GEO-POLITICAL, TRADE AND CONSUMER UPDATE
STEPHEN JACOBI, EXECUTIVE DIRECTOR, NZ INTERNATIONAL BUSINESS FORUM
Introduction
Thanks to the team at NZ Apples and Pears for the invitation to be with you today.
I’m here to talk about the bigger picture against which your industry carries out its business here at home and around the world.
I’m conscious that it was not long ago that Hawke’s Bay went through some of the worst times anyone could remember.
And all of you are coping with weather events and rising costs of production which impact on your business.
Globally too we are living in anxious times.
We see this in two horrendous, armed conflicts, growing geo-political uncertainty, a global economy that is only now shaking off inflation, a climate crisis and a new wave of technological change.
It’s important in times like this to keep some perspective.
Markets rise and fall.
The sun will inevitably rise no matter who is elected President of the United States.
And an apple a day … well, you know the story.
Today I’d like to talk about:
- The global economy in the midst of geo-political disruption;
- Some recent significant trade policy developments; and
- What consumers are looking for in a world like this.
My comments are informed by the views of the members of the NZ International Business Forum – an organisation which brings together our larger exporters and leading business associations, including I’m delighted to say, NZ Apples and Pears.
You can find out more about us at www.tradeworks.org.nz. Please follow us on Twitter, LinkedIn and Facebook!
A disrupted global economy
It’s fashionable these days to say that “history, geo-politics and (even) geo-economics are back”.
I’m not sure they were entirely absent earlier, but it is true that these days we seem to be returning to another age in terms of super-power rivalry.
Certainly, geo-politics is being talked about more frequently and at Boardroom level than before.
That’s doubtless because of the growing risk caused by geo-political disruption.
By “geo-political risk” we mean the way in which conflict or tension between states or other international entities can impact on the global economy and the ease and cost of doing business.
Putin’s illegal and immoral war in Ukraine is the most striking example.
We are faced today with the horrible prospect that the war in Ukraine may drag on indefinitely, or even spread to other theatres, casting a shadow over security and growth in Europe and beyond.
Then there is the continuing conflict in Gaza between Israel and Hamas, with the risks this poses for wider conflict in the Middle East.
This has already impacted on global supply chains and the cost of shipping passing through the Red Sea.
Your own industry is affected by this both by rising costs and the extra time required to get shipments to Europe.
There is also the “new cold war” that is becoming hotter between the United States and China, in which New Zealand itself risks becoming embroiled – I’ll talk more about this in a moment.
And there is the prospect of a return of a Trump Administration in the United States which could further complicate all of the above.
Geo-politics can never be entirely put to one side, but today the risks to prosperity are heightened because the global economy is still struggling to break free from the aftermath of the pandemic.
The UN Secretary General has said that the world cannot afford more war[1], and he is undoubtedly right.
Economic growth
The IMF released its latest World Economic Report[2] just two weeks ago.
There is some better news on the economic front: the world is making some progress in reducing inflation, which is forecast to will slow to 5.9 percent this year from 6.7 percent last year.
The not so good news is that inflation is surprisingly persistent: while costs of “headline” inflation – food and energy – have declined, prices for services have continued to rise, which complicates the return to a more normal inflation outlook.
The IMF expects the global economy to grow 3.2 percent this year and 3.3 percent next year.
That’s slightly lower than last year (3.3 percent) but significantly lower than the long-term average of 3.8 percent.
The growth projection masks different scenarios for different economies.
Generally speaking, emerging markets and developing economies especially in Asia and Africa are doing better than advanced ones.
And some economies including the United States are propped up by massive government spending and borrowing which will one day have to be paid for.
China’s economy is facing structural problems, but is forecast to grow by 5 percent next year and 4.5 percent in 2025.
India continues to out-perform but at a lesser rate – down from a high in 2023 of 8.2 percent to 7 percent and 6.5 percent this year and next.
Other economies in “emerging and developing Asia” which include some of New Zealand’s bigger trade partners are doing reasonably well.
Why do these figures matter?
They matter because they impact on the countless commercial decisions in international markets which drive the prices which you as New Zealand businesses can receive for your goods and services.
Trade growth
In April the World Trade Organisation released its annual trade survey[3].
The WTO forecast is that trade should grow by 2.6 percent in 2024 and 3.3 percent in 2025.
That’s a lot better than the paltry 1.2 percent score for 2023.
But these are still not great numbers.
One bright spot is that services trade – driven by a surge in digitally-delivered services – things you can buy over the net – and other services like tourism – has expanded significantly.
