Trade and the Rural Sector: if not TPP, then what?

ADDRESS TO 16^th MARKETING TO THE RURAL SECTOR CONFERENCE  

AUCKLAND, 15 AUGUST 2016

STEPHEN JACOBI, EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

It’s good to be with you today.

In case anyone hasn’t noticed, there’s an election in the United States and this has caused us to rethink the content for my address.

I’m still going to talk about the Trans Pacific Partnership, even if the prevailing winds are against the early ratification of this agreement right now.

I aim to keep the flame of hope alight, not because I cling to an idea whose time never came, but because, whether or not TPP as we know it today is finally ratified, the important issue of devising fairer and more effective rules for global trade and investment is not going to go away.

I’m speaking to you today on behalf of the New Zealand International Business Forum, an organisation which, as you see here brings together leaders from the rural economy to promote New Zealand’s connections into global markets.

Those rules are important to the rural sector because your prosperity and future is directly linked to the global economy.

And like the rural sector New Zealand as a whole depends on international trade and investment for our economic security and social progress.

The world today is more inter-dependent than ever before, although that very notion of inter-dependence is under threat today from political demagogues and backward-looking protectionists the world over.

Some of them even live in New Zealand!

So I hope to cover several things today.

I’d like to bring you up to date with where we are on TPP.

I’d like to recall why TPP is still fundamentally a good idea.

And I’d like to consider what options there are for us if TPP does not proceed.

Where are we now? 

While TPP has taken six years or more to negotiate, it has been only six months or so since the signing in Auckland and the US electoral conventions, which appear, at least in the view of some, to have consigned TPP to the altar of false dreams.

TPP has undergone a fair amount of demonising in recent weeks, but at its simplest level, TPP is really a debate about how economies like New Zealand connect with the rest of the world – and under what rules.

For some larger economies like the United States, there is the possibility of turning their back on the rest of the world, at least for a time.

But those same options do not exist for New Zealand.

The rural sector knows only too well we can’t eat all we produce, we can’t make all the things we use in everyday life.

Trade brings you your job and your livelihood.

Trade brings you the car you drive, the medicines you take and the clothes you wear.

If we want to see more money spent on transport infrastructure, new generation medicines or free tertiary education, then trade is the way to pay for it.

But trade today is changing.

Because like the world as a whole business is also becoming increasingly inter-dependent and integrated.

The way of doing business is changing.

It’s not just the I-phone or the 787 Dreamliner that today are made in the world, not just in one country.

It’s not just that a new world of e-commerce and digital technology is upon us.

Change is also profoundly felt in the primary industries.

Think of Fonterra operating farms in China, being one of the largest exporters of dairy products from the United States, establishing processing operations in Europe.

Think of Zespri becoming the importer of record of kiwifruit in China, investing in growing fruit in Korea, entering into joint ventures in Italy.

Think of the new role played by retail distributors whose customers want to know increasingly more about the provenance and quality of the products they buy.

This is the new world of global value chains and networks that TPP seeks to facilitate.

Today more than ever before doing business needs to be faster, lower cost and seamless across multiple economies and jurisdictions.

That’s the 21^st century agenda that TPP tries to advance.

To come into effect TPP requires members representing 85% of the area’s GDP to ratify – these means both the United States as well as Japan.

Eight of the twelve parties including New Zealand have commenced the ratification process.

Four parties – the US, Canada, Chile and Brunei – have yet to get started.

President Obama is keen to see the TPP implementing legislation passed by the existing Congress in the ‘lame duck’ session after the elections on 8 November and before a new Congress and a new Administration take office on 20 January.

Once the President sends the treaty text to Congress, which he may do at any time, under terms of the Trade Promotion Authority, the Senate and House must both have a vote up or down within 90 days.

US politicians on both sides of the House say they have problems with TPP.

Some – on both left and right – hate the whole idea of trade, which they wrongly accuse of exporting jobs and hollowing out the domestic economy.

Others, mostly on the left, think TPP goes too far in entrenching property rights for pharmaceutical companies and giving new rights to foreign investors.

Others, mostly on the right, think TPP doesn’t go far enough in terms of intellectual property, tobacco and financial services.

