NZ/China – is our next big earner in front of us?

 As published in the NZ Herald on 3 April 2019.

Next month, hard on the heels of the Prime Minister, Trade Minister David Parker sets off for China for the second Belt and Road Forum in Beijing.  He’ll join leaders from a large number of other countries keen to explore new opportunities under the biggest and most ambitious trade and development initiative we’ve seen for decades.

The timing is perfect.  Now the Prime Minister has visited, we are moving on from earlier uncertainty in the relationship.  We have the chance to take another step forward by demonstrating to our partners in China the unique value we can add to the Belt and Road Initiative.

What is that unique value going to be?  Clearly, we need big ideas to stand out.  We’re far removed from the trade routes most often associated with Belt and Road, linking China and other Asian countries and Asia and Europe.  As a developed economy we won’t be the recipient of concessionary finance for infrastructure.  We’re global traders, with other important relationships to nurture and a strong belief in the multilateral trading system and the rights of small economies in the international order.

But we may have a big and original idea, one that’s right in front of our noses.  It’s about making New Zealand a major and natural connection between China and South America – we’re calling it the Southern Link.

The numbers point to some serious opportunity.  Links between China and South America are booming, with plans to increase trade and investment significantly.  Putting New Zealand into this picture could mean increased passenger transit and airfreight, building on our expertise in trade and customs facilitation and supply chain connectivity.

It may sound idealistic.  We’re a geographically isolated country so we’ve never been seriously considered as a hub for global travel or trade.  It will come with major challenges.  But several factors play into our hand which make the possibility of a Southern Link a lot more realistic.

People movement between China and South America is increasing, but there are no direct flights. Broadly at the halfway point, New Zealand, whether Auckland or Christchurch, provides the shortest flight distance between certain Chinese and South American cities, including important routes between Shanghai, Guangzhou, Santiago, Buenos Aires and further afield.

A Southern Link could help assist and simplify e-commerce and traditional parcel post which criss-crosses the oceans between China and South America in ever-growing quantities.  In terms of tripartite cooperation, the idea also feeds into our goal of deepening our relationships in South America, building on CPTPP and the Pacific Alliance with Chile, Mexico and Peru.  While we have ample connectivity between China and New Zealand, boosting the connectivity between South America and New Zealand with added Chinese volume and capacity could lead to a host of new connections.

It shows the Belt and Road isn’t just about hitching your wagon to China’s star, either.  It doesn’t involve any surrender of sovereignty or raise the spectre of “debt diplomacy”.  What the initiative offers is the chance to build greater connections with other participating countries on a regional or even a global basis.

A conference to take place in Auckland on 25 June will explore the business case and value proposition for the Southern Link in more detail.  The NZ China Council and the Latin America NZ Business Council are teaming up with partners in China, Chile and Argentina to bring major players and decision-makers together.

For a century and a half, New Zealand has managed to turn its natural advantages into valuable export business.  We’ve overcome the tyranny of distance and transformed our economy into one that is outward looking and diverse.  Building the Southern Link represents yet another chance to turn the Kiwi number eight wire mentality into economic opportunity.

 

 

 

 

 

What is the new normal in New Zealand’s relationship with China?

On 26 February 2019 The Spinoff published Stephen’s article outlining recent developments in the relationship with China.  Read what he had to say here.

Back to the Future? New Zealand, the European Union and Britain

On 19 February Stephen spoke to the Hawke’s Bay Branch of the NZ Institute of International Affairs about New Zealand’s trade relationships with the European Union and Britain. Here is what he had to say:

 

ADDRESS TO THE HAWKE’S BAY BRANCH OF THE

NZ INSTITUTE OF INTERNATIONAL AFFAIRS

HAVELOCK NORTH, 19 FEBRUARY 2019 

STEPHEN JACOBI

EXECUTIVE DIRECTOR

NZ INTERNATIONAL BUSINESS FORUM

BACK TO THE FUTURE?  NEW ZEALAND, THE EUROPEAN UNION AND BRITAIN

 

Thanks to my friend Dick Grant for the kind invitation to speak to you today.

It’s great to be back in Hawke’s Bay again and talking with you about trade and economic opportunities, not this time with the United States, or China, or Japan, but with old friends in Europe.