(Of course, these are the very same services where price rises are now contributing to global inflation!)
We see this in New Zealand – while tourism is not yet back to pre-Covid levels, there are now more Chinese airlines serving New Zealand than pre-Covid.
When it comes to goods trade, the last year, as many of you know only too well, has been a tough one but there are some green shoots evident in the statistics.
For New Zealand as a whole there are signs that exports are stabilising – whereas total goods exports declined by 5.5 percent in the December 2023 quarter they rose by 2 percent in March, although dropped by 0.1 percent in June[4].
It’s pleasing to see that in the case of apples and pears MPI is forecasting that renewed growth in the national crop should enable export volumes to return this year to between 2021 and 2022 levels.
Some have pointed to the economic difficulties in China, your largest market, as a contributing factor to New Zealand’s export performance over the last year.
It’s true that the Chinese market has continued to be problematic, reflecting a slow rebound from Covid and other structural problems in the economy.
Meat exporters have been particularly hard hit, but in other sectors like dairy and horticulture there would still seem to be optimism for a rebound in the market in the medium term.
It’s important to remember that New Zealand is not supplying “the whole of China”: there remains a lot of growth potential in the middle class, which is our target market, variously estimated to be between 500 and 700 million people.
What’s more China continues to open its market to New Zealand as is shown by Chinese willingness to explore new ways of further upgrading our ground-breaking FTA.
Geo-political risks
Let me come back to those geo-political risks facing our world.
As I suggested earlier, they are present not just in Europe and the Middle East, but also in our Asia Pacific region too, as the United States and China compete for economic power and political influence.
There has been some alleviation of geo-political tension between the US and China following the meeting in San Francisco of Presidents Biden and Xi last November.
It is an improvement in tone, rather than in substance, but it is welcome in terms of ratcheting down tensions.
But since then new areas of difference have arisen – both economic, as the US places new tariffs on Chinese exports of electric vehicles, and political, as the US and its allies take issue with China’s continuing economic links with Russia.
New Zealand’s predicament is that we need to maintain close and strong relationships with both the US as an enduring security and economic partner and China as our largest export market.
It is important to maintain some sort of balance, while remaining faithful to our values and history.
That’s really what an “independent foreign policy” is all about: making our own decisions about what we say and when we act, quite often in concert with our traditional partners, but from time to time acting on our own.
It’s not easy and it’s getting harder all the time.
Our traditional relationships matter, but so do our economic interests particularly at times like these.
The political risk is rising of an impact on our trade from an unforeseen event or some new policy direction, which disturbs the balance we have tried hard to maintain.
Exporters need to be alert to these risks.
It’s not simply a case of rushing to other less rewarding markets (if indeed these can be found) but taking steps to mitigate risk by shoring up key relationships and where possible diversifying product offerings in market.
And by encouraging the New Zealand Government to be alert to the potential unintended economic consequences of big changes to our independent foreign policy.
Recent trade policy developments
New Zealand’s Chief Trade Negotiator Vangelis Vitalis often talks about “the end of the golden weather” for trade policy.
By this he means that the period over the last thirty years which saw a large expansion in free trade agreements and market access has come to an end.
Today, protectionism on the rise everywhere as the number of trade restrictive measures increases.
Free trade is giving way to “industrial policy and friend-shoring”.
These are relevant to the economic growth scenarios I outlined earlier.
The IMF points to the increasing use of what it calls “unilateral measures – tariffs and subsidies – as a tool in geo-political contest.
To quote the IMF Chief Economist:
“Our imperfect trading system could be improved, but this surge in unilateral measures isn’t likely to deliver lasting and shared global prosperity. If anything, it will distort trade and resource allocation, spur retaliation, weaken growth, diminish living standards, and make it harder to coordinate policies that address global challenges, such as the climate transition”.[5]
In case anyone hasn’t heard there is a really big election in the United States later this year.
It’s hard to see a second Trump Presidency as being anything other than a disaster for trade with his proposal to raise tariffs of 10 percent to all goods as well as further measures against China.
Imagine a 10 percent tariff applied to your industry’s fourth largest export market valued at around $80 million with a zero tariff.
Imagine a 10 percent tariff applied across the board to New Zealand’s $14.5 billion worth of exports to the United States, which is not protected by any free trade agreement, meaning we would have to rely on the protection of the WTO.
This could prove even more problematic for our economy than the impact of economic uncertainty in China.
In fact, even under the Biden Administration, the United States has moved away from their traditional role of global trade leadership.
