Submission to the Foreign Affairs, Defence and Trade Committee of the New Zealand Parliament

MARCH 2018

Introduction and Summary

1.  This submission is made on behalf of the NZ International Business Forum (NZIBF) whose members are listed at Annex A.1 NZIBF is a forum of senior business leaders working together to promote New Zealand’s engagement in the global economy. NZIBF was a strong supporter of the earlier Trans Pacific Partnership (TPP) negotiations and subsequently of the efforts to negotiate the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) between New Zealand and ten other economies.2 In particular, the achievement of a Free Trade Agreement (FTA) with Japan – now realised through CPTPP – has been a long-held ambition for the private sector in New Zealand.

2.  NZIBF supports the CPTPP as a new framework for trade in goods and services and for investment in the Asia-Pacific region. Beyond the welcome market access improvements for New Zealand goods and services negotiated in the CPTPP, the value of the agreement lies in the “legal framework for nearly a third of New Zealand’s current trade” and in its role as a “platform to support the integration of New Zealand business into regional supply chains and provide greater certainty to traders and investors”.

3.  NZIBF also considers that the impact of standing aside from CPTPP would be serious and adverse, recalling the National Impact Assessment (NIA) analysis that this could cause a decline in GPD of NZ$183 million and the erosion of our participation in valuable supply chains and competitive markets.

4. NZIBF believes CPTPP will lead to new trade and investment opportunities between New Zealand and the four other economies in CPTPP with which New Zealand does not already have free trade arrangements (Canada, Japan, Mexico and Peru). The agreement should also deliver an enhanced relationship with the other six economies with which New Zealand already has FTAs. While it is unfortunate that the United States chose to withdraw from the TPP, we consider that the merits and benefits of the CPTPP remain substantial and compelling.

5.  The agreement can be expected to contribute to economic growth and to improvements in real wages for New Zealand workers. While the estimation of future gains is invariably difficult, NZIBF believes that a conservative approach has been taken in the NIA and notes that in other FTAs, including China, the dynamic economic gains generated by those agreements has in fact far exceeded the original estimates.

6.  While CPTPP is disappointing in the scope of the liberalisation achieved for the dairy sector (tariffs will remain on dairy products – as well as beef to Japan) the agreement nevertheless improves the current situation for these sectors. For other key export industries, including horticulture, wine, forestry, seafood, textiles and manufactured products, CPTPP is an excellent outcome which will materially benefit those industries. NZIBF also welcomes improvements to the access and conditions for services exporters contained in CPTPP. In some cases these services outcomes are fairly modest but they serve as a first step in liberalising opportunities for the export education, professional services and transport, distribution and logistics sectors. The outcomes also support exports of services embedded in goods trade.

7.  While public attention was focused on the implications of TPP (and by extension of CPTPP) for New Zealand’s sovereignty, NZIBF believes an appropriate balance has been maintained in the CPTPP through a series of safeguards, checks and balances.

8.  On investment, while CPTPP includes somechanges to New Zealand’s past practice,in important areas it extends the high standards of previous agreements both in respect of the appropriate protection of investments and the continuing right of the Government to regulate in the public interest. In particular it includes new limitations on investor-state dispute settlement (ISDS) both in respect of the scope of the mechanism and its application to CPTPP partners, while continuing to offer reassurance to investors that their investments will be appropriately protected.

9.  NZIBF continues to see value in the protection of both inward and outward investment. We have concerns that the effect of side letters with some CPTPP countries will result in inconsistent application of ISDS and will remove protections for New Zealand investors in these countries.

10.  While intellectual property was a sensitive area in the negotiation and indeed in the TPP Agreement, CPTPP commitments require no change to current practices in New Zealand, including in the area of copyright term and in relation to technological protection measures (TPMs).

11.  NZIBF welcomes CPTPP’s provisions aimed at addressing next generation business issues,such as the digital economy. NZIBF also welcomes the emphasis on“progressive trade” elements in the agreement, including its binding environmental and labour provisions, the emphasis it places on the economic empowerment of SMEs and women, and other elements.

12.  NZIBF believes that the CPTPP should be a living agreement and notes that future possible accessions to the agreement by other economies would provide another opportunity to improve on the market access outcome for both goods and services and to promote CPTPP as a pathway to future trade liberalisation in the Asia Pacific region.

