership role as the world hopefully begins to return to a semblance of normality and work to secure the economic recovery begins.
Certainly, in the APEC Business Advisory Council in which I play a role, there is a fairly wide-spread reflection underway about what the region’s business environment will require in terms of public private partnership to deliver new value and new opportunities to our citizens.
These developments all underscore that our policy processes and ways of doing business are going to need to continue to evolve as we meet these challenges.
What the world needs right now is more global co-operation and less confrontation, more strategic thinking and less knee-jerk protectionism.
Despite the current challenges New Zealand’s economic livelihood will continue to depend on our ability to connect globally and our land-based exports to established markets are showing the lead.
I asked at the beginning of these remarks whether the current situation will lead to something new or just a continuation of the past.
It’s hard to think that what we have been through in recent months might make no impact on trade and the way business is done.
These are the most difficult or times, but in a post Covid world, the work we have done in the past puts us in good shape to weather the crisis and face a new future.
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