This was seen clearly last November when the United States withdrew, without warning, from negotiations on trade issues in the Indo Pacific Economic Framework (IPEF) – its own initiative for economic co-operation in the region.
The agreements signed under the umbrella of the Indo Pacific Economic Framework (supply chain, clean economy and fair economy) provide an opportunity to maintain engagement with the United States, but it is still not clear what they can deliver.
In case you were wondering, there is little if any hope that the United States would re-join TPP, which it left in 2017, or negotiate a bilateral FTA with New Zealand.
WTO
US ambivalence on trade was also seen at the recent World Trade Organisation Ministerial in Abu Dhabi, where very little in the end was achieved, despite the strenuous efforts of our own Trade Minister McClay and his officials.
The US was not the only WTO member at fault, but the heft it can normally bring to such negotiations was sorely lacking.
As the ultimate keeper and arbiter of the rules of international trade, the WTO must remain our top trade priority, but it is now in a severely weakened state, just when we need it most.
The tragedy for the WTO today is that even if a number of the things on offer at the Ministerial had been agreed, they would have been unlikely to impact significantly on the downside risks currently facing the global economy.
The WTO is ultimately the creature of its 166 members: they control its destiny, but the world is not in the open, outward looking frame of mind it once was.
NZ/EU FTA
More positively for New Zealand a big new free trade agreement, the NZ/EU FTA came into force on 1 May.
This FTA seeks to connect our exporters to 450 million European consumers and it delivers some significant new openings especially in apples, kiwifruit, wine, honey and seafood.
I know you were pleased that the FTA was able to enter into force earlier than expected.
Unfortunately the gains for other goods we sell in volume (dairy and meat) are much smaller.
The value of the agreement is further eroded by the risks of non-tariff barriers arising from increasing environmental regulation in the EU.
On the other hand the FTA is also accompanied by the application of the EU’s Horizon Fund for scientific research and development – this is very significant and could prove a real boost for innovation in this country.
Both the NZ/EU FTA and the earlier NZ/UK FTA are quite possibly the last in a line of larger agreements, like NZ/China, NZ/ASEAN and the Trans Pacific Partnership (TPP), which New Zealand has been able to secure during the period of “golden weather”.
But the cause of freer trade is not completely dead and nor have we reached “peak FTA”.
CPTPP
There is a still a range of agreements which can be further upgraded as China was in 2022 and ASEAN in 2023.
New Zealand’s main opportunity lies in the deepening and expansion of the renamed Comprehensive and Progressive Trans Pacific Partnership, or CPTPP.
CPTPP now has twelve partners once again now that the United Kingdom is in the process of completing its accession.
There are others waiting in the queue including China and Chinese Taipei and several Latin American economies as well as Indonesia.
Even Ukraine wants to join.
I’m sure your industry would rejoice if South Korea could join – that will depend largely on the progress made in expanding the agreement.
Enlarging CPTPP helps spread the CPTPP rulebook around the world.
That would also be assisted by the general review of CPTPP rules which is now underway, led by Canada which is the current Chair.
New Zealand has been part of the CPTPP journey from the very beginning – in fact, it was our idea!
Trade agreements need to be continually updated as business models change and new issues arise.
Deepening and expanding CPTPP at the same time is no easy undertaking, but if this is not successfully completed, with new rules and new members within the next two years, the value of CPTPP could be significantly eroded.
Other negotiations
Some smaller FTA negotiations also remain on the books.
Negotiations for an FTA with the United Arab Emirates are now underway.
A wider negotiation with the Gulf Co-operation Council has spluttered along with no breakthrough in recent years.
The Government has also expressed interest in picking up again the opportunity to join the Pacific Alliance linking Chile, Colombia, Mexico and Peru – Colombia is a missing piece of our coverage through CPTPP.
Sri Lanka, a sizeable market for dairy exports, is seeking membership of the Regional Comprehensive Economic Partnership (RCEP), to which New Zealand also belongs.
India
Then of course there is India.
I am well aware of your interest in the Indian market and the 50% tariff which restricts your ability to grow sales.
There’s no doubt about India’s growing political and economic importance.
India’s recent growth has been extraordinary.
India may have well and truly arrived on the world stage, but New Zealand’s relations are still quite restricted especially in the economic space.
We export to India about a tenth of what we export to China.
In past years we have already been down the FTA route with India both bilaterally and in the context of RCEP without success.
Unhooking a fresh start will require a large amount of investment and some new ideas on the part of the Government and business.
Above all we need to demonstrate the value proposition for India – why would an expanded economic relationship be of interest to them?
