NZ China Council releases Belt and Road report

On 1 May 2018 Stephen joined in launching the NZ China Council’s report “Belt and Road Initiative – A Strategic Pathway”, prepared by PwC.  Full details can be found at www.beltandroad.co.nz. Here’s what Stephen had to say at the launch:

It is a pleasure to be able to join in launching this report today and I want to add my thanks to Colum Rice and the PwC team, as well as our other partners who have worked together to help build this strategic pathway for New Zealand’s engagement in the Belt and Road Initiative.

I’m sure you all know already that BRI is aimed at achieving development-led growth along ancient trade routes linking China across Eurasia to Europe, as well as more modern trade routes including from China across the South Pacific to New Zealand and on to Latin America.

What is not so well known is how a distant nation like New Zealand can co-operate with this initiative and how it can add value to New Zealand’s relationship with China and other countries along the Belt and Road.

That is the purpose of this report.

In March 2017, New Zealand and China signed a Memorandum of Arrangement (MoA) under which the two countries undertook to explore ways of working together in relation to BRI.

In August 2017, the Council commissioned PwC under the leadership of Colum Rice to prepare a report which placed BRI in context for New Zealand and set out a range of options to enhance connectivity with China and other BRI countries.

The options outlined in the report are not intended to be exhaustive but an illustrative indication of what could be developed under this new framework.

Our intention is to begin a discussion with New Zealand stakeholders about BRI and we are starting this discussion today.

Having spent some time now thinking about the place of New Zealand in BRI, it seems to me that the best place to begin is not with a map of trade routes.

There are multiple maps in circulation about BRI and most of them manage not to include New Zealand!

Our report does have a map, as you see here, a rather complicated one, with New Zealand and the Pacific firmly on it.

For New Zealand, the starting point for any discussion of Belt and Road really has to be the positive relationship between China and New Zealand which has grown significantly in recent years and more particularly since the conclusion of our groundbreaking FTA.

As we consider the future of the relationship, it is clear to us at the NZ China Council that the future is not likely to be a continuation of the past.

For New Zealand, the strategic context for our consideration of BRI is how we can maintain the momentum of the relationship into the future.

Today New Zealand is facing greater competition than ever for attention in China.

Australia has negotiated a very good FTA, Chile has already upgraded its FTA, European states are making a huge push to develop people-to-people links, and countries in Europe, Asia and even Latin America are already staking out their roles in the BRI.

Our relationship with China is not just about trade and investment and nor is BRI.

What is clear is that BRI is at the centre of Chinese policy and at the very core of China’s country to country relationships.

BRI matters to China and therefore, if we want to continue to expand our relationship, it has to matter to New Zealand as well.

At the time of writing some 69 countries and organisations had identified that they wish to co-operate with China in BRI – the number has continued to expand to more than 80 today.

BRI is not without its sceptics and critics so we also need to be alert to the implications of a fundamentally bilateral initiative, with China at the centre, for the region’s wider trade and economic architecture, as well as any reputational or geo-strategic risks that might arise.

Our report identifies these risks and we have considered them in relation to the specific opportunities we have presented for further discussion.

It is really up to each country to decide for itself the extent to which they choose to engage with BRI.

Having already signaled a willingness to consider engaging with BRI, we in New Zealand must now do the work to determine the depth and breadth of our engagement, consistent with our interests and our values.

BRI is dynamic and continues to evolve as the priorities and interests of China and other Belt and Road countries change.

This changing nature of BRI means it can be challenging to define clearly the opportunities it presents and hence the need for guidance such as that offered in this report.

BRI is perhaps best known for its massive infrastructure construction programme, but it is important to note, as you see here, that infrastructure is only one of five policy priorities under BRI.

It is in the area of connectivity that the Council believes BRI could provide a significant opportunity for New Zealand.

This does not mean that there will not be opportunities in the infrastructure space, both in New Zealand and offshore, but the emphasis in this report is how we can leverage BRI to expand and enhance connectivity with China and other countries along the Belt and Road.

As well as putting BRI in context for New Zealand the report identifies a number of opportunities that can be further developed in a BRI framework.

As noted earlier these opportunities are not designed to be exhaustive but indicative of the range of projects that could be developed.

PwC engaged with our stakeholder group, to capture, first of all, a range of actionable options by identifying a wide variety of initiatives that New Zealand could pursue.

PwC then helped us narrow down the suite of possible options by assessing them against six key criteria:

  • Alignment with New Zealand’s comparative advantage
  • Value to New Zealand – with a weighting to those options which had broader application in BRI
  • Ease of implementation
  • Potential to interest our Chinese partners
  • Benefits vs costs
  • Reputational risk

The outcome of this “diverge/converge” process is eight specific opportunities grouped under four categories

Each of these has been assessed against the criteria and presents, we believe, a viable opportunity for New Zealand to engage with BRI.

All the categories are in connectivity space:

  • trade facilitation (incorporating biosecurity, customs clearance and supply chain hubbing)
  • New Zealand as a conduit to Latin America
  • innovation; and
  • the creative sector

Trade facilitation could leverage our world class biosecurity regime, expertise in cross border movement of goods, and experience in working across jurisdictions in supply chain hubs.

Our geographic location and existing trade and tourism relationships with China and South America position us well as a natural connection between the two.

In the innovation space, New Zealand can utilise its strong capability in science and technology and advance our existing collaboration and promote greater commercialization of ideas.

For the creative sector, opportunities exist to use creative strengths in web solutions, gaming and other properties to expand people to people links, cultural awareness, understanding and exchange.

