The State of New Zealand Trade Policy - Speech to New Zealand Pacific Economic Cooperation (NZPECC) AGM, Wednesday 8 May 2019, Wellington

Hon David Parker

As we approach the middle of 2019 and the mid-point in this parliamentary term it seems appropriate to take stock of New Zealand’s trade policy.

The importance of trade to New Zealand is a given.

We do not build computers or mobile phones or cars, much medical machinery and medicines; and, because our domestic economy is too small to provide an adequate market for what we are best at producing, we have to sell to the rest of the world in order to pay for the standard of living that we want.

Trade is crucial to securing and increasing the prosperity for all New Zealanders, but we are operating in a difficult and challenging world.

I talked earlier this year about the end of the ‘golden weather’ for New Zealand trade policy, which started with the establishment of the WTO in 1995. The assumption of ever reducing barriers and ever more open trade no longer holds firm.

Since 1995 we have lived in a global trading system underpinned by the multilateral legal framework established in the Uruguay Round, while we have also been able to construct a partial safety net in the form of our FTAs, building on the vital agreement with Australia from 1983: Singapore in 2001; Thailand in 2005; P4 in 2006; and others subsequently.

Two thousand and eight was a watershed year.

On one hand we concluded FTA negotiations with China and with ASEAN and Australia (the AANZFTA agreement). Both of these processes had begun much earlier, led by former Labour trade minister Phil Goff.

On the other hand, the Global Financial Crisis will probably be seen as the turning point on an era of increasingly unrestrained financial speculation and financial market excess. Much of that is still with us, some of the quantitative easing put in place after 2008 have caused other problems. Low interest rates have both bid up asset prices and enabled those who already held assets to leverage them for more. The rapid transfer of wealth to the 1% has grown exponentially as economist Thomas Picketty has shown. Global growth since the GFC has been lower although it has to be said that debt-fuelled consumption prior to the GFC means some of the pre-GFC numbers were inflated. After apparent recovery in the last few years, which saw global growth peak at close to 4% in 2017, the IMF has recently downgraded its global growth forecast three times in the last year– now to just 3.3% over 2019. Political uncertainty around Brexit, global trade tensions, and softened global demand undermine Europe’s outlook while China’s growth is also expected to level off through the year.

Despite some positive signals in the U.S. job market and Chinese manufacturing sector, downside risks are evident worldwide. These are starting to come through in trading figures with the IMF expecting a 0.4 percentage point drop in trade growth (from 3.8 to 3.4) over 2019.

Allied to this, there have been significant changes to the structure of global trade. Although output and trade continue to increase in absolute terms, the share of output that is traded among economies is declining within almost every goods-producing value chain. The share of goods output that is traded internationally has fallen from 28.1% in 2007 (the year before the GFC) to 22.5% in 2017.[1]

Flows of services and data now play a much bigger role. A recent report by the consultancy firm McKinsey & Co found services already constitute more value in global trade than goods, and that all global value chains are becoming more knowledge-intensive. These changes have been explained by growing domestic demand in China and other developing countries, growth of comprehensive domestic supply chains in those economies and the effect of new technologies.

In the last two years we have seen the highest increase since 1995 in protectionist measures – a 30% increase. Four hundred measures in the first six months of 2018. Taking the broader definition of Non-Tariff Measures as a whole, all regulations in Asia Pacific Economic Cooperation (APEC) countries alone increased by 74%, from 814 in 2004 to 1414 on 2015 according to research from NZIER[2]. The cost to New Zealand exporters of these NTMs was US$5.9 billion.

Also concerning is the imposition of tariffs by the US (and retaliation either actual or threatened by its trading partners). This has led to a very real threat that global tariffs could rise to a much higher level. While there are positive signs emerging on the US-China talks, we still face a very real risk that the world could revert to the environment of the 1980’s, where might was right and countries faced unilateral trade sanctions.

In this more challenging environment, an active and successful trade policy is indispensable for a small open economy such as New Zealand. So how is our trade policy doing?

As I touched on last year, and outlined in greater detail in a recent speech to ANZ Capital Markets in March, our strategy is built around six elements.
1. Defending the rules-based system, centred in the WTO that is so crucial to New Zealand;
2. Embedding New Zealand in the emerging regional economic architecture;
3. Supporting regional and global public goods: this means organisations like the OECD, APEC and the Commonwealth. I want to come back to APEC later in this speech;
4. Advancing the concept of ‘flexible and open negotiating arrangements’;
5. Developing a Trade for All agenda in consultation with New Zealanders; and
6. Intensifying what we call our ‘Economic Diplomacy’.