So, are we no longer doing Asia, some of you may be tempted to ask?

I can assure you we most certainly are “doing Asia”, not just because of the enormous potential which is still on offer closer to home but because we live today in an increasingly complex and inter-dependent world, which requires us to pursue multiple opportunities at once and to mitigate risks across a range of markets.

The free trade agreement we are now pursuing with the European Union is part of that strategy, but it is not aimed at replacing markets in Asia but supplementing them and hopefully also giving rise to new productive investment which can help us develop new and profitable areas of business.

I’d like to examine this further with you by first looking more closely at the rationale for an FTA with the EU, then some of the potential problems, which might complicate the negotiation more than some politicians would like to admit, and finally and briefly, because I know you’ve recently heard from the British High Commissioner, at how Brexit might change our relationship with Britain.

Rationale of the NZ/EU FTA

 It’s true that the idea of an NZ EU FTA has a sort of “back to the future” feel about it.

I began my career over thirty years ago working on trade with Europe including four years at the NZ Embassy in Paris.

Much of that time New Zealand faced an uphill battle to secure ongoing butter and sheepmeat access to Britain which involved annual visits by NZ Prime Ministers and Ministers to Brussels.

This matter was resolved in 1995 in the Uruguay Round of multilateral trade negotiations – or at least we thought it was, as it now rears its head again in the context of Brexit.

I’ll talk about that a little more in a moment, but, for now, let’s just reflect that those annual negotiations coloured our relations with the EU for many years, when we saw each other as competitors rather than partners.

This tended to obscure both the continuing economic importance of Europe even as we sought as an urgent matter of national economic survival to diversify our markets.

It is supremely ironic that today we hear similar calls for diversification – away from Asia and back to Europe!

Despite all this, the 28 (for the time being) member states of the European Union constitute a510-million strong consumer market, ranking as our third-largest export destination, our second biggest supplier of imports, and our second-largest source of investment, with strong people-to-people linkages.

The rules governing our trade are however 30 years old and that puts our exporters at a distinct disadvantage especially when compared to competitors whose countries have concluded FTAs with the EU.

By the way it also puts EU exporters to New Zealand at a disadvantage as we have concluded FTAs with China and others which have resulted in a loss of market share for the EU especially in machinery, high tech manufacturing and a range of services.

More than one European diplomat in Wellington has lamented this sad state of affairs to me over the years – well, trade flows in both directions and this FTA negotiation is a chance to put that right.

New Zealand and Australia, which is negotiating separately with the EU, are almost the last cabs off the rank with the EU which has had a very active negotiating agenda over the years.

One wonders why it has taken so long – possibly because of lingering perceptions about being competitors rather than partners – but the good news is that the current EU leadership, as was made clear to the Prime Minister recently, sees this negotiation as a matter of priority.

Although it would be flattering to think so, this is not so much about the potential of our small domestic market – it has more to do with geo-politics and the opportunity this FTA gives to demonstrate openness to trade at a time when others are turning inwards, and to fashion some next generation commitments that can address today’s trade challenges.

For example, both New Zealand and the EU share a commitment to advancing “trade for all”: how, at a time of increasing scepticism about trade, how can we find ways of making trade work for people and addressing the specific needs of those groups who previously may have been left on the side-lines, including smaller business, women and in our case Maori.

Or reflecting new models of doing business, how can we address the needs of the digital economy, promoting cross border digital trade and e-commerce while respecting privacy and upholding cybersecurity?

That’s the rhetoric anyway but it does point to a more strategic context for this negotiation which will be helpful in Brussels when the rubber hits the road and we get down, as inevitably we will do, to the hard tacks of the negotiation.

From a New Zealand perspective, this negotiation is an opportunity also to promote and advance growing exports of high-quality food products including horticulture and wine, services such as tourism, education and creative sector exports, and well as high-tech and niche manufacturing.

The export boost at the New Zealand end is likely to be significant, with EU modelling suggesting the deal could add up to 0.5 percent to New Zealand’s GDP – a gain of up to $2 billion, giving rise to better jobs and living standards for New Zealanders.

But we should not see this simply in two way trade terms.