What is the part that New Zealand can play in India’s rapidly developing economic success?
Taking a sector-by-sector approach may prove – how shall I put it – “fruitful” in the short term.
Discussions are already advanced in kiwifruit space – other sectors, including apples, could be added over time until the case for a more formalised partnership can be made.
There may be scope to leverage off the recent World Bank project in Himachal Pradesh.
This work will require significant investment from both Government and business and it will take time to mature and develop.
Our newish Government is certainly ambitious on trade and that’s a good thing.
But doubling export value in ten years is not an easy task.
We will likely need more than just new free trade agreements and more trade missions, however valuable they both are.
Some big new ideas are needed.
Slide 15
One such big idea is moving more rapidly towards paperless trade – eliminating the vast amount of paper documentation which accompanies goods as they move through global supply chains.
There are big savings to me made here in terms of the cost of doing business – estimated to be as much as the gains from a free trade agreement.
Adopting digital, data-driven systems can avoid the need to replace lost paper documents by sending expensive couriers around the world, something that, as you know well, happens quite often.
What’s more by exchanging data rather than paper, clearance times through ports can be accelerated and more information can be provided to regulatory authorities and even to customers and consumers about a product’s provenance, safety and sustainability.
Our trading partners including the Australia, the UK and Singapore are moving far ahead of us and we need to catch up.
What do consumers want ?
I want to finish my remarks today with a word about consumer preferences.
I realise I am in front of people who know a lot more about this than me.
Digital and paperless trade provide a means to connect more rapidly and efficiently with customers and consumers around the world.
There are a number of possible markets in which to sell, but not all markets are created equal.
We do not enjoy the same market access everywhere, connectivity remains an issue and doing business globally remains expensive.
There’s little doubt that we’re aiming at the top of the market, at consumers who can afford to buy what we have to sell.
In these tough economic times, even those top end consumers, who have plenty of choice, are focusing on value for money.
And in anxious times consumers everywhere are wanting reassurance.
Reassurance about a product’s origin, safety and sustainability.
The 2024 KPMG Agribusiness report[6] summed this up well:
“The challenge for organisations is targeting consumers that understand our products and are prepared to pay for them, and then ensuring that the whole value
chain – from input providers through to producers, including all supply chain partners – is geared up to deliver the experience we sell ..the industry needs to be clear in its ambition to deliver nature-positive food from well stewarded landscapes, that is demonstrable by hard data”.
This seems to me to point to at least four important messages for the industry:
- Harnessing more effectively the use of data
- Dealing proactively with climate and sustainability
- Continuing to do the basics really well, especially quality and food safety
- Selling the New Zealand experience to customers – telling the story of this land, our people and what we can produce.
Conclusion
No-one is saying that the task we have ahead of us is straightforward – it is not.
As I said, these are anxious times around the world.
We cannot fully control the weather, the global economy or the geo-political risks affecting our business.
What we can do is continue as businesses to focus on those things we can influence.
Nurturing existing and new relationships in-market and focusing on delivering what consumers want, while paying attention, as the whole industry, to productivity, competitiveness and costs.
As a nation, we must continue our careful and deliberate management of New Zealand’s external engagement, developing new trade agreements and upgrading or expanding others, along with adopting other big ideas, like paperless trade, to reduce costs and promote the ease of doing business.
In a contested world there are few magic wands to be waved.
As ever, New Zealand’s prosperity lies in our ability to connect and integrate in global markets.
That’s the challenge and the opportunity and one I know this industry is completely focused on achieving.
[1] https://www.un.org/sg/en/content/sg/statement/2024-04-14/secretary-generals-remarks-the-security-council-the-situation-the-middle-east-delivered#:~:text=It%20is%20vital%20to%20avoid,concerned%20to%20prevent%20further%20escalation.
[2] https://www.imf.org/en/Publications/WEO/Issues/2024/07/16/world-economic-outlook-update-july-2024
[3] https://www.wto.org/english/res_e/publications_e/trade_outlook24_e.htm
[4] https://www.stats.govt.nz/information-releases/overseas-merchandise-trade-june-2024#:~:text=In%20June%202024%2C%20compared%20with,a%20surplus%20of%20%24699%20million.
[5] https://www.imf.org/en/Blogs/Articles/2024/07/16/global-growth-steady-amid-slowing-disinflation-and-rising-policy-uncertainty
[6] https://assets.kpmg.com/content/dam/kpmg/nz/pdf/2024/06/2024-agribusiness-agenda-v6.pdf