Against that strategy, what progress has New Zealand made to date?

We have stepped up New Zealand’s active support for the rules-based multilateral trading system centred on the WTO. To do this effectively, it is important that New Zealand has a seat at the table when it comes to discussions about the future of the WTO – and that is what we have. New Zealand is one of 13 WTO members in the Ottawa grouping which is working to develop constructive proposals for WTO reform. We hope to address the concerns which some WTO Members, including New Zealand and the US, have in relation to the WTO.

The dispute settlement system is often described as one of the three 'pillars' of the WTO. In this context, the recent appointment of Ambassador David Walker, New Zealand’s Permanent Representative to the WTO in Geneva, to chair the organization's Dispute Settlement Body is good news.

One of David’s more delicate jobs at present is conducting informal consultations on the concerns which the US has expressed strongly about how the Appellate Body has been functioning, and the reactions of other WTO Members to those concerns. He conducts that role independent of New Zealand’s national position.

For New Zealand I would say we share some of the US’ concerns around WTO reform. For example, we too want to ensure that the Appellate Body respects the prescribed timelines for hearing cases.

In light of the need for prompt settlement of disputes, we can also understand the US concern that the Appellate Body not engage in excessive ‘obiter dicta’ or stray into ‘advisory opinions’ by pronouncing on issues not strictly necessary to settle a trade dispute before it. But we want to address these concerns in a way that minimizes the risks to the system. New Zealand’s overriding interest is a systemic one: we and many other WTO members need to ensure a functioning WTO dispute settlement system as one of the three ‘pillars’ of the WTO system.

New Zealand has also stepped up to more actively support the WTO system in the other two ‘pillars’.

On the day to day functioning of the WTO we have for example recently submitted our (long-overdue) services notification. We have co-sponsored a proposal from the US, EU, Japan, Australia and others to enhance compliance with existing notification requirements. We are seeking to revitalise the regular Committee work across the organisation.

On the third ‘pillar’, of negotiations, New Zealand is also looking to update the rules to better respond to modern economic challenges such as e-commerce and to conclude negotiations on fisheries subsidies this year.

Moving to the second element in our strategy - to embed New Zealand in the regional economic architecture - the most strategically important trade policy advance has been the conclusion of CPTPP and its entry into force last December. This gives us FTA relationships with three G20 economies – Japan, Canada and Mexico – where we faced very high tariffs and other restrictions. The agreement gives us the added security of FTA commitments that now cover 65% of our goods exports, compared with 57% before CPTPP entered into force. CPTPP will reduce tariffs charged on New Zealand goods exports just to the 11 countries that signed CPTPP of $222 million at full implementation[3].

We’re already seeing positive tangible results from CPTPP. In January, the quantity of New Zealand’s beef exports to Japan increased three-fold compared to January 2018. That will be in no small part due to CPTPP and the immediate reduction of the tariff on beef from 38.5 per cent to 26.9 per cent. That beef tariff will continue to come down over the next 16 years as CPTPP is fully implemented.

At the same time, CPTPP put aside the most challenging provisions from TPP – particularly those on intellectual property which had contributed heavily to public anxiety about the earlier agreement – and reduced the application of ISDS provisions in our trade relationships. And we have been able to safeguard New Zealand’s residential housing market in relation to CPTPP investment provisions by banning foreign investors from buying existing homes. In effect, New Zealand has been able to secure most of the market access benefits from the earlier TPP agreement while protecting our national interest.

The implementation of CPTPP (including the changes we have made to house buying rules and ISDS clauses) made a big contribution to restoring the ‘public license’ for New Zealand’s trade policy. So did moves on multinational tax avoidance, addressing the future of work (caused by the digitalisation of the economy), staff training and support for post school education and housing affordability. All of these dealt with the insecurities that are driving populism and anti trade rhetoric.

The number of submissions to the Foreign Affairs, Defence and Trade Committee (FADTC) of Parliament on CPTPP were far less than had been the case for TPP, with relatively few concerns expressed. That was echoed in the size of public demonstrations. Thousands marched against the TPP, blocking motorways in Auckland at one stage. Protests were very modest against the CPTPP; the largest was little more than 100 people.

