THE IMPORTANCE OF TRADE AND INVESTMENT FOR GROWTH

PRESENTATION TO THE UNIVERSITY OF AUCKLAND MBA PROGRAMME
3 AUGUST 2019
by Stephen Jacobi, Executive Director
NZ International Business Forum, NZ China Council, Jacobi Consulting Ltd.

THE IMPORTANCE OF TRADE AND INVESTMENT FOR GROWTH

Thank you for the kind invitation to be with you today.

It’s always a good time to talk about the trade, investment and growth, but today we do so against a backdrop that is decidedly stormy.

Something must have got into the water to make the world become so crazy about trade in the last few years.

What we are seeing are some deep-seated problems in the global trading system that have existed for a long time but have now come to a head.

It wasn’t that long ago that we had gridlock in the streets of Auckland with protestors saying all sorts of astonishing things about the Trans Pacific Partnership (TPP) – some years later things are quieter on the street, but the public debate about trade and globalisation and whether the benefits have been shared adequately has certainly not gone away.

At the global level, the storm clouds are certainly gathering.

A President in the land of the free and the brave prefers tariffs to trade and provokes a conflict with the world’s second largest economy.

That great life-boat for international trade – the World Trade Organisation – is now on the rocks and taking on water.

It makes you wonder whether in the current environment concluding trade agreements is at all possible.

But trade negotiators are eternal optimists and they carry on their work in all weathers – who here for example has heard of the Regional Comprehensive Partnership (RCEP) coming soon to a TV screen near you?

In this complex environment it’s hard to know who your friends are.

China has certainly emerged as a friend with benefits, but it’s important to ask if there are strings attached.

That’s the context in which New Zealand companies are doing business around the world today, a context which is hard to predict but which seems to be getting even more difficult.

I’d like to unpack this a little with you today and I look forward to the conversation that will follow.

I’m speaking from the perspective of the NZ International Business Forum, which brings together leaders from our largest internationally oriented companies and sectors, and from the NZ China Council, which seeks to build strength and resilience into the relationship with China.

Why trade anyway ?

The question “why trade anyway?” makes me think of that  joke we used to tell in primary school.

Why did the chicken cross the road?

I need hardly remind an MBA class that the chicken saw greener pastures and richer pickings on the other side.

In the same way, to put the issue in its simplest form, we have stuff to sell and other people want to buy it.

It’s not that complicated, but economists will give you a more sophisticated answer.

Trade enables specialisation in production, which expands opportunities for competitive firms in the economy, and leads to growth and employment.

In New Zealand some 620,000 jobs are linked to trade, with many more indirectly linked.

Trade also enables resources to be deployed to the most competitive sectors – we tend to export the things we do best and import the other stuff (although that doesn’t really account for intra-industry trade – we export Chit-Chats but import Tim-Tams).

Trade benefits consumers because they have greater choice (at least in chocolate biscuits) and prices are kept lower.

All that is marvelous but for many today it is not quite enough.

There is an entirely reasonable concern about making sure that trade does not result in a race to the bottom – that workers’ rights are safeguarded, that the environment is protected, that indigenous people’s rights, encapsulated in our case in the Treaty of Waitangi, are upheld.

The Government’s new “Trade for All” initiative is all about ensuring that what economists somewhat huffily call the “externalities” of trade are fully taken into account in trade policy and trade agreements.

I think this is entirely possible – trade certainly needs to regain the level of public confidence and bipartisan political support it once enjoyed.

That’s because trade makes possible the sort of economy we have become accustomed to and the lifestyles we enjoy – our domestic market is small, we cannot produce all we need for everyday life and we certainly can’t eat all the food we produce.

It takes a lot of kiwifruit to buy a plane, so we need to develop a range of globally competitive industries to keep this show on the road and trade and open markets are vitally important to us.

The trouble is not everyone around the world sees things the same way.

Exporting from New Zealand remains frustrated by a range of tariffs and increasingly non-tariff trade barriers in all our external markets.

That includes those who style themselves as the most open.

In the land of the free and the brave

I need at this point to make a disclaimer.

I am a fan of America.

I spent the best part of ten years as Executive Director of the NZ US Council, working to lift our relationship with the United States to a new level and I am proud of what we achieved.

New Zealand and the United States share fundamental values about democracy, human rights and the market economy, although the different way we choose to demonstrate these values in areas like trade, climate change and guns is also clear to see.

The best part of America is its extraordinary creativity, innovation and entrepreneurship.

The worst part of America is its politics – despite its continual fascination for us.

The current Administration in Washington is taking the US in a radical new direction – away from its traditional global leadership on trade, to quite a different place.

Protectionism is replacing market openness, bilateralism is replacing multilateralism and the foundations of the international trading system, which America itself once helped to create, are being shaken.

