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Address to Nikkei Forum – Tokyo, Japan

Address to Nikkei Forum – Tokyo, Japan

Given the theme of your Conference – "Rising Asia: Messages for the Next 20 Years", it took me no time to select a topic for my speech – "TPP and Trade Integration in the Asia-Pacific".

Trans-Pacific Partnership (TPP), or the more general issue of economic integration, is, I believe, central not only to your over-arching theme, but an issue of high political and commercial importance to Japan and to Abenomics, which we consider is reshaping Japan's economic trajectory in an extremely positive way. And one aspect in particular encouraged us: the Prime Minister made it very clear that the Japanese Government saw structural adjustment – the main pillar of the 'Third Arrow' – as crucial to success of his internal economic programme. Equally, the success of TPP is recognized as crucial to achieving structural reform in Japan. Minister Amari’s responsibilities are instructive – he is Minister of State for Economic Revitalization and TPP.

It is not always this way. Far too often, Governments around the world take a narrow, one could say 'mercantilist', perspective on international trade negotiations, rather than see them as helpful policy instruments to broader national programmes of reform. But there are exceptions. I will give you two examples – one involving a very small economy and the other involving not Japan, but another giant economy.

The small economy example I shall take is my own – New Zealand. One economic analyst, considering the plight of developed economies, has recently called NZ 'the rock star economy'. We certainly have enviable economic numbers and prospects – growth trending up to 4%, net debt to GDP below 30%, unemployment at 6% trending down to a bit over 4% and the highest ever recorded labour force participation rate. And all of this has been achieved while we struggle with the effects of the Global Financial Crisis and the massive destruction in Christchurch, our second biggest city, by a devastating earthquake in which tragically a number of young Japanese died.

However, we have mixed feelings about being called 'the rock star economy'. We know that such a description could breed complacency and encourage a loss of discipline in policy. Nevertheless, the comment has been made and we are certainly in a confident mood

But it was not always so. Until we made a decision to open up the highly protected sectors of our economy, NZ adopted a highly defensive position in international trade negotiations making no contribution whatsoever. We protected almost all our industries and several of our then highly uncompetitive agriculture sectors behind the developed world's last remaining import licensing system, augmented by highest average tariffs in the developed world.

We needed reform, we needed structural adjustment, we needed to do something to improve our productivity and export performance in our highly protected sectors. Finally, we came to the conclusion that this would never be done unilaterally. We needed the impetus of external competition. We then began a long, slow process of opening up the protected sectors of our economy first with our then largest trading partner, Australia, later the world.

Let's go to the opposite end of the spectrum – the giant economy of China. I can be very brief because you will be far more familiar with the extraordinary process of economic change that essentially began when their visionary leader Deng Xiaoping famously proclaimed in the late 1970s "It is glorious to be rich" and who started a process of opening the then closed economy of China with a special economic zone in a small fishing village of some 50,000 people called Shenzhen.

Today, Shenzhen is a giant trading city of some 12 million and its economic success has spread to dozens of cities and many provinces. The huge progress China has made in dragging hundreds of millions of its people out of poverty would have been impossible without opening up the economy to competition. Chinese economists and intellectuals today openly credit the tough conditions China had to fulfil to resume its position in the WTO as essential to the next wave of economic reform. Today, following the conclusions of the Third Plenum, the Chinese leadership is now signalling its readiness to engage in further and deeper reform.

In terms of using external pressure as a dynamic, China’s WTO accession is acknowledged to have run its course, hence the strong interest of China in a variety of free trade agreements. We are one of the countries with which China has a comprehensive FTA. It has utterly transformed our economic relationship for the better. NZ is of course, far too small an economy to have much of an impact on the world's second largest economy – hence the strong Chinese interest in another mega-regional trade deal, RCEP, or the Regional Comprehensive Economic Partnership negotiations involving 16 countries including Japan and NZ.

Potentially, China may also see TPP as another opportunity. There is certainly an unmistakable increase in interest from senior Chinese officials in TPP. I am constantly asked for briefings on TPP and I am always happy to do that.