13.  As a leadership body NZIBF leaves the task of identifying specific sectoral issues in CPTPP to these sector groups. This submission therefore comments on cross-sectoral or wider issues. On balance NZIBF concludes that ratifying the agreement would be consistent with wider trade and investment liberalisation efforts, presents net benefits to New Zealand and would be in the national interest.

14.  NZIBF recommends to the Parliamentary Committee that it confirm its approval of CPTPP.

About the NZ International Business Forum

15.  NZIBF provides a voice to articulate the needs and priorities of New Zealand’s international business, in particular the importance of open markets, to the New Zealand Government and public stakeholders. Incorporated in May 20075, NZIBF works with companies, business organizations and government agencies to implement key projects, including working to develop New Zealand’s key international business relationships and conducting research and other activities relative to New Zealand’s international competitiveness. NZIBF receives no direct government funding for its core operating budget, but from time to time may receive funding for jointly-funded projects. Funding is also provided in respect to the policy advice and support NZIBF provides to the New Zealand members of the APEC Business Advisory Council (ABAC). The NZIBF Board (refer Annex A) brings together leaders from amongst New Zealand’s largest internationally oriented companies and peak business organisations.

16.  While this submission is made on behalf of the NZIBF membership a number of NZIBF members are likely to make their own submissions containing more detailed comments on specific issues relevant to their individual business interests.

General comments

Economic importance of CPTPP

17.  CPTPP provides a vehicle for concluding free trade arrangements with ten other countries which represent over 13.5% of global GDP, 480 million consumers, 30% of New Zealand’s goods exports, 31% of services exports, over 64% of foreign direct inward investment and about 56% of total outward investment. CPTPP marks the conclusion of a new plurilateral framework for trade in goods and services and for investment. CPTPP seeks to promote economic integration among the eleven parties at a time when the model for doing business in the Asia Pacific region is undergoing considerable evolution and when there are emerging risks to the stability and forward trajectory of the global trading system.

18.  CPTPP aims to improve market access, reduce the costs and increase the speed of doing business and create the sort of regulatory environment which leads to increased trade in goods and services and investment as a means of expanding sustainable, inclusive economic growth. NZIBF supports these goals and believes that CPTPP provides a basis on which to improve the business environment in the Asia Pacific region. NZIBF agrees with the National Interest Analysis (NIA) which finds that the CPTPP is a platform to support the integration of New Zealand business into regional supply chains and provide greater certainty to traders and investors”.6

19. A number of domestic and international studies have sought to estimate the impact of TPP and subsequently of CPTPP on trade and investment. Broadly speaking, although the majority of these studies see positive impacts on growth, others point to a lesser growth impact involving possible job losses in some sectors. The outcomes of these forecasts depend largely on the economic assumptions that underpin them. Nevertheless, previous trade agreements have delivered significant benefits for New Zealand and the modelling of benefits has been conservative compared to actual outcomes.

20.  The NIA estimates CPTPP will give rise to a $1.2 billion positive impact on GDP or additional growth of 0.3 percent per annum by 2030. NZIBF accepts these findings as conservative estimates, which have been based on modelling by ImpactEcon Chief Economist Terrie Walmsley, Associate Professor Anna Strutt and colleagues.7 At the same time NZIBF notes that in other FTAs (e.g. with China and ASEAN) the dynamic economic gains arising from those agreements have ultimately significantly exceeded the original modelling estimates.

21.  The NIA notes that some 620,000 New Zealanders’ jobs already depend on exports.8 Some critics of CPTPP contend that it will provoke job losses, for example through the provisions allowing foreign business people to come to New Zealand to undertake trade- or investment-related activity. NZIBF does not accept this contention. The provisions in CPTPP for the temporary entry of business people do not apply to people seeking employment in New Zealand, nor to immigration matters such as citizenship or permanent residency. The relevant provisions are country-specific and based on existing provisions in New Zealand’s FTAs with ASEAN and Malaysia, and are consistent with current policy settings related to business visitors. New Zealand’s existing requirements around licensing and professional requirements would not be affected and would continue to ensure that high professional standards would be upheld.

