Goff: Global Food Challenge - NZ opportunities
Hon Phil Goff
Minister of Trade
29 September 2008
The Global Food Challenge - leveraging the opportunities in New Zealand
Speech to Pacific Economic Cooperation Council
Thank you for the invitation to speak this afternoon at the first session of the PECC Roundtable discussions.
Agriculture and agricultural trade are vital to New Zealand. Our primary sector exports account for some 63 percent of our goods exports, yet that profile makes it extremely difficult to negotiate market access, since in many countries agriculture remains heavily protected.
As such, issues concerning global food producers and consumers threaten to disproportionately impact on countries with trade profiles like ours.
The Global Food Challenge
Since 2006 global food prices have increased dramatically. The general food price index of the UN's Food and Agriculture Organisation (FAO) rose 23 per cent in 2007 and a further 50 per cent in the first three months of 2008. Rising prices have led to concerns about food security, and have triggered domestic policy responses in many countries.
Of additional concern is that high food prices impact most heavily on net food importing developing countries and on poor households that purchase their food in the market. Higher food bills threaten to increase the already high incidence of malnutrition and hunger and to undermine achievement of the Millennium Development Goals.
What are the causes of the global food crisis?
On the supply side, there have been large reductions in exports from some of the key commodity exporters. For example, drought in key wheat-growing regions in Australia and Eastern Europe saw global production drop by 5% last year.
On the demand side, growth in the key developing country markets has seen demand for agricultural products soar. This is being driven by changing diets in the growing middle classes in emerging economies like India, China, and South-East Asia. Increasing urbanisation, economic growth, and growing populations are driving demand for food and animal feed in developing countries.
In global terms, the OECD reports that food and feed remain the largest sources of demand growth in agricultural trade. But there is also significant growth in demand for feedstocks for the burgeoning bioenergy sector, which has been a factor in the current growth in commodity prices.
The OECD and FAO estimate that biofuels will increase average wheat prices by about 5%, corn prices by about 7% and vegetable oil prices by around 19% over the next ten years.
While the effect of biofuel production on commodity prices is less than that driven by changes to supply and demand around food and feed, biofuels will be a key driver of agriculture commodity prices in coming years. Looking at mandated fuel targets in the EU and US, 13 percent of world coarse grain production and 20 percent of world vegetable oil production could shift to biofuel production by 2015.
As a net exporter of food products, New Zealand is a beneficiary of high international food prices, at least in the short term. Our terms of trade are at very high levels, providing a boost to New Zealand's income. However, these benefits will not accrue to all New Zealand exporters. Price rises are also being felt in the domestic market. In the longer term, persistently high prices will lead to increases in global production. Alternatively, it may lead to shifts in consumer demand away from New Zealand's export products, as developing country consumers move from relatively expensive meat and dairy products back to basic staples. So while high food prices may be good news for New Zealand exporters in the short term, there is no room to be complacent. There is still a clear need for reform in agricultural production and trading systems.
Breaking down trade barriers
Progressive tariff and market liberalisation are important components in addressing the current distortions in global agricultural markets in the long term. This can improve market predictability and the ability of global agriculture to better respond to market signals and boost supply when prices increase.
The role of governments around the world should be to allow agricultural markets to function without government intervention, complemented by measures to improve productivity.
Securing a successful outcome to the WTO Doha Round remains our best hope of achieving this.
At this time of global economic uncertainty and lack of confidence in world markets concluding the Doha round would send a positive signal. Agricultural trade reform can be an important element of the international response to the global food crisis.
A Doha Round outcome would reform world agriculture, including setting new ceilings for domestic subsidies, eliminating export subsidies and reducing tariffs. All of these elements are important to New Zealand and would improve market conditions for our agricultural exports over time.
Unfortunately the Ministerial-level talks in the Doha Round in July failed to achieve an outcome. That breakdown is intensely disappointing, because we were closer than we ever have been to a deal on the modalities for liberalising agricultural and industrial goods trade.
We are not placing all our hopes on the new market opportunities that a successful Doha Round would deliver. New Zealand's policy of pursuing its trade objectives at regional and bilateral levels reflects our assessment, firstly, that a Doha outcome may not deliver all the market access gains we would like and, secondly, a defensive concern that competitors might gain an advantage by beating us to such preferential arrangements. We are therefore pursuing an active FTA agenda.
This morning I returned back from the US where, at a meeting of the P4 Trade Ministers and USTR Representative Susan Schwab in New York the US announced that it will be entering into the Trans-Pacific Partnership, also known as P4, on a comprehensive basis. This is a significant outcome for New Zealand.
