Jim Sutton Speech - Retailers Association meeting
Hon Jim Sutton
12 April 2005
Retailers Association meeting, Auckland
Ladies and Gentlemen, thank you for the invitation to speak today.
Thank you for the invitation to join with you to exchange views on the free trade agreements we are negotiating and what they mean for us all.
As we are a small group, I propose to organise my comments to you around a series of questions focusing on issues that I hear often raised around FTAs.
Where do things stand on the FTA agenda?
You know that CER has been in place since 1983 and the New Zealand-Singapore CEP since 2001.
But we all know the world-wide enthusiasm for free trade agreements has quickened. FTAs are being negotiated around the world.
New Zealand shares this enthusiasm ? we have to be part of this trend or we will be left behind and our exporters and importers disadvantaged.
So ? New Zealand's current batch. We are just at the point of signing one agreement, one is close to conclusion, and three are in the early stages of being negotiated.
We have just initialled the text for the New Zealand Thailand Closer Economic Partnership. The Prime Minister and I will be visiting Thailand to formally sign the agreement next week, on the 19th of April.
We are in the late stages of negotiating the Pacific 3 agreement with Chile and Singapore. We expect to conclude the negotiations within a few months.
We are preparing for the third round of negotiations with China to be held in New Zealand next month.
Australia and New Zealand are negotiating with ASEAN. There have been two rounds of exploratory discussions, one in Melbourne and one in Manila. The next round will be in Auckland in June.
The Prime Minister and Prime Minister Abdullah Badawi recently announced the joint decision to launch negotiations for a New Zealand-Malaysia free trade agreement. We've started the process and look forward to further talks with the Malaysians later in the year.
Do we have any plans beyond this list?
We continue to look actively at other possibilities.
One of my objectives when I visited Japan last week was to take a fresh look at our trade and economic relationship with Japan.
My sense is that agencies in Japan are not ready to look at negotiating an FTA that includes broad coverage of agricultural trade.
You will also be well aware of a long-standing interest in an FTA with the United States.
We have emphasised to the United States our interest in negotiating a New Zealand-US free trade agreement when space opens up on the US trade negotiation calendar.
Are we just taking opportunities as they come up or do we have a strategy and priorities?
I have a duty as trade minister to be opportunist. If a good opportunity comes along we shall certainly grab it. In this business you cannot rely on the same opportunity coming along twice.
But that doesn't mean seizing every temptation that is dangled in front of us. It is important to stick to the principle ? which is also a WTO rule ? that any free trade agreement should cover substantially all trade between the countries concerned.
We have special reason to guard this principle: our key agricultural exports are discriminated against in most major markets. So I would not be keen to start a negotiation if I did not expect to achieve coverage of agriculture.
In terms of priorities, obviously some negotiations offer potentially larger returns. Of those on the current list China stands out for obvious reasons. But we try not to take a narrow view.
While on paper the immediate gains from our Pacific 3 negotiations with Singapore and Chile are not huge, we have had a conscious objective of using this negotiation to develop a 'template' ? one that would provide a state-of-the-art model within the Asia-Pacific region.
It has been a strategic negotiation also in the sense that we want to develop a free trade agreement joining Asia to Latin America, one that other countries are welcome to join. The Sultanate of Brunei has been attending recent negotiations and is looking to negotiate accession soon after P3 is complete.
What benefits will these agreements deliver?
The raw numbers we get from modelling the impact of liberalising bilateral trade can be substantial.
In the case of China, for example, modelling forecast that under an FTA New Zealand exports would grow by as much as $400 million per year over twenty years ? that's 2007 to 2027. The welfare gains to New Zealand are expected to be more than three billion dollars. These are not insignificant returns.
Are we mainly focusing on eliminating tariffs on goods?
The figures I just cited are 'static gains' in economic jargon. I believe they heavily understate the likely real gains.
Those of you who dabble in export as well as import will know that for many products in many markets tariffs have ceased to be a major factor. Exchange rate swings alone can far outweigh tariffs in terms of the raw calculation of export or import profitability.
As far as access is concerned it is often not tariffs but a myriad of other factors that determine whether a company is going to get into a particular market and sell profitably, such as customs procedures, technical barriers to trade such as standards, certification and labelling requirements. And then there are plant and animal health requirements, not to mention basic market familiarity and contacts.
One recent study reported in the Journal of Economic Literature suggests that crossing borders will typically add 170% to the cost of the good or service being traded. The cost will vary widely from case to case, but the study uses this figure as a representative increase for OECD economies.
The figure can be broken down further. Around 20% of it is accounted for by transport costs, varying with distance, and only around 45% results from border related barriers such as tariffs.
The remainder ? 100% out of the 170% increase, in other words ? is related to the "other" costs of doing business. These costs are dominated by overheads such as customs, labelling, certification and SPS, along with the market familiarity factors that I listed above. A trade agreement is an important way of tackling some of these hidden costs of doing business.
Think for a moment about the dimensions of the economic and trade relationship we have today with Australia. Then ask yourselves what it would be today had we instead frozen the whole CER framework as it was 20 years ago and not allowed it to evolve and develop at all levels. This will give you some sense of the scale of the potential dynamic gains we can expect to see over time in other FTAs.
