Trade Policy in Turbulent Times

Ministry Statements & Speeches:

  • Trade
Speech delivered by New Zealand Minister for Trade and Export Growth David Parker to ANZ Capital Markets in Wellington on 21 March 2019.

The context for global trade today is very different from what we saw 25 years ago or even 10 years ago.

The IMF recently released revised global growth forecasts – they are downwards on the back of the China slowdown, US-China trade tensions and Brexit and, perhaps related to that, a decreasing confidence in the world.

Notwithstanding that, New Zealand investors have reason to feel positive with expected economic growth of around 3%, while other advanced economies are expected to grow an average of 2% in 2019.

Before we get into the outlook for global trade and how we’re responding to that, I’d like to set some context for where we’ve come from by touching on three key milestones in what has been the golden weather for New Zealand’s trade policy stretching back 25 years.

With the establishment of the World Trade Organisation in 1995, agriculture was, for the first time, brought into international trade rules and an effective system for resolving disputes on trade was created.

The next watershed, 2008, was the year that New Zealand concluded a trade agreement with the ASEAN countries and our trade agreement with what is now our largest market, China, which was led by the Honourable Phil Goff, came into force. Trade with both ASEAN and China has increased significantly. In China’s case, exports have more than quadrupled since that deal entered into force.

The last milestone is much more recent history - CPTPP coming into force and the EU-NZ FTA negotiations getting underway.

CPTPP covers 10 trillion dollars of GDP and 500 million people. It gives us preferential trading relationships with three G20 countries, Japan, Mexico, and Canada, that we didn’t have a secure trading relationship with and faced very high tarrifs. In respect of tariff reductions, there are hundreds of millions of dollars per year once the deal is fully implemented, but in addition to that it drives volume growth so the benefits will be very very significant. With CPTPP, 65% of New Zealand’s trade is now covered by preferential agreements.

We’re already seeing very positive tangible results from CPTPP. In the month of January, the quantity of New Zealand’s beef exports to Japan increased three-fold compared to the same period one year earlier. That will be in no small part due to the CPTPP and the immediate reduction of the tariff on beef from 38.5 percent to 26.9 percent. That beef tariff will continue to come down over the next 16 years as CPTPP is fully implemented. Australia has had an FTA with Japan since 2015 so for the first time in 4 years we are able to compete on a level footing with Australia in the Japanese beef market. Similarly, New Zealand butter exports to Canada jumped six fold this January compared to a year earlier and cheese exports to Mexico more than doubled. Admittedly some of these figures will have been influenced by people delaying the delivery of product until CPTPP came into effect, but these are very significant changes for those industries.

Our other active negotiations include:

  • The Regional Comprehensive Economic Partnership, also known as RCEP, which involves ASEAN, the North Asian countries (China, Japan and Korea), Australia and, perhaps most importantly from our perspective, India.
  • Negotiations with Pacific Alliance, a group of Latin American countries including Mexico, Chile, Peru and Colombia.

Negotiations with China to upgrade and modernise our existing FTA are also in play.

The promise of these trade deals and the benefits of existing deals like the China FTA and now CPTPP - seem so obvious to us, given that we know we don’t build computers or mobile phones or cars, a lot of medical machines and medicines and we have to sell to the rest of the world in order to pay for the standard of living that we want. Why then, are we seeing rising protectionism, rising distrust in Government and, in many countries, growing scepticism around the benefits of trade?

On the one hand, most of our lifetime has seen a period of consistent economic growth both in emerging economies as well as in OECD countries. But there is increasing evidence, in fact it is clear now, that the distribution of wealth is not what we hoped for. The world’s wealth is increasingly concentrated amongst the wealthiest 1% in the world, they have captured most of the wealth created in the last couple of decades.

With the woes of the Global Financial Crisis still fresh in peoples’ memories, we see discontent around growing inequality, multi-national tax avoidance, limited employment opportunities and, higher housing costs, which are causing political instability. Traditional industries are being disrupted by new digital technologies, creating uncertainty for those whose jobs are disrupted. The reasons for the discontent may not always relate directly to trade, but it is clear that we need an open dialogue with New Zealanders around not just those issues but also trade if we are going to maintain public support  for trade. We are doing that in New Zealand through a Trade for All policy which responds to the concerns and interests of people who worry, not just about trade issues but also about these other issues.

