Trade in the worst of the worst times

Read Stephen’s end of year round up for the Trade Works website:

“Out with the old, and in with the new”. The old saying seems to have particular relevance for 2020, a veritable annus horribilis for the global economy.  2021 can’t come fast enough, but while the vaccine portends better times to come,  many parts of the world remain in crisis as the year closes.

Trade plows through rough water

The Covid 19 virus caught the world unprepared and has had incalculable effects on people’s health and livelihoods:  too many precious lives have been lost and economies have been devastated.  Trade has been heavily disrupted as supply chains continue to come under pressure.  Protectionism was quick to rear its ugly head at an early stage as even supplies of much-needed medical equipment were blocked, but eventually wiser heads prevailed and markets remained largely open and trade continued to flow.   The WTO reports that global trade volumes bounced back in the third quarter from a deep slump in the second quarter – up 11.6 percent, as compared to – 12.7%, but still 5.6 % lower than the same time the previous year.

New Zealand’s trade has held up remarkably well this year, with some variations between products.  The trade surplus is the highest it has been for twenty years or more: imports are down sharply while exports are around 4.4% lower than this time last year (which was a bumper year for trade).  There is little doubt that trade saved New Zealand’s economic bacon in 2020, but constraints at ports and a growing lack of shipping are beginning to have a major effect.

Trade policy did not stand still 

It’s hard to keep a good trade policy down, and New Zealand negotiators pivoted very successfully during the initial impact of the crisis to negotiate a series of supply chain resilience agreements.  International organisations played their part too with the WTO, G20 and APEC all making supportive statements.  Some significant agreements were concluded this year including the Digital Economy Partnership Agreement (DEPA)signed virtually – of course – in June and the Regional Comprehensive Economic Partnership (RCEP) signed in November.  

Other negotiations are ongoing.  The NZ/EU FTA is the biggest of these with eight rounds of negotiations having been held, but the NZ/UK FTA is gathering speed, albeit in the uncertain environment created by Brexitwhich, as ever, is going down the wire.  Much attention was focused early in the year on an apparent truce in the trade war between the US and China,  

but this conflict has by no means gone away and may not be entirely resolved by an incoming Biden Administration.  New Zealand’s own relationship with China has been in the spotlight this year:  the NZ/China FTA upgrade has been completed but awaits signature.  As the year closes the World Trade Organisation – that great lifeboat for international trade – remains without a Director-General and without an Appellate Body, rendering the task of settling trade disputes that much more problematic. 

Enter APEC !

In this highly contested and uncertain environment, New Zealand takes the chair of APEC in 2021 and will do so virtually.  This is no mean feat for our Prime Minister, Ministers and senior officials but it gives us a chance to help lead the emergence from Covid and prepare the ground for the economic recovery.  Business is gearing up too as New Zealand also chairs the APEC Business Advisory Council (ABAC).   This will be major preoccupation for us in 2021 as ABAC provides an important opportunity to socialise important ideas and concepts and build alignment with other business leaders and groups around the region.  Global co-operation and collaboration have been critical during the pandemic and will be no less so during the recovery.

Keeping on keeping on 

Throughout this year it has been important to continue our work in support of trade and investment and to point out to New Zealanders (and anyone else listening) the importance of openness and integration.  We published 18 blogs on current issues, posted a raft of information to the Trade Works site and to our social media channels and updated the look and feel of the website as well as the content, with a view to the work we have to do with  ABAC next year.  The New Zealand election gave us the opportunity to publish background on the trade positions of the major parties.  We look forward to engaging with the new Government in the period ahead.

As the curtain falls on the most difficult year many of us have ever experienced, all the team at Trade Works extend our best wishes to all our readers for a restful holiday period and for a happier, healthier and more secure trading year in 2021.

What does a Biden Presidency mean for New Zealand?

In this article published by The Spinoff, Stephen assesses the impact of a Biden Presidency on New Zealand’s trade interests.

The American people have spoken.  America’s “better angels” have prevailed.  We all hope for better times ahead, but, while there is ample scope to expand co-operation with a Biden Administration in the White House, the future is unlikely to be all plain sailing.