These opportunities can be implemented by the two governments, agencies, cities or the private sector.

Under each category the report provides some further ideas that could be explored, representing different levels of engagement.

Some might well ask – aren’t these things we are doing already and the answer is yes!

But BRI is about leverage – how can we focus the attention of partners in China on these opportunities and open up new sources of support and funding by placing existing work streams in a BRI framework.

Going forward, we are particularly keen to engage with any groups interested to be part of the conversation and thinking about how they can be involved in BRI.

We are planning a series of discussions around the country with interested stakeholders – a Christchurch event will be held on 17 May and events in other centres will follow from July.

This morning we are also launching a dedicated Belt and Road page on the Council website which can serve as a repository for our report and New Zealand-related information and commentary about BRI.

The page – which will enable you to download the report itself – can be accessed from our website at www.nzchinacouncil.com or directly from www.beltandroad.co.nz.

The web page will help deepen New Zealanders’ understanding of BRI and inform the discussions we will be having around the country.

BRI represents an opportunity for New Zealand.

It is an opportunity which is up to us to grab hold of or leave to others.

We need to move forward aware of both opportunities and risks and determine how it serves our national interest to be involved.

The China Council hopes this report is the beginning of a national conversation and looks forward to pursuing that conversation with the Government and interested groups around New Zealand

CPTPP: Six ways and more to help #SME Leap

Stephen addressed the SME Leap Summit in Auckland on 31 January.  Here’s what he had to say: 

It’s great to be here and thank you Tenby Powell for the invitation and for your leadership in putting this event together.

Tenby has not only shown considerable foresight in arranging this LEAP Summit the day before the meeting of the APEC Business Advisory Council (ABAC) here in Auckland, but also an uncanny sense of timing in that it takes place just days after the announcement of the conclusion of CPTPP in Tokyo.

CPTPP – that’s the Comprehensive and Progressive Agreement on Trans Pacific Partnership – quite mouthful, and, as I’ll explain, quite an opportunity!

Even for someone like me who has been following CPTPP closely, the announcement came as something of surprise – a real Hallelujah moment for those of us working for better market access and better trade rules in the region.

Today I’d like to cover three things:

  • first, I’d like to talk about SMEs and international trade
  • then, a closer look at what’s in CPTPP for SMEs
  • and lastly, I’d like to suggest what we – you and me – need to be doing now to prepare to “leap” at the CPTPP opportunity.

I’m speaking myself as the owner of a small consulting business among whose clients are a number of enterprises grouped in the NZ International Business Forum – known more by our Tradeworks campaign which seeks to explain trade to New Zealanders (please sign up to our website www.tradeworks.org.nz and follow us on Facebook, Twitter, LinkedIn and Youtube).

SMEs and trade: what’s the problem?

Let me start with something I can’t stress enough –  the benefits of trade are not just for larger companies.

As a small, open economy, New Zealand makes its living largely through trade and is mostly made up of small and medium-sized businesses.

It follows that if New Zealand wants to take a new giant leap forward into the global economy, it must do so off the back of SMEs.

But there is a disconnect – the statistics on SMEs and trade tell us that  80% of New Zealand MSMEs have never generated overseas income.[1]

This isn’t just a New Zealand thing: in economies around the Asia-Pacific region, smaller firms contribute on average around half of GDP, but less than a third of direct exports, and in some economies only a tiny fraction of that.[2]

Research shows that small firms which export employ more people, for higher wages; enjoy higher productivity; are more innovative; and expand faster.[3]

So, what can we do to ensure that SMEs are more successful at trade?

 Surveys by MBIE[4] and others in New Zealand reveal that small firms say they find it hard to get hold of market intelligence and the information they need about trade requirements.

They often struggle to access foreign distribution networks and customers.

There’s clearly an information deficit, and a need to build deeper and broader international connections.

Many New Zealand SMEs also cite distance from markets as a barrier and services such as logistics and transport tend to cost proportionately more for SMEs.

SMEs are also particularly impacted by the domestic business environment, typically much more so than larger firms.

That’s an ongoing challenge I know a lot of speakers will cover today.

But there’s a cross-border element too: red tape and compliance costs for meeting standards or regulatory requirements in overseas markets disproportionately affect small firms.

SMEs trying to operate across a lot of different markets can face the extra challenge of having to meet a myriad of diverse and often conflicting or unjustified requirements for the same product or service.

In the jargon we call these “non-tariff barriers or NTBs – we need to do something about those too.

Finally, access to finance is seen a major impediment to SME participation in Asia-Pacific trade.

More positively recent MBIE survey reports that 94% of SMEs say they can access debt financing on acceptable terms, and 88% can access acceptable equity finance.

But specific trade-related financing may be a different story.

Now, if these trade barriers hurt small firms more than bigger firms, then removing obstacles to trade in turn should also benefit SMEs more than larger firms.[5]

What’s CPTPP got to do with it?  

Here’s the thing – CPTPP, and other high quality trade agreements like it, can offer SMEs a real springboard into trade.

CPTPP linking eleven economies in the Asia Pacific region does this in at least six important ways.

 First, CPTPP cuts tariffs and improves market access, especially in the four economies with which we do not already have free trade arrangements –Japan, Canada, Mexico and Peru (that’s over $4 billion of trade in goods and over $1 billion trade in services).

Some improvements are also made to existing FTAs with Malaysia and Viet Nam.

Over time tariffs are reduced and eliminated on New Zealand’s key export products – dairy, meat, horticulture, wood, wine, seafood, manufactured products like agricultural machinery and medical devices.

