Trade Update - January 2017: EU/UK/Brexit

EU/UK/Brexit

Brexit and the form of exit chosen by the UK Government has just made New Zealand's relationship with Europe more complex.

The good news is that we have the EU and Britain keen to negotiate a FTA with New Zealand. In the case of the UK this has not been possible. And in the case of the EU this was a prospect that was being laughed at as recently as 2004/05 when New Zealand began its negotiations with China.

The EU (or UK) was our major market and has the potential to be a higher yielding and larger destination for New Zealand goods and services exporters if we negotiate good quality deals.

EU leaders and UK leaders gave Prime Minister English some cause for optimism around time frames for negotiations. The UK is keen to begin negotiations as soon as possible. The trouble is that it can't legally begin negotiations until it has finally left the EU. We still don't know how long the Brexit process will take. No one has ever negotiated an exit under Article 50 before. EU leaders talked about having negotiations completed within 2 to 3 years. But we still don't have a start date. And while all Member States may be happy at present to support the notion of a FTA with New Zealand, there are three big elections pending for 2017 – France, Germany and the Netherlands. New Governments in one or all of these key member states could be problematic for New Zealand. It is unlikely that we will have any clarity on a commencement date until after the German elections.

Brexit has complicated the New Zealand EU and New Zealand UK FTA negotiations considerably – at least as far as the most sensitive of agriculture products in concerned – dairy and sheep meat.

These products are currently covered by tariff quota arrangements that were negotiated under the framework of the GATT/WTO, essentially to go some way to compensate New Zealand for the market loss that occurred when the UK decided to join the EEC.

If the UK had remained in the EU, the negotiation of market access for dairy and sheep meat would have been relatively straightforward. New Zealand would have argued for the removal of the quotas and free trade. The EU would likely have said "no way, live with the existing quotas". The two sides would have met somewhere in the middle with a probable expansion of the tariff quota – maybe coupled with some special agricultural safeguard provisions – the likely result.

But now we have a problem. The EU and UK will have to negotiate with New Zealand in the WTO the future of the existing quota arrangement. The EU will no doubt be saying "well now you (NZ) are negotiating a FTA with the UK, and as these quotas were all about compensation for losing the access you once had to the UK market you won't need this compensation once you have your FTA with the UK." New Zealand will be responding "Giving us this access to the full EU was a legal commitment negotiated as part of the Uruguay Round. UK entry into the EEC is ancient history. We have established new markets in non-UK EU over many years and you therefore can't back away from your commitments". So it will go on. But the point is that the conclusion of this difficult negotiation in the WTO is probably the starting point for the negotiation on dairy and sheep meat for the bilateral FTA negotiation between the EU and New Zealand (and possibly also the negotiation with the UK).

So, in summary, the Government has done very well to keep the EU committed to a FTA with New Zealand and to have New Zealand close to the front of the queue for a FTA with the UK. But don't expect rapid progress in either negotiation.

One final word or warning, agreeing deadlines for a negotiation rarely suits New Zealand interests. Helen Clark made this mistake with Thailand. At the deadline for the conclusion "by the end of the year" the Thai's had given little ground on dairy and no ground on services. In the end, rather than admit failure to meet the deadline, New Zealand accepted a poor deal on goods and deferred the services component for 3 years. That was 2004. In 2017 we are still waiting for that services negotiation with Thailand to commence.

GCC

Trade Minister Todd McClay has followed up his December visit by making another visit to Gulf Cooperation Council capitals to advance the case for resumption of the FTA process with New Zealand.

He is getting a good hearing and both he and Murray McCully are optimistic that negotiations will resume. But we have yet to actually have a firm commitment to resumption of negotiations from the GCC and we don't have a date for the next negotiating round.

Sri Lanka

Following on from the positive comments on a FTA made by the Sri Lankan Prime Minister during his visit to New Zealand last year stories have emerged in the media of a possible FTA involving Singapore, Sri Lanka and New Zealand. This is an interesting concept. Sri Lanka could be a very lucrative market for New Zealand – with a population the same size as Australia and Taiwan, but tariffs are high.

US Trade Policy Under President Trump

The US has formally withdrawn from TPP.

There are now several options available for New Zealand and the other TPP parties. They could implement the existing agreement (but without the US). They could re-negotiate the agreement removing the bits that are only included because the US insisted. Or they could negotiate a series of bilateral FTAs. Mexico has already suggested that this might be their preferred path. Japan, Australia and New Zealand have made noises about implementing the existing signed agreement minus the US.

The problem with this strategy is that it will require all the major players to hold together and agree on this strategy. Already this looks difficult. Canada seems to be distancing itself from Mexico in the NAFTA context. This will annoy Mexico. And Mexico is saying it prefers the bilateral approach.

For New Zealand the major gains from TPP were represented by the US, Japan and Mexico (and to a lesser extent Peru and Canada – because the Canadian agriculture offering was rather limited). Mexico seems keen on doing something with us. That is a positive. Japan will be a problem. We are negotiating with them in the RCEP context but ambition in that negotiation is far lower than it was under TPP.

The US remains the big prize for New Zealand and the withdrawal from TPP takes us back to the pre-2008 world, where we have been signaling interest in a deal with the US but the US was finding it hard to justify the negotiation given New Zealand's size, political differences and agricultural sensitivities. No doubt many of the great brains in MFAT are thinking of how to entice the US into a bilateral negotiation.

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