There is also huge scope to develop and deepen global value chains spanning from Europe through New Zealand into the Asia-Pacific incorporating the best of our complementary goods, services, capital, R&D, technology, ideas and innovation to service customers beyond both of our shores.

The EU is already a significant investor, although behind Australia, China and the United States – more can be done to boost the investment partnership and although the FTA will not at this stage include investment disciplines, it should help focus greater commercial attention on these wider possibilities.

Potential obstacles

 Both governments are on record as saying the FTA should be able to be concluded quickly.

That would indeed be an achievement – I have never seen an FTA concluded quickly, but I certainly hope we can avoid the long, drawn-out process associated with the Trans Pacific Partnership for example.

Trade agreements take ages to conclude because they are complex – even more so when a number of countries are involved.

In the case of the EU, the European Commission negotiates on behalf of the Union but behind them, every step of the way, sit the 28 (or maybe 27) member states which all have their own interests to protect and advance.

Some of those interests in the EU’s agricultural producing nations are not necessarily enthusiastic about the detail of what might be included in an FTA with New Zealand.

That’s why the preparatory steps towards the negotiation have literally taken years –  I visited Brussels in 2010 because we thought the negotiation was getting closer!

Hopefully these careful preparations will pay off because this negotiation will inevitably throw up some difficult issues.

Let me mention just three of them.

The first has to do with those tariff rate quotas for sheepmeat, beef and dairy products which are the legacy of New Zealand’s trade with Britain since colonial times and which after a generation of effort were finally settled and secured in the World Trade Organisation.

Brexit casts a big shadow over these important arrangements and the European Commission and the British Government have proposed that upon Brexit the TRQs will be split in half.

That poses a lot of difficulties for New Zealand exporters who have over a considerable period developed markets in both Britain and EU which they manage according to market trends and consumption patterns and in the light of flows of British products to the EU and European products to Britain.

Our exporters will lose considerable flexibility from the proposed splitting of the tariff rate quotas even though their right to export within the quota limits and rules has been guaranteed since 1995 – and I might add, effectively “bought and paid for” by New Zealand once already.

What’s more the European Commission and the British Government have in effect decided to proceed over the objections of New Zealand and other trading partners with similar arrangements – they risk opening up years of trade litigation in the WTO.

Now it has to be said these matters are not directly related to the FTA negotiation but they are very unhelpful for the effort to find a consensus around agricultural trade.

New Zealand for obvious reasons is wanting to expand on these tariff rate quotas but the EU and Britain are wanting to restrict them.

I’ll come back to this in a moment but New Zealand already paid a high price when Britain joined the European Community in 1973 – we are not minded to pay again now Britain wishes to leave.

A second issue also relates to agriculture.

The EU wishes New Zealand to adopt strict regulations about the way certain geographical names are used in international trade – not so much the use of names of wine regions like Champagne which is already restricted here, but names associated primarily with dairy products and some meat products.

This new strict regime would not just apply in New Zealand, but also to our exports into other markets.

Think feta cheese, mozzarella and parmesan.

New Zealand’s view is that these names have become generic rather than related to a certain geography.

Fonterra currently supplies large amounts of mozzarella cheese to China – every second pizza in China is covered with it, that’s a lot of pizza and a lot of cheese.

The EU has proposed the restriction of a large number of geographical indications which are presently being reviewed by our officials.

Some of them may not pose difficulties, others certainly will, but there is a principle at stake here and also significant commercial interests in trade with third countries.

The third potentially complex issue relates to digital trade.

Digital trade is the new black – all trade is rapidly becoming digital as goods are exchanged across e-commerce platforms and a wide variety of services are also delivered digitally to offshore consumers.

Think Alibaba for the former and as an example of the latter the way education or entertainment services are delivered by Internet.

This is a brave new world and there are distinctly different approaches to regulating issues like cross-border data flows, privacy and cybersecurity.

For example, on personal privacy, the EU approach, encapsulated in something called the General Data Protection Regulation (GDPR), is highly precautionary.

GDPR requires even the most basic data about EU citizens, such as an email address, to be protected to the nth degree by any business that collects it – even if that business is situated around the other side of the world.

This potentially entails high added business costs and hassle.

