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Suse Reynolds Address to Probus Greytown

Address to Probus
Greytown - Wairarapa
30 July 2004
TLN's Suse Reynolds

I am genuinely thrilled to be here today. Thank you so much for the opportunity to speak to you.

I have always been incredibly enthusiastic about NZ and its potential to foot it internationally. In 1983 I spent a year on a student exchange in Indonesia. During this year, mixing with all sorts of nationalities and living in a country so vastly different from our own, I realised how much NZ has to offer. It was that year away which sparked my pursuit of a career with Foreign Affairs. Here I am twenty years on from my year in Indonesia, in my dream job, and speaking to you – MAGIC !!

I want you to head home for lunch fizzed up about trade and why it matters to you. More specifically, I want you to mull on the opportunities there are for all of us in trade agreements.

Now I acknowledge trade is not something that traditionally sets people on fire with enthusiasm and yet I have promised to attempt that for you today. It was a rash promise but let’s have a crack at it. I promise to be on the look out for signs of boredom - drooping eyelids and faces flopping into chests will be a sure sign that I’m losing you. Please feel free to cough loudly if you feel yourself fading and that will be my cue to jazz it up.

For several years the anti-trade/anti-globalisation movement has been preaching doom and gloom; multinationals are taking over the world, opening up trade means endless job losses, the poor nations are being exploited by the rich and the environment is being trashed.

I don’t for a minute believe that globalisation is the panacea for all ills but I think it is important to inject a little balance into the argument. In the same vein I think it’s important to have a balanced view of the trade agreements the Government is pursuing at the moment. It’s pursuing half a dozen or so, but I want to look at those two with the highest profile at the moment – those with Thailand and China.

Before we get down to it, let me briefly explain what the Trade liberalisation Network is and what “trade liberalisation” is.

What is the Trade Liberalisation Network?

As far as we have been able to determine the Trade Liberalisation Network is globally unique. It is a privately funded business lobby group established to broaden public understanding and support for trade. We’re about promoting policies that accelerate the prosperity and social development of all New Zealanders. That may sound rather bureaucratic, but by god we mean it.

We’re very proud of our independence and the fact that we represent about 75% of New Zealand’s exports interests. Our independence gives us the right to have a poke at the Government if we deem it necessary and we believe the depth of our representation gives us credibility when we do so.

We want New Zealanders to be more passionate about trade. We tend to take trade for granted. However, it needs our active defence and we would like you to be part of that active defence.

So what is trade liberalisation?

Trade liberalisation is quite a mouthful. It is certainly not “free trade”. It might seem a fine distinction to many, but it reflects the complexity of the issue that the TLN is very staunch about using the tag “trade liberalisation”. This involves removing the discriminatory aspects of trade and establishing rules for international business. A variety of phrases are used to characterise the trade liberalisation process.

The term “free trade” is not preferred by the TLN because it tends to suggest complete lassez faire and international trade without rules. In other contexts it refers to the total absence of tariffs. But this doesn’t mean the trade is “free”. Tariffs are not the only trade barrier. Quotas and onerous health and safety regulations just as effectively impinge on freedom to trade.

Neither is fair trade always a particularly useful term. Fair trade describes two different propositions. The first is “fair trade” that calls for protectionist measures by rich countries against products that have been produced in poorer countries at prices the rich countries cannot compete with because of their different economic circumstances.

Protectionism is defended by arguing that trade should only be conducted on a level playing field. Let’s be realistic, a global level playing field for conducting international business is unlikely to ever exist, although there is nothing wrong with aspiring to it, as the World Trade Organisation does. We need to acknowledge that even if the field was level, some players will always be better than others. It’s called comparative advantage.

Then there is the notion of “fair trade” which is used to describe conduct by consumers engaged in pro-poor trade with developing countries. In this context fair trade refers to a consumer movement whereby people choose to pay prices often above market level for products produced under certain conditions in third world countries.

So where does trade fit in our lives?