That has enormous implications for a small, open and outward-looking economy like New Zealand.

The US departed the “fellowship of the ring” in the Trans Pacific Partnership which has nonetheless continued as the Comprehensive and Progressive Agreement on Trans Pacific Partnership – a veritable mouthful of an agreement.

Tariffs have also been applied on bogus “national security” grounds to New Zealand’s small exports of steel and aluminium to the United States.

On the other side of the ledger, it has to be admitted, the US is under the Kiwi Act in the process of making it easier for NZ investors and entrepreneurs to gain visas to work in the United States.

But the real risks of this change in direction can be seen very clearly in the trade war between the United States and China.

Tariffs have been applied to around $500 billion in two-way trade.

Just today more tariffs were promised on a further $300 billion of imports from China into United States.

The President has already doled out $12 billion in trade-distorting subsidies to American farmers to compensate them: he has also threatened to dump US agricultural surpluses on world markets.

Markets have been unnerved, both China and US economies are already hurting and are set to hurt a lot more.

China has responded in kind but China’s options for tariff retaliation are certainly more limited.

On the other hand  US tariffs applied to remaining imports from China are likely to hit consumer goods, which will affect the US consumer and voters a lot more than they do now.

It’s no wonder an air of pessimism has settled over the outlook for trade and global growth.

Just over a year ago, trade was predicted to grow by 4.4% in 2019, but the most recent forecast downgrades that to less than 2.6%.  

The IMF has twice this year downgraded its 2019 growth forecasts, from 3.5 percent at the start of the year to 3.2 percent by July.

Supply and value chains, the lifeblood of global commerce today, are being disrupted.

This is not to say of course that there are not issues that need to be addressed in China.

Indeed, New Zealand shares some of the American concerns about the role of Chinese state-owned enterprises in the economy and the sometimes-patchy implementation of intellectual property laws.

But our experience of China has been fundamentally different.

In 2008 China gave us precisely what the United States has never been willing to give – a free trade agreement.

Thanks to the FTA, China has now emerged as our largest trading partner – we export twice as much to China today as we do to the United States.

We continue to face challenges in the Chinese market – and have been trying to upgrade our FTA to deal with some of them, I’ll talk about that more in a moment.

When it comes to the trade war, what we know is this: using increased tariffs to promote market openings in other areas is a blunt instrument which does far more harm than good.

Our strong preference would be for the United States to join with others and deal with problems through the World Trade Organisation (WTO).

Meanwhile in Geneva

Unfortunately today the WTO is in deep trouble.

The WTO is a binding agreement between governments, which through negotiation establishes a set of rules for global commerce and a system for settling trade disputes.

It once seemed inconceivable that the WTO would not form the unshakeable foundation of the global trading system, but today the WTO is in a parlous state – its negotiating functions, although not completely exhausted, have been marginalised, as countries resort to bilateral and plurilateral agreements, and now the dispute settlement system is also under threat.

New Zealand has always put a lot of store in the WTO and rightly so – a small country needs those global rules and an independent referee if something goes wrong.

New Zealand can point to a number of victories in the WTO – finally securing predictable access for butter, beef and sheepmeat to Britain and the EU, prohibiting the use of hugely trade-distorting export subsidies for agriculture, successfully challenging the giants of world trade including the US, EU, Canada, Australia and Indonesia when their actions have been contrary to world trade law.

The US has however advanced a number of concerns about the way the WTO operates, most particularly in relation to dispute settlement.

New Zealand shares some of these concerns but we disagree on the way the US is choosing to drive action on these issues.

The US is blocking the appointment of judges to the WTO Appellate Body, the system’s upper court which hears appeals – this will render the whole system unworkable before the end of the year.

New Zealand, and our Ambassador in Geneva, David Walker, is in the thick of trying to find a solution to the problem, but it is not clear whether the US is genuinely interested in an outcome or simply prefers to blast open the whole system.

New Zealand would have cause to worry about this at the best of times, but the situation is even more delicate right now as we face a big looming dispute – one with the European Union and Britain about the future of those tariff rate quotas for butter, beef and sheepmeat we thought had been long ago been made secure, but which have now been thrown into question by Brexit.

Not to mention other possible disputes which might arise from the trade war.

That is, if there is a dispute settlement system at all under which to litigate.

Two and a half cheers for RCEP !

I asked earlier whether it is still possible to conclude trade agreements.

Certainly it is not for want of trying – RCEP negotiators have been at it for five years and have held 25 rounds of negotiations.

Whether you’ve heard of RCEP before or not, you may be about to hear a lot more – depending on whether Ministers meeting in the next few weeks can get the agreement over the line.

The parties to RCEP are the ten-member states of the Association of South East Asian Nations (ASEAN), plus Australia, China, Japan, India, New Zealand and South Korea. 