New Zealand and others grouped in the CPTPP prefer a lighter-handed and more finely-tuned approach that allows cross border data flows and hence is trade-friendly, while also protecting those important objectives of privacy and cybersecurity in a way that is actually fit for purpose.

The EU has already recognised that New Zealand has its own very high privacy standards and has granted us something called “data adequacy”.

But resolving our differences across the broad sweep of digital trade issues in the FTA will be complicated.

Given the rapidly evolving digital world, this is not an area that is hugely familiar to many in the business community and we will want to tread carefully.

It is precisely this sort of complexity which delays the conclusion of trade agreements despite the best intentions of governments.

The Brexit conundrum

I want to touch on Brexit only briefly and I most particularly don’t want to get drawn into the Brexit debate itself which is something that must be decided by the British people.

The first and most obvious point to make is that Britain, despite the changes of the last fifty years, remains very important to New Zealand in political, economic and cultural terms.

New Zealand has an interest in an orderlyBrexit if indeed Brexit is what the British people wish to achieve.

And the converse also applies – we face risks, most particularly to trade and New Zealand businesses established in the UK if Brexit is disorderly.

The Brexit deal negotiated by Prime Minister May would have allowed the current arrangements to remain in place as they are now through to the end of 2020, while the detail of the future trade relationship with the EU was worked out.

Without a departure deal, or other action being taken, Britain will crash out from the EU on 29 March.

No comfy status quo through to the end of 2020 – just the “cliff edge” on 29 March, as some of the commentators have put it.

This risks significant disruption to supply chains,  to customs clearance at British ports and quite likely a significant dent in the British economy.

The British Government is interested in a future FTA with New Zealand.

That is a welcome prospect from our point of view and as with the EU there are both opportunities and challenges from a future FTA.

If a hard Brexit occurs on 29 March, Britain is able and will indeed be eager to negotiate and implement a future FTA with New Zealand as soon as possible, bearing in mind of course these things are always more difficult than politicians would have you believe.

For as long however as Britain remains a member of the EU Customs Union, including under any transition arrangement or if the so-called backstop is initiated, it may negotiate but not implement an FTA.

For New Zealand therefore, under hard Brexit, we face potentially short to medium term pain with the prospect of a future FTA on offer.

Under soft Brexit we face short to medium term continuity but an extensive delay to realising our FTA ambitions.

Bear in mind too that as long as Britain remains a member of the EU and the Customs Union it remains bound by any FTA we negotiate with the EU.

Bets are on as to which is achieved first – complete Brexit or NZ’s FTA with the EU.

Conclusions

New Zealand’s relations with the European Union and Britain are long-standing, for the most part very warm and important in political, economic and cultural terms.

We have different approaches to agricultural trade and always have.  Our approach to digital trade also differs.

On many other things we see the world in similar ways: that hopefully will provide a basis to see beyond our differences and work constructively to overcome them.

That may take time – these things always do and I’ll be the first person to applaud an early conclusion.

I’m also holding my breath for an outcome to Brexit which avoids a shock to the system any more than is necessary.

Future free trade agreements with the EU and eventually with Britain, if these can be achieved, provide a means not to go back to the future, but to look forward into the 21stcentury and put the relationship with these old friends and partners on a new level.

Trade in 2018 – still looking for that star !

Just as well the magi didn’t face tariffs at the border !  Here’s Stephen’s end of year round up!

 2018 will not go down in history as a good year for trade.  While international businesses struggled on, they did so against a backdrop of rising protectionism and all-out trade war between the world’s two largest economies. Will 2019 be any different?

 It sometimes said that not much changes in trade from year to year.  Not so in 2018 which was a year of two halves.

On the more positive side, some important new trade agreements were concluded.  Of course, here in New Zealand we’re thrilled about CPTPP* – a veritable mouthful of a trade agreement.  Rivalling it, if not in substance then at least in terms of an unpronounceable acronym, was USMCA*between US, Mexico and Canada – described unflatteringly by one commentator as “NAFTA O.8”. Then there was the linguistically more adventurous JEEPA – the Japan EU Economic Partnership Agreement.  Hats off to our Japanese friends – with CPTPP and JEEPA they have shown real global leadership in the cause of trade liberalisation (even if on agriculture they still need to fully overcome their worst instincts).

