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

 

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.

A Trade policy for our times

The Government’s “refresh” of its Trade Policy Strategy is both timely and appropriate.  Hopefully it will prove substantive as well.

The existing strategy coined a generation ago by former Trade Minister Tim Groser, while still an MFAT official, has served New Zealand well.  It saw in the successful conclusion of the Uruguay Round, the inauguration of the World Trade Organisation (WTO) and led to the negotiation of a suite of high quality FTAs, including the as yet unratified Trans Pacific Partnership (TPP).

The world looks vastly different today, but no less uncertain.  Back then it was unknown whether the Uruguay Round would be concluded.  Today we face the same uncertainty with TPP.  Back then we were worried about rising protectionism and being excluded from new trading blocs.  What’s new?

In the interim business has changed profoundly.  Global value chains are transforming business models. Products are no longer made in one country and shipped to another in finished form but made “in the world” in multiple jurisdictions. Trade in services is growing faster than trade in goods, and has done so for the last decade.

The challenges faced by business today are also different.  There is still the urgent, unfinished business of tariff elimination especially for agricultural goods.  Even if TPP is enacted the NZ dairy industry will have duty free access only to around 13 percent of global consumption. Beef also faces ongoing barriers.  TPP delivers duty free access for most other products including horticulture and wine, but sanitary, phytosanitary and other technical barriers to trade routinely arise.

Non-tariff barriers are the highest priority for our agricultural producers as well as for manufacturers and the forest industry.  The needs of other industries are also becoming more prominent.  New priorities include improved conditions for a new generation of services industries, better conditions for outward and inward foreign investment, new rules for the digital economy and e-commerce and new ways of fostering innovation.   SMEs have long complained they find it hard to take advantage of new market openings.  New Zealand’s fast moving technology and creative sectors also want in.  There are new pressures for a better integration of environmental and labour disciplines in trade agreements.

The existing Trade Policy Strategy established a number of “tracks” for achieving better outcomes for New Zealand – the unilateral track focused on domestic reform; the multilateral track established primacy for the GATT and its successor the WTO; the bilateral track targeted individual countries with a focus on Asia, although with the mantra “Asia first, not first and last”; the regional track looked forward to the establishment of a new Asia Pacific Community derived from APEC.

This “multi-track” approach remains relevant.  But here too things have changed.  New Zealand now has FTAs with all the Asian economies except Japan, which would be delivered by TPP, and India, where our negotiation for a new FTA is languishing.  The three amigos of NAFTA – the US, Canada and Mexico – are also covered by TPP.  Outside the Asia Pacific we are making progress with the EU and may succeed in launching a negotiation next year.  Once the UK leaves the EU, we may have another willing partner, though this is likely to take some time.  A refreshed strategy could usefully help identify who our new partners for high quality FTAs might be – if not by naming them, then at least establishing some criteria about how to recognise them, including by considering regions of potential trade growth rather than simply looking to current trade flows.

The new strategy could also address the current situation of the WTO and offer some thinking about how its role as trade liberalising body can be strengthened even while it retains centrality as the holder of global trade rules and settler of disputes.

The big unknown remains TPP and the outlook for ratification in the US.  President Obama hopes TPP can be ratified in the lame duck session of Congress; if not, then the options are bleak.  The incoming President could declare TPP dead and buried, thereby turning her/his back on generations of American leadership on trade.  Or s/he could initiate a re-negotiation, which will be far from easy and will take considerable time.  Or TPP could be adopted, possibly after some ritual face-saving, by the new Congress.  Hope springs eternal in trade policy.

If we have learnt anything about the fractious debate about TPP, it is surely that we have to do more to explain the benefits of trade and investment to a sceptical public.  Those benefits include jobs and livelihoods, a richer variety of goods and services, and new opportunities at all levels.  Yet clearly we have to make trade work even better for people, especially those who face the challenges of adjustment.  That means more and better structures for consultation, more openness where possible, more involvement by business and other stakeholders, and, where justified, carefully-crafted policy approaches that moderate the risks of that adjustment.

Trade Minister Todd McClay has made a good start by holding public meetings about the strategy around the country. Hopefully these are occasions for listening as well as talking.  The times require a new strategy to respond both to the new demands of business and also the public disquiet about the pace and extent of globalisation. That requires more than just a tweaking of what’s there already.

(Published by the Dominion Post, 4 October 2016)

Emerging trade agreements

Stephen spoke to the Primary Industry Summit in Wellington on 25 May.  Read his speech here.

I’d like to start today by asking the question – why do we seek negotiate trade agreements in the first place, especially when they seem so hard to I’ll then give you a sense of where I, as business observer, think some of the more current FTA negotiations are up to.

I’d also like to venture some thoughts about what all this might mean for the primary industries.

New Zealand business at APEC Vladivostok, 3-6 September

New Zealand business representatives to participate in the APEC CEO Summit in Vladivostok

Click on the link above to read the media release available on the New Zealand International Business Forum website.

 

Having our cake and eating it too makes sense

Having our cake and eating it too makes sense.

Click on the link above to read the article published in the Dominion Post and now available on the New Zealand International Business Forum website.

WTO remains priority despite “not achieved” grade for Doha

WTO remains priority despite “not achieved” grade for Doha. A media release by Stephen Jacobi now available on the New Zealand International Business Forum website.

Crunch time (again) for Doha, warns International Business Forum

Crunch time (again) for Doha, warns International Business Forum. A media release by Stephen Jacobi available on the New Zealand International Business Forum website.