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Address to Latin American Business Council

Hon Tim Groser
Minister of Trade

28 June 2013


Address to Latin American Business Council

I returned recently from representing New Zealand at the Summit of the ‘Pacific Alliance’ in Colombia. We are now an official observer of the Pacific Alliance – along with Australia, Canada (Stephen Harper, the Canadian Prime Minister, was also present in Colombia) and a handful of other countries.

At this stage, the Pacific Alliance includes Mexico, Colombia, Chile and Peru. It has a combined GDP of over $2trillion – equivalent to the 8th largest economy in the world. This is about the size of ASEAN. They are the countries in Latin America that want to join the global economy and liberalise trade and investment flows, not follow inward-looking import-substitution models that made so many countries poor in the last Century. We (almost certainly working with Australia) may have a new project on our hands: developing a long-term strategic relationship with them in the first quarter of the 21st Century.

We are still of course interested in the other Latin Countries outside the Pacific Alliance – led by the biggest of them all, Brazil and the Prime Minister visited Brasilia only a few months ago. But today my focus is exclusively on the Pacific Alliance.

The Parallel: Building Our Links with Asia

From a purely New Zealand perspective, there is a certain parallel here with our great success story in the last quarter of the 20th Century – developing a surging economic relationship with Asia. Make no mistake about – that is still a work in progress and there is still massive upside left for NZ here. But our relationship with Asia was not always like that and we need to bear this historical parallel in mind when considering our options in Latin America where our economic relationship is similarly ‘thin’ and undeveloped.

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The political message here is simple: things change. And, more to the point, we can effect change through conscious and consistent foreign policy strategy. There are some fundamental lessons to be derived from our long-term success in Asia that I think we can apply to Latin America.

Reflect on where we have come from with respect to Asia. In the period from the 1940s to mid-1970s, our involvement in Asia had virtually no economic component whatsoever. Our involvement in Asia was dominated by insecurity, involvement in their various land and sea wars, and (in the case of the then Federation of Malaya) counter-terrorism.

Until, say, the mid-70s, most of these Asian economies were then mired in poverty, authoritarian governments, and hopelessly inward-looking economic policies attempting to be self-sufficient in almost everything. As they moved progressively towards more open political systems (Indonesia is now a fully democratic country and even Myanmar has taken its first baby steps towards more open political markets) and adopted more rational and orthodox open economies, that all changed. This allowed NZ and Australia to be where we are today with them and develop outstanding platforms for our trade and economic relationships (the FTA with China, the FTA with ASEAN for example). Export companies exist and people have jobs in NZ because of this. TPP will carry this process of engagement in the Asia Pacific a step-change forward.

The countries in Latin America, which border the deep blue waters of the Pacific that we share with them, are well and truly making the same transition towards more open political and economic markets. That is, they are following the same pattern as our Asian partners did some years before them. Like Asian countries of the last quarter of the 20th Century, they too are emerging from deeply difficult pasts – military dictatorships or effective one-party States, a history of human rights abuse, terrorism (often fused with the narcotics trade), inward-looking economic policies and engrained poverty.

Obviously some of them are far further down the track than others who still face formidable development challenges. Chile, with a per capita income around 70% of New Zealand’s, is probably less than 10 years from becoming a developed country; Peru grew by an average annual real growth rate of more than 6% over the last ten years. Colombia, while it grapples with continuing problems with terrorism and narcotics and a population of nearly 50 million people, may well become the second largest economy in South America within the next ten years. Mexico is forecast by some experts to surpass Brazil as the largest economy in Latin America despite the large difference in size (110 million for Mexico versus 190 million people for Brazil).

Finally, it is all about optionality. NZ’s trading future has never looked better, having struggled to find markets once our main export market, the UK, went into the then EEC, now EU.  As we fought our way through that shock, we learned the hard way that no-one owes NZ a living. We have to create options with smart, creative and very long-term political strategies. We might just have that new project on our hands with respect to the Pacific Alliance.

Latin America: NZ Inc. Approach

I have been around the edges of a debate inside the NZ Ministry of Foreign Affairs over decades. There has never been an argument about the principle of trying to develop a more productive relationship with the countries of Latin America. That is not, and never has been, under debate. The problem has been to operationalize the idea.

On the positive side of the agenda, and almost always working hand in glove with Australia, we have enjoyed very productive relationships with Latin American countries on common multilateral agendas. These issues are wider than trade policy, and cross into a variety of UN forums including disarmament and more recently Climate Change with our shared membership of the Cartagena Dialogue and the Global Research Alliance on Agriculture Emissions which has a strong Latin component. But shared interests in multilateral trade reform stand out as the strongest element. And it is not just networks of experienced officials that understand this. There is widespread appreciation of this up to and including Head of Government level.

