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Bailey's Farewell Address

Bailey's Farewell Address

Retiring Federated Farmers President, Malcolm Bailey gave a hard hitting farewell speech at the 1999 National Federated Farmers Conference. During his speech, Mr Bailey highlighted the need for New Zealand to strongly push for further liberalisation of trade in agriculture products.

Mr Bailey noted that freeing up trade has by far the most potential to raise New Zealand farmers incomes and that it would be incredible if New Zealand farmers, who have to export 85% of their output, didn't believe in free trade.

Mr Bailey said that free trade should not be confused with 'free markets'. Mr Bailey also said that farmers should not protest at APEC. as it would be interpreted as farmers opposing free trade.

The speech also defended the environmental record of farmers and citicised attacks by environmentalists in the international arena on dairy farming. Mr Bailey characterised the criticism as part of a larger agenda against free trade and that economic growth from freer trade was the best way to protect the environment.

Producer Board deregulation was supported by Mr Bailey as necessary to improve unity with the farming sector and to improve farmers incomes.

In his conclusion, Mr Bailey said the future of farming was good, but New Zealand had got bogged down in political trivia that was interfering with better farm profitability.

A full copy of the speech is attached.

ENDS

FEDERATED FARMERS NATIONAL CONFERENCE Plymouth International Hotel, New Plymouth 24 - 25 July 1999

Address by Malcolm Bailey

Ladies and gentlemen

Our conference theme is trade and particularly the role of the World Trade Organisation and its relevance to New Zealand's farmers.

This theme was chosen because this year marks the commencement of the next round of WTO talks in Seattle. We also have New Zealand as the APEC host nation for 1999.

This theme has turned out to be particularly apt given recent developments that have caused some New Zealanders to question our overall trade and economic policies.

It is good to focus on a constructive topic. Freeing up the international trade in agricultural products has the greatest potential to raise farmer incomes. New Zealand is otherwise too bogged down on navel gazing and trivia. We need to broaden our vision and think of what we can do rather than what we can't.

There are a few key issues that I intend to cover in relation to New Zealand's support for freer trade.

Free trade versus free market ideology

Why unilateral tariff removal makes sense

New Zealand's tariffs relative to other countries

The importance to New Zealand farmers of further trade liberalisation

Non-tariff trade barriers

Trade and farm employment

Trade and the environment Producer board reform Free Trade versus the "Free Market"

The appalling decision of the US Administration to impose tariffs on our lamb exports has prompted some commentators to suggest that New Zealand should turn the clock back and start erecting trade barriers ourselves. Others have responded by say that this decision proves that New Zealand's "free market" policies have failed.

The people questioning New Zealand's support for free trade are wrong, and, in case you are in any doubt, I will tell you why.

The first requirement is to remove any confusion about support for the removal of international trade barriers (free trade) with the so-called "free-market" debate at home.

The free market debate is entirely an internal one about whether the government should own businesses like TVNZ or electricity generation. This has nothing to do with supporting free trade to increase the opportunities for New Zealanders to more profitably export around the world.

>From the viewpoint of farmers it defies logic that we should be anything other than ardent believers in international free trade. To earn our living we must export between 85 and 90 percent of all the food and fibre we produce. We are more reliant on international trade than any other group of farmers in the world.

Currently the international trade in agricultural products is far from fair and New Zealand farmers have to pay hundreds of millions of dollars per year in tariffs to be able to sell our products in many markets. Our participation in APEC (Asia Pacific Economic Co-operation) and the WTO (World Trade Organisation) is based on trying to reduce and eventually eliminate these unfair barriers that lower New Zealand farmers net incomes.

The US decision to impose new trade barriers against our lamb exports is most unfortunate. However, the road to freer trade in agricultural products is a rocky one and occasional setbacks do not stop overall progress.

It does not mean that we should lose confidence in APEC and the WTO. The WTO is the one organisation that can both help resolve trade disputes and offer hope of world trade reform to remove the scope for unfair barriers in the future.

It is very important that farmers have very clear minds on these issues. We would do enormous harm to our future if we give any credence to anti free trade thinking. We should cherish the opportunity APEC and the WTO provide to help roll back the unfair export barriers we currently face.

It is right that we continue to reinforce our displeasure at the US decision to impose tariffs on our lamb exports. Whether we should protest at APEC in this regard is highly debatable. Because the media will interpret a protest against President Clinton as a protest against APEC, I have concluded it would be counter-productive.

By all means we should argue the pros and cons of some of the free market issues at home such as electricity reform. But we certainly don't participate in APEC and the WTO to argue about this or whether TVNZ should be privatised.

Tariffs and why removing them makes sense even if other countries don't

Many people keep watching our trading partners and argue that we should only reduce tariffs in line with their reductions.

The well respected Economist magazine countered this view strongly in an issue a few months ago when they argued that matching other countries protectionist follies was no recipe for success. From New Zealand's point of view if other countries join in an reduce their tariffs it is a bonus - certainly not a prerequisite for our action.