You can find the detail by using MFAT’s tariff finder at https://tariff-finder.fta.govt.nz.

This reduces the cost of doing business – costs which weigh even more heavily on SMEs than larger enterprises.

Second, CPTPP includes disciplines to address those non tariff barriers.

Identifying and addressing NTBs is never easy, but CPTPP helps this process by providing ways to limit the impact of technical barriers to trade like rules, regulations and standards and promoting sound regulatory practices.

Much of this draws on practices and experience we have become used to in CER and APEC.

MFAT has established a new web portal for companies reporting specific problems to have these investigated and addressed – check this out at  https://tradebarriers.govt.nz – it’s a great new resource for exporters.

Third, CPTPP addresses not just goods but services– a range of measures to open services markets and are designed to assist our services exporters in sectors like consultancy, education and information technology.

Services are distinct from goods – they have been described as anything you can’t drop on your foot – but they represent an increasingly important part of international trade and are often directly connected with the export of goods.

CPTPP provides for better conditions for services trade including the right to establish operations in other markets, to obtain visas to visit the market and to engage in cross border e-commerce.

For those of you look to add value in smart, innovative, knowledge-heavy sectors such as consultancy, technical services, transport, logistics, distribution or computer services and IT, CTPP should generate some great new opportunities in overseas markets.

Fourth, CPTPP includes the first-ever commitments in a trade agreement to promote an open digital economy.

E-commerce and digitally-provided services have meant that SMEs can engage across borders in a way that could not have been imagined even a decade ago.

Smaller firms can connect directly, immediately and at low cost with any number of customers offshore.

Restrictions on cross-border data flows, expensive Customs processing for the small shipments that are typical with e-commerce, and restrictive rules on e-payments, can all undermine the benefits of digital transformation.

CPTPP puts in place new rules to ensure that the lifeblood of the digital economy – data flows – continue to circulate freely subject to reasonable safeguards for privacy and consumer protection.

CPTPP requires governments to secure the necessary tools for trade in the digital environment by enabling e-payments and allowing express delivery services.

CPTPP prevents governments from requiring firms to store customer details in local data centres, so-called ‘forced data localisation’;  it prohibits customs duties on electronic transmissions.

All of this is aimed at ensuring SMEs can sell services and goods to customers around the world without needing to invest in local infrastructure or rely on expensive or insecure payment systems.

Fifth, CPTPP contains specific commitments designed to make it easier for SMEs to do business in the region.   

Remember that one of the major impediments that SMEs have identified is a lack of information about markets and trade requirements.

CPTPP governments have agreed to set up websites containing information about all aspects of the agreement – whether SMEs are looking for tariff rates, or Customs regulations or procedures, or information about technical standards or regulatory requirements, or relevant business, tax or employment regulations.

A working group will meet regularly to share experiences on best practice to support SME exporters, to identify ways to assist SMEs to take advantage of the new commercial opportunities generated by the agreement, and to develop capacity-building programmes, training and other forms of assistance, for example around trade financing.

All of this should help to mean that, where the other chapters of CPTPP open the door for SMEs to trade, it is also enabling those small firms to walk through that door with confidence.

Sixth, the beauty of CPTPP is that it sets up a framework of rules designed to strip out exactly those trade costs and other hurdles that make life so difficult for SMEs in the international arena.

Those rules take in all aspects of doing business, including, for example, the right to sell into government procurement in CPTPP economies, as well as the need to promote good environmental practices and decent labour standards.

CPTPP is about creating the best possible conditions for modern models of business and trade, such as so-called “global value chains”.

In a global value chain, production is fragmented across multiple markets, using inputs of goods and services from a range of different countries, sourced from large and small firms, before the finished output gets to the final consumer.

New Zealand SMEs, where they do participate in trade, report that they mostly sell goods or services for use by other businesses in those global value chains, rather than directly to end consumers.   And that’s typical around the region for SMEs.

Because CPTPP streamlines the rules for trade across markets, it gives small firms the opportunity not only to step onto the international ladder, but also to move up the rungs as they develop capability, efficiency and innovation thanks to the connections they make and the skills they gain from working in value chains.

Other GVC-friendly elements of the CPTPP that will help SME goods producers include new rules that try to smooth out Customs procedures, facilitate goods trade, and provide frameworks for developing consistent, evidence-based technical rules, biosecurity and food safety measures.

All of these new rules will help to reduce the costs of doing business and address non-tariff barriers for SMEs, in whichever sector they may be operating.

So what do we do now?

 I’ve outlined six ways in which CPTPP could work to assist SMEs, but it will not happen by magic.

CPTPP still needs to be signed and ratified but there are things we collectively – and most particularly you, with our help – need to be doing to get ready.

First, be informed.

That applies particularly to business with interests in Japan, Mexico, Canada and Peru who need to familiarize themselves with the market access outcome.

Check out MFAT website (www.mfat.org.nz); there will be seminars etc after 8 March signing – watch out for those.

Get the business organisations you belong put out info to members and organize discussions with MFAT, NZTE, MBIE and other agencies.

Second, organize.

Work in clusters to figure out the change CPTPP could make to your sector.

Review your strategic plan and business plan, particularly from the perspective of how you can link more closely to global value chains.

Third, influence.

The ratification process in New Zealand will also require submissions to the Parliamentary Select Committee – think about participating in the public debate that will invariably come back about the benefits of the agreement.

Engage with officials – when it comes to the implementation of this agreement, and the negotiation of others in the pipeline, they need real-word stories of challenges, problems and successes in offshore markets.