So the link between involvement in comprehensive FTAs, or trade and investment integration agreements by whatever name, and internal reform is certainly nothing new and we are delighted that your Government sees TPP in this light. Let me quote Prime Minister Abe:

"If Japan alone should become inward-looking, we would have no chance of growth. Companies would not invest in Japan. Talent would not be attracted either. The TPP is a framework which promises 'prosperity in the future' in the Asia Pacific."

Opposition to this bold decision by your Prime Minister was inevitable and we are now seeing it. There is no reason to be surprised by that. What drives protectionism is not so much 'vested interests' but fear of change. There is nothing improper in that. It is human nature. I want to explore this a little more deeply. I learned this in my own country four decades ago when we took our first uncertain steps to opening up the highly protected sectors of our economy.

Our wine industry for example was completely opposed to any liberalisation. They pointed out, perfectly accurately, that Australian grape yields, helped by the warmer Australian climate, were far higher than was attainable in any region of NZ with its cooler climate. At that stage, prior to liberalisation, we did not export a single bottle of wine. Our wine was not of sufficient quality, and was uncompetitive internationally. You required an import license to import any wine. Our domestic wine producers feared they could only survive behind high domestic trade barriers.

Well, we went ahead with very slow but progressive liberalisation in the teeth of their opposition. Today, the NZ wine industry is incredibly strong and has a fantastic future. It is innovative, overwhelmingly export oriented and competitive internationally. It is not competitive by being low cost – indeed, NZ average wine prices per bottle are the highest in the world, even slightly higher than French wines. In short, we compete on quality.

Against this background, I would invite you to reflect further on Prime Minister Abe's view about a new future direction for Japanese agriculture. Let me quote again directly from Prime Minister Abe's statement:

"Japan has agriculture products which are carefully grown in the four seasons. As the world becomes richer, I have no doubt that delicious and safe Japanese agricultural products will become increasingly popular… the TPP is not a crisis, it is a big chance."

In other words, competitiveness is not just about cost – you can, as the NZ wine example shows, be extremely competitive and relatively high cost. It is your value proposition in today's world that is going to produce the winners and we have no doubt that moving to high quality agribusiness is the real future of Japan in this sector as the number of well off consumers around the world and Asia in particular increases at a phenomenal rate.

Rising Asia: The Era of Hyper Globalisation

What is happening in Asia is not unique, but is the largest single component of an unprecedented global phenomenon called by some analysts 'The Era of Hyper-globalisation'. It is projected that the number of middle class consumers in emerging markets – now around 500 million – will rise to some 3.2 billion by 2030, only 16 short years ahead.

Within Asia, China is the largest component – but only that, a large component. There is, of course, another sleeping giant – India. We all wait with intense interest to see whether the electoral tsunami in India might lead the new Prime Minister-elect, Mr Modi, to adopt pro-growth policies that would unleash the enormous growth potential of that second emerging developing country super-power.

Governments everywhere are responding by negotiating trade and investment integration agreements. In the Americas, we have the Pacific Alliance. At this stage, this new trade grouping includes Mexico, Peru, Colombia and Chile (3 of these countries are APEC Member Economies). They have just successfully completed the negotiation of a fully comprehensive FTA. They have dealt with their most sensitive agriculture sectors – and they are all agriculture sectors – by long timeframes, not by excluding them from complete liberalisation.

Closer to Japan in a geographical sense is the AANZFTA Agreement – the FTA that integrates the Australian, NZ and the ten South East Asian economies of ASEAN into a single free trade zone covering some 600 million people. Indonesia finally ratified the agreement in 2011 so this huge FTA is now in the process of being implemented.

Three crucial mega-regional deals are also under negotiation globally. TTIP – the Trans-Atlantic Trade and Investment Partnership – is intended to unite the 28 Members of the EU with the United States. In our region, both Japan and NZ belong to the other two negotiations – TPP and RCEP.

Asia Pacific Integration

My focus today is on TPP – by far the most mature negotiation of these mega-regional deals, but a word first on RCEP. This is a world of 'competitive liberalisation' and if TPP falters, RCEP, either in its current full form or some 'slimmed down' version with a 'two-speed trajectory' is likely to take leadership of the process of Asia Pacific integration. What I mean by 'two speed' is simply the possibility that we may find not all of our negotiating partners are finally able to move forward.