Everyone seems to want to do something about so-called currency manipulation, except American currency manipulation of course.

But here’s the key point:  TPP, after six or more years of exhausting negotiation, represents a careful balance – not perfect by any means, but the consensus reached between the twelve parties.

TPP is not the end of the story for the quest for more effective trade rules – in some senses it is only the beginning of a much wider initiative to create a new framework for trade and investment in the Asia Pacific region.

That’s why there is so much riding on TPP and why, even in the face of what must appear unsurmountable odds, TPP is a good idea which will simply not go away.

Why is TPP still a good idea? 

TPP once implemented would link New Zealand to the eleven other member economies representing 36% of the world’s GDP, markets taking over 40% of our exports and 812 million consumers.

Some of these markets we already have good trade arrangements with; others like the United States and Japan, we do not.

TPP stacks up very well for New Zealand.

First, TPP would advance New Zealand’s economic interests by opening up new markets especially in the five economies with which we do not already have free trade arrangements – the United States, Japan, Canada, Mexico and Peru.

Over time tariffs would be reduced and eliminated on New Zealand’s primary export products – meat, horticulture, wood, wine and seafood – as well as manufactured products including processed foods and agri-tech exports.

Attention has been focused on the TPP outcome for our major export product – dairy.

That outcome is not as good as it could have been, but dairy would benefit from some new if limited access in the United States and Japan.

Beef to Japan is another good example of an imperfect outcome, which delivers benefits to New Zealand.

The Japanese beef tariff would drop from 38.5% to 9% – not zero admittedly– but it would put New Zealand on a level playing field with Australia, which has an FTA with Japan.

Without TPP, Australia will steal a march on us in the Japanese market.

TPP is not just about tariffs – just as the rural sector these days is not just about producing basic commodities, but is intimately concerned with adding value to volume, complementary services, intellectual property and investment-heavy innovation including through an increasing participation in the digital economy.

TPP addresses all of these elements.

TPP includes disciplines relating to non tariff barriers which today, as tariffs come down, are even more problematic for exporters, and risk eroding the returns to the rural sector of the trade that takes place.

Nor is TPP just about goods – a range of measures to open services markets and are designed to assist our services exporters in sectors like consultancy and education, as well, of course, as services related to agriculture and food processing.

A second advantage lies in those rules for trade and investment that TPP puts in place.  

The rules cover all aspects of business from flexible rules of origin for goods, to those rules for services and investment, intellectual property, state owned enterprises, customs co-operation, e-commerce and the digital economy and issues relevant to small and medium sized business.

TPP, for the first time in a plurilateral agreement, contains enforceable disciplines on the environment and labour, which would improve sustainable development and good work-place practices again especially among TPP’s developing members.

The environmental disciplines contain a commitment to better conservation practices and to the elimination of fishing subsidies.

The labour disciplines uphold worker rights enshrined in a number of ILO conventions.

The third big advantage of TPP is that it provides better protections for foreign investors while preserving governments’ ability to regulate in important public policy areas.

There has been extensive discussion about TPP’s provisions on investment.

But here’s the thing – New Zealand needs more, not less, foreign investment to expand the capacity of our domestic industries to develop world class enterprises of scale and to add value to volume.

Those same enterprises including in the primary sector also to need to invest more overseas to get closer to their customers and to connect to global value chains and networks.

So much as in all the other FTAs New Zealand has signed in recent years including with China, ASEAN and Korea, TPP seeks to ensure a minimum standard of treatment to foreign investors and the right to seek compensation when investors’ property is expropriated.

The latter of course is the investor state dispute settlement or ISDS that often figures prominently in criticisms of TPP.

TPP and ISDS do not require economies to change their legislation and do not override domestic sovereignty.

In fact TPP significantly improves on past practices by raising the threshold for taking cases, creating a clear set of exemptions for public policy and increasing the transparency of the process.

Actions to protect public health, the environment, the Treaty of Waitangi and a range of other public policy measures are all clearly safeguarded.

Tobacco control measures are also excluded.

In short what TPP should do is make it safer and more predictable for New Zealand companies to invest overseas, and for foreign investment to flow with confidence to capital-thirsty areas in the New Zealand economy.