The benefits of trade must flow to all New Zealanders and be felt throughout the country. We want a policy environment that helps small and medium sized businesses, women and Maori – who haven’t benefited as much as big business from trade deals. We want them, and we want to help them, to succeed on the global stage.

At the same time we want to protect our unique environment and get the best out of our existing and future trade deals.

Not only are we seeing more citizens questioning the wisdom of globalisation and open markets, the same can be said for some Governments. In fact, we may be witnessing the end of an era, where we benefit from the establishment of the WTO; the legal enforceability of trade rules, and a continued reduction in global protectionism – all supported by a burgeoning network of trade agreements.

Over more than two decades, New Zealand’s trade policy has been informed by two key assumptions:

  • that global market openness will continue to increase
  • and that the rules-based trading system will strengthen and expand.

Recent tensions in international trade are challenging those assumptions.

In the last two years we’ve seen the steepest increase in protectionist measures since the establishment of the WTO.

There are a range of tensions at play but there are at least three which are front of mind.

Tensions between the United States and China are of particular concern. I don’t think I need to say much about that other than we hope matters can be resolved in a way that is consistent with WTO rules and the principles behind them.

On Brexit we’re working hard to ensure any issues are resolved in a way that minimises potential disruption for New Zealand’s trade.

This is not a new issue. New Zealand has been actively engaging with the UK and the EU for more than two years now to protect the current access we have for key agricultural trade exports and to make sure that there are mechanisms in place to deal with the administrative access to trade if and when Brexit proceeds.  This access is bound at the WTO and we have stressed the importance of ensuring that these existing commitments are fully honoured.

Our concerns are shared by many other WTO Members, including all of the largest non-European WTO Members.

The proposals the EU and the UK have made to cut back their WTO quotas would seriously disadvantage exporters from a number of countries – including New Zealand – who depend on the WTO quota access for products which otherwise face prohibitively high tariffs into the EU and UK.

And third, the continued enforceability of WTO’s dispute settlement system is looking less certain.

The ability to take trade disputes through the WTO has ensured that countries abide by the rules they have agreed to.

New Zealand has taken nine cases to the WTO and we have won all of them. Recent examples include our case with Indonesia on beef and horticulture and of course, the case we took with Australia on apples.

But, as I mentioned, the enforceability of the WTO is now looking less certain.

The United States has said it will continue to block the appointment of WTO Appellate Body judges, if its concerns around WTO reform are not addressed.

Unless something changes by December this year, the Appellate Body will no longer have a quorum of three judges, threatening the viability of the wider system.

If WTO Members lose their ability to appeal, that increases the possibility of Members refusing to abide by dispute panel findings. 

New Zealand shares some of the US’ concerns around WTO reform but we want to advance these in a way that minimises the risks to the system.

Against this backdrop, the recent appointment of Ambassador David Walker, New Zealand’s Permanent Representative to the WTO in Geneva,  to chair the organisation’s Dispute Settlement Body is good news.

Having a New Zealander appointed to this role shows the esteem in which New Zealand and David Walker are held. It also reflects our willingness to contribute to the effective functioning of the organisation, especially in the face of current challenges.

So far we have not seen a wave of countries turning to protectionism writ large. But the risks of rising protectionism are real. New Zealand has an important role to play to help stem the tide.

I’d like to talk you through our six-part strategy for managing the turbulence ahead.