RCEP stands for the Regional Comprehensive Economic Partnership negotiation. It includes 16 countries, all but one (India) are APEC economies and they share the distinction of having an FTA with ASEAN, the Association of South East Asian Countries. Crucially, RCEP does not include the United States but does include China and India. TPP is of course centred on the United States and Japan – respectively, the world's number one and number three economies. When you step back and try to make sense of this, what do you see?

First, and most obviously, an explosion of interest among Governments in negotiating new and binding international trade and investment agreements – call them FTAs, 'Closer Economic Agreements', 'Partnership Agreements', they all add up to the same thing.

This is a little surprising at one level: conventional wisdom would have suggested there might be little appetite for liberalising trade as the world struggles to extract itself from the biggest global downturn in 70 years. I think Governments are simply rediscovering the old truth in the phrase 'trade is an engine of growth'. Further, the growth of regional and global value chains makes even small degrees of protectionism deeply counter-productive.

Second, and I say this with some regret, this explosion of interest in negotiating new liberalising agreements is not taking place in the WTO. I have spent most of my professional life in the GATT and the WTO. We all agree that the global economy needs a global system of rules. That is still thankfully intact but the negotiating function of the WTO has still yet to prove it can find a political formula to advance the hard-core issues of liberalisation of international agriculture, non-agriculture or industrial goods and services.

Third, these new mega-regional agreements are not low-quality agreements including many exceptions to liberalisation. This is in sharp contrast to many poor quality FTAs of the 1990s.

Fourth, and I think this is most intriguing, these are what I have called 'convergent' FTAs. In no case do they break entirely new ground. In most cases, the negotiating partners involved in TPP and the other mega-regional trade deals already have numerous bilateral FTAs with each other. They are literally 'collapsing' these bilateral agreements into broader agreements. In TPP, for example, NZ has an FTA with Singapore. Singapore has an FTA with the United States. Mexico has an FTA with Japan. Canada, the United States and Mexico have a trilateral NAFTA agreement. All of these FTAs and others are now 'collapsing' into one mega-regional trade deal, TPP.

Legally, the constituent parts of these mega-regional deals such as TPP – the early generation bilateral FTAs – will continue to exist. But in many cases they will be 'empty shells' – they will continue to exist, washed up on the beach by the political tide, but there may be nothing living inside the FTA shell since these FTAs will have been overtaken by events. There is an important message here for any negotiating partner that finally decides they cannot accept the final result of the negotiations. They could be left behind.

The Roots of TPP

TPP has deep roots. It started with a bilateral FTA between Singapore and NZ. We then invited Chile into the negotiation. The vision of the earlier Singapore-NZ FTA was to be a bridge to what we called 'P5', or 'Pacific Five'. For that, we needed a Latin American economy in the hope of capturing the interest of the United States. Eventually, Brunei asked to be included and we negotiated not P5, but P4 – four small APEC Economies. And then we waited.

Eventually, the United States, looking for a platform for the 'pivot' to Asia in the economic sphere, started to look to this interesting, but economically modest agreement of P4. After some time, President Obama decided to participate, using the P4 agreement as the legal base. Since NZ is the legal administrator, or 'Depository' of P4, we continue to be the Administrator of TPP.

As soon as the United States had made its move, others followed – including eventually, Mexico, Canada and Japan. And of course others, notably Korea, the Philippines and China may follow. TPP is, as we like to say, now 'bigger than King Kong'. Furthermore, if it succeeds, it will exercise a huge influence on an even broader and more ambitious goal – to be a decisive 'building block' to FTAAP – the 'Free Trade Area of the Asia Pacific'.

This is a goal first endorsed by APEC Leaders in 2006, including the Leaders of both our countries at the time. That implies free trade with China. I have just returned from Qingdao – that great city of Shandong Province – for the APEC meeting of Ministers responsible for Trade at which we took a further step forward towards that visionary goal.

