Geopolitics and New Zealand - putting the politics back in political economy

Thank you to the Canterbury Employers’ Chamber of Commerce and Export New Zealand for hosting Global Connections and for giving me the opportunity to speak today. 

A privilege to be speaking today with Ruth Richardson and Malcolm Johns.

The brief I received for today was broad – to cover in 10 minutes geopolitics (the world and what it means for New Zealand exporters), global trends on trade, and the outlook for New Zealand’s export economy, including on Free Trade Agreements and longer term emerging markets, current and future trends in environmental sustainability, trade, future foods, and transition to a zero net carbon economy. 

That was rather too much for 10 minutes. 

What I will attempt to do today is to try and explain why Geopolitics is back - to put a bit of politics back into Political economy. 

I’ll cover:

• The main political influencers and how they look from New Zealand
• The main general disruptors and international trends that affect government and business and how some of these trends inform the current New Zealand trade and economic agenda.

That will still leave a range of topics uncovered but as a panel we can possibly address those further during our round table.

Can I also take the liberty of pointing out a few audience members:

• Martin Harvey (New Zealand’s Chief Negotiator on the FTA with European Union and a WTO expert)
• Mark Trainor (Principal Adviser on trade and lead negotiation on the Regional Closer Economic Partnership of Asia, the second of the mega FTAs covering Asia, involving India and China.  Mark is also Lead Negotiator for the India FTA and one of the key architects of the refreshed trade policy agenda).
• Alana Hudson (who has services, investment and digital responsibilities across trade negotiations)All those who pay any attention to the media and global affairs will appreciate that we are in a period of disruption.

Politically, the orthodoxies of the post 1991 Cold War world are being challenged by new power balances, in particular as China and the United States work through a new modus vivendi, and as the United States looks to amend the international trading system to accentuate its strengths and protect its advantages.

Economically, and related to political balances, systemic and internal disruptors are affecting the international trading system that we have known since the conclusion of the Uruguay Round and the establishment of the WTO in 1995.

Since 2015, we have seen a 30 percent increase in trade restrictive measures.

And at the same time, we have a moving centre of economic geography as economic centres and population centres align in Asia.

Unusually in our history, many of the most disruptive elements internationally - and many of the opportunities - are being played out close to New Zealand.

We value many of the existing rules and are a participant in the structures that are being challenged by disruption.  And, as an open economy, with a quarter of our jobs dependent on exports, we are collectively affected by global changes.

Economically, New Zealand is located in the region of opportunity for the 21st century.  But it is a region that will experience continued strategic challenges as well, as large countries seek to benefit and capture the benefits of growth.

Three countries and one region may help ground this discussion:

• Clearly the United States, as the biggest economy in the world, is a key player.  The US is a vital partner for New Zealand and has been the foundation of the current international system since the Second World War. 
• A traditional Republican administration would follow an agenda based on strong defence, trade liberalisation augmenting the strengths of US industry, a “freedom” agenda, and pursuit of smaller government. 
• The Trump administration is not an orthodox Republican administration.  President Trump’s rise is personal but it is also based on broader trends in the United States that will be enduring beyond the current President and reflect internal political concerns around distribution and opportunity.  I’ll briefly elaborate on some of those broader trends and causes in a moment.
• An economically growing and strategically important China continues to fill an ever more important role in Asia, where it is the located power.  Since 2008, to mitigate its weaknesses as well as leverage its strengths, China has been more willing to utilise its economic resources to pursue its own economic and strategic initiatives, including those now being bundled as the Belt and Road.
• The US system has decided that China is its primary competitor. Ultimately China’s economic and security relations with the United States are pivotal to how global systems work and how they evolve. 
• Australia can sometimes be taken for granted in New Zealand but, as a $25 billion trading partner, it remains a fundamental anchor for New Zealand, including for smaller and consumer-led businesses. We remain extremely strategically fortunate to have a country that is a friend as our nearest neighbour.
• South East Asia is an important region for New Zealand economically and politically, with contested space in the South China Sea.  The countries of South East Asia are linked to the world trading order and facing similar disruptions as New Zealand and Australia.

All countries and regions face global mega trends that are consequential to businesses and governments and affect decisions.  I will highlight just three that are to the fore:

1/ Employment and mobility

The global workforce is increasingly mobile, which is a new reality for businesses and governments.

I’ll draw on another US example. In my discussions with American manufacturing associations, I was consistently told that the United States has more than 400,000 manufacturing jobs currently unfilled.  This is at a time when its government is talking about a crisis of manufacturing employment.  It could be as accurately seen as a crisis of worker mobility.