Are we pursuing trade objectives to the exclusion of all else?
In today's world, you cannot conduct trade negotiations in a silo, ignoring everything else. As a government we are committed to sustainability and to the improvement of the human condition, not least in the developing world. The New Zealand public expects nothing less.
We do face questions about the impact of trade deals on environmental objectives and on labour conditions.
We have made it clear to our FTA partners that it is important for us to talk about these issues as part of our negotiations.
With Thailand we negotiated bilateral arrangements on environment and labour in parallel with the CEP agreement. We are pursuing similar objectives in our other negotiations, though we retain an open mind on the form in which any results are captured.
What confidence can we have that the theoretical gains from FTAs will be realised in practice?
Free trade agreements or closer economic partnership agreements can really only provide opportunities. Ultimately it is up to business to take advantage of them and make them work.
But we do not see our job as ending the day the ink dries on the signature of the agreement. We are working on 'harvest' strategies to leverage opportunities from trade agreements, looking out over the next five to ten years. This is a whole-of-government approach involving close cooperation with business and other stakeholders.
One aim is to launch each of the agreements with a bit of fanfare to ensure they get people at both ends thinking about the new opportunities they provide.
We will, for example, take a trade mission to Thailand for the signature of the CEP with precisely that objective.
For China, a 'harvest' strategy is already being developed well in advance of concluding the FTA.
The 'harvest' strategy is complex. It includes efforts to identify sectors that offer most long-term potential within a specific FTA relationship and the alignment of activities across government to get a common focus for each FTA. We are actively talking with business, local government and New Zealanders who are living in the country concerned. Work is also being done to improve business capability and build relationships with FTA partners at both government and industry levels.
Do we risk compromising on quality for the sake of a deal?
I am happy with what we have achieved so far. It is true that we have been prepared to trade time for ambition. In the case of the Thai CEP liberalisation for some products extends over as much as 20 years. But the end-point for all products is zero. That ? in a large and dynamic developing country market, currently with relatively high tariffs in some sensitive sectors ? is an important achievement.
Generally we have preferred to wait rather than make large compromises on quality. Again using the Thai agreement as an example, we have chosen not to address services in the first phase of the agreement. We have agreed to start a services negotiation within three years. At that point we think the prospects for a high-quality agreement on services will be significantly better.
Are FTAs now the main game in terms of trade negotiations?
The WTO negotiation is still my top priority. For a country such as New Zealand ? selling many products that are favourite targets for protectionist groups overseas ? there is simply no substitute for a rules-based multilateral trading system.
There are some things ? like negotiating on agricultural subsidies ? that you can really only do in a multilateral process in the WTO.
And we need the rules. The WTO dispute settlement system, however imperfect, does provide an important discipline and an important tool for dealing with issues that are otherwise politically hard to manage.
The ultimate risk, were the WTO negotiations to collapse, would be that the dispute settlement system would also start to crack. This would eventually mean a return to law of the jungle. That's when little guys such as New Zealand really suffer.
What is our focus in the WTO process?
This is a critical year for the current round of WTO negotiations. In order to get all the fine print completed by the end of 2006, just before the US Fast Track authority runs out, we shall need to settle the main elements of the deal this December in Hong Kong.
At the moment it is not easy to see how we shall get there. There are large unanswered issues about how far we need to go in cutting agricultural subsidies and agricultural and non-agricultural tariffs. Resolving these will require concentrated political and technical effort over the relatively short period remaining until Hong Kong.
These issues will require some important political decisions by all governments involved in the negotiations, including our own.
Within the next month, for example, we shall need to take a decision on whether to go ahead and revise our initial offer on services in accordance with the framework agreed by trade ministers in July last year. Our services regime is already one of the more open ones, and our offer was a generally accepted to be a solid one.
That said the round has moved on, and there may be a case for making certain improvements for the sake of our larger objectives in the Doha negotiations. Departments are currently working on a short list of possibilities. They are in the process of talking to stakeholders with direct interests in the specific options that might go before ministers. I won't be making a recommendation to my Cabinet colleagues until I return from a series of trade ministers' meetings in Paris early next month. Those meetings will be a chance to 'take the temperature' of the negotiations at a critical point in the process.
Ladies and Gentlemen: Some of you might just be old enough to remember when Brian Talboys was trade minister. His most important task was to head off to London and other European capitals every year or two to plead our case as our butter and lamb quotas came up for renegotiation.
The job of a trade minister these days is very different. The stamps in my passport make it look more like something out of the Rough Guide or Lonely Planet series. But that is because I see it as my job to go to places where New Zealand is doing business or ought to be doing business. And I know from what I see in the shops that you and your colleagues are getting to lots of colourful destinations yourselves.
You might ask where ultimately all these various trade negotiations are taking us and just what they mean for you.
The picture I have in my head is of a time when New Zealand investors and exporters or importers of goods and services are able to do business almost as freely in countries such as Thailand, Malaysia and China as they do now with Australia.
That is a long-term goal that requires partnership between government and business. You know better than most the sort of pay-off we can expect if we achieve that goal.