The Global Future: Challenges to Security, Stability and Sustainability

by | Dec 12, 2016 | Trade In The News

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Address to NZIIA Conference, 21 November 2016

Philip Turner, Director of Global Stakeholder Affairs, Fonterra

One of the striking things about New Zealand in recent times has been the deepening disconnect between our traditional security partners, and the trading partners that increasingly underpin our prosperity.

50 years ago security and trade went hand in hand. Then things started to change with the UK joining the EU. NZ had to seek new partners, new arrangements, and new friends.

Meanwhile the post-war system – GATT, WTO – moved agonisingly slowly on opening up agricultural markets

And provided cover for our traditional friends to further entrench protectionism in their markets.

Think butter mountains, wine lakes.

Things have greatly improved over the last 30 years

Partly thanks to some welcome – though very slow – reform in the EU and US.

But also due to the opening of massive new markets on our doorstep in Asia which really want, and are prepared to pay good money for, our products.

China’s entry to the WTO was arguably the biggest event in trade policy in last half century – and overshadows the importance of the NZ/China FTA

The reality of the last 20 years has been the contrast between the closed and protectionist economies of Europe, North America and Japan, and our new trading partners in the east

China and most of Asia (with the exception of India), as well as much of the developing world, are more open to what we want to sell than our traditional friends.

At least in the primary products that still make up for more than half of our exports

Less than 3% of our dairy trade goes to the EU today

And now, to cap it all, our traditional friends, who built the post-war trading system, seem to be losing their appetite for globalisation.

Trump, Brexit, TPP.

So NZ finds itself in a very challenging place. Axis of tension indeed.

Maintaining the balance between old and new friends feels increasingly uncomfortable.

What can we usefully say and do about this from a business perspective?

First, business today is increasingly complex. That creates prosperity but also vulnerability.

In the 21st century trade is no longer not binary – exports and imports – but is increasingly occurring through global value chains.

Take galacto-oligosaccharide (or GOS) by way of example: Lactose produced in the Netherlands – exported to our JV in UK where it’s converted into GOS – exported to a Fonterra plant in Australia where it’s blended with NZ ingredients to make infant formula – then exported to China and Asia.

Each step of that chain is enabled by open markets and stable operating environments.

We make money from that complexity. Consumers benefit.

An attack on the stability or openness of those arrangements will, other things being equal, make all of us poorer, and less safe.

You can see why at a very basic level business is fearful of economic nationalism. It might – and usually does – drive markets up in the short term.

But it’s usually at the cost of a bigger, deeper and sometimes catastrophic fall later on.

Even before Brexit and Trump, we knew that the world has been shifting in that direction.

Global trade growth is now – unusually – below the level of GDP growth.

In 2015, global trade grew by only 2% – a rate that has only been seen twice in the past five decades of global trade.

The WTO and OECD report that protectionism measures have been on the rise for some years.

 There is a feeling out there that we are witnessing a seismic shift.

Maybe in relative terms, but seismic nonetheless.

Some people are inclined to look at the number of FTAs that have been signed in the last decade and declare victory.

My view is the opposite.

FTAs themselves – because they reflect the binary way in which we used to view trade – are themselves a second-best means of expanding trade.

Done well – as in the NZ-China FTA and CER – they are very beneficial.

Done badly they can do more harm than good.

New Zealand now finds itself a ‘shag on the rock’ in the global trading environment.

We are geographically isolated yet heavily dependent on trade.

Yet the world seems to be headed in a more inward looking direction.

And we are an increasingly lone voice in advocating trade liberalisation.

Even with all the negotiating success NZ has enjoyed, we now have FTAs with markets that cover 52% only of our current exports.

In the dairy world I know best, only 13% of global dairy demand is open to trade in the sense of tariff rates of 10% or less.

This lack of depth in agricultural markets in turn means generally more volatility, and more exposure to disruptions, including regional instability, economic sanctions, and political change.

So far from reaching a point of satisfaction with our FTA coverage, we face a world that is increasingly uncertain with regard to both policy direction and trade flows.

There is no doubt that there will be opportunities from these changes as well as risks.

But the bigger need right now is to find new means of growing and securing market access for New Zealand goods and services and building our connectedness offshore.

How do we do that?

Three words: be nimble, creative and robust.

Nimble in being ever ready to seize opportunities and mitigate risk where they present themselves.

TPP is under a heavy cloud. We don’t know if it will survive – or mutate into some new son-or-daughter-of-TPP.

We need to look for any and all opportunities – whether new FTAs, accelerating ones under discussion, or finding some new recipes to break the log-jam.

Creative in the best NZ tradition. Our negotiators have a great record in getting big guys to work together in ways that help us – think of how NZ kicked off what became TPP, or how we secured the four firsts with China.

And finally robust: in the sense of making sure people stick to the rules we already have.

Let’s look hard at more dispute settlement through the WTO.

And let’s look hard at reducing the ridiculous number of non-tariff barriers around the world.

Which the NZIER tells us cost the NZ economy over $5bn a year.

It should be a truism that open, inclusive and rules-based trade diversifies and strengthens economies, improves people-to-people connections, and ultimately drives national and regional stability.

But it is less understood that trade is also a key enabler of food security.

Food security – as the name suggests – is a critical component of security itself.

By 2050, 9 billion people on this planet will require sustainable nutrition.

Trade allows food to be produced where it is most economically and environmentally advantageous and sent to where it’s needed most.

Conversely, protectionism protects local supliers at the expense of the wider communities.

It makes consumers more susceptible to production shortages, which often leads to political instability.

It is typically a luxury of richer countries.

It almost always punishes the poor.

Protectionism also leads to poor environmental outcomes, as production is allocated to areas of highest political demand, not what is best for the planet.

This takes us back to what you will find is a deeply unsurprising conclusion for a NZer.

In an uncertain, dynamic and even alarming world, rather than picking friends from one side or the other, NZ will instinctively revert to our traditional and deep-seated preference for multilateral – ideally global – solutions and institutions.

We still love the WTO, despite all the competition from competing regional and international bodies.

We would love to see the WTO make a comeback, ideally with NZ helping that to happen.

I am personally confident that our future will very largely evolve in the context of some sort of open, rules-based multilateral trading frameworks.

But what is not clear is whether these new arrangements will continue to hew quite so strongly to the Bretton Woods institutions and approaches that have provided the foundation of international trade since the second world war – the GATT, the WTO, FTAs themselves.

Or whether we will collectively develop something different. Something perhaps much more Asian in style, and approach. Perhaps something Chinese.

That would be interesting.

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