The US faces a challenge common to most developed economies: one of matching people, skills, and jobs and the consequential importance of such arrangements to superannuation, health and education provision.  This has political as well as economic implications.

2/ Impact of Technology

Market surveys in New Zealand identify technology as the biggest business and market disruptor.  This too is a global trend.

International energy markets are being transformed by technology, with the rise of renewables and shale oil and gas changing geopolitical relationships.  Technology now means that the United States is less reliant on foreign oil than India, China or Japan. 

Digitisation and automation meanwhile affects wages and employment, in developing as well as developed countries.

Automation is the basis of much of New Zealand’s current prosperity, especially in agriculture and horticulture.  Continuing to leverage smart ideas will be essential for New Zealand’s agricultural economy to deliver high returns to owners and investors.

Automation is also particularly important in Asia because industrial development has been the pathway to development in many countries, including China.

This broadening of wealth based on global tradeables has created new markets for New Zealand products, from Hong Kong to Bangladesh.

Looking forward, localised digitised technology could lead to greater manufacturing in developed economies (NZ or Ohio) or to large scale industrialisation without large scale job creation in Hyderabad or Harare. 

One of the consequences of this trend is that more economies with large domestic markets may seek to leverage investment into that market for job creation purposes as a condition of access.   This is already a characteristic of India-China relations, for example.  Such conditionality is a risk for smaller countries more reliant on trade for wealth creation.

3/ Impact of Geography

Digitisation is not causing the end of geography. Industry clusters, financial arrangements and availability, venture capital are all influenced by geography. 

Developing competitive business environments is a major focus for many countries.

Surveys tell us that when viewed from the rest of the world, New Zealand has one of the best business and security environments in the world, and that we display values such as integrity, fairness, and pragmatism. 

In diplomacy, New Zealanders are seen as constructive problem-solvers. International counterparts take us seriously. Our ideas get traction, and our influence generally outstrips our size and location.

In business, Canterbury stories like Icebreaker show that authenticity and traceability is being sought by affluent customers around the world.  In addition, fundamental values like product or food safety are valued by Synlait or ANZCO’s high end consumers in developing markets.

New Zealand businesses can use references to origin, without coyness or half apology.  This includes using digital methods that speak to your contemporary customers.

Unfortunately, the other reality of New Zealand geography, is that nothing yet has conquered the classic Kiwi requirement to reach out to distant customers in person.

Uncertainty

Trends and country competition means that we have all rediscovered uncertainty as a core element within international engagement.

Neither business nor government have the luxury of simply commenting on uncertainty: we both have the requirement to try and provide some understanding and leadership to succeed despite it.  

What does it mean?

New Zealand has benefited very substantially from the established international system and we will continue to work to preserve it.

In particular we have benefited very significant from open trading arrangements, as has the rest of the world, in macro terms at least. 

World GDP has grown substantially in times of relative peace and established rules.  China’s rise and India’s more recent development have occurred in a stable international environment. 

Specialisation throughout the world has seen new growth and new opportunities.  Like other economies, New Zealand produces more specialised products for international markets than we ever have.

In New Zealand we have 620,000 jobs dependent on export performance.

In the US and in most other larger markets the proportion of workers linked to trade is much lower.

That different balance between domestic and international markets, strong domestic growth, and low unemployment, are all reasons why the US government has the current political space to institute protectionist steps.

The key upcoming events in the US are domestic and political, not economic.  Mid-term elections in the House of Representatives and the Senate occur in November.

Despite the massive dollar numbers being bandied around, trade tariffs are not affecting a high proportion of international trade, yet. 

Less than 5 percent of Canada-US $630 billion per annum trade is impacted by tariffs, which shows the enormous size of some embedded trade relationships.

That may yet change, depending on the extent to which tariffs are extended on Chinese goods on 23 August as announced, and whether possible US general tariffs on autos are applied. 

International system

To summarise, the international system is being disrupted by large players within it that are looking to effect change to gain themselves relative advantage.

Consensus around international institutions and rules to govern trade has been shaken. 

It has rallied many countries in defence of institutions and structures that have not been getting the attention they require, in particular the World Trade Organisation, including some that have traditionally been relatively ambivalent.

It has reopened conversations about what the future trade system might look like.

And it has encouraged domestic reassessments of policy to cope with international disruptions, and to start to address the underlying causes of disruption.