This group makes up 39% of global GDP and covers nearly half the world’s population, so this is a very big deal indeed and much larger than CPTPP.

New Zealand already has FTAs with all the members of RCEP, bar one:  the fact that RCEP includes India is a major opportunity for us.

Why negotiate new FTAs when we already have them?

There are really two answers for this – first to expand the quality of the agreement by including new commitments and disciplines and second to expand the coverage by including new partners.

You may have heard of the “noodle bowl” of free trade agreements which presents a rather confusing picture for businesses.

RCEP is an opportunity to bring a number of our other trade agreements together and to get India on board.

But that’s easier said than done.

When launched five years ago, RCEP was styled as “modern, comprehensive, high-quality and mutually beneficial economic partnership”.

Unfortunately negotiators have struggled to live up to that ambition.

Some economies including India are simply not prepared to cut tariffs especially in what they consider to be “sensitive” industries like agriculture.

Rule-making has also proved difficult in areas like services, rules of origin, investment and intellectual property rights.

Ministers have earlier committed to concluding the negotiation by the end of this year.

That would be a considerable achievement but if it is done so at the expense of the substance of the agreement that could prove difficult for New Zealand in other negotiations underway including with the European Union.

New Zealand does not have a lot to “give” in these negotiations – our small market is already largely open: that’s why we favour these “plurilateral” negotiations with a range of partners.

There seems little likelihood of opening up the Indian market without RCEP so we have a lot riding on a successful outcome.

Is China our new BFF?

One country which did open up its market to us in 2008 was of course China.

It did so because it was keen to demonstrate that it could negotiate with a developed economy and probably because it judged any economic “threat” posed by New Zealand was small.

No-one could have foreseen how quickly the Chinese economy would grow over the last ten years or that China would be today our largest trade partner and second largest investment partner.

Today, China is an economy that cannot be ignored – China is not only the world’s second largest economy, but it actually wants to buy the things we have to sell and in increasing quantities.

As a consequence of its economic growth, China is also making its presence felt in political terms, sometimes positively as in its support for the Paris Climate Change agreement, sometimes not so positively as in its continuing development of disputed islands in the South China Sea.

New Zealand and China have been able to develop what is termed a “comprehensive strategic partnership” but our two countries have quite distinct views on issues like human rights and public freedoms.

That requires some deft handling in today’s geo-political context and especially when it comes to trade.

Our FTA with China, while still an effective basis for doing business, needs updating to bring it into line with other agreements China has signed and to address contemporary trade challenges.

Negotiations have been underway for some years now but some stumbling blocks have appeared – China is unwilling to liberalise the remaining tariff barriers for dairy products and wood and New Zealand is unwilling to open up further New Zealand’s investment regulations to China.

At this point it remains to be seen whether a robust, commercial outcome can be achieved beyond a political photo-op conclusion.

Whether we upgrade the FTA or not, New Zealand has a lot of interests to protect in China.

Much has been said about whether in the current global climate we need to choose between China and the United States.

I think that is the wrong question.

In fact New Zealand already chose long ago to be an open, liberal, market democracy and that is not going to change.

If we have a choice to make, it is to maintain an independent foreign policy and to maintain close, co-operative relations with both China and the United States.

Having our cake and eating it too is a long-standing principle of New Zealand’s foreign policy.

It means we can develop defence relations with the United States while remaining strictly nuclear free.

It means we can participate in China’s Belt and Road Initiative while maintaining our own approach to infrastructure development in New Zealand.

There is however another choice to make – that is about choosing to expand our capacity to do business with China by making sure we have the rights skills to do so, especially in terms of cultural understanding and Chinese language.

We also need to work to broaden the relationship beyond trade – climate change co-operation for example is an area where we can both work closely together.

The more broadly based our relationship can be, the less risk it entails.

Conclusion

I’ve painted a rather sobering picture.

These are more than “interesting times” for trade and these issues may well affect the bottom line of New Zealand companies both big and small doing business around the world and consequently our nation as a whole.

That’s because, as has been said before, trade is the lifeblood of the economy – it’s the returns from trade pay for hip replacements, roads and bridges and pre-school education.

Whether it’s our highly competitive agricultural exporters, our innovative SMEs, the tech-savvy digital and creative sector – all of these rely on strong, open and secure global markets.

And, most important of all, trade provides around 620,000 jobs with many more indirectly linked to trade.

The external environment for New Zealand business is always challenging which makes it all the more necessary to try to understand what is going on, how it might impact and how the worst effects can be mitigated.

Here’s my final point: things may well get rougher in the months and years ahead !

That’s why you’re here and why we need capable, educated, forward-thinking executives like you all to lead our businesses into the future.

Now I’m looking forward to hearing your views about how best to get that chicken safely across the road !