The Prime Minister has said trade is New Zealand’s lifeblood. She’s quite right. Let us look at where trade fits in our economy. Our exports total about $40 billion per annum: of which services equal $10 billion, dairy $7 billion, meat $4 billion, wood $3 billion, and fish $1.5 billion.

Here are some other interesting export figures. In the last five years, our exports of armoured tanks have gone from zero to $5.4million, our shampoo exports from $700,000 to $4.4 million worth and our dental floss exports from $5.7 million to $7.7 million worth. And did you know we export more onions than wine.

So where do the Thai and Chinese trade agreements fit into all these enormous numbers and what do they mean to the Wairarapa and you?

Those with little faith in New Zealanders ability to foot it in international markets claim trade agreements with these countries will decimate our economy and destroy thousands of jobs, particularly in our clothing, footwear and textile industries. Some of you will no doubt recall similar doomsday threats about our Closer Economic Relations (CER) agreement with Australia when it was proposed twenty years ago.

Not only has our trade with Australia doubled since its inception but initial concerns that the fifteen year lead in for the phase out of tariffs would be too fast proved unfounded. Our exports to Australia grew faster than their exports to us and all tariffs were abolished several years ahead of the original timetable at the instigation of business.

Of course some businesses had to adjust. The same will be true of agreements with China and Thailand. Some industries and employees will need help doing so, but none of the agreements being proposed will be concluded tomorrow. There is plenty of time for planning and plenty of time for business to let the government know where it has concerns or where it would like to see opportunities made easier to access.

So what about the Wairarapa’s exports? Over one hundred and fifty thousand beef cattle and nearly two million sheep graze your region’s farms. More than 80 percent of the meat they produce is sold into some 60 different off shore markets. Another hundred and ten thousand dairy cattle produce about 4 million litres of milk a year and almost all of it (95 percent) is consumed outside New Zealand. More than a quarter of your workforce is employed in agriculture; nationally the corresponding figure is only 10%.

The Chinese spent $70 million on New Zealand meat last year. Tariffs added at least 15% to the price they paid. A trade agreement should lower these tariffs and offer real potential to grow this market. We actually export very little meat to Thailand due in large part to prohibitive tariffs of up to 50%. Lowering these tariffs offers opportunities in a market of over 63 million people.

China is still our largest market for wool. It’s worth over $140 million, but we face tariffs of up to 38%. The Chinese sheep flock is the biggest in the world and a long way from the level of sophistication reflected in our sheep industry. Opening the Chinese market to New Zealand producers of sheep meat and wool is therefore unlikely to be easy as Chinese negotiators will want to protect their producers from our more efficient ones. Our negotiators must be encouraged to “hang tough” and ensure we do get more access to this market.

Over 5% of the Wairarapa’s total land area is planted in trees. Forestry and wood products manufacturing contribute over $20 million a year to your region’s wealth or GDP and it is responsible for more than 400 jobs. Wood is the country’s fifth largest foreign exchange earner generating about $2 billion a year.

New Zealand’s $120 million worth of log exports to China enter duty free, but particle board, like that produced by Juken Nissho up the road, faces 18% tariffs and kitset housing faces a 22% tariff. Imagine the markets that could be generated if the cost of these products were reduced to Chinese consumers by negotiating lower tariffs.

The Wairarapa has a vibrant horticultural industry, with hundreds of hectares of vegetables, fruit and wine grapes planted in recent years. At least 40% of our vegetable production and 70% of our fruit production is exported.

Tariffs on horticultural exports to China are between 13-17% but once other duties and taxes are added that can rise to 28% to 56%. Thai tariffs on horticultural products range between 10% and 60%. Think about the opportunities if these tariffs could be reduced.

Nearly half the value of New Zealand’s total wine sales comes from exports. Conservative estimates put China's wealthy middle class at 25 million and it is growing every day. They are all clamoring for luxury goods like those from the Wairarapa’s twenty six wineries.