Japan's Entry into TPP

The entry of Japan into the TPP negotiation was transformational. The addition of the world's third largest economy immediately raised the stakes. We are delighted that your Prime Minister made such a positive and emphatic statement on 15 March 2013 in signalling why Japan wished to be involved and how a high level TPP agreement would complement the Japanese recovery.

Today, when we look at Japan, what do we see?

We see an extraordinary nation. In terms of geographic size, Japan is only some 10% bigger than NZ. Even in population, with some 126 million people, certainly Japan is a large country but Pakistan and Nigeria both have more people. And yet in terms of economic clout, Japan incredibly contributes some 9% of global GDP. This is a testimony to the genius of the Japanese people, even though we recognize that in the last 20 years Japan has, one could say, gone sideways.

Your Prime Minister's response – known around the world as 'Abenomics' – represents a profound and dramatic response to these deep-seated problems. As your Prime Minister said to the OECD Ministerial Meeting only weeks ago and I was in the audience at the time:

"The Japanese economy has been reborn through my 'three arrows'. Compared to seven years ago, the economic landscape has changed completely… I will never be afraid of reforms. The Japanese economy is back. The Japanese people are reaping the benefits of economic revival. The conditions are all set. Now it's time for bold reforms".

Not only is this important to the Japanese people; it is important to all countries. We cannot have a healthy world economy and a sick Japan, given its size. The first two arrows – a massive expansion of the monetary base and a huge fiscal expansion – have been fired and have had unquestionably positive results. Now comes the tough part – the 'third arrow' of structural reform of which TPP is a central part. So where do we stand on TPP?

The State of TPP

TPP is now at a crucial stage. I think of it as a negotiation in two parts, though this is a bit of a simplification. The first part is a negotiation over rules designed to meet the realities of the 21st Century. The second is a negotiation over market access. They are inextricably linked – we cannot sign off 21st Century Rules and ignore 20th Century unresolved market access issues, of which deep pockets of high protection in agriculture (negotiators call this 'tariff peaks') are unaddressed.

The rules negotiations are extremely advanced. Japan, as the world's third largest economy with deeply sophisticated industrial, pharmaceutical, motor vehicle, software and hardware sectors has a huge amount to gain here. The rules negotiations on matters such as Intellectual Property, E-Commerce, new rules for State Owned Enterprises, Competition Policy, Government Procurement, and the Movement of Business People as part of a Services outcome – are all crucial to the future of Japanese commerce.

Second, Japan has so much to gain from TPP by being what I call 'on the TPP bus'. If successful, the 'TPP bus' will pick up passengers at the Tokyo station. But this is not its final destination. The 'TPP bus', if we complete the negotiation, will carry on to other destinations in the Asia Pacific. Though TPP may yet still stumble if Governments finally lack the courage to take the final decisive decisions to confront their highly protected sectors, there is every reason to believe TPP will be the decisive influence in creating the entire FTAAP or Free Trade Area in the Asia Pacific.

Finally, on the gains to Japan from TPP, let us factor in the least obvious and most controversial: the gains to Japanese agriculture from TPP. This may sound controversial but actually I am saying nothing here that your Prime Minister has not said. Japanese agriculture is in a political 'cul de sac' – a road that, without change, leads nowhere. Let me recall the central facts mentioned by Prime Minister Abe in his statement of 15 March 2013:

• Large areas of cultivated land have been abandoned;

• Farmers are in trouble – and I know from a recent visit I made to Hokkaido, that even there (Hokkaido is regarded as among the stronger agriculture regions) farm profitability is a huge problem;

• For full time farmers, less than 10% are under the age of 65. Without rejuvenation of your farming communities, Japan agriculture has a deeply difficult future.

Japan's agriculture future does not lie in trying to compete on cost, but on quality. And there is a future there. It is in high quality, specialized agri-business appealing to the new generation of wealthy Asia Pacific consumers who are more concerned with quality and food safety than price. That is a huge market. But this will require structural adjustment.

Ladies and gentlemen, given Japan's role both in the world economy and in international trade, it would be inconceivable for us to fail at this juncture. To succeed with TPP will require real political courage. But I am confident that Abenomics has provided the Japanese nation with the confidence to continue to take bold steps towards a much better future.


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