Securing an FTA negotiation with the United States, the world's largest economy, has been a key trade objective for more than a decade. Securing this through the P4 negotiations follows my discussions of this idea with USTR Representative Susan Schwab at a trade meeting in Cairns 14 months ago. I am delighted that the US has taken up this idea.
The United States is New Zealand's second largest individual trading partner and second largest export market. New Zealand's total trade with the US in the year to June 2008 was worth $8.14 billion, accounting for 9.6 per cent of New Zealand's total trade. US research conducted in 2002 into the impact of a FTA with the US showed it would be of considerable benefit to both countries.
New Zealand's food exporters are amongst those expected to gain most from a comprehensive agreement with the US, given that our two largest exports, beef and diary, operate within quotas - with tariffs on out of quota exports at over 26 per cent.
To have this commitment from the United States in the same year as we have also concluded FTAs with China and the ASEAN economies is an excellent achievement and opens up the prospect of significant and sustained benefits to New Zealand businesses and the economy in general.
With the involvement of the US, the Trans Pacific Partnership is now poised to expand rapidly to encompass other countries in the region and to lead to greater economic integration in Asia Pacific.
Participation in the agreement by the US on a comprehensive basis is likely to enhance the interest of others in using this high quality comprehensive agreement as the basis for further trade liberalisation and economic integration.
Interest in the agreement has been shown by other countries such as Peru, Vietnam and Australia. Eventually we hope the agreement will prove attractive to other large economies in the region such as Japan. As significant export markets for New Zealand, this would also bring big benefits for New Zealand.
The Trans-Pacific Agreement is a high-quality, comprehensive agreement and is WTO consistent. By promoting increased trade liberalisation it will support continued ambition in the Doha Round in the same way that the creation of APEC was a spur to other countries to complete the Uruguay Round of the WTO.
The elimination of tariffs and the removal of other barriers to trade stimulate economic activity. This agreement at a time of global economic uncertainty, such as we are currently experiencing, is therefore particularly important. Further adding to our efforts towards regional consolidation and trade liberalisation is the ASEAN - Australia - New Zealand FTA, also known as AANZFTA. We successfully concluded substantive negotiations on 29 August in Singapore, finalising arrangements with the trade ministers from Indonesia and the Philippines . ASEAN collectively represents a market of more than 575 million people. Our exports of goods to the ASEAN market have grown at 24 per cent per year over the past three years. Taken together, those ten countries were New Zealand's third largest merchandise export market last year, worth NZ$4.6 billion.
It was curious that this deal barely registered with the New Zealand media.
The FTA is a means by which we will eliminate tariffs on all key items of trade interest to New Zealand in these markets. This means we protect New Zealand businesses' access to ASEAN as well as securing a competitive advantage against other countries that are also active in the region. Whilst agriculture was a sensitive part of the AANZFTA negotiations, progressive elimination of tariffs on all key trade products is an excellent outcome for our food exporters.
It also critically, made us a part of Asean's strategic trade architecture.
Closing out the "hat trick" for 2008 is the NZ-China FTA which comes into force in two days' time.
As has been well canvassed, this agreement is a major outcome. It sets a high standard, and is a model for how two trading partners - disparate in size but complementary in the products and services they offer - can take a trading relationship to a new level.
Creating new opportunities in China can deliver large benefits. China is the world's third largest economy - around one quarter of the size of the US and 60 percent of Japan, with a population of over 1.3 billion people and a rapidly growing middle class. China's GDP has been growing by about 10% each year for nearly three decades.
China is our fourth largest export market. A pre-negotiation study of implications from the deal estimated that a high quality FTA would increase New Zealand exports to China by up to NZ$350m a year.
The deal provides for elimination over time of tariffs on 96% of our current exports to China. Based on current trade, that will equate to an annual duty saving of $116 million. When the deal comes into force on 1 October, 35% of imports from New Zealand will be duty free. Duties on a further 31% of our exports will be phased out over five years. Tariffs greater than 20% will be reduced to 20% on day one, and will be phased out over 5 years. We secured a zero tariff outcome for all our key agriculture exports, with phase-in over 10 years for some of the most sensitive products in dairy, meat, and horticulture.
Alongside these agreements we also have a number of other agreements that we are currently working on.
We have recently re-engaged in talks with this year with Malaysia. The seventh round of negotiations - or the first round since re-engagement - has recently been held in Kuala Lumpur, with promising progress towards building on the AANZFTA outcome.
We have had three rounds of FTA negotiations with six states of the Gulf Cooperation Council, - Saudi Arabia, Oman, Qatar, Bahrain, United Arab Emirates and Kuwait. The GCC together forms our seventh largest export market, worth over eight hundred million dollars a year.