The region earns millions of dollars of foreign exchange from the export of services too.

Tourism is our largest foreign exchange earner at around $6 billion a year and is responsible for around 1600 jobs in the Wairarapa or 12% of the total employment in the region. About 70,000 Chinese and 20,000 Thais visit us every year. The wealthier those countries become, the more their citizens will travel and the more they will spend. Concluding trade agreements with these countries will raise New Zealand’s profile and attract more visitors.

Let’s finish up with exports and look at the other side of the trade ledger – imports.
We export to be able to import. It is imports, not exports that allow us to enjoy higher standards of living. Exports without imports are like a job without a pay cheque. Our imports of machinery and cars total $11 billion, services $10 billion, fuel $3.5 billion, textiles and clothing $1.7 billion and plastics $1.3 billion.

Abolishing import licensing and tariffs on 95 percent of our imports has spurred the Wairarapa’s economic growth. Industry benefits through access to competitively priced inputs and the latest technology. Consumers benefit through access to a wider range of goods at better prices.

China has recently become our fourth largest source of imports. So diversified are these imports that the top ten items account for barely a quarter of the total. They include computers, clothes, shoes, toys, machinery and electrical equipment.

I have recently detected some concern that far from creating opportunities, trade agreements with China and Thailand will simply swamp us with imports. The trade balance will swing massively in their favour with little benefit for us.

So I want to talk for a moment about trade deficits – New Zealand has tended, particularly recently, to import more than we export – or to put it another way – to buy more than we sell.

Deficits with individual countries are actually irrelevant. How about our trade with Australia? For eighteen of the twenty years of CER we have run a trade deficit with Australia. But New Zealander’s have bought what they need from Australia and Australians have bought what they need from us. Any other needs have been met by other countries. What really matters is that we export or sell enough to pay for what we import. Even then, we may run an overall trade deficit and this still is not necessarily a bad thing.

There are two sides to the balance of payments – the capital account (buying and selling investment assets like real estate, shares and bonds) and the current account (the flow of goods and services and investment income). Trade or current account deficits have nothing to do with trade policy or our competitiveness off shore.

They reflect investment flows. Savings and investments determine those flows. We cannot reduce our trade deficit by restricting imports or by getting other governments to lower barriers to their markets, although that of course would be good.

New Zealanders do not save enough. Our lack of savings means that much of our business expansion and growth has to be funded by offshore investment. We rely heavily on foreign investment. At the moment, we’re also an attractive place for international investors due to our relatively high interest rates. It is this investment from off shore that allows us to buy more than we sell and to grow our businesses.

What matters most is not the difference between exports and imports but the degree to which people are free to trade and invest across international borders. If this is done freely, our resources will flow to the best and highest use raising our overall standard of living.

Don’t let people tell you that trade deficits mean we should be raising barriers to trade to either enhance our exporters’ competitiveness or to save foreign exchange. Neither of those arguments stack up under scrutiny.

What’s in it for you?

Let’s return to why trade liberalisation is so important to you personally and why we should be welcoming the prospect of more trade and the trade agreements we are discussing.

For a start there is now much more scope to “wear what you dare in New Zealand” than there was when we had import licensing and high tariffs. The average New Zealand family now spends $700 less a year on clothing than it did in the mid-eighties. To put it another way, when trade restrictions were at their height buying clothes for the family took twice as much from the household budget as it does today.

Not so long ago, if you felt the need to spice your marriage up with something saucy you had to settle for ‘good old NZ made, not so sexy, cotton creations’. You had little choice and it was relatively expensive. Now you can choose between a $9.95 pack of three or pay $80 for something silky and fantastic!

Three decades ago, to talk to friends in England you needed to book a week in advance and it cost you $80 to speak for ten minutes. Now, you not only have a choice of telecommunication providers, but for $8 you can speak for up to two hours.