The state of the relationship

The importance of the United States in international affairs is such that It is in New Zealand’s interest to co-operate with whoever occupies the White House.  The NZ/US relationship has continued to expand over the last four years. High level contacts have continued, although the Prime Minister herself has not yet made the customary visit to Washington. Security and defence relations are closer now than at any other time.  New Zealand and the US continue to be “very, very, very good friends.”  

Trade has flourished, even in the absence of an FTA.  Consumer demand for our products probably increased as a result of the economic stimulus flowing from the Trump Administration’s tax cuts.  Even Covid-19 has not made a dent in the trade figures.  True, the Administration disappointed us (and this writer in particular) on the Trans Pacific Partnership (TPP),  and continues to apply tariffs on our steel and aluminium exports, but with the KIWI Act it gave us visas for investors and entrepreneurs.  

New Zealand has not been immune from the fallout from the US/China trade war which has cast a shadow over the global economy.  We have also been concerned about US policies towards the World Trade Organisation (WTO), as well as multilateralism more generally, including, most importantly, withdrawal from the Paris Agreement on Climate Change.  The approach to  Iran and North Korea has been perplexing.  Co-operation in science, technology and education have all advanced, and our space co-operation has literally blasted off.  

Those annoying tariffs aside, the relationship is in good shape and ready for further development.

What do we want at this point?

There are a number of things that the Ardern Government might like to see from the US under a Biden Presidency, including:

  • Re-engagement in multilateral institutions, including the Paris Agreement and the WTO
  • Reduction of tension with China and re-alignment with Asia more generally
  • Partnership on global political, economic and environmental issues affecting us both 
  • Openness towards trade and investment.

Some of these seem assured given the Biden/Harris policy pronouncements; others will take time to eventuate: the processes required to get a new Administration up and running are labyrinthine by New Zealand standards.  It will take time to re-orient the ship of American policy.  New Zealand will need to take its turn, although our chairing of APEC in 2021 will give us some useful early opportunities to engage.

What about trade ?

We should not expect any early moves towards joining the Comprehensive and Progressive Agreement on Trans Pacific Partnership (CPTPP).   There are competing views on trade and President-elect Biden cannot be expected to want to disturb the Sandersistas in his party, at least not straight-away.

A bilateral FTA is no more likely in our view.  We have been down this path before, with both Republican and Democrat Administrations.  Somehow, no matter the quality of our friendship, we can never get the right conditions to allow an FTA to proceed.  That’s because we offer the Americans only a small market and our asks of the US are not without consequence domestically.  You only have to look at the importance of Wisconsin in the recent election to see that no favours affecting American dairy farmers are likely to be done for New Zealand.   The whole strategy with TPP – now CPTPP – was that the prospect of a bigger deal might serve to outweigh these domestic concerns.  As it turned out, TPP delivered only marginal agricultural market access and the Obama Administration was unable to get it passed through Congress.

The US may take a less aggressive stance on the WTO and New Zealand and the US could well co-operate on reforms aimed at improving the dispute settlement system rather than seeking to undermine it.  A return of US global leadership on trade is to be welcomed by New Zealand.  The multilateral trading system was after all one which the US helped build. 

Another area we can expect some welcome evolution in policy is in relation to China.  Although the Trump Administration’s tariffs have undeniably hurt America more than China, the perception of China as a strategic competitor cuts across the political divide.  We would expect a Biden Administration to continue to contest China’s economic, political and technological rise, but the policy could be pursued in a less confrontational way. That may not however lessen demands being made of very good friends like New Zealand.

What’s next ?

New Zealand and the United States have many shared interests, but America remains very divided, in the grip of a health and economic crisis and the “America first” movement has not gone away.  New Zealand has long pursued an independent foreign policy, but we value opportunities to work together. The relationship will continue to require close attention in the years ahead from Prime Minister Ardern, Foreign Minister Mahuta and Trade Minister O’Connor.  