22.  More broadly, NZIBF accepts the modelling prepared by Walmsley, Strutt et al that the dynamic gains to the New Zealand economy arising from the CPTPP will lead to growth in real wages and no overall decline in employment, albeit likely involving some shifting of workers between different categories of employment.9

23.  In sum NZIBF believes the strategic economic gains from CPTPP will be significant. Consequently, failure by New Zealand to ratify the agreement would be significantly against the national interest as these potential gains would not be realised. Furthermore, if CPTPP were ratified by the other countries and entered into effect without New Zealand’s participation, New Zealand’s competitors in the region, including Australia and Chile in particular, would benefit from preferential terms of access into important markets at New Zealand’s cost. The most visible example of this is in the Japanese market for beef and dairy products.

24.  NZIBF therefore concurs with the observation in the NIA that “if CPTPP goes ahead without New Zealand…New Zealand’s place in regional supply chains would be eroded, exports from competitors would be favoured and comparably cheaper than New Zealand’s, and investment would likely be diverted away from New Zealand to other CPTPP economies”.10 NZIBF notes the estimate that if CPTPP were to go ahead without New Zealand, there would be a NZ$183 million decline in our GDP.11

CPTPP and sovereignty

25.  The ratification of any international treaty implies that New Zealand is prepared to limit its sovereignty in certain areas in exchange for the broader benefits that the treaty imparts. Even in so doing, international treaties generally make clear those areas where the Government retains policy flexibility and the continuing right to regulate (see the discussion on investment below).

Specific outcomes

26.  NZIBF is pleased that the market access outcomes of the TPP were preserved in their entirety in CPTPP (however excluding those with the United States, as a result of the latter’s withdrawal from the agreement). This was a significant achievement in the negotiations and forms an important foundation for NewZealand’s future trading relationship with the other ten CPTPP economies.

Goods

27.  CPTPP provides for tariff reductions and/or elimination on a number of products of critical importance to New Zealand’s goods exports. The scope of tariff elimination extends to 92.2% of New Zealand’s current exports. These include meat, forestry, seafood, horticulture, wine, certain dairy products and manufactured products including medical technology and agricultural technology. The impact of these reductions is most significant in relation to the four markets with which New Zealand does not already enjoy free trade arrangements (Canada, Japan, Mexico and Peru). In the case of Malaysia and Viet Nam additional access has been secured over and above the level of the existing arrangements in wine and some dairy products.

28.  Tariff elimination over varying timeframes in different markets is achieved for meat (except beef to Japan), horticulture including kiwifruit and apples, wine, forest products, most seafood products, textiles and manufactured goods. The NIA estimates the value of these tariff savings to be $219.5 million once CPTPP is fully implemented.

29.  In the case of beef to Japan, the tariff reduces from 38.5% currently to 9% over sixteen years. It should be noted that while safeguards still apply to these exports if volumes exceed specified levels, an important benefit of the CPTPP Agreement is that it prevents Japan from imposing WTO safeguard tariffs on New Zealand beef as they did in August 2017, which saw frozen beef tariffs hike from 38.5% to 50%. This outcome, while less than complete elimination, will ensure that New Zealand exports receive comparable treatment to Australian exports, which are already subject to an FTA. The achievement of a level playing field between New Zealand and Australia in the Japanese beef market was a major objective for the New Zealand industry in the negotiations.

30.  Unfortunately dairy remains one of the few sectors which does not benefit fully from liberalisation. That said, CPTPP contains a number of advantages for dairy in key markets which improves the current position. Tariff savings are estimated to be around $88.5 million and new, albeit limited, access is gained to Japan, Canada and Mexico. Access to the Peruvian market remains inhibited by the operation of the Peru Price Band. NZIBF believes that it should be a key objective of the Government through the CPTP implementation and expansion process to eliminate continuing protectionism against dairy in CPTPP markets as soon as possible.

31.  NZIBF notes that these market access outcomes are accompanied by a range of other measures which will materially benefit exporters by improving transparency, predictability and removing trade costs. These include flexible rules of origin (ROO), Customs and trade facilitation commitments and rules on the operation of tariff rate quotas.

32.  CPTPP further includes measures to address non-tariff barriers (NTBs), which exporters regularly report are often more problematic than tariffs. Non-tariff measures (NTMs) which may be introduced for a variety of legitimate policy reasons may become NTBs when they unnecessarily restrict trade. In so doing they can act as disguised barriers to trade, and have the potential to limit exports, erode margins, add costs and inhibit participation in global value chains.