The Cairns Group – very influential in the last successful Uruguay Round multilateral negotiations – started as a Latin/Australia/NZ political initiative and grew from there. The networks that have been built up those experiences are still there. It is when we go beyond our strong shared interests in common multilateral agendas, that we encounter the real problem. The problem is different: the bilateral relationships we have with many of these countries remain what I would call ‘thin’. It is all perfectly friendly and cooperative; it is just that there is not a whole lot going on.

So what are we doing about this? Well, quite a bit and the main point of my address today is that I think the formation of the Pacific Alliance could be transformational in terms of deepening our relationships with at least an important sub-set of Latin American countries.

First, we have established a Latin American Strategy designed to deepen our links with Latin America and to maximise the economic opportunities for New Zealand in the region. This strategy has been based quite explicitly on the understanding that we prioritised other regions, and we are ‘lite’ on Latin America. Inevitably, this Latin American strategy has a variety of different ideas and concepts. As always, it starts with political engagement.

Here, the Prime Minister blazed the trail politically into the Pacific Alliance three months ago, visiting three out of four of the countries (Mexico, Colombia, Chile) and establishing the political bridgehead for a sustained engagement with these countries. He asked me to follow up by representing New Zealand at the meeting of the Pacific Alliance in Colombia. If you are interested in becoming an anchor tenant in a new development, it does help to get in on the ground floor and lock in the ground rental.

We have a variety of programmes in place to deepen our tourism linkages, air links – which are already not too bad, since we have around 10 flights a week between the region and Auckland and a further three coming via Sydney.

Education is another obvious opportunity. We have seen how important Asia has become to our international education sector. We supply an excellent English language alternative according to all objective international comparators. The relentless rise in the dollar has eroded some of our earlier claims to affordability, but not removed them. We see every reason why young people from this region should consider the NZ option. We are trying to develop better science and research ties.

Investment and our extraordinary strengths in agriculture technology stand out as obvious opportunities. This region has immense agriculture potential. We already have significant investments in Chile. All this, and other similar aspects to our NZ Inc. Latin American strategy are worthwhile. But there can be no substitute for strong growth in trade and investment flows. This is where the Pacific Alliance comes into view. I think it is a huge, albeit long-term, possibility for NZ and no doubt Australia.

I will assume first that the success of the Pacific Alliance countries in the past decade in pursuing more open political and economic markets will continue. We will then need to keep very close to the evolution of the Pacific Alliance negotiations. We have the mechanism in place to that – our admission as an ‘observer’, which was the reason I went to Colombia.

My sense on the ground was that this initiative is going like an express train. There is huge political momentum behind it. As one of the Heads of State at the meeting in Colombia put it, in the short period of time it has been under high level discussion, there have been two changes of Government – in Mexico and Peru. The fact that the discussions continued seamlessly, he argued, proved that the Pacific Alliance has in effect become what he called ‘State Policy’ for the countries concerned. I think he is right.

The agenda is very ambitious and is deeply informed by some broader developments in world trade practice and theory. First, the continuing sad state of affairs in Geneva with the stalled Doha Development Round exercises a huge political and psychological influence on negotiators – just as it does on TPP. Trade negotiators around the world have a formidably consistent record when it comes to deadlines – they never meet them. That said, in both TPP, which of course also involves Mexico, and the Pacific Alliance, there is an absolute determination to maintain momentum and avoid a repeat of the WTO Doha Round.

The first order objective, and agreed at this meeting, is to remove all direct barriers to their internal trade. According to the agreed plan, 90% of tariffs will disappear immediately the negotiation is done and the rest of the more sensitive products will be liberalized within seven years. What is even more interesting is the plan to harmonise regulatory frameworks, e-commerce, rules around services trade, customs and other procedures that are so important to modern international trade.

Don’t forget: the boundaries between trade in goods and trade in services are becoming increasingly porous. If you measure NZ exports of services conventionally, our services exports amount to around a quarter of our goods exports. If you use the new models being developed by the OECD working in close collaboration with the WTO – that is ‘Trade in Value Added’ – 46% of NZ exports are services exports. It is just that our services are incorporated in our exports of everything from milk powder to niche manufactured products. The trade policy implication is clear: you need liberal access to world priced and first world quality services to be competitive as an exporter of manufactured, agriculture or any goods.

The Pacific Alliance Members are quite explicitly following what they call a ‘deep integration model’ – pretty much identical to what we and Australia have been doing in the last ten years or so through the Single Economic Market exercise after phasing out our own direct trade barriers in CER. This is very strongly influenced by much of the analytical work around global supply chains that professional negotiators study. The Ministers of Trade or Commerce were quite explicit about this at the meeting in Colombia. They want a joined-up economic zone to attract companies’ from around the world to invest bits of the supply chain in their countries.

Naturally the giant US economy will be the target both of inward investment and final market destination. And you can see the logic just by looking at the metrics of US trade and investment in the region. More than 40% of total US exports now go to Mexico and Central and South America. Collectively, Latin America is the US’s fastest-growing export destination. Mexico is America’s second-largest foreign market (valued at US$215 billion in 2012). US exports to Central America have risen by 94% over the past six years; imports from the region have risen by 87%.