Address to the 47th One Stop Update for the Accountant in Business

In October 2020 Stephen spoke to accountants’ conferences in Christchurch and Wellington: here are his remarks:

GLOBAL ECONOMIC UPDATE: TRENDS, SHIFTS AND IMPACTS ON NEW ZEALAND’S BUSINESS LANDSCAPE

It’s good to be with you again at this 47h One Stop Update event. My thanks to Conferenz for having me back.

When I spoke to this group last year, I took on the role of a weather-forecaster.

As I looked over global landscape, with the shadow of the US/China trade war and a rising risk of protectionism, I issued a warning – cyclone approaching – but I definitely missed something.

This year I’d be better off being an epidemiologist.

What just happened ?

A small item in the Economist of 11 January read as follows:

“Almost 60 cases of pneumonia in the Chinese city of Wuhan were thought to be linked to a new strain of the virus that caused the SARS epidemic in 2002-03. Unlike then, no-one else has yet died from the disease.  The WHO is investigating…”

This global pandemic caught us unprepared and has left havoc in its wake.

All analyses, forecasts and outlooks are having to be revised – for most we may as well start over again from scratch because, let’s face it, 2020 has been brought to us by the letters W, T and F and we ain’t seen nothing like this before.

2020 has become a wasteland of hopes and dreams.

We haven’t previously seen – at least not since 1918 – such a devastating health impact and crippling effect on local economies.

We have not ever seen such a shock to the global economy or global supply chains, nor the fall out on formerly strong sectoral performers like tourism and international education. 

Curiously though there has been some, albeit faint, light on the horizon.

We’ve seen, despite some initial hesitations and some variation between sectors, markets for our key goods exports remain open and performing.

We’ve seen traditional industries and some key markets largely save the day when it comes to our economy.

We’ve seen too some strong policy actions on the part of our Government aimed at shoring up supply chains and continuing the task of keeping trade flowing.

The question for us now is what we can do to weather the continuing storm in this incredibly uncertain environment

Working out “What’s next” has never been easy and while I’m not here to predict the future, I’d like to unpack some of this further with you and I look forward to the conversation that will follow.

In the wasteland 

At the outset we should note the tragic loss of life and human potential which have been caused by the pandemic, which has yet to run its course around the world.

Words fail to express the sorrow at the loss of 25 fellow New Zealand citizens, let alone the over 1 million global citizens whose lives have been prematurely ended.

That such a tragedy could befall us at a time when the world is more advanced scientifically, more connected globally and more prosperous economically than at any other time in history will be something for historians, philosophers and economists to ponder in the decades to come.

The scarring of this sort of catastrophe cannot be measured just in accounting terms (if you’ll foregive the expression) – the human cost is simply incalculable.

The global economy is reeling.

Never before have all parts of the global economy suffered a shock at the same time.  Never before have both supply and demand been affected at once.

Most countries have been suddenly plunged into recession: the World Bank says that growth will contract by between 5.2 percent and 8 percent in 2020 and that the COVID-19 recession has seen the fastest, steepest downgrades in consensus growth projections among all economies since 1990[1].

While developed economies have certainly not been spared, developing economies have been hardest hit :  for over 25 years world poverty has been steadily declining but now, the World Bank says, the deadly combination of Covid and climate change could in 2020 drastically increase the number of people living in extreme poverty by 88 million to 115 million[2]

Here in New Zealand our economy declined by 12.2 percent in the last quarter.

Even with a strong rebound expected after the ending of the lockdown in Auckland, the economy is still expected to shrink significantly this year, perhaps by as much as 5.6 percent before rebounding in 2021.

Here as elsewhere some sectors have been hit harder than others –international tourism and education, hospitality and entertainment, the creative industries property, construction, manufacturing to name just a few.

Around the world the loss of air and sea-freight connections has seen supply chains tested to breaking point with many businesses looking now to re-shore some critical manufacturing operations.

The pandemic has caused major disruption to food production and distribution resulting in bottle-necks along the entire food supply chain.

Throughout the pandemic a high level of policy uncertainty has existed. 

The protectionist reflex, already present in the pre-Covid world, became initially even more manifest as economies looked to protect local supplies of essential health equipment, from sanitiser to PPE to soap and even food.

As the crisis began several economies placed restrictions on food exports, including eggs, rice and grains. 