Report the problems you are facing in offshore markets.

Only business knows how business is done; only SME owners know the challenges they face.

I am certainly hopeful that the discussions you will be having around this Summit will put in place the structures required to enable more effective sharing of information between SMEs and officials.

Conclusion

I said at the beginning: the benefits are not just for the bigger companies.

CPTPP has been conceived with SMEs in mind and its success for New Zealand will ultimately depend on SMEs making use of those six benefits I have outlined.

I’d like to leave you with another simple idea: it’s that all of us in this room, and New Zealand SMEs across the board, need to raise our eyes above the New Zealand horizon and look more ambitiously outward to the world beyond and particularly the Asia Pacific region.

The Asia-Pacific will be the centre of economic gravity for at least all of our lifetimes, and very probably for the lifetimes of our children too.

In New Zealand we are blessed with fantastic commercial prospects as well as the potential to develop our skills, productivity and competitiveness: now also we have the means through CPTPP to engage more easily and seamlessly across borders.

New Zealand SMEs should seize those opportunities – and trade agreements like CPTPP give us a perfect leaping-off point to do so.



[1] MBIE Small Business Sector Report 2014

[3] WTO (2016), ‘Levelling the Trading Field for SMEs’, World Trade Report 2016, page 75; see https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf

[4] Ministry of Business, Innovation and Employment, Small Business Sector Report, 2014, page 47.  See also WTO (2016), page 77.

[5] WTO (2016), pages 78-106.

Trading in an uncertain world – the post-TPP agenda for New Zealand and Asia

On 6 April 2017 Stephen addressed the World Services Group in Auckland – read his remarks on the Tradeworks website here.

Asia Pacific Integration – with or without the United States?

This is the text of an address Stephen gave to the Asia Forum in Wellington on 7 February 2017.

It’s good to be with you this evening and to have this early opportunity, as a new year unfolds, to speak about the outlook for trade and investment in the Asia Pacific region.

This year is definitely not a case of “plus ça change, plus c’est la même chose”. 

A new President in the White House is challenging the model of past American leadership in the global economy and with that long-held principles and practices of economic co-operation and integration.

This coincides with a new questioning around the world of the process of globalisation, how its benefits are shared and its challenges managed.

I am perhaps a little brave, at this early stage, in accepting Farib’s invitation to explore these issues – the President has been in office for less than a month (somehow it seems longer!) and his Administration is not yet completely in place.

I am certainly of the view that we need to let time elapse before being too definitive about the policy choices New Zealand might have to make in the light of these profound changes in the global environment.

It is not too early to start thinking about how we might position ourselves and so tonight I’d like to explore with you:

  • firstly, where the process of economic integration in the Asia Pacific region has led us thus far
  • secondly, how this process might be challenged in the months to come
  • and lastly, what we here in New Zealand need to be doing.

I’m speaking to you this evening mainly from the perspective of the NZ International Business Forum, a group of senior business leaders concerned with New Zealand’s engagement in the global economy.

These themes are relevant across the range of my work with organisations including the NZ China Council, the APEC Business Advisory Council and the Australia New Zealand Leadership Forum.  

Economic integration – how far have we come?

One of the much repeated criticisms of the ill-fated Trans Pacific Partnership (TPP) was that it was not a trade agreement at all.

I read as much in a recent blog on the website of the Foundation for Economic Education.

Rather than a simple agreement to lower tariffs for mutual benefit, the writer alleged, TPP morphed into a massive international regulatory regime over 5,000 pages long. It was weighed down by numerous non-trade provisions aimed at appeasing non-trade special interests”[1].

It’s not the purpose of my remarks tonight to attempt to rebut the many criticisms of TPP but this particular one calls for a little more economic education!

Of course TPP was a trade agreement – the larger part of those 5000 pages are taken up by complex schedules outlining the process for the elimination of tariffs.

(We can debate whether TPP is a “free” trade agreement since in some limited cases, albeit ones of interest to New Zealand, the goal of zero tariffs was not reached).

But there’s a much bigger picture here and it’s really not complicated – trade is not trade anymore.

Trade has been replaced by a set of much more complex economic interactions between firms and whole economies.

Professor Peter Petri and colleagues, in a report to ABAC in 2015, captured this well when he said:

“Businesses (today) engage in more varied activities, with a wider range of partners, and in more markets than ever. Major technological and economic trends are disrupting the business environment, including the emergence of global value chains, the digital/Internet revolution, the rise of a giant middle class, and dramatic improvements in connectivity[2].

Many of the objections to TPP overlook the fact that the business model in the region has changed and that global and regional value chains, where production occurs across multiple jurisdictions, are, in the words of Professor Petri, “an Asia Pacific innovation”.

New Zealand is not immune from this movement.

New Zealand manufacturers and processors of natural resources including food and forest products are suppliers into these global value chains.

As my friend John Ballingall from NZIER suggested in a recent op ed: “The days of Kiwi firms shipping butter and whole sides of lamb direct from the processing plant to the end consumer are long gone”[3].

Research undertaken by NZIER for the Pacific Economic Co-operation Council (PECC) shows that while New Zealand is struggling to lift its overall participation in GVCs we do much better in relation to agriculture and food and beverage production.

To quote John Ballingall again:  “This world of global value chains (GVCs) poses a number of challenges and opportunities to Kiwi firms, and forces policy-makers to think in non-traditional ways. What’s been done in the past is unlikely to be ideal now as New Zealand looks to boost its productivity and living standards”.

It was precisely to try to find new ways of incentivising and enhancing access into these global value chains that TPP was conceived.