33.  NZIBF welcomes the range of provisions in the CPTPP aimed at minimising and/or mitigating NTBs, which are contained in chapters on Sanitary and Phytosanitary Measures (SPS), Technical Barriers to Trade (TBT), Regulatory Coherence and Customs Administration and Trade Facilitation. These provisions emphasise the need for NTMs to be predictable, consistent, transparent, based in sound science or closely linked to international norms (as appropriate), and no more trade-restrictive than necessary. While the CPTPP measures on SPS and TBT replicate existing WTO disciplines (and therefore do not amount to significant change in New Zealand practice), they provide for improved implementation by other CPTPP economies, which will assist exporters.

34.  Taken together, these outcomes (on NTBs, ROO, Customs and trade facilitation) all help to reduce compliance costs, streamline export processes and enhance the ability of New Zealand exporters, especially SMEs, to participate in regional value chains. The fixed costs of trade and of doing business often fall disproportionately on SMEs given their smaller scale and generally more limited technical capabilities than larger firms. SMEs will also benefit from provisions in CPTPP which aim specifically to enhance their ability to take up the opportunities in the agreement, including by facilitating greater access to trade-related information and foreign networks, and a commitment by CPTPP governments to share ideas on how best to assist SMEs to take advantage of the CPTPP and to build capacity.

Services

35.  NZIBF welcomes the liberalisation of services trade contained in CPTPP, especially given the growing importance of services in the New Zealand export economy (around a quarter of total exports). Four out of ten of New Zealand’s top markets for services exports are CPTPP members (Australia, Japan, Singapore and Canada).

36.  Liberalisation of trade in services helps to foster deeper regional economic integration. NZIBF recognises the value of new commitments (in some cases going beyond existing FTAs and current WTO commitments) relating to professional services (such as engineering, legal and architectural services); business services such as management consultancy; private education including language teaching; agriculture services; environmental services and transportation, warehousing, distribution and retail services.

37.  The gains in CPTPP include more open markets for cross-border trade in services, better provisions relating to investment in services operations in CPTPP member economies and improvements in visa arrangements for services exporters visiting other markets. Some of these gains are relatively modest but represent a first step in opening previously closed markets to competition. NZIBF hopes these outcomes can be improved as CPTPP expands and matures.

Investment

38.  In general, NZIBF supports provisions in FTAs which provide both encouragement and appropriate protection of both inward and outward investment. CPTPP introduces some changes into past New Zealand practice in respect of investment protection. NZIBF understands the rationale for these changes but has some concerns with their application.

39.  In relation to the encouragement of investment, NZIBF notes that under CPTPP there is no change to the Overseas Investment Act 2005, except that New Zealand will increase the threshold above which a non-government investor from a CPTPP party must obtain prior approval from $100 million to $200 million (other than Australia, which is treated separately under the CER Investment Protocol). NZIBF welcomes the increase in threshold level given the importance of attracting foreign direct investment to New Zealand. NZIBF also notes that prospective amendments to the Overseas Investment Act 2005 including clauses relating to the screening of investments in residential housing are unaffected by CPTPP.12

40.  In relation to the protection of inward and outward investment, CPTPP provides for the continuing, albeit modified, application of investor-state dispute settlement (ISDS). It should be noted that this applies only to the investment chapter and to limited aspects of the financial services chapter relating to investment in financial services. The application of the ISDS provisions to New Zealand is reduced by a series of reciprocal, legally binding side letters with Australia, Brunei Darussalam, Malaysia, Peru and Viet Nam. In the case of Australia and Peru the side letters mean the ISDS provisions do not apply; and for the others, that ISDS would require the New Zealand Government’s explicit consent to proceed. These countries together account for more than 80 percent of our inward investment from CPTPP countries overall.

41. NZIBF sees value in continuing to provide appropriate protection for investors in relation to non-discrimination, control over investments, minimum standards of treatment and protection from unjustified expropriation. In relation to inward investment, NZIBF concurs with the Government’s view that the chance of a successful challenge to New Zealand under ISDS remains very unlikely provided the the New Zealand Government continues to deal fairly with foreign investors. CPTPP contains high-standard provisions which will preserve the Government’s continuing right to regulate in the public interest in the areas of public health, the environment, education and other core government services, along with a number of other protections which limit the scope of ISDS (including the exclusion of investment agreements (contracts) and investment authorisations from the application of ISDS) as well as the costs of potential proceedings.