Fortunately, by August most of these restrictions had been removed.

This was due to a lot of pressure from international organisations like the World Bank, the IMF, the WTO, G20 and APEC which did the job we needed them to do and called for markets to be kept open and trade flowing.

As bad as it has been, there have been one or two glimpses of light in the darkness.

In April this year the best estimate of the World Trade Organisation was that trade would drop by 12.9 percent in 2020: a new forecast suggests the drop will be more like 9.2 percent, with trade rebounding by 7 percent in 2021 but still remaining below the pre-crisis trend[3].

Interestingly for New Zealand, the trade decline in Asia is expected to be less – at 4.5 percent.

All these forecasts of course are predicated on the absence of a resurgence in the pandemic; as we see in the United States, Europe, South America and India, the worst may be far from over.

New Zealand’s trade has held up remarkably well also.

Our key exports of dairy, meat and fruit are all higher this year than last year, but exports of forestry and seafood are down. 

In the year to August 2020 New Zealand’s total annual exports were up 2.8 percent from the same period the previous year and total annual imports were down 8.2 percent[4].

Our traditional exports of agricultural and food products have been saving our bacon during this crisis and a big shout out needs to go to our farmers and exporters.

Key markets especially China have performed well and exports to Japan have been growing strongly as the market has opened under the Trans Pacific Partnership.

Generally speaking, our markets have remained open to us in a regulatory sense – again proving the worth of the free trade agreements which today cover over 64 percent of exports and eight out of our top ten markets.

Exporters have faced problems in terms of disruptions to supply chains including logistical delays at ports, time delays with courier services and bottlenecks in inspection and storage.

Some jurisdictions are putting in place new certification requirements and exporters need to keep in close touch with their customs agents and NZ officials about these in case they become unjustified non-tariff barriers to trade.

Several sectors are also facing critical shortages of skilled and unskilled labour including RSE workers to pick fruit, people required in meat processing plants or to service equipment in factories and seafarers to work on the fishing fleet – these shortages are going to become more acute as the border closure continues and could threaten the export-led recovery.

It has to be said that NZ Government agencies over this time have been noticeably attentive to exporters’ needs.  

The Government has adopted a Trade Recovery Strategy focusing on retooling exporter support, rebuilding the network of trade agreements and refreshing key relationships.

Regular updates have been held with business represenatives to maintain a check on the pulse of trade and any problems both onshore and offshore that have arisen.

At an early stage temporary steps were taken to ensure air routes remained open both for exports and imports[5] and a number of supply chain connectivity arrangements were negotiated with key overseas partners.

Sone problems remain to be addressed: several sectors are facing critical shortages of skilled and unskilled labour including RSE workers to pick fruit, people required in meat processing plants or to service equipment in factories and seafarers to work on the fishing fleet – these shortages are going to become more acute as the border closure continues and could threaten the export-led recovery.

With Covid there came a risk that some of our partners’ worst protectionist instincts might have been awakened – by and large this has been avoided, but that protectionist reflex has not gone away.

Geo-political tensions that were smouldering pre-Covid have broken out into more aggressive firefights – the US/China relationship for example is at a worse point today than at any other time in history.

The shadow of the US/China trade war is getting longer and darker.

It is very easy at tense moments like this for trade to get caught in the cross-fire, as Australian farmers have found out recently.

This requires care in handling sensitive international relationships – we are not out of the woods yet.

It is too early to tell yet how long the current uncertainty might last.

That is very cold comfort indeed for those in the international tourism and education sectors whose revenues will simply not recover fully until borders re-open we can travel freely again.

That will depend on the ability of governments around the world to improve their response to the pandemic and the availability and distribution of vaccines and therapies.

Progress is doubtless being made but not at the speed which is needed.

In the light of that uncertainty what can be done to weather the storm?

It is pretty clear that effective domestic policy action is a pre-requisite for addressing the pandemic, but equally clear that no country working on its own has all the solutions.

This is a time when we need governments and international institutions to come together as never before – our lives literally depend on it.

Unfortunately, it is a time when distrust between the major powers is at an all-time high.