Australia/NZ: Where Do We Fit In?

By joining as ‘observers’ right at the foundation of the Alliance we and Australia have already made a strong political statement of intent. I took a deliberate decision when I was there not to try to define what the role of an ‘observer’ would mean in practice.

I took this for a variety of reasons. First, because it is clear, at least informally, there are differences between the various categories of ‘observers’. There are those who will, one assumes, for the foreseeable future remain literally ‘observers’. The Spanish Prime Minister, Mariano Rajoy, was also at the meeting for obvious historical, political and cultural reasons. But Spain, as a Member of the EU, could only develop a more structured relationship with the Pacific Alliance if the entire EU Customs Union moved in that direction. I would not rule that out, but that is way into the distance.

Others are observers but clearly ‘candidate countries’. Costa Rica was represented by the President, Senora Laura Chinchilla Miranda, and I would expect Costa Rica to become a full member of the Pacific Alliance in the near future. Panama is a step further back. An early rule established by Members of the Pacific Alliance is that to become a Member you need to have FTAs already in place with each of the Alliance Members. This is a bit of a problem for Panama since to meet this requirement would involve the initiation and completion of a number of FTAs. It remains to be seen whether this rule will play a transitional role or become a permanent fixture.

I cannot talk for Australia, obviously. But my sense is that we two countries are in a third space as observers. First, I would hope that as a minimum we can engage with Members of the Pacific Alliance in a deep discussion about our experiences in CER and, more particularly, the evolution of the Single Economic Market. I describe the ‘Single Market’ exercise as an attempt to establish a model of ‘two countries, one system’.

The Single Economic Market exercise is a work in progress but is as good an example as you can find anywhere in the world of what you need to consider when you wish to go beyond the first order issues of liberalising trade in goods and services. I would be open to any proposal to deepen that dialogue, when and if the Pacific Alliance countries want to.

But I am more ambitious than that. I see no reason why we should not aspire to the long-term vision of full membership starting with free trade in goods and matching what they might negotiate in services. I see no value whatsoever in maintaining trade barriers between our part of the world and theirs. None at all. As the development success deepens, the base for a huge expansion of the economic relationship will come into view.

We and Australia have done this with ASEAN through the AANZFTA and there is no obvious reason why we could not do the same with these emerging economies. Another example is China. Our exports to China today are over twenty times what they were in the early 1990s. If you had forecast this in 1990, people would have thought you were dreaming. But it happened. And it happened because the two critical strategic drivers were in place:

·         the first was China’s phenomenal success in economic development creating a middle class market for quality goods and services that NZ can produce competitively;

·         the second was formal trade liberalisation through a combination of China’s WTO accession and the NZ/China FTA to give us access to these consumers.

One without the other will never do the trick for our country’s export future. In the case of the Pacific Alliance, the first factor – the growth of their economies and further development of a middle class – is entirely in their hands and they are doing really well. We have some influence on the second strategic driver – hence the initiatives we have taken consistent with deepening trade liberalisation with the countries concerned.

With respect to liberalisation of trade in goods and services, NZ already has an FTA with Chile (P4) and there is a pathway to an FTA with Mexico and Peru via TPP. That leaves only Colombia within the current configuration of the Pacific Alliance. Precisely with this in mind, I wrote a strategic think-piece on a possible FTA between NZ and Colombia and handed it across to Colombian Ministers at the Ministerial Climate Change Meeting late last year in Doha, Qatar. This is, incidentally, a classic example of the reality of any of these major international conferences. They provide endless opportunities for doing business with decision makers in the margins of such meetings and often on unrelated matters.

This proposal was received by Colombian trade experts with considerable interest. In fact, rather more than I had expected since normally there is a long gestation period before you get a considered response. The Prime Minister was then in the ideal position to advance this concept in his discussions with President Santos in Bogata in March this year. In the press conference after their excellent bilateral discussions, President Santos spoke very favourably about the idea of a bilateral FTA. Colombia is highly experienced in this area and of course already has an FTA with the United States.

I then in turn followed up the idea of an FTA with Colombia with Colombian Ministers in the margins of the meeting of Heads of State of the Pacific Alliance. My sense is that this will take a little time to come together because understandably the Colombian system will be preoccupied in the immediate future with the pressing agenda of the Pacific Alliance. And indeed, so they should. As I said to various Ministers and senior officials of the Alliance, we don’t want to be ‘observers’ of a talk-shop; we want to be observers of something real and substantive.

The objective is, at least in my mind, clear: we want free trade with all Members of the Pacific Alliance. The precise means or pathways to achieve this are another matter. But clearly, having already been accepted as an ‘observer’, with TPP in a mature state of negotiation, with the existing FTA with Chile already in the bag, and our proposal for a separate bilateral FTA with Colombia, we are in exactly the right space as the Pacific Alliance strategy unfolds.

I think it is exciting and could become the next ‘new project’ for NZ trade policy strategy.


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