42.  NZIBF also notes the Government’s intention to exercise the right to restrict the applicability of ISDS to tobacco.

43.  In relation to outward investment NZIBF notes that the side letters the New Zealand Government has negotiated on ISDS mean that its application will not be uniform among all CPTPP trading partners.. NZIBF is also concerned that the side letters especially with Viet Nam and Malaysia have removed protections from future New Zealand investors in those markets.

44.  NZIBF welcomes the provision which ensures that government actions to accord more favourable treatment to Maori under the Treaty of Waitangi are fully upheld and safeguarded.13

Intellectual property

45.  Intellectual property was one of the most difficult areas of the negotiation of TPP. A range of the most controversial TPP intellectual property provisions were suspended in the negotiation of CPTPP. These included provisions on copyright terms of protection, extra protection for rights management information and technological protection measures, data protection for new medicines including biologics, and around patent term extension.

46.  NZIBF notes that only minor changes to existing policies in the area of intellectual property are now required by CPTPP. No change to New Zealand’s current laws, regulations or practice is required in respect of parallel imports, patents for software, patent terms for pharmaceuticals (except in so far as there are delays in the approval process), data protection terms for biologics or internet services providers’ liability for copyright infringement.

47.  In the area of purchasing of medicines, although TPP would have required limited procedural/administrative and transparency changes in respect of Pharmac, these provisions have likewise been suspended from CPTPP. Pharmac is no longer required to make any such changes and its purchasing model remains protected. (A number of remaining provisions reflect existing Pharmac processes and would not require specific action from New Zealand.) ISDS does not apply to decisions by Pharmac. For these reasons, and given the lack of changes to patents and data protection above, NZIBF finds it difficult to believe therefore that, as continues to be claimed by some, CPTPP may lead to an increase in the cost of medicine or result in other negative effects on the health of New Zealanders.

Next generation trade and business issues

48.  NZIBF notes that CPTPP contains a number of provisions which seek to make it a “next generation” or “21st Century” agreement. These include provisions relating to trade facilitation, competition, state owned enterprises (SOEs), small and medium sized enterprises (SMEs), the digital economy (including data flows and e-commerce) and regulatory coherence.

49.  NZIBF welcomes these provisions which, for the larger part, represent best practice in the Asia-Pacific region and which are already practiced in New Zealand. NZIBF notes that SOEs in New Zealand already operate along the lines required by CPTPP.

“Progressive” elements: Environment, labour, gender and SME provisions

50.  NZIBF welcomes CPTPP’s chapters on environment and labour and the fact that these provisions are subject to dispute settlement. These provisions should ensure that CPTPP is complementary to global efforts to raise environmental and labour standards. The adoption of these provisions poses little if any complication for New Zealand but will be of significant assistance to CPTPP’s developing members to improve performance in these areas. NZIBF particularly welcomes the provisions related to the elimination of fishing subsidies and also the market access improvements for environmental goods and services which build on APEC and WTO initiatives.

51.  Along with these provisions around labour and the environment, NZIBF welcomes the emphasis on other “progressive” elements such as those intended to foster the participation of SMEs in trade (noted above) and the provisions emphasising the importance of women’s economic empowerment.

A living agreement

52.  NZIBF welcomes provisions in CPTPP which seek to make it a“living agreement”. These are important as business models in the region continue to change and evolve.

53.  NZIBF notes also that a number of economies have expressed interest in joining CPTPP at a later date.14 These include Korea, the Philippines and Thailand. The UK has also discussed the idea of joining. As future accessions occur this provides an opportunity to improve the current market access and other outcomes in the future. The prospect of new accessions increases the attractiveness of CPTPP as a pathway and template for broader liberalisation in the Asia-Pacific region leading ultimately to a future Free Trade Area of the Asia Pacific.

54.  NZIBF believes that CPTPP’s functioning and broader vocation would be assisted by the establishment of a permanent Secretariat to advise the Trans-Pacific Partnership Commission as the governance body for the Agreement15 and, since New Zealand already acts as Depositary for the Agreement, recommends that the Government pursue the opportunity of hosting such a Secretariat in New Zealand.

Recommendations to the Foreign Affairs, Defence and Trade Committee

55.  NZIBF recommends that the Committee:

1. note the NZIBF’s support for the ratification and implementation of the CPTPP Agreement based on the agreement’s importance for regional economic integration, trade and investment growth and its overall positive contribution to the economy
2. approve NZIBF’s request to be heard in support of this submission.