Since pre-Covid we were worried that the larger economies could not demonstrate global economic leadership, it is hardly surprising that today they lack the wherewithal to show global political leadership.

Yet, out of adversity can come opportunity and there is today a new role for smaller players like New Zealand working with others to bring together coalitions to focus on what is needed to set the stage for an eventual re-opening of borders as health circumstances permit and get the global economy moving again.

This requires New Zealand to continue to pay close attention to international affairs – even during an election campaign and formation of a new government – and to navigate carefully between super-power rivalry.

It requires us to continue the hard and sometimes frustrating work of opening new markets as we are doing today through negotiations with the European Union, the United Kingdom, as well as partners in Asia and Latin America.

Those negotiations are not easy.

An FTA with the European Union would bring significant benefits, and enable us to address some new issues, but it is still not clear whether our European friends are prepared to open their market to us for agricultural products.

Similarly, the prospect of a potentially valuable FTA with post-Brexit Britain depends entirely on the outcome of Britain’s negotiations with the EU and the direction of Britain’s future trade policy.

A very large negotiation with Asian economies – the Regional Comprehensive Economic Partnership (RCEP) – alas excluding India – will deliver some important liberalisation amongst the fifteen partners but not so much for New Zealand which already has good arrangements in Asia.

A negotiation with the Pacific Alliance of Latin American economies is making only slow progress.

If the big wins from new agreements feel somewhat elusive right now, there is other work to be done.

We should continue to focus on updating existing arrangements that have served us well such as with China and ASEAN and expanding the CPTPP.

We should even now to start to look for new partners further afield in Africa and Eurasia.

We should think ahead to new types of arrangements which can address new business models particularly in the digital space.

Trade policy and free trade agreements are important – critically so as without market access and effective trade rules trade cannot take place – but they need to be accompanied by domestic policies that develop capacity, increase productivity and competitiveness and spur new investment, including from overseas.

We are now in time where we simply cannot afford bad policy and poor investment decisions.

We may have beaten the virus, not once but twice, but securing the economic recovery will be a test of our collective endeavour and political will to make the right decisions.

In that context I want to highlight a particular opportunity that is before us in 2021 when New Zealand will chair APEC and for the first time, we will chair it virtually.

APEC or Asia Pacific Economic Co-operation provides an opportunity for New Zealand to show political and economic leadership at a critical time for the economic recovery, to work co-operatively with some of the world’s largest economies and our major trading partners and to draw on a wealth of experience and ideas to find the best solutions to address the Asia Pacific region’s critical needs.

APEC has 21 member economies who are vital economic partners for New Zealand, normally taking around 73 percent of our exports and accounting for 70 percent of our imports. 

Fourteen of our top 20 export markets are APEC members, including the three largest economies in the world (the United States, China and Japan).  

APEC is not just the domain of governments – APEC’s business voice is provided by the APEC Business Advisory Council (ABAC).

Three ABAC Members from each economy provide recommendations direct to APEC’s Economic Leaders:  New Zealand’s ABAC Members are Rachel Taulelei, Malcolm Johns and Toni Moyes and I have the honour to advise them and lead the ABAC executive team next year.

ABAC has a role to play in focusing APEC on what is needed to rejuvenate economic activity throughout the Asia Pacific region including, critically at this time, a strong vision for the future of a highly inter-connected region, enhanced co-operation between economies and new openness to trade and investment.

Under the theme of Tāngata, Taio me te Taurikura, (People, Place and Prosperity) we’ll be developing new ideas about trade and investment, about renewable energy and responses to climate change, about Māori and indigenous business, about the digital economy and about open and inclusive financial systems.

To do this effectively, we will want to get the sort of input and perspectives from the New Zealand business community that will make the agenda practical and business-led.

You can find out more about our programme on the Trade Works website – www.tradeworks.org.nz.

The move to a virtual hosting format is certainly a challenge but it will hopefully also demonstrate New Zealand’s ability to innovate in the digital space. 

Above all we will want to host APEC and ABAC in 2021 in a way that is distinctively Aotearoa, which creates a legacy going forward and which enhances the success of NZ business in the region, no matter their size or scale.