Trade restrictions, trade war, trade divorces

On the decidedly less positive side, protectionism has been let off the leash with trade restrictive measures in 2017-18 now seven times larger than recorded by the WTO in the previous period.  While the end of the year showed some, possibly only temporary, alleviation of the US China dispute, the consequences of the trade war have been felt in markets around the world as well as in the domestic economies of both presenting countries.  The impact on the WTO itself is most concerning. And de-stablising forces in the global trade architecture have also been felt in Europe, as the Brexit process has ground its way painfully towards an acrimonious UK-EU divorce.

What’s next for trade?

Where to for 2019?   The year will start on a positive note – CPTPP will enter into force for the six signatories with a first round of tariff cuts on 30 December with a second round for all except Japan on 1 January.  Japan’s second round of cuts will take place on 1 April. For Viet Nam entry into force and the two rounds of cuts take place on 14 January.  We expect at least one further accession to CPTPP in 2019, starting with the most likely candidate -Thailand.

Other important negotiations will continue during the year.  We are hopeful of progress with NZ/EUbut we are aware that these things take time and nothing will be concluded until everything is concluded.  We would be bold to forecast a conclusion to RCEP given past delays, but Ministers are on record saying this will happen by the end of the year.

On Brexit, who can possibly say what will happen?  There are differing views in our own team (here in the South Pacific!) but, notwithstanding the current polls, it does seem possible that calls for a second referendum will grow in intensity the closer we get to 29 March.    In November we published a discussion paper on New Zealand’s interest in a future FTA with the UK but much will depend on whether the UK exits the EU as planned on 29 March and on the shape of the future UK-EU relationship to be negotiated.  We forecast continuing uncertainty next year which is in itself corrosive to business and investor confidence.

Not out of the woods yet

We are not out of the woods on the trade war. President Trump’s dinner with President Xi at the G20 Summit resulted in a 90 day period during which both countries will refrain from new tariffs and return to the negotiating table.  That is positive, but a much-anticipated speech by President Xi on 18 December on the occasion of the 40th anniversary of China’s reform and opening up will perhaps have disappointed – no new measures were announced to address issues in the Chinese economy which cause concern not just for the US, but others as well.

Come next December we hope we are in a better place than today.  Trade negotiators like the magi continue to follow the star.  Let’s hope like them we can continue to move across borders without disruption!

*   (1) CPTPP = Comprehensive and Progressive Agreement on Trans Pacific Partnership

(2) USMCA = United States, Mexico, Canada Agreement

(3)  RCEP = Regional Comprehensive Economic Partnership

 

Watch Stephen discuss the implications of the US/China trade war

Stephen and Liam Dann, NZ Herald, discuss the fall-out from the first shots fired in Trump’s trade war:

Making trade work better – remarks to London JustShare event

On 30 May 2018 Stephen spoke to an event organised by JustShare at St Mary-le-Bow church in the City of London.  The theme was how trade can be made to work better for people including women, indigenous people and sectors like small business.  Here is what he had to say:

 

Thank you JustShare and Fr George Bush at St Mary-Le-Bow for the kind introduction to join this distinguished panel for our discussion this evening.

I bring greetings from the other side of the world, from Aotearoa-New Zealand, where we too experience the need for a different kind of conversation about trade, one that puts people at the centre.

There is a much-loved saying of the Maori people – “He aha te mea nui i tea o?  He tangata, he tangata, he tangata” – what is the greatest thing in the world?  It is people, it is people, it is people”.

 For the longest time trade has mostly been a conversation about business, but, at a time when globalisation is under more intense scrutiny, it’s good to be talking about how trade can be made to work better for people.

It’s a particular pleasure for me too to be in this church of St Mary-Le-Bow – my mother was born within the sound of these bells:  while she lived more than half her life in New Zealand, the spirit of the Londoner was always part of her and so I dedicate what I have to say tonight to the memory of Florence Alice Bennett.

I’d like to introduce tonight’s discussion with some initial thoughts – around New Zealand’s approach to trade, around some of the criticisms we see of globalisation today and how we might begin to address these.

New Zealand’s approach to trade

It’s sometimes said that to live in New Zealand and to be involved in trade, you have to be an optimist.