In that sense TPP represented an effort for the regional framework of rules for trade and investment to catch up with the action – even if in the end it was a very long and tortuous process.

Hence the need for the agreement to cover not just tariffs but non-tariff barriers, not just goods but services, not just trade but investment, not just border measures but behind the border measures, not simply regulatory harmonisation – as the writer of that blog contends – but processes for regulatory coherence and convergence, not “one size fits all” but “one fit for all sizes”.

I promised this wouldn’t become an apologia for TPP but simply put TPP was trying, in all its insufficiency, to reflect the new reality of the way business is done in the region and beyond.

The fact of the matter is that business is moving faster than the regulatory system and has been doing so for some time.

TPP was one instrument for achieving economic integration – certainly something less than the utopia of free trade but a very good second best option.

TPP is not the whole answer either – it is a coalition of twelve willing partners, which was always designed to lead to something much larger, an APEC-wide grouping gathered together in the Free Trade Area of the Asia Pacific (FTAAP).

Nor is TPP the only such pathway to FTAAP.

In Asia there is the Regional Comprehensive Economic Partnership (RCEP).

I’m tempted (but it would be unkind) to describe RCEP as a coalition of 16 unwilling partners, given the rather limited level of ambition, which seems to characterise the negotiating process.

It is important to stress that RCEP is not the forum in which China, as our American friends would have it, “is writing the rules for the region”.

RCEP is led by ASEAN, not China, and while on paper seeks an ambitious outcome, is mostly about ASEAN integration with the rest of East Asia.

For its part China remains very interested in the concept of the Free Trade Area of the Asia Pacific (FTAAP).

In his address to the APEC CEO Summit in Lima last November President Xi Jinping described FTAAP as a strategic choice concerning the long-term prosperity of the Asia-Pacific; We should steadfastly promote its construction and provide institutional guarantees for fostering an open regional economy”[4].

President Xi also expressed a preference for inclusiveness:

Any regional trade arrangement, in order to earn broad support, must be open, inclusive and all-win; closed or exclusive pacts are not the right choice”.

Finding a way to realise the FTAAP vision has been difficult.

The theory was that TPP and RCEP, once concluded, would coalesce into FTAAP which would be anointed by the coming together of China and the United States in a new framework which could spark life into a global process in the World Trade Organisation.

Hope clearly springs eternal in the realm of trade negotiations!

Challenges to the existing order

The arrival of President Trump in the White House has clearly put paid to much of this grand strategy – at least for the time being.

His decision to withdraw from TPP was easily done, if fundamentally flawed – after all, he was withdrawing from a treaty that had not come into force, the benefits of which had not been fully seen.

But there are broader issues at play.

His “America First” policies, including the call to bring businesses back to the USA, pose a direct challenge to the prevailing business model in the region.

His stated preference for bilateral deals runs counter to the quest for a region-wide framework of rules for trade and investment.

These rules seek to make doing business easier while avoiding the infamous “noodle bowl” effect of conflicting and overlapping disciplines.

Any future adventurism in US foreign policy, particularly with regard to China, could serve to destabilise the stability and security of the region.

This stability is a necessary pre-requisite for advancing economic and commercial interests.

All of this reverses former President Obama’s policy of seeking to engage more directly in the region through the “Asia pivot” of which TPP became, more by association than by design, the flag-bearer.

It may well be of course that these worst fears may not be realised – as I said, these are very early days in the life of new Administration.

But even at this point it is not hard to see that there could be a departure from what we have known of American leadership in the region.

In a recent memo the respected head of the American think-tank CSIS, John Hamre, writes that we are back in 1949 – a time when President Truman faced an existential choice about whether to concentrate on domestic growth and competitiveness at the expense of global recovery after World War II.

Hamre writes – we are back to the great challenge that faced President Truman. Will America shake off its deep- seated desire to pull back and nurse its bruises, or will it champion an international order designed to create a broad environment where human potential can blossom?[5]

It was after all American leadership, which imposed a benign order on the region after the conflict of the last century.

It was this leadership, which helped secure the emergence of the World Trade Organisation as the repository of trade law and a framework for settling disputes

It is this leadership, which has in more recent times, trialled new arrangements for trade liberalisation through NAFTA and a range of other agreements, and helped shape the new business model we see today in the region.

This is not to say that the existing order is either perfect or sufficient – clearly it was not.

In the economic space that order has come under intense criticism.

There has been criticism for failing to take sufficient account of environmental and sustainability issues.

There has been a perceived failure to ensure that those who are disadvantaged from the adjustment brought about by changing patterns of production and trade are appropriately cared for and helped into new areas of enterprise.

And there is the criticism that economic integration has served to advance the interests of multinational corporations especially through measures aimed at stimulating and protecting investment or through the rules being devised for the digital economy.

“Making globalisation work for people” is not just a slogan – it has become a policy imperative in the age of Brexit and Trump.

So, in 2017, we face not only the prospect of new direction from the United States on trade, we face new challenges from within about the nature of the very order that has served us well in the past.

 What should New Zealand do?

In this context, what is to be done by a small, open, trade-dependent economy like New Zealand?

It needs to be recognised that this is not the first time the core assumptions of New Zealand’s trade policy have been challenged.

When Britain joined the European Economic Community in 1973 we faced the herculean task of diversifying our economy while hanging on tooth and nail to our access for butter and sheepmeat.  (How ironic that today we’re back again talking with Europe and Britain!)