Of course the work of rebuilding public trust needs to continue. Officials continue an intensive programme of outreach around the country. During the last 18 months they have held over 30 open public meetings and 20 hui focused on engaging with Māori as the Crown’s Treaty Partner. I know they’ve also held a number of other meetings with civil society groups and unions when there has been interest. Sometimes attendance has been low but we have persisted.

I want to repeat my view about the causes of rising protectionism, rising distrust in Government and, in many countries, growing scepticism around the benefits of trade. The reasons for the discontent do not always relate directly to trade, though it has sometimes acted as a prominent lightening-rod. Indeed, growing inequality, multinational firms' tax avoidance, higher housing costs, uncertainty created by the impact of new technologies in the workplace and the effect on people’s jobs are fundamental issues.

Globalisation is in the midst of a transformation, yet the public debate about trade is often about recapturing the past rather than looking at the future. It will continue to be necessary to grapple with the reality that the insecurity felt by people is likely to be due increasingly to application of digital technologies and rapid growth in artificial intelligence and automated tasks.

It is clear that we also need to continue our open dialogue with New Zealanders about trade if we are going to maintain public support for trade policy.

This brings me to another element in our strategy – developing a Trade for All agenda in consultation with New Zealanders. Where are we currently on that?

In August last year we announced the establishment of a Trade for All Advisory Board (TFAB), to make recommendations to me on trade policy. This is Chaired by an independent trade expert (David Pine) and comprises a wide range of perspectives across New Zealand society on our trade policy. I expect to receive their recommendations by the end of this year. Again, I am hopeful that this will both shape and add to the process of rebuilding broad public support for New Zealand’s trade policy.

Turning to the sixth element of our strategy - the Government’s Economic Diplomacy Programme – this was launched by MFAT in December 2018. It aims to better use our diplomatic network to help New Zealand exporters succeed in overseas markets and help the New Zealand Government access key international policy insights. We think we do well in helping business: NZTE focusses on the F700 high growth companies. Most of the Tin200[4] are in this group. The Ministry will be upgrading its flagship Tariff-finder site, which the Ministry expects to go live in mid-May. In addition to listing the best tariffs that exporters can get in the 20 markets where we have Free Trade Agreements, it will also list the tariffs applying in 135 other countries.

Looking to the future, what is there still to do?

Here I would wrap our fourth element - advancing the concept of ‘flexible and open negotiating arrangements (FONA)’ - with the first element of support for the rules-based system. In addition to participation in the E-commerce negotiations in Geneva, New Zealand joined like-minded members at the last WTO Ministerial to issue statements in support of other initiatives such as fossil fuel subsidies reform. We are working to ensure that WTO initiatives launched under the Joint Ministerial Statement initiatives at Buenos Aires respect the set of principles we have set out for ‘FONA’, one of which is ensuring that initiatives amongst subsets of members have a pathway to multilateralism. We are also pushing to continue reform of world agriculture trade rules, particularly subsidies.

As part of the second element of our strategy we are continuing work to further embed New Zealand economically in the region. The Prime Minister’s successful visit to China in early April clearly established that our bilateral economic relationship is in robust shape. The shared commitment to accelerate our FTA Upgrade negotiations was important. Indeed another round has been going on here in Wellington and will finish this evening. I have just come back from a very good visit to China to attend the Belt and Road Forum, hold bilateral talks with key ministers and lead a trade mission.

In my meeting with Commerce Minister Zhong Shan we agreed to take the next steps in advancing the FTA upgrade (in line with the direction from Premier Li and PM Ardern) and as I said the next meeting between officials took place in New Zealand this week. We are also closer to establishing a work programme around the Belt and Road Initiative (BRI). It was reassuring to hear China President Xi Jinping at the forum broaden the scope of the BRI while acknowledging concerns about the debt incurred by some countries’ projects. New Zealand as a developed country does not need the sort of infrastructure projects some other countries might, but there are other areas – notably greening the Belt and Road and on ease of doing business - where New Zealand may play a part.

Our other active negotiations in the region include:

• The Regional Comprehensive Economic Partnership (RCEP), which involves ASEAN, the North Asian powerhouse economies - China, Japan and Korea - as well as Australia and New Zealand and, perhaps most importantly for a host of reasons, India with its US$2.7 trillion economy and rapidly growing market for middle-class consumer products;

• the 'Pacific Alliance' of Chile, Colombia, Mexico and Peru; and

• the Upgrade of our existing FTA with ASEAN - AANZFTA.