We need to be clear in our minds that imposing tariffs on New Zealand's imports does nothing to off-set the damage we suffer because we face tariffs on our exports. In fact it makes the position of New Zealand's export industries much worse. Farmers and other exporters end up paying both ways. At least by removing the tariffs at home we have removed an unfair tax on the inputs farmers buy and taken away half the problem.

Concern has been raised that opening up New Zealand to more foreign competition has meant a loss of jobs in our economy. Not so. The past 15 years clearly demonstrates that our unemployment rate has fallen from around 11 percent, when we started opening up our markets, to around 6 - 7 percent today.

This has occurred because we have benefited from a consistent fall in the price of our inputs and this has raised the international competitiveness of New Zealand industries with a consequent substantial rise in economic growth and employment.

As well, some of the protected industries have shaped up and become internationally competitive and grown much bigger than they were while protected. The manufacturing sector has numerous examples of this as evidenced by the growth of manufactured exports following removal of import protection.

Consumers in New Zealand have benefited significantly from tariff reduction as well. A June 1999 study by the NZIER shows the average household gain per year was $1140 in 1998. The gain by 2006 will be around $2100 per household per year.

If you are still not convinced, answer the following questions. What farm inputs would you be happy to see increase in price as a consequence of tariffs being re-introduced? Would you be concerned if New Zealand's agricultural industries became less internationally competitive and employed less people and returned farmers lower incomes?

Another misunderstood aspect of tariffs concerns the negative impact on industries that do not suffer the direct impact of tariffs on their inputs. This particularly concerns agriculture where we now have virtually no tariffs on our direct inputs. The fact is that the interdependence of our industry sectors means that if higher costs are created by tariffs in one sector they invariably feed through in the general cost structure.

New Zealand Average Tariffs Relative to Other Countries

The critics who say that New Zealand has removed tariffs while the rest of the world has done nothing are wrong.

It might surprise you but New Zealand's simple average applied tariff rate is higher than you may realise. Figures for 1996 show:

New Zealand 8.7 United States 6.2 European Union 9.5 Australia 6.1 Japan 6.7 Source: OECD

However, we have made further progress on tariff reduction since 1996 with the abolition of protection for the car assembly industry being the most significant event.

We have also committed to zero tariffs by 2006.

New Zealand farmers and other exporters will have to continue to suffer until 2006. As you all know, we need every advantage now because of the tough trading conditions we face.

The Importance of Further Liberalisation of the Trade in Agricultural Products

Despite the progress made in the Uruguay Round, we still face huge barriers to our exports.

In the dairy industry alone the tariffs alone cost us around $500 million per year or about $32,000 per dairy farmer per year. We also have to pay tariffs on in the sheep and beef sector. All up the annual cost is in the vicinity of $600 million per year.

World wide the average tariff on manufactured goods tariffs is about 4.5 percent. The average tariff on agricultural products is about 50 percent.

But measuring the tariffs we pay is only part of the overall cost of trade protection and subsidies.

Many tariffs are set at such high levels that it is uneconomic to try and sell our food and fibre exports. Quantifying this loss is much more difficult but it is very real.

Quota restrictions obviously limit what we sell. Often the loss caused is partly off-set by the higher prices that quotas create and the so-called "quota rents" that we can earn. However these rents still leave us well out of pocket.

Perhaps the greatest loss of all is caused by export subsidies that drag down international prices.

Two weeks ago we hosted the leaders of the French Farmers Organisation, FNSEA. They lamented the low prices at which many of New Zealand's food exports are sold. They want us to get our prices up.

I told them we would dearly like to do this but we get hammered by low international prices which are driven down by export subsidies. The Frenchmen struggled to believe this and argued that the small percentage of total food production that is internationally traded should not drag down all prices.

Their lack of understanding of market dynamics is not surprising. Their customers are EU politicians who pay the subsidies.

We must set a very clear goal of eliminating all export subsidies as part of the Seattle Round.

According to the Australian Department of Foreign Affairs & Trade in a June 1999 empirical study entitled Global Trade Reform, halving the levels of world trade protection would lead to global welfare gains of approximately US$400 billion per year.

Full trade liberalisation would generate annual gains of around US$750 billion per year.

Non-Tariff Trade Barriers

The harsh reality is that very few of our export markets really want our produce or Australia's. To be sure we enjoy strong consumer demand but, in between New Zealand producers and these consumers, we have domestic farmer lobbies and politicians who would close down this trade tomorrow given half a chance.

Using a sanitary or phyto-sanitary (SPS) measure, which is not actually justified for health or biosecurity reasons, can be a very effective protectionist device to stop trade in agricultural products. These can be particularly deceptive and difficult barriers to challenge.

The SPS Agreement that came into being following the Uruguay Round has been vital in helping to prevent this happening and instrumental in resolving disputes when it does.