APEC is a big opportunity but to really deliver in 2021 we have to focus on what is most important – building the economic recovery.

The fact of the matter is we don’t know what is ahead of us – other than that at some unknown time the immediate crisis will come to an end.

Covid has removed a lot of the old certainties and assumptions.

Stamping out the virus and rebuilding will likely take time.

We will need to keep doing what works – both at home and abroad.

We also need to prepare better for future challenges like this one – listening to both the epidemiologists and the weather forecasters and, critically, remaining open and continuing to look outwards.


[1] https://www.worldbank.org/en/news/feature/2020/06/08/the-global-economic-outlook-during-the-covid-19-pandemic-a-changed-world

[2] https://www.worldbank.org/en/news/feature/2020/10/07/global-action-urgently-needed-to-halt-historic-threats-to-poverty-reduction

[3] https://www.wto.org/english/news_e/pres20_e/pr862_e.htm

[4] https://www.stats.govt.nz/reports/new-zealand-now-overseas-trade-at-september-2020

[5] https://www.beehive.govt.nz/release/government-working-keep-air-freight-moving

Trade and the virus: united we stand

Economies need to fight the Covid-19 virus by standing together.

Desperate times call for desperate measures, but not stupid ones.  The world faces an unprecedented challenge to human health and to economic vitality.  Many economies including New Zealand are now resorting to extraordinary measures to check the spread of the virus, treat sufferers and deploy massive economic stimulus.  That is as it should be.  Borders need to close to travelers for a time. But some economies are resorting to protectionism.  That will make the fight against the virus even more complicated and is likely to delay the recovery once there is light at the end of the tunnel.

Protectionism – what’s new ?

Unfortunately, protectionism is nothing new and has been rising steadily since the Global Financial Crisis, and particularly over the last three years.  Economic openness had been fragile before the crisis struck and it seems that the virus has accelerated the trend.   Fifty governments are now limiting access to the essential tools to fight the pandemic, imposing export restrictions on medical equipment and drugs.  Many more are maintaining tariffs on even the most basic protective items such as soap and disinfectant.  The Global Trade Alert team at the University of St. Gallen  have pointed out that at least 16 export bans have been imposed since the beginning of this month alone.  Now, as Prof Simon Evenett says “beggar-thy-neighbour means sicken-thy-neighbour”.

What can be done ? 

Trade and open markets are crucial to getting through this global challenge, helping life-saving medical supplies to get to where they are needed most.  By contrast, going it alone is a recipe for disaster.  Commentators at ECIPE (European Centre for International Political Economy) have called for economies to “get rid of the restrictions and tariffs that delay the purchase of medical equipment and make them more expensive”.  They are right.  We need a lifting of export bans and a stand-still on new tariffs and elimination on these products as soon as possible – and for markets for other goods and services to stay open too, even as countries may be tempted to throw up barriers elsewhere in response to the difficult period that undoubtedly lies ahead.   We believe that economies in the Asia-Pacific should show global leadership here, staying true to our shared values of “equal partnership, shared responsibility, mutual respect, common interest and common benefit” as APEC Economic Leaders put it in their Bogor Declaration in 1994. 

Getting the engines started again

While we are in the midst of the struggle right now, thought will need to turn to how to restart the engines of trade and investment as soon as possible.  Forecasts are for a serious global recession, at least in the short term.  We will need the right tools to keep economies and communities going in the meanwhile, and ready to crank up again when the moment is right.  Protectionism is bad medicine.   First to hand instead should be openness and co-operation. Bodies such as APEC and the WTO, where countries can come together to lay the groundwork for coordinated global action, will be crucial to get things moving quickly.  New Zealand has a leadership role to play here as Chair of the WTO General Council and Chair of APEC in 2021.  We need to get back to the habit of mutually beneficial international co-operation.

For now, the world and its people are hurting. We wish all our readers the best of health and happiness wherever it can be found in these viral times.  Kia kaha ! (Be strong!) 

This post was prepared by Stephen Jacobi and Stephanie Honey.