The fourth and final advantage from TPP I want to highlight is that very little policy change will be required in New Zealand to implement this agreement.

That’s because most of TPP’s disciplines already form part of the policy approach in New Zealand.

In one area only – intellectual property – will change be required but the impact should be marginal.

For the record – there is no change required to patents for software, parallel importing or use of the Internet.

The role of Pharmac will not change; New Zealanders will continue to have access as today to new generation medicines and the price of medicine is unlikely to increase as a result of the agreement.

In one area – copyright – major change is required:  the copyright term will be extended from 50 to 70 years after the death of the author or first release of a movie or song.

This brings New Zealand practice into line with most other economies.

And, looked at from the other perspective, for the producers of knowledge-intensive content – the innovators, the smart thinkers, the people who can add value to agriculture, food, agri-tech and other parts of the economy – the intellectual property outcomes give them greater certainty and opportunity across the Asia-Pacific.

To recap then, the benefits of TPP would be four-fold:

• TPP would convey measurable trade advantages for primary exports as well as other goods and services for New Zealand
• TPP would put in place an updated and extensive set of rules for trade and investment
• TPP would improve the climate for inward and outward investment
• TPP would require little policy change in New Zealand, with the major change being an extension to copyright term.

All of these elements combined together should help to take the ‘grit out of the machine’, help trade and investment to flow, provide new opportunities for New Zealand entrepreneurs, producers and consumers, and ultimately, raise living standards and help to safeguard the prosperity we currently enjoy.

And that is as true for the rural sector, if not more so, than the rest of New Zealand.

Now some will continue to argue that the risks of TPP outweigh the benefits.

We believe that the benefits are substantial and that any risks have been well and truly mitigated by the checks, balances and safeguards built into the agreement.

And we need to remember the counterfactual: can New Zealand and the primary industries seriously afford to stand aside from an agreement with eleven partners representing 36% of the world’s GDP, over 40% of our exports and 812 million consumers?

If not TPP, then what? 

If this seems compelling from a New Zealand perspective, it is clear it does not look that way in the United States.

If we set aside the political rhetoric for a moment, we need to remember that TPP was initiated under President Bush and has been completed under President Obama.

It has not been thrust upon the American people – it has been negotiated by their representatives.

But the lame duck strategy may not work given the polarisation around this issue in the election campaign.

If so, then it will be for a new President and Administration to address the critical economic and foreign policy issues behind TPP.

There are three broad scenarios.

One is that TPP will be completely abandoned and the United States will turn its back on decades of American-led globalism with all the implications for its interests this implies.

The other is that there will be an attempt at re-negotiation.

This will not be easy – why should any of the TPP partners do so when they have been so grievously let down before?

It will also not be quick – it normally takes an incoming Administration the best part of  a year to appoint a US Trade Representative and other key personnel.

The last scenario is that the incoming President will make the calculation that TPP is too good to pass up and will submit the treaty to Congress.

This scenario – the best from the New Zealand perspective – cannot be totally dismissed but has been rejected by both Presidential candidates.

Any delay in moving forward with TPP will also give rise to important shifts in global trade policy.

Other negotiations – like the Regional Comprehensive Economic Partnership or RCEP, under negotiation between 16 Asian economies including New Zealand – will take on new importance.

But equally, we cannot be confident that the outcome of RCEP would have the same high level of ambition as TPP.

Other groupings may also emerge but none of them are likely to include the United States.

The very issues and concerns that fuelled the development of TPP will undoubtedly find an outlet but this will take time – time, unfortunately, that will translate into lost opportunities.

Conclusion

What will not change is that trade will continue to be the driver of New Zealand’s prosperity, and a fundamental component of the health of the rural sector.

 

We will need to continue to connect with the rest of the world and the rules for this engagement will remain vitally important for us.

 

Things may not be looking good for TPP but it is too early still to declare the battle lost.

We must continue to put to our American and other friends that turning aside from TPP would represent a significant threat to all our interests.

For if TPP is not the answer, then we will be faced with the daunting task of finding other options.

But find them we must, and especially so for the rural sector, as for New Zealand as a whole.