In the 1960’s a new car cost you a year’s wages. Now thanks to our ability to freely import cars without high tariffs many families don’t give a second thought to buying a second car. A new car still costs roughly a year’s wages but we have so much more choice, not only in the range of new cars, but also of second hand ones.

While some still argue New Zealand’s poor are poorer than they were twenty years ago, the fact is that real incomes have improved and trade liberalisation has played a vital role.

What about your job?

At least two thirds of New Zealander’s jobs depend on trade. What do imports do for jobs? Open markets help business retain a competitive edge, they give clear signals about where the best profits can be made, they give us access to cutting edge technology and competitively priced inputs – be they goods or services.

The key point is that regulating and stopping imports through tariffs and other industry protection mechanisms does not create jobs but stifles their creation. Sure, removing industry protection may initially displace some workers, but the number of jobs in an economy and its ability to replace those lost is determined by monetary policy, labour market flexibility and other non-trade factors.

All tariffs do is send false signals about a job’s viability. Tariffs keep people in jobs without long terms prospects. Import barriers may save some jobs in certain protected industries, but at the cost of destroying jobs in other, more globally competitive industries.

New Zealand manufacturing is often cited as being particularly hard hit by the removal of tariffs and the lack of protection and support. But the fact is that in developed countries, like New Zealand, the trend is for jobs to be lost in manufacturing and created in services. Now listen to this, here are some rather mind blowing figures. In the UK between 1970 and 2000, 3.5 million jobs disappeared from the labour market but 6.4 million new jobs were created in services.

In fact, trade liberalisation does not cause a net loss of jobs at all, or a net increase for that matter, but a better, more productive mix of jobs in the economy. Imports create better jobs. Open borders to imports shift resources to industries where worker productivity is higher. Just as improvements in technology do, and in just the same way, imports raise living standards. Living standards are raised because imports keep downward pressure prices and stimulate domestic competition. These two factors improve real incomes.

Research in the US has shown that a rising level of imports usually signals the creation of more jobs. This is because rising import levels generally reflect a growing economy. It probably won’t surprise you to hear that larger trade deficits are usually associated with falling unemployment.

On the other side of the trade equation, exporters also do great things for jobs and workers. Australian studies show exporters do better things for workers in terms of wages and salaries, they provide better working conditions, have better occupational health and safety records and provide greater job security – better job security, because to export you have to be internationally competitive.

If the point of all this needs proving, you only have to look at New Zealand; in the ‘90s after all the jobs lost due to reform were replaced, a net 600 were created every week as the New Zealand economy doubled the growth it had experienced in the previous 20 years. At the moment, we have the lowest unemployment levels in decades.

I get very upset when I hear some sectors of New Zealand call for trade barriers or tariff maintenance. It’s so defeatist and reflects such a lack of faith in New Zealanders’ ability to foot in international markets.

Not only can we foot it internationally, we are footing internationally – across the board - in primary produce, manufactures, software and increasingly in the service industry – tourism, transport and education provision.

Very very few New Zealand businesses can afford to be anything other than internationally competitive. Globalisation is not going away. If your business can’t foot it without protection from the rest of the world it will always struggle to be a success.

The infant industry argument is often touted as a justification for tariffs – “just leave them in place long enough for the industry to get on its feet”. Any number of studies has shown this is not the case. New Zealand provides its own examples in the protected car and television industries of the seventies. These were inefficient, unproductive and cost the consumer dearly. US economist, Frank Taussig’s, thorough examination of early US tariffs found they did nothing to protect domestic industry. Japan is sometimes given as an example of tariff protection successfully fostering new industry. In fact, it was not the tariffs. The industries chosen for protection were globally competitive in the first place.

As Dan Griswold from the Cato Institute has pointed out, those who call for protection also systematically ignore the costs involved and conveniently over look who is actually paying for that protection. And the costs are literally huge. Industries and interests that benefit from protection are usually concentrated, organised and politically connected. You only have to look to the US steel industry, its sugar producers and cotton growers for obvious examples. In contrast those who pay the price for protection, namely consumers, but also import-using producers, are typically more dispersed and politically unorganised. As a result, their interests are discounted and ignored.