New Zealand’s real challenge with China

Stephen stepped down from the role of Executive Director of the NZ China Council at the end of 2019. Here is his departing comment on the relationship, published in the NZ Herald on 20 December 2019.

No one can predict exactly what’s ahead for New Zealand’s relationship with China, but one thing is clear.  For the foreseeable future at least, China will become increasingly important to New Zealand.  To suggest otherwise is to ignore the role China now plays as a global power, and our place in an increasingly interconnected Asia Pacific. 

This presents us with tremendous opportunities, but also significant challenges.  To remain a truly valued and respected partner, we must find new ways to build relationship capital with China in areas beyond our traditional two-way trade in goods and services. 

Of course, trade remains the critical underpinning of New Zealand’s economic prosperity and trade with China will likely continue to grow.  Last year, we became China’s top food supplier globally, ahead of both Australia and the USA.  China wants to buy what New Zealand has to sell, and there is, fortunately, no reason to believe this will change any time soon. 

We need to continue to nurture our strengths in our key export sectors which generate the returns we need to fund economic and social development back home.   It’s harder than many commentators seem to realise to add value to the things we sell overseas, but genuine progress is being made.  The dairy industry, for example, is acutely aware of the need to diversify and much of what we sell, from cheese to infant formula, are premium products. 

The next generation of consumer offerings, particularly in the natural health sector and in the digital and creative space are now being established including by people who have the benefit of family and personal connections back in China.  As young people from both countries become more familiar with each other’s culture and language, this diversification in our trade will continue. 

The real risk to New Zealand’s relationship with China, in my opinion, comes less from having all our eggs in one Chinese basket, as some suggest, but rather that we focus so much on trade and the economic dimension that we underinvest in other, important areas.  

Three new areas of opportunity that New Zealand can leverage include cooperating with China’s Belt and Road Initiative (BRI), partnering on programmes to tackle the threat of climate change and greater cooperation in science and technology. 

BRI is China’s project to promote development-led growth between China and the rest of the world.  BRI is not just about infrastructure: it’s a framework for expanding connectivity amongst all the BRI participants.  We can’t build a physical bridge between China and New Zealand – we can find ways to help goods, services, people and capital move along the Belt and Road.

An initiative where New Zealand can add real value due to our unique geographic location and the expertise we have developed as a result.  Thanks to our existing ties with both China and South America, the concept of New Zealand as a ‘Southern Link’, or major conduit between the two for trade, travel and tourism is now gaining traction especially in moving e-commerce parcels between China and South America through Auckland.  

On climate change, Minister Shaw has spoken of the potential for the joint research agenda between China and New Zealand to become a global example for others to follow.  We have a huge advantage in renewable energy generation, an area in which China is investing aggressively.  China has expertise in electric vehicles. Greater cooperation to bring down emissions in both countries will give each of us a stake in solving a massive global problem.  

More broadly in science, the health sector has given us a template for how we can partner with China in new ways.  Recently, a group of health researchers and experts from Shandong province met with the Waitematā District Health Board to open lines of cooperation from hospital and nursing practices to data and technology application.  The commercialisation of local knowledge and research with Chinese partners is an area we’re only just beginning to explore. 

The more we expand the range and depth of these links with China, the more we can build up our relationship capital and help our Chinese friends see us as a more than just a provider of goods and services – things that one day they might choose to get elsewhere.

I am confident our relationship can also withstand our obvious differences on serious issues like human rights and regional security.  While in 2019 these differences have been thrown into sharp relief a number of times, New Zealand has not been silent on the values we hold.  The task ahead is to strengthen our capacity to make our independent voice heard including with big global players like China.  

The point is we can effectively de-risk the entire relationship by looking actively for new areas of cooperation.  This will not only help alleviate risk from a trade perspective:  importantly, it will also help us negotiate points of political difference more maturely and effectively.

This is New Zealand’s real challenge with China.  Maintaining our most important trading relationship by building strength and resilience into areas beyond trade.  This is the only way for New Zealand to see beyond its obvious differences with China to what can be achieved for the long-term benefit of both countries. 

Trade in 2019: somewhere over the rainbow

The sky is definitely not blue for the global trading system.  Are these the worst of times? Perhaps.  Can they get better – who knows?