In 1983 we sought to break out of a straightjacket of protectionism and economic befuddlement when we concluded CER with our best friends the Australians – that living and evolving agreement remains a bedrock of New Zealand economic success.

In 1993 when the outcome of the GATT Uruguay Round was in doubt, we made it known that New Zealand was open to the concept of high quality and comprehensive trade deals in the Asia Pacific region.

That ultimately led to FTAs with Singapore, Chile, P4, ASEAN, China and TPP – this sort of FTA coverage was unthinkable back in the day.

Today we see that New Zealand’s Plan A, focused largely if not exclusively around TPP, has gone off the boil and Plan B, is, to quote Prime Minister English, “tricky”.

What is Plan B for New Zealand?

It is certainly not a retreat into “fortress New Zealand” which makes no sense for a nation so dependent on trade and economic integration.

Nor is it a futile attempt to keep away from the controversial aspects of TPP and seek to negotiate more limited “market access only deals” – this merely denies the reality of value chains.

New Zealand after all is already largely a free market for others’ exports – most of them don’t see the need to reciprocate.

One key advantage today, which was not the case in 1973, 1983 or 1993, is that we have options.

Plan B is likely going to be a mix of things, both in the Asia Pacific region and beyond.

Among the latter are the emerging NZ/EU FTA and a possible post Brexit FTA with Britain.

Among the former are the initiative to upgrade our bilateral FTA with China and new initiatives like China’s “One Belt, One Road”, which we need to examine more deeply.

We certainly need to continue to seek a high quality, comprehensive and ambitious outcome from RCEP.

RCEP may not at present be an alternative to TPP, but is a useful initiative none the less, particularly for New Zealand if it delivers for us better access to Japan and India which we currently lack.

Then there the prospect of a TPP-like agreement amongst the remaining 11 members.

Australia, New Zealand and Singapore have expressed interest in exploring the options and Mexico has signalled that it wishes to explore bilateral agreements with the remaining members.

Japan, a key player, has recently said TPP is “meaningless” without the United States.

I think this Japanese reticence is entirely understandable and needs to be seen in the context of their critical security relationship with the United States.

On the other hand, Japan, like New Zealand and unlike other members, has already ratified TPP.

We need to let some quiet diplomacy proceed to see if the remaining 11 parties, or a sub-set of them, see merit in amending TPP to take account of US withdrawal.

This should include deciding whether or not to strip out of the agreement those things that were essentially US demands.

TPP (11) would not deliver the long sought-after FTA with the United States.

While China – under our shortly to be upgraded FTA – may have replaced the United States as our top trading partner, the US remains as important to us today as it was the day before the Presidential inauguration.

America is not just a major trade and investment partner – it is a powerhouse of innovation, entrepreneurship and business ideas.

New Zealand now has to find a way to engage and work constructively with the new Administration, even as we look to advance other options for growing and future-proofing our economy.

The way ahead is far from easy.

New Zealand has been seeking to obtain a bilateral FTA with the United States since the turn of the century.

Two problems have bedevilled that effort: first, a poor political and security relationship, which has now been fixed, thanks to efforts over years by certain politicians and diplomats on both sides, supported by leaders from business and the wider community gathered in the NZ US Council and its counterpart in the United States.

And second, on the economic front, the small size of the New Zealand economy and the perceived – if highly exaggerated – risk which our agricultural sector poses to American farmers.

This will make it difficult for New Zealand to get ahead in the FTA queue and may make a purely bilateral agreement ultimately no easier to negotiate than TPP.

While we simply do not know the detail of the new President’s trade policy, he is not likely to do us favours on agriculture and may seek to go beyond the TPP outcomes on issues like investment and intellectual property, especially medicines.

There is also the challenge of seeking improved visa access to enable New Zealand professionals to work temporarily in the US as many services exporters especially in the tech sector would wish.

To return to my favourite theme, there is much irony here – TPP’s lengthy negotiation was in part because the other 11 partners were seeking to counter the full extent of American ambition across a range of issues.

This was largely achieved: the final TPP text was a carefully structured consensus, which represented a balance of interests of all parties.

For New Zealand TPP delivered substantial benefits with little change to existing policies, even if we did not achieve all we hoped.

Conclusion

Will economic integration proceed with or without the United States?

The theme for my remarks this evening was framed as a question but perhaps it should have been an exclamation!

Economic integration driven by globalisation and commercial impetus is likely to proceed whether the United States ultimately decides to lead that process or not.

There may be holes in the boat, but it is not sinking – yet.

The question is more what sort of economic integration are we going to see and what will be the rule-making that shapes it.

New Zealand benefits from rules for trade and investment especially when we have had a hand in making them.

New Zealand does not have the luxury of closing off options before they have been fully explored.

We’ve been in this space before.

Today we are entering a new and uncertain period where old assumptions may no longer hold true, where old economic allies may not play the role we have become accustomed to.

This profound change requires fresh thinking from governments and stakeholders, together with perseverance and commitment, as we chart some new and potentially rough waters.

 



[1] Iain Murray: “Free Traders shouldn’t mourn the loss of the TPP” -https://fee.org/articles/free-traders-shouldnt-mourn-the-loss-of-the-tpp/

accessed 1 February 2017

[2] Peter A Petri et al: “The FTAAP Opportunity – a report to ABAC”, October 2015 – https://www2.abaconline.org/assets/2015/4%20Manila/FTAAP%20OPPORTUNITY%20(1).pdf accessed 1 February 2015

 

[5] John Hamre; “Memorandum to CSIS Trustees, Advisers and Friends”, 1 February 2017

“Friends with benefits – CER, SEM and TPP”

Stephen was pleased to address a business breakfast organised by the Australian Consulate-General, Austrade and the University of Sydney.  The subject was the economic relationship with Australia – here’s Stephen’s speech:

It’s a pleasure to be with you this morning and to join Professor Romalis from the University of Sydney and our friends at Austrade to talk about a critically important economic relationship for New Zealand.