Beyond our region, we are now well into the FTA negotiations with the EU. The Commission President Juncker told the Prime Minister earlier this year that negotiations could be concluded by the end of the year. New Zealand agrees with this objective, which is feasible if current momentum is preserved. But whether we can hold to this time-frame depends to a large extent on whether the EU can bring forward a comprehensive and commercially meaningful market access offer, which would allow progress to be made across a broad front.

On Brexit we’re working hard to ensure any issues are resolved in a way that minimizes potential disruption for New Zealand’s trade. We have now reached agreements on regulatory continuity. The Ministry has mechanisms in place to provide advice to exporters in the event that Brexit is triggered.

On market access, New Zealand has been actively engaging with the UK and the EU for more than two years to protect the current access we have for key agricultural trade exports and to make sure mechanisms are in place to deal with the administrative access to trade if and when Brexit proceeds. This access is bound at the WTO and we have stressed the importance of ensuring that these existing commitments are fully honoured.

Our concerns are shared by many other WTO Members, including all of the largest non-European WTO Members.

Looking further out, we are already gearing up for New Zealand’s hosting of APEC in 2021. At a time when international institutions are under pressure across the board, we are reinvesting in APEC, both for its role in support of international institutions and for the public good that entities like APEC generate (the fourth element in our strategy).

To illustrate the point, I want to highlight two major contributions APEC has made in pursuit of “open regionalism”.

First, it has championed the WTO as a rules-based system underpinning trade. When I am in Chile next weekend for the APEC Ministers’ Responsible for Trade Meeting, my APEC colleagues and I will be discussing what we can do to support the WTO. APEC is a forum where we can have an open dialogue about the WTO. I am not going to pretend it will be easy for us to build a consensus on the WTO. But we can build trust.

Second, APEC has been the unsung hero connecting Asia-Pacific economies over the past thirty years. For instance, the Bogor Goals of “free and open trade and investment flows by 2020” helped established a set of norms within the region that have seen barriers to trade tumble and which have been locked in through FTAs. The stretch goals we set ourselves at Bogor in 1994 have not, of course, been fully realised, but they have played a galvanising role. Next week, APEC Trade Ministers will be discussing what more we can do towards the achievement of those goals.

When we host APEC in 2021, we hope to inherit the vision for APEC for the decades to come. While much work remains to tackle barriers to New Zealand’s agricultural exports into the Asia-Pacific, and keeping an adequate focus in APEC on remaining ‘tariff peaks’ will remain a key challenge for New Zealand, you will not be surprised to hear that I see the next phase of APEC’s existence as focused more widely than liberalisation of trade and investment flows, important as that effort will remain.

How APEC’s work should be refocused is the topic of much discussion internally and with key stakeholders. Technological changes, like digital, mean the basis of trade is fundamentally shifting and we need our peoples and our economies to prosper in this new era. There is a vibrant conversation in APEC on the future of work and how our peoples, as well as businesses, can be equipped to thrive using new technologies. Governments also have a role to provide an economic environment that will promote innovation. This includes putting in place regulations that will promote the use of new technologies while ensuring that people continue to enjoy the same kinds of rights and protections that are available to them at present.

There is now a strong consensus in APEC that policies that promote greater inclusion in our economies will support growth.

There is also a growing consensus in APEC that future growth must be sustainable. This includes recognition that environmental and climate change challenges have the potential to act as a strong brake on future growth if not tackled head on. Across APEC, the quality of water is under increasing threat, energy and other resources are being depleted and pollution is significantly affecting the quality of people’s lives, not to mention their ability to work effectively.

Meeting these challenges will be vital if we want APEC to remain as the world’s most dynamic and fastest growing region. Following on from Chile and Malaysia, this will put New Zealand in a pivotal position as host in 2021 as APEC seeks to put in place the instruments that will allow it to move forward. We see PECC as an important partner in this process and look forward to working with you on it.

Thank you for your attention.

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[1] McKinsey & Co, Globalisation in transition: The future of trade and global value chains..

[2] NZIER discussion paper November 2016.

[3] The estimated tariff gains from TPP were $272 million

[4] The top 200 companies from the Technology Investment Network.

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