New Zealand is on the brink of facing such a challenge because of our refusal to allow trout imports. Not only is this ban a negative influence on other vitally important trade issues (such as US lamb tariffs), we will lose the case if it is taken to the WTO.

In the last few days we have heard that our salmon farmers will be able to expand their exports by about $20 million because Australia has lifted a ban on salmon imports.

This begs the question, "how much longer is New Zealand going to continue to ban trout farming?

Scientists tell us that rainbow trout and salmon are virtually identical introduced fish and that farming trout will not increase the disease risk for our wild trout. We can have the best of both worlds. We can enjoy our magnificent wild trout and earn money from both fishing tourism and farming.

While our politicians appear to be too gutless to tell the public of New Zealand the truth about this, New Zealand continues to lose export opportunities and run large balance of payments deficits.

Trade and Farm Employment

There is some opposition from labour organisations to further liberalising the trade in agricultural products. They fear cheaper wage rates in other countries.

However, If OECD farm employment statistics are anything to go by, farm sector organisations should not fear freer trade.

Farm Employment % change 1986-88 to 1996-98

United States + 3.5 Australia + 1.5 New Zealand + 1.5 Canada - 8.0 European Union -27.5 Japan -35.0 Korea -48.0 Source: OECD

These figures are remarkable because the European Union, Korea and Japan have maintained or increased their subsidies for farmers over this period yet employment has plummeted.

Trade and the Environment

Another disturbing aspect is the emergence of anti trade liberalisation sentiment coming from environmental groups. Typically this view comes from well-off people in rich countries who themselves have gained all they want from trade and seem oblivious to the needs of the rest of the world.

They argue that growth of farm output in poor countries will further damage the environment. They are wrong. All the evidence shows that freeing up trade will stop the most environmentally damaging over-production in the rich subsidised countries and allow standards of living in the poor countries to rise to the point where people can start to value a clean environment as opposed to struggle to survive.

Recently you will have noted that some New Zealand environmentalists have decided to tell the world (via the internet) that New Zealand farming is polluting our environment and that we are not serious about doing anything about it.

Further, this is part of a campaign to target Cairns Group countries. Why only Cairns Group countries. The answer is simple. The Cairns Group is pushing hardest for further agricultural trade liberalisation.

The real agenda of these environmentalists is that they do not want free trade. Their thinking is no more robust than a New Zealand member of parliament who is reportedly against trading food around the world because "we use up fossil fuels sending a boat load of our food to one country and then bring a boat load of their food back".

I don't know about you but I would soon get very sick of eating cheese all the time and never having a banana.

The best way to sum this up is to quote Dennis Avery, Director of the US Hudson Institute's Centre For Global Food Issues:

Modern agriculture can, and will do, an even better job for the world and the environment in the future.

Farming cannot wait for the journalists of the world to end their romance with environmentalists and wake up to the urgency of agricultural research and free farm trade. The environmental movement has gone directly to the public and misrepresented modern agriculture. That false image of modern farming could prevent agriculture from feeding the world while conserving wildlands in the 21st century.

That natural world can only be saved by modern high-yield farmers who are supported by increased investments in agricultural research, and given the opportunity for free trade.

Producer Board Deregulation

Does New Zealand need to deregulate our producer boards to prepare for the next round of WTO trade talks? The short answer is, no.

State trading enterprises are legitimate under Article 17 of the WTO. . Producer board deregulation is not directly linked to our push for freer trade although it is likely to be helpful.

Does New Zealand need to deregulate our producer boards to help promote growth in farmer incomes?

In my opinion the answer is a most definite yes. The Chairman of the NZDB supports this view when he says that the dairy industry is losing $1 million per day or $25,000 per dairy farmer per year under the current flawed structure.

New Zealand is being left behind as we squabble over the best way to join the real world. The non-commercial interventions we have in New Zealand agriculture have been dragging us down for years. They have diverted attention, and much needed capital, away from the main game.

They have also created an unwanted division in New Zealand farming. There is no substitute for unity of purpose based on commercial reality.

The time for change is well overdue and the fast pace of change in world food and fibre markets means we have no time to lose if we want to reduce our dependence on the commodity trade.

By comparison, arguing whether we should have a Commodity Levies Act or a Compulsory Levies Bill is like bald men fighting over a comb.

Summary

Agriculture in New Zealand is not going down the tubes. We have a good percentage of farmers doing very well. We would all like many more farmers to be in this category. However the worldwide reality is that low commodity prices have hurt farmers everywhere.

Supporting further liberalisation of the international trade in agricultural products is the single most important way of improving farmer incomes in New Zealand.

New Zealand has got bogged down in trivia. We must move beyond this and develop a vision of how we can improve our place in the world. We must focus on what we can do rather than what we can't. Our customers are interested in our products, not our petty internal politics.

Provided our government does not get in the way I am confident that New Zealand farmers can meet the challenge and succeed in the global food business.

Ends


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