For some years now I have played a role, on behalf of BusinessNZ, in helping co-ordinate the annual Australia New Zealand Leadership Forum, which brings together senior government, business and community representatives to foster and advance the relationship

The Leadership Forum has been meeting for twelve years now and will do so again later this year.

 The Leadership Forum has been described as a symbol of trans-Tasman “togetherness”.

 That “togetherness” is not just a sentimental thing – although sentiment is certainly part of the Anzac relationship.

 That “togetherness” is also about business, about the economic value both countries derive from their integration with one another, and increasingly, about the way in which both countries, together, can integrate with the rest of the world.

That’s why the relationship might also be described as “friends with benefits”:  this morning I’d like to talk about some of these benefits by focusing on the pillars of that economic togetherness – CER, SEM and TPP.

CER – a vision delivered

CER or to give its proper title ANZCERTA – the Australia New Zealand Closer Economic Relations and Trade Agreement – is more than an acronym.

CER is quite simply the world’s most comprehensive trade agreement, which was signed in 1983.

It’s hard to remember what the world looked like then, but the trans-Tasman environment was certainly not the space for by and large free movement of goods, services, investment and people it has become today.

CER had a profound impact on New Zealand because it was the first step towards the liberalisation of what had become a fortress economy marked by absurd import licensing, high tariffs and even agricultural subsidies.

Of course not everything was achieved on day one, but the pace quickened notably over the years so that the deadline for the removal of quantitative restrictions and tariffs was achieved five years earlier than scheduled.

And for those who are – quite rightly – concerned that the Trans Pacific Partnership (TPP) will not achieve complete free trade by the end of the implementation period, CER at the outset was no different with dairy products excluded at the beginning.

What we have seen quite clearly is that the CER agenda has evolved over time.

The first decade was taken up with a focus on manufactured goods and agriculture.

 This included:

  •  removal of tariffs and import licensing
  • elimination of anti-dumping
  • establishment of processes and institutions for conformity assessment and quality assurance
  • development of customs and quarantine cooperation
  • provisions on government procurement.

 The second and third decade moved to a period of deeper integration leading to the development of a concept we now know as  the Single Economic Market (SEM).

 This included:

  •  focus on services, business law harmonisation, regulatory reform, investment (CER Investment Protocol)
  • further market opening for goods
  • mutual recognition of goods standards (TTMRA)
  • single food safety regime
  • new rules of origin (introduced in 2009)
  • enhanced cooperation on biosecurity and customs.

 This period has given rise to a flourishing of the trade and economic relationship and the emergence of a truly Trans-Tasman economy and of trans-Tasman enterprises better able to participate in the global supply and value chains and networks that today mark the way business is being done around the world.

 The traffic hasn’t all been one way.

Australia has been New Zealand’s top trading partner since 1989 (apart from a brief period in 2014) but New Zealand is Australia’s fifth largest trading partner.

Australian companies are our largest foreign investors with a stock of around A$100 billion.

New Zealand is the largest source of in-bound visitors to Australia.

All this didn’t happen by accident.

CER has been the result of close collaboration between governments and business and supporting networks.

As it has evolved, it is important to note that CER’s model for integration is not based on “one size fits all” – rather than adopting identical and standards on both sides, the objective has been to achieve equality of outcomes so that ultimately it becomes as easy to do business in Auckland as it is in Sydney and vice versa.

It is also true that as CER has evolved and adapted to changing economic circumstances, making progress has become more difficult, not so much because the vision is no longer there, but because as economies become more integrated, attention turns to policies and regulations that have a lot to do with national sovereignty – the focus turns from at the border to behind the border.

That’s essentially the challenge of the SEM agenda.

Where to next with SEM?

SEM is the natural consequence of CER: the goal is to create a seamless environment for business across the Tasman.

 Closely connected to the SEM goal is the concept, first elaborated by Prime Ministers Rudd and Key, of “net trans-Tasman benefit”

This requires a move beyond a narrow calculation of national economic benefit on any single issue to a balanced benefits approach across the range of areas under consideration.

Some notable applications of this principle applied to the SEM include:

  •  signature of the Closer Economic Relations Investment Protocol (February 2011) – an important advance in the bilateral economic relationship aligning CER with other modern high quality free trade agreements and facilitating investment by reducing compliance costs for investors
  • Steps aimed at making travel across the Tasman a more “domestic-like” experience, including:
    • smartGate for arrivals and departures at Auckland, Wellington and Christchurch international airports;
    • biosecurity direct exit lanes at New Zealand international airports
    • the transfer of x-ray images of checked in baggage from Australian airports to MAF in New Zealand
    • joint studies looking at further streamlining of trans-Tasman travel.

One important issue which is raised regularly in the Leadership Forum but which thus far, shall we say, has “failed to capture the imagination of Australian officialdom” is the mutual recognition of imputation and franking credits.

This could provide a further boost to trans-Tasman investment well beyond the short term fiscal costs of implementation.

This one issue would do more to move the dial in the trans-Tasman economy than any other currently before us.

Both Governments remain committed to maintaining the momentum in the SEM and the broader integration project.

A report by the Joint Productivity Commissions in 2012 made some useful suggestions.