Government initiatives

The New Zealand government's aim is to build a productive, inclusive and sustainable economy in turbulent times.  This is built around six specific elements underpinning foreign and trade policy:

1. 1. Support for current international rules as well as new initiatives that meet our expectations of openness, non-discrimination, and that deliver the predictability that New Zealand needs. We will continue to strongly support the fundamental importance of the rules based international order.
   2. Support for key international and regional architecture.  That means supporting foundation components of the international system: the UN machinery, international development banks, the World Trade Organisation –  so it can be reinvigorated and positioned to manage global disruption through dialogue and negotiation; while having a strong voice in regional organisations and negotiations as well.
   3. Support and investment in international public goods and encouragement to other countries to do the same.  We will be hosting APEC 2021; contributing in the OECD on issues from fish subsidies to tax avoidance; and bolstering non-traditional Trade Policy areas like the Commonwealth.
   4. We will be working deliberately to enhance relationships at all levels that give us the support we need to preserve our national positions and influence international changes.  It is this kind of investment that enables the delivery of improvements to businesses such as the passage of the KIWI Act expanding NZ business visa rights in the United States this last month.
      
      In the same vein we will continue to pursue trade diversification.  In trade terms this has been a long run game, with its roots extending back into the 1970s.  Our existing free trade agreements [with Australia, China, Chile, CPTPP countries, ASEAN through AANZFTA (the countries of South East Asia), the Pacific Islands, Chinese Taipei, Hong Kong, Thailand, Singapore and Malaysia] give our exporters assured access to a growing network of markets, and afford a degree of rules-based structural economic protection in a more volatile trade environment.
      
      MFAT is currently leading trade negotiations to expand trading options with
      • the European Union
      • the Pacific Alliance of South American countries (Mexico, Peru, Colombia, Chile)
      • the Regional Closer Economic Partnership of AsiaIndia
      • FTA upgrade negotiations with Singapore and China
      • And a second exploratory dialogue with Mercosur (Argentina, Brazil, Paraguay, Uruguay)
        
        In the future we will continue to emphasis open plurilateralism.  CPTPP is a leader in this area, the ratification of which will bring to 65 percent the proportion of New Zealand trade covered by FTAs.  We would like RCEP to have similar future expansion properties.
   5. Refreshing and extending our practical economic diplomacy, in three main areas:
      • Working directly with New Zealand Trade and Enterprise, MBIE, Ministry for Primary Industries and Export New Zealand to provide direct wrap around support New Zealand businesses onshore and offshore.
      • Extending practical online export tools like the Non-Tariff Barrier online Portal - which enables a whole of government responses to real problems brought to us by exporters on Technical Barriers to Trade (TBT) and Sanitary and Phyto-sanitary (SPS) issues and to which we have a firm commitment to reply within two working days! – as well as the online tariff finder services and – coming soon to a screen near you – a services finder;
      • And we are also working towards making some relevant offshore reporting more accessible and available to government agencies and business.
   6. Pursuing progressive and inclusive Trade for All is the latest important government initiative. Launched by the prime minister last week, it is aimed at shoring up and sustaining the social licence for trade and business and making sure our trade policy and agenda is genuinely fit for purpose. New Zealand is a trading nation and we always will be.  Under Trade for All, New Zealanders have a fresh opportunity to have a say. The consultations will explore how, where possible, trade disciplines can be used to address global challenges, such as environmental issues, labour rights and gender equity; and how the benefits of trade can be shared by all, including initiatives that support women, Māori, small and medium size enterprises and regional economic development.  Trade for All is very much designed to build the broader constituency for trade necessary for our future.

Business opportunities

At the end of the day, as Robbie Deans is famous for saying in the 1980s, you can train and prepare and then you have to play what is in front of you.
Successive governments have voiced the aspiration for New Zealand to be a high value, high income country in the world.

We have many of the key ingredients right to achieve export success.

1. 1. 1. • Successive governments have maintained sound macro-economic settings and taken prudent approaches to debt
         • Competitive interest rates
         • Low inflation
         • The NZ dollar is at a competitive historic level
         • A transparent and civil government – our political parties are constructive and collegial, and our politicians seek to make a positive difference.
         • A natural environment which contributes to branding in both developed and developing countries.

As a company, it is not possible to hedge in a single way against changes in the global environment

But you can take a number of steps that sharpens your awareness of the impacts of change and enables responses. 

Many of these are good business practices:

Know your customer – know who buys your products and what they are used for. 

If your goods are intermediate goods, know where they are sold, and who to, and maintain a dialogue with the company on demand projections.

Know your competitors – learn who they are and where their major markets are, including if you aren’t active there yourself. The prospect of product being diverted is higher in times when new barriers are being introduced.
Maintain excellent communication with your agents, including by keeping a close eye on customs practices in some markets. 

Report problems, don’t just accept them. Remember the support structures you have and use them.

And, in the spirit of Trade for All, make clear in New Zealand communities the importance of trade and commerce to jobs, returns and livelihoods.  People won’t support what they don’t understand.

Thank you for listening.  I look forward to the round table.