Our small nation of just 5 million people, once described as the last bus stop on the planet, is a long way away from global markets, yet we produce more food than we can eat and the small scale of our market means we can’t manufacture all the products we need.

Much of the history of our trade policy has been about trying to overcome what we call the “tyranny of distance” and trying to get closer to our trading partners.

Of course, New Zealand has some advantages – we are a developed economy, albeit with the economic profile resembling a developing country with a high proportion of primary exports; we have well-educated people, stable and for the most part reliable government, some world-class production capabilities, not just in agriculture and other natural resources, but also in niche industries and the new and “weightless” economy – the creative sector especially – and a “can-do” attitude.

As a small economy, we rely more than larger ones on the rule of trade law and especially on institutions like the World Trade Organisation, where we have never lost a dispute settlement case but have challenged successfully the EU, the United States, Canada and Australia.

The current trade friction in the WTO between the United States and China and the delay in appointing judges to the WTO Appellate Body is a particular concern.

We have also pursued high quality, ambitious and comprehensive free trade agreements with many partners especially in the Asia Pacific region.

Amongst others, we have FTAs with China, Hong Kong and Chinese Taipei and the Comprehensive and Progressive Agreement on Trans Pacific Partnership – CPTPP – a veritable mouthful of an agreement – positions us well for the future, with new accessions to the fellowship of 11 existing partners, alas without the United States.

An FTA negotiation with the European Union is about to get underway and we have strong interest in a future FTA with Britain once the complex arrangements around leaving the Union have been sorted out.

New Zealand has long been attached to the concept of comprehensiveness – by which we mean including all products, agriculture as well as industrials, services as well as goods, investment as well as trade and the raft of other measures relevant to doing business in the 21st century.

Our newly elected Government is also keenly interested in the concept of progressive trade policy by which is meant trade to benefit everyone especially those who may not have participated fully in the past – women, small business, indigenous – and where the externalities of trade are better taken into account – environment, climate change, labour.

Our Government feels it can tell the story of trade better – three cheers for that – but that we also need a better story to tell.

Criticisms of globalisation

 Having a better story to tell has become more of a necessity in recent years.

Partly this is a response to public pressure – at the time of the signing of the first TPP (the one with the United States…) in Auckland in February 2016, the city was gridlocked by protestors.

While the protestors’ specific concerns were varied, they reflected world-wide unease about the pace of globalisation and a sense that the benefits had been poorly shared.

Trade is sometimes treated a little unfairly in these criticisms – technological advancement and the digital revolution have been greater drivers of productivity change and shifting patterns of employment – but it is certainly true that greater trade openness can lead to job losses in some sectors while job gains take time to realise.

But this is only part of the story – there is also the concern that by not including all sectors of the economy, some important gains of trade have not been realised.

Take women for example[1].

Women are certainly under-represented in export activity, and their participation tends to be concentrated in traditional sectors (agriculture, textiles and clothing) and a few service sectors (tourism, education and information communication technology services).

Globally, only one in five exporting firms are led by a woman.

Yet women-owned businesses which export report substantially higher sales than their non-exporting counterparts.

Exporting firms especially in developing countries also employ more women than non-exporters.

So, this under-representation matters, because we know that trade does bring benefits in terms of better jobs, higher wages and living standards and women appear to be missing out on these benefits.

Similar arguments could be made about the lack of inclusion of small business, as well as in New Zealand’s case the Maori economy valued at around $40 billion.

The point is that the argument is not just about individuals or sectors within an economy not sharing the globalisation dividend, it’s that the dividend is that much smaller because there is not better access and inclusion.

The more we can expand participation and inclusion, the better the results will be.

And this point is valid not just within economies but between economies as well.

As the World Bank tells us, trade has helped reduce by half the proportion of the global population living in extreme poverty (1990-2010)[2].

But in many parts of the world, and especially in Africa, the participation of countries in the global economy is hindered by production and export subsidies and continuing protectionism in the developed world.

That the global community could not find a way to conclude the WTO Doha Development Agenda, once dubbed “the development round” is a shocking indictment on all WTO members.

The risk of current global trade tension is that the needs of the poorest economies will once again be shoved to the back of the queue.

So, while we think about fostering greater inclusion at home, let’s also remember that the global environment has its particular and persisting forms of exclusion.