At their joint meeting earlier this year Prime Ministers Turnbull and Key urged business leaders to come up with some practical ideas.

Prime Minister Turnbull said they were looking for ideas to “help scrape the barnacles from the bottom of the boat”.

The Australia New Zealand Leadership Forum has collaboration underway in a number of sectoral areas – tourism, infrastructure, health technology, innovation and agri-business.

The aim is to come up with a series of recommendations which can be presented to the Leadership Forum later this year.

Certainly the future of CER and SEM is likely to be as much around areas of practically focused business collaboration in areas like innovation, infrastructure and investment, as in a continuing series of improvements to policy and regulation.

It is also increasingly apparent that the opportunity lies as much in third markets as it does between the two economies.

That’s where TPP comes in.

Realising the TPP opportunity

 New Zealand and Australia have been for a generation close partners in APEC established at the initiative of Prime Minister Hawke in 1989.

New Zealand and Australia are partners with ten other economies in TPP which was signed in Auckland in February and is now undergoing ratification.

New Zealand played an instrumental role in getting the TPP concept off the ground through the earlier P4 agreement concluded with Singapore, Brunei and Chile.

Australia and New Zealand had earlier explored a P5 concept with the United States, Singapore and Chile, which was overshadowed by the conclusion of the GATT Uruguay Round in 1993.

Australia and New Zealand are also working together with Asian economies in the Regional Comprehensive Economic Partnership (RCEP).

Whether through APEC, TPP, P4, P5or RCEP both countries are seeking to develop learnings from the CER experience which can be applied more widely.

It’s not an exaggeration to suggest that goal of economic integration has been trialled in CER, wholesaled in APEC and retailed in TPP.

TPP contains many CER innovations including the concept of regulatory coherence but develops them further and applies them in a wider setting.

Like CER over thirty years ago TPP is trying to address the needs of a new economy and of businesses operating in a new environment.

The goal is for a seamless economic space across the twelve, designed to lead to a broader vision of a Free Trade Area of the Asia Pacific (FTAAP) which links all 21 members of APEC.

TPP goes beyond trade in goods, to trade in services, investment, innovation, the digital economy, SME concerns and even into labour and the environment.

It is a future-facing agreement, which sets a new framework for trade and investment  – that is, if it can be successfully ratified by the 12 members.

TPP can come into force only if it is ratified by economies representing 85% of the GDP of the members.

For New Zealand the stakes are incredibly high – just as they were when we signed CER.

TPP represents 36% of global GDP and over 40% of our exports.

TPP will deliver free trade arrangements with the United States, Japan, Canada, Mexico and Peru with whom we do not have FTAs and extend our relationships with existing partners Malaysia and Viet Nam.

TPP has little direct impact on our existing relationships with Australia, Chile, Singapore or Brunei but adds some new commitments in specific areas.

All New Zealand export sectors stand to benefit from TPP – the impact on the beef, wine, horticulture, dairy, seafood and wood sectors is perhaps the greatest.

To implement TPP New Zealand has to make very few policy changes.

Only in the area of copyright are we required to make a major change – from 50 years after death of the author to 75 years – but this change brings us into line with Australia.

As in most other FTAs, New Zealand will provide commitments to foreign investors including investor state dispute settlement but these will not apply to Australia where the CER Investment Protocol will be the instrument governing investment between us.

Conclusion

 In signing and hopefully ratifying TPP all members are faced with a fundamental choice.

The choice is for regional economic integration, a seamless economic space and greater togetherness – which is good for business, good for security and good for development.

In CER New Zealanders and Australians have been able to see the benefits of that togetherness for over thirty years now.

CER was revolutionary at the outset but has been more evolutionary in successive stages particularly as we move to the SEM.

TPP is also revolutionary but will doubtless also in time adopt a more evolutionary path.

In that sense each new trade agreement builds on the last and makes way for the next as the economy expands and evolves under the changing nature of business.

There is something very positive about our CER togetherness.

Friends with benefits – who could want anything more?

Stephen was pleased to address a business breakfast organised by the Australian Consulate-General, Austrade and the University of Sydney.  The subject was the economic relationship with Australia – here’s Stephen’s speech:

 

TPP Unwrapped

Stephen is giving a number of addresses about the Trans Pacific Partnership (TPP) and the implications for New Zealand.  See here for an address he gave in Nelson to the NZ Institute for International Affairs on 5 April. Other addresses are available on the Tradeworks website – www.tradeworks.org.nz

 

TPP and Latin America

In a speech to the Latin American Business Council Stephen outlines how TPP will impact on the relationship between New Zealand and Latin America especially Chile, Mexico and Peru.

Read the speech here.

NZ and Japan – an added value relationship: the implications of TPP

In a speech to the Japan NZ Business Council in Tomakomai,Japan, Stephen outlines the implications of TPP for the Japan/NZ relationship.

Read the speech here.

TPP – where to from here (and how did we get here anyway?)

Read Stephen’s speech to the Wellington branch of the NZ Institute for International Affairs (NZIIA) here

As we look at where we have got to with TPP, we see a deal which is at last coming together in its final form.

To un-pack all this today and to help explain ‘where to from here’ I’d like to focus on three areas – why we set out on this journey, where we are now, and where things might take us in coming months.

 

The case for trade

Stephen addresses the Nelson branch of the NZ Institute of International Affairs here.

I’m here to make the case for trade but in some respects there is no need to make such a case here in Nelson.

This region lives by its exports of seafood, wood, horticulture, wine, meat and dairy products.

Can there really be any debate about trade in a place like this?