With India, we are conducting a joint study into an FTA. The bilateral trade and economic relationship has a great deal of unrealised potential. New Zealand presently exports almost no dairy and meat to India due to high tariffs and non-tariff barriers. There are good prospects to build export trade from its low base of NZ$360 million if these barriers can be reduced.
It is expected that the study will be completed and referred to the two governments before the end of 2008, with a joint recommendation to commence negotiations on an FTA in 2009.
Following a positive joint study on the implications of a free trade agreement with Korea in April, it was agreed that two rounds of preparatory talks will be held. Our expectation is that Korea will be in a position to announce a decision to enter into FTA negotiations early next year, following approval by its National Assembly of the Korea-US FTA.
We will hold the first round of preparatory talks in Korea next week and the second round in New Zealand before the end of the year. We have significant offensive and defensive interests in Korea with potential tariff savings from an FTA in excess of around $200 million annually.
And finally Japan. Japan is our other key partner in North Asia; we celebrate this month the 50th anniversary of our original Treaty of Commerce with Japan. We are making gradual progress towards an FTA negotiation, with Prime Minister Helen Clark and former PM Fukuda agreeing that an FTA study should be undertaken by the two countries. We are currently discussing with Japan the Terms of Reference for such a study and hope to get this underway next year.
But working to break down tariffs and barriers to trade through FTAs is only one aspect of what we have to do. There are other actual and potential barriers to be addressed. Sustainability is one of these challenges. It is particularly important for New Zealand due to our reliance on the food and beverage sector. Half of our exports are food-related, with the sector employing one-in-five of the New Zealand workforce.
Like other policy areas such as animal welfare, there are legitimate policy objectives to which we subscribe and indeed, by having high standards, we can make these a positive factor in our international relationships marketing.
Aspects of the sustainability issue, however, could pose threats to our trade interests. A case in point was the misleading concept of food miles and some of the inaccurate comment and advertising about New Zealand products in the UK market - and elsewhere in Europe.
Thanks to the work that had been commissioned in New Zealand, it was possible to turn that debate around into a focus on the carbon footprint of products, where our key products compare positively with locally produced products in Europe, even after taking into account the distance travelled. We continue to monitor closely developments in our overseas markets on carbon footprinting research and on the potential development of international standards in relation to measurement of the carbon footprint. Our approach is to try to be ahead of the game and to see the opportunities which research and innovation can give us.
We need to be ahead of the pack when it comes to environmental performance, global competitiveness, and delivering new products and services to market. We are facing growing competition from lower cost, higher volume producers. As well, consumers in affluent markets have rising expectations about the quality of the food they consume and the way it is produced. We can expect ever more focus on the functionality of food and on the extent to which it is sustainably produced and supplied.
The government has recognised the need for similar innovative thinking to build on our key strengths in pastoral agriculture. It announced New Zealand Fast Forward, a $700 million initiative to lift the global competitiveness, dynamism, value and sustainability of New Zealand's pastoral and food industries.
The future of this will depend on the outcome of the election, with National inexplicably promising to scrap this initiative.
This is an area that New Zealand can have a real competitive advantage. We need to position sustainability as a global opportunity, not as a compliance cost. We need to shift the focus of businesses from the basic understanding of sustainability as equating to efficiency savings, to one of innovation, value creation and product differentiation in the marketplace.
There are larger concerns too. One element of the climate change debate in some developed country markets has been the suggestion that imports from countries which do not take on emissions targets, should be targeted and have to pay a levy to compensate for their lower production costs. This so-called "border tax adjustment" concept - while not yet an immediate threat - is another trade element of the sustainability debate, where we need to be vigilant and engaged.
Where does this leave New Zealand agriculture?
The huge growth in demand from our Asia-Pacific neighbours should help to keep commodity prices high. There are new opportunities for New Zealand agriculture in those markets, which is why the focus for our FTA efforts is in that region. We can already point to recent success with China and ASEAN, and we are working on closer engagement with Korea, Japan and India, as well as the negotiation with the US and others for a Trans Pacific Partnership. Further liberalisation from multilateral negotiations, and from reform in our key markets, would deliver important new benefits.
New Zealand's pastoral and food industries have a strong productivity record, which requires ongoing improvement. Creating new market access, and improved trading conditions and regulatory links overseas will be an ongoing challenge. We need also to focus on the competitiveness, dynamism and sustainability of New Zealand's pastoral and food industries.
Given the continuing importance to the New Zealand economy of the agricultural sector, our future prosperity relies on our progressing on all these fronts.