Some argue New Zealand should not have unilaterally removed tariffs. They make two points in this respect; we have lost a bargaining chip and we have put ourselves at an unfair disadvantage to our trading partners. Unfortunately, the “bargaining chip” argument just does not stack up. At 0.06% of the global population and making up only 0.27% of world trade as we do, our key trading partners – the US, Japan and Europe – were never going to, for instance, lower their dairy tariffs if we lowered ours.

To argue that we have put ourselves at an unfair disadvantage to our trading partners by unilaterally liberalising trade assumes that trade liberalisation only works if others do it too. That is mercantilist and wrong. Trade liberalisation is beneficial in its own right. As I said earlier, open markets help you retain a competitive edge, they give you clear signals about where the best profits can be made, and give you access to cutting edge technology and competitively priced inputs. As Joan Robinson, the English economist, famously said, “if your trading partner throws rocks into his harbour, that is no reason to throw rocks into your own. It may sound "fair" to do so but it is downright silly - and even harmful to oneself”.

Finally, let’s look at some of the broader issues related to international trade and address some of the anti-globalisation arguments before I wrap up.

Why is trade good for the environment?

Trade is good for the environment because the more a country trades the wealthier its citizens become. Studies have shown that once annual income reaches a certain point people start to care about the environment and become intolerant of pollution.

Researchers at Princeton University reckon the turning point comes when the annual income per person reaches around $5000. Once annual income reaches around $8000, roughly where South Korea is, almost all pollutant levels start to fall.

Some environmentalists argue for trade restrictions. But these are usually a costly and blunt instrument. Take farm trade for instance, restricting it would do nothing to tackle the environmental damage caused by producing food for the home market, particularly in Europe. A far better way to deal with environmental damage would be to get rid of agricultural subsidies which seriously harm the environment by over intensively farming.

And, how about this, the environmental services industry turns over an astonishing $420 billion a year world wide, 4 times the size of New Zealand’s economy. Liberalising this trade and allowing experts and environmentally friendly products greater access to the world’s markets would do fabulous things for the environment. So think green and let the world trade!

Why is trade good for the poor?

I acknowledge the issues here are complex. But, there are a few stark facts which make it very clear that open economies do far better than closed ones.

Two Harvard economists have found that poor countries that were open to international trade during the 1970s and ‘80s double in size every sixteen years. Closed ones take a hundred, by which time, the living standards in open economies will have grown eighty fold.

China is a great example of the poor benefiting from open borders and more trade. In 1978, Deng Xiaoping decided to try East Asia’s export led success. The transformation has been astounding. In just twenty years the economy has grown eight times bigger, the average bloke on the streets of Beijing is six times richer. Between 1990 and 1998 the number of Chinese living on less than a dollar a day has fallen by 150 million. That’s the fastest fall in poverty the world has ever seen. In 1970, exports and imports equalled 4% of its GDP, today they equal over 50%.

The critics of trade liberalisation invariably point to Africa to argue open borders do not help the poor. But, it is not the open borders that are at fault. Generally these countries have weak property ownership systems and ineffective legal systems, in other words, corruption has a free reign.

But even under these handicaps, the single best thing the world could do for developing countries would be to liberalise trade in agriculture. The OECD spends $350 billion a year on agriculture support, and only $50 billion on aid. But, the nub of it is that agriculture plays a much bigger role in developing countries economies than it does in developed countries and developing countries produce agricultural products far more cheaply than the West. Very few African farmers would choose aid if they were able to earn a decent living from their farms.

Conclusion

That’s it.

If you take only two messages from today it should be these - trade is about you: it’s all about more choice, better quality and better value. And trade agreements are about opportunities – whether they be new export markets or cost competitive imports.

If you want to enhance and protect our wonderful lifestyle, you should support trade – being protectionist and grumpy isn’t going to do a thing for us.

Ends


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