  1. Defending the rules-based system: Negotiations on new rules have become more challenging over the years and I have mentioned live-risks to the WTO’s dispute settlement system. We are actively defending the system of international trade rules that are crucial to New Zealand. To do this effectively, it is important that New Zealand has a seat at the table when it comes to discussions about the future of the WTO – and that is what we have. New Zealand is one of 13 WTO members in the Ottawa grouping which is working to develop constructive proposals for WTO reform. We hope to address the concerns which some WTO Members, including New Zealand and the US, have in relation to the WTO. We are also looking to update the rules to better respond to modern economic challenges such as e-commerce and sustainable development.
  2. Embedding New Zealand in the emerging regional economic architecture: This is an important insurance policy. We are participating in regional agreements to bolster commitments that countries have made to us in the WTO, for example, the CPTPP and RCEP.
  3. Supporting regional and global public goods: We want to reinforce global and regional institutions which help safeguard social, economic and political progress – organisations like the OECD, APEC and the Commonwealth.  In 2021, New Zealand will host APEC for only the second time. So if in two years from now you find yourself in a traffic jam as some of the world’s leaders descend on Auckland, please remember that some problems are too big to be solved by countries going it alone. APEC, and institutions like it, are vital in supporting economic cooperation between the world’s major players.
  4. Advancing the concept of ‘open plurilateralism’: We can further bolster the rules-based system by pursuing international agreements with clauses that allow others to join if they can match the standard of commitments set by the original partners. This could include agreements like the e-commerce negotiations that have recently begun with over 70 Members at the WTO. It could include free trade agreements such as the CPTPP.  A number of countries including South Korea, Thailand and Colombia already appear to be interested in the CPTPP and new membership is something we and other CPTPP countries will need to consider and encourage.
  5. Developing a Trade for All agenda in consultation with New Zealanders: As I alluded to earlier, we can’t negotiate trade agreements and trade rules without the support of New Zealanders. I see the Trade for All agenda as a crucial element in our push back against the anti-globalisation sentiments which are feeding protectionism abroad and which I’ve said earlier, in my opinion, largely arise from the insecurity of the middle class.
  6. Intensifying our Economic Diplomacy: Through New Zealand’s network of embassies and high commissions, which often include NZ Trade and Enterprise, and through these highly skilled people; we’re able to provide information and analysis that helps Kiwi businesses succeed in international markets, and provide insights and advice to our policy-makers. We do well in this space, NZ Trade and Enterprise focuses on the F700 high growth companies, not all large, not all tiny, and most of the Tin200 are within this group of 700 companies – experiencing rapid growth in revenue and offshore personnel.

Finally, I’d like to touch briefly on some of the things we’re doing domestically.

Last year the Government passed the Overseas Investment Amendment Act to stop speculative foreign investment in housing. This was the key cornerstone that got the public to give us permission space to proceed with CPTPP. The Act also encourages investment in forestry where FDI is crucially needed.

A second phase of work on the Overseas Investment Act is now underway where our aim is reduce complexity, improve investor certainty and cut unnecessary red tape, while ensuring investments are consistent with New Zealand’s national interest.

A discussion document on phase two will be published soon and I hope many of you will have input into the consultation.

The review of the Overseas Investment Act is just one of a range of policies which acknowledge that having a productive economy doesn’t need to come at the expense of ensuring that New Zealand’s growth is both sustainable and inclusive.

There are four main parts to our plan for growth.

Firstly, we need to strengthen the foundations of our future success, including developing new points of comparative advantage. R&D tax credit talks to that: we campaigned on 12.5% and we brought it in at 15%. Currently it only has value for companies in profit, but we are looking at how it can apply to start-ups.

Secondly, in the largest areas of our export economy today, we are trying to encourage the addition of more value to volume. We also want businesses to reduce their adverse impact on the environment. We believe this will also add value via both efficiency improvements and through enhancing the brand we rely on for premium prices.

Thirdly, we need to leverage new opportunities - many of which are adjacent to our existing key sectors. That’s important to lift productivity and exports, and to enable higher-value land uses in New Zealand, which will also help us to address the environmental challenges we have.

Fourthly, we need to back the industries of the future, positioning New Zealand as a hub for world-leading innovation, linked into global value chains.

Success will not be measured by GDP alone.

In May, we will present the world’s first Wellbeing Budget. Our starting point for the Wellbeing Budget is that while economic growth is important, it doesn’t tell New Zealand’s whole story. There’s no week that makes that more obvious in New Zealand’s history than this. We want to take a much broader approach that looks at New Zealanders’ quality of life and wellbeing, including attitudes to minorities, alongside important economic indicators.

While our economic foundations are sound, we and the rest of the world face significant challenges. We always will. We also have exciting opportunities.

By moving from volume to value-building on our comparative advantages, and pushing the economy towards productive investment, we aim to build an economy that is more productive, more sustainable and more inclusive.  Only by achieving all three will we be able to ensure that growth benefits all New Zealanders and I believe the benefits to every one of us will be more fulfilling.

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