Finding solutions

What seems clear is that finding solutions to these problems, both local and global, will require some new thinking and a whole lot of us to do it!

This is not just something just for governments – it’s far too important for that!

Business has a role to play – not just because it is the right thing to do but because it is good for business.

Other stakeholder groups – including the church – have their own useful perspectives and need to be part of this conversation.

The good news is that business increasingly gets it.

I have the honour of serving as an Alternate Member of the  APEC Business Advisory Council, a group of business leaders who advise 21 Asia Pacific governments on the APEC agenda for sustainable and inclusive economic growth.

Making trade and globalisation work better is a theme that has come up repeatedly in recent years.

Last year we tasked the MBA programme at the USC Marshall School of Business in Los Angeles to survey business opinion in the region and come up with some recommendations.

The Marshall School team report[3], based on close to 500 interviews with business and thought leaders in APEC makes for useful reading.

The team found that whereas 94 percent of those interviewed expected cross-border trade in the region would increase there were fairly high levels of uncertainty around the political environment for this growth.

Over 90 percent supported the idea of better policy approaches to manage adverse impacts of globalisation – over a third went further to suggest more radical approaches to better inclusion and fairer distribution of benefits.

Amongst the possible approaches cited include:

  • Creating “springboards” rather than just focusing on safety nets – citizens need to be assisted for the jobs of tomorrow not just for those of today
  • Promoting synergistic eco-systems – uniting governments, business, unions, education providers and other stakeholders to enhance opportunities for young workers, women and small business owners
  • Enhancing job mobility – fostering labour market reforms and adopting policies and programmes to help people to move where new opportunities open up
  • Reinventing life-long education – fostering greater resilience amongst workers to adapt to changing technologies and working conditions
  • Bringing business into this dialogue, engaging organized labour and having more conversations about income redistribution were also considered important.

Many of these recommendations focus on policies and programmes to accompany trade liberalisation.

But trade liberalisation remains important too.

We know that protectionism penalises small businesses more than larger ones because they lack the resources to address barriers head on or to find work arounds.

Reducing trade barriers and putting in place better trade rules, particularly ones that target inclusion and take account of the externalities of trade, are also building blocks for a fairer, more inclusive trading system.

Or to put it another way, protectionism and inward looking policies are a sure fire way of restricting growth and inhibiting social progress.

With a new generation of trade agreements, we can target more effectively women, small business and indigenous people.

New Zealand is a nation of SMEs with Maori and women wanting “in” more than ever before

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.

 Smaller 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.

Red tape and compliance costs for meeting standards or regulatory requirements in overseas markets disproportionately affect smaller firms.

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

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.

I give this example not to praise the merits of CPTPP, but to illustrate that a new generation of FTAs, can be part of the solution to addressing inclusion and equity.

Conclusion

Kiwis are optimists when it comes to most things, trade included.

But if we are to make trade to work for people, we need both optimism and good ideas, to take us forward.

Tonight’s discussion is an excellent opportunity to engage all of you in that task and I’m delighted that a business guy from far away can share a perspective.

He aha te mea nui o te ao?  He tangata, he tangata, he tangata.



[1] Honey, Stephanie: Will CPTPP Offer Tangible Improvements for Women? – CIGI, Geneva, May 2018

 

[2] Lagarde, Christine: “Making Globalisation work for all” – address to Sylvia Ostry Lecture, Toronto, 13 September 2016

 

[3]APEC’s New Challenge – Inclusive growth througher smarter globalisation and technological progress” – a report by the USC Marshall School of Business, prepared for ABAC, November 2017

PM’s Europe visit – Stephen comments on Radio NZ website

Radio NZ asked Stephen to comment on PM Jacinda Ardern’s visit to London – read what he said here.

Earlier Stephen commented on the PM’s stops in Paris and Berlin – see here.

Finally Radio NZ asked Stephen to comment on Foreign Minister Winston Peters’ proposal for a Commonwealth Free Trade Agreement – not as unlikely as it sounds, see here.

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.

NZ/Pacific Alliance – game on!

Stephen welcomes the launch of FTA negotiations between NZ and the Pacific Alliance – see the NZIBF statement on the Tradeworks site here.

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.