In his annual report to the AGM of the NZ International Business Forum, Chair Malcolm Bailey writes: Around the world New Zealand exporters continue to undertake profitable business, somewhat against the odds, but the outlook for trade liberalisation is bleak.”

US team blows whistle on global trade referee

At the apex of widespread concern about the outlook for trade is the crisis in the World Trade Organisation’s Appellate Body.  The Economist says the Appellate Body  is one of those institutions that most people have never heard of, but which will be missed when it is gone”.  The Appellate Body hears appeals from the WTO’s trade dispute settlement system and the US Administration is blocking new appointments to the body to replace members who are retiring.  Come 10 December, the Appellate Body itself will no longer be operational and the whole system risks slowly grinding to a halt.  Some WTO members are trying to find a work-around, but there is little if any likelihood this can happen before the end of the year.

Does this matter?  Yes, it does.  While the US and other large economies might be able to foot it as the law of the jungle gradually prevails over trade law, smaller economies like New Zealand cannot.  Using the current dispute settlement system we have taken on some of the world’s most powerful economies and won. We face a looming dispute with the EU and post-Brexit Britain about our tariff rate quotas for sheepmeat, beef and dairy products.  We need the protection and rule of law that the WTO provides.

There is no argument that the dispute settlement system needs to be reformed.  Indeed New Zealand, through Ambassador David Walker in Geneva, is leading this work.  But blowing up the current system is not the answer. 

Trade wars are not so easy to win after all

Meanwhile the trade war rumbles on.  “Phase one” of a deal between the US and China is proving elusive. It now seems most unlikely that this sorry saga will be resolved before the end of the year. Other trade relationships may get caught up in the row. 

Markets remain unsettled by the prolonged nature of the dispute.  This has not led to global recession as some fear, but forecasts for global trade growth continue in the doldrums. 

Market disruption has affected New Zealand exports of horticultural products, wool and wood. And no relief has yet been granted to the US tariffs applied on “national security” grounds to the tiny NZ exports of steel and aluminium.

Is there any hope for trade left?

That New Zealand exporters continue to do well in the current environment is testament to their smart thinking and the resilience of our small, open economy.  There have even been some notable gains – a modest upgrade to the China FTA has been announced and an outcome to RCEP is on the cards, albeit for the time being without India.  It seems trade liberalisation may yet be possible for those who seriously put their mind to it.  

But time is running out at the WTO in Geneva.  A number of negotiations have been  mandated for conclusion by the end of the year, including fish subsidies and the long-standing moratorium on tariffs on electronic transmissions (eg streamed movies, e-books or even digitally-supplied services).  In advance of the next WTO Ministerial Meeting in Kazakhstan in June, work continues on other important negotiations including on e-commerce, agricultural domestic support and domestic regulation of services.

What’s a grown trade advocate to do?

Tradeworks was established by the members of the NZ International Business Forum to explain the background to trade and to advocate for more open global markets and better trade rules.  This past year along with other material we posted to the Tradeworks website 26 blogs and videos on current topics including the trade war, Brexit, the NZ/EU FTA negotiations, WTO, APEC and digital trade.  

Next year we will continue to pay close attention to the range of negotiations in which New Zealand is involved and we will work with our partners in New Zealand and around the world to create a more secure environment against which to do business.  We’ll also be thinking ahead to New Zealand’s chairing of APEC in 2021 and stepping up our work with the APEC Business Advisory Council.

No, these may not the best of times for trade, but somewhere, over the rainbow, we may yet find that pot of gold !

A mainstay in international trade

It’s nearly impossible to talk about New Zealand trade issues without mentioning the name of Stephen Jacobi.

A Chartered Member of the Institute of Directors, Stephen is a mainstay in the New Zealand international trade space. After working at the Department of Trade and Industry and the Ministry of Foreign Affairs and Trade for 25 years, he shifted to consulting and took on roles as head of major business councils. The Institute of Directors spoke with Stephen and in the article below he shares his insights into the rapidly changing global trading environment and what this means for New Zealand.

Read this profile prepared by the Institute of Directors.

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.