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Tim Groser

22 November, 2011

Opening of Synlait new dairy factory

Ambassador Xu, Minister Carter, Distinguished Guests

I am delighted to open this new dairy factory today – the largest infant formula facility of its type in the Southern Hemisphere. I congratulate the senior executives of the NZ company, Synlait Milk, and our Chinese partners, Bright Food Group, one of the largest food and beverage companies in China.

This is another major step forward in our rapidly expanding trading relationship with China. It will create more export growth and sustainable jobs in New Zealand – something that is at the top of this Government’s economic growth plan. But more broadly, it is another sign of a much bigger picture that is reshaping the world that I grew up in.

Even before the Global Recession, the worst recession in 70 years, began in 2009, the shift of relative economic and political power to the emerging economies, led by China and India, was taking place at a breath-taking pace. This will now accelerate.

The medium term outlook for international trade is particularly difficult to characterise with a few generalisations. Before we consider the scope for trade policy to contribute growth and jobs, let’s look at the state of the international economy.

On the negative side, there are obvious dangers we need to take into account. I have a pretty conventional view here. On both sides of the Atlantic, there are major imbalances associated with a sea of debt that need to be wound back. This will be done either in an orderly or disorderly way, but it will be done eventually.

In most of these countries, there is little scope for conventional fiscal and monetary policy – the policy headspace has been used up, as it were, by the Global Recession of 2009, hence the increasingly arcane debate around the scope for further quantitative easing. And all of this has to be done against the background of double digit unemployment, with youth unemployment rates in several of these countries above 40%. This is fertile political ground for false prophets.

There are exceptions – Canada is one where there is a clean majority Government – but a fundamental problem is that right around the developed world political power is divided, leading to strange and unusual political coalitions. Even in Australia, controversial legislation has to be negotiated with a tiny number of independents who have massive leverage and therefore massive political power. It can be done of course – look at the passage of a carbon tax through both Houses of Parliament in Canberra but it takes a huge concentration of political effort to do it.

There are very few Governments in the developed world whose electorates have given them a clean pair of hands to chart a responsible course forward. Consider the politicking and intrigue leading up to the resignations a few days ago of the Prime Ministers of Greece and Italy as, metaphorically speaking, Rome was burning. Both countries have ended with the politicians essentially ‘giving up’ and handing power to unelected technocrats.

That cannot be a permanent solution of course. As numerous commentators have pointed out, technocratic Governments, while vastly better than dysfunctional Governments, lack democratic legitimacy.

The situation is much more challenging in Europe than in the United States and the reasons for this are again fundamentally political. At the end of the day, the United States has a unified political system to deal with that challenge, the Eurozone does not.

So we will see this drama unfold. What we know is that the world is generally good at crisis management so the balance of probability is that we will see slow and anaemic growth from the major centres of developed power.

The world economy is all inter-connected – this phenomenon of the Global Supply Chain is called ‘global’ for good reason. For NZ, Europe takes 15% of our exports; for the major emerging economies including China, Europe remains a very important final destination market.

That is why growth rates for China, India and the emerging markets have been marked down by the IMF. OK, I accept that these are predictions but no other organisation in the world has comparable expertise and knowledge of world financial markets. So, yes the IMF a couple of weeks ago has downgraded its forecasts, but when we say ‘downgraded’, we are talking about the following:

• The biggest picture of all is obviously global growth. The IMF is now forecasting total global growth for next year of 4%, down from 5%.
• With respect to all developed countries, they are not forecasting recession, but anaemic growth of 1.6% when the US, EU and all advanced economies are lumped together;
• In emerging economies, the growth forecast has been downgraded to 6.4%. 6.4%! Has anyone reflected on what that number looks like in historical terms? The first country in the world to move from an agrarian to an industrial base – Great Britain as it was so justly called – averaged around 2.2% annual growth from 1780 through to the beginning of the twentieth Century.
• Then drill down into the emerging economies picture. China’s growth has also been downgraded – to 9% next year; India, which grew over 10% in 2010 is expected to grow ‘only’ 7.8% in 2012.
These projections will undoubtedly be proven wrong, but the real question is ‘how much’? We may get higher or lower growth and the balance of risk is clearly on the downside, not the upside. But to present this world economic outlook, at least from the perspective of an economy fully plugged into the Asia Pacific, as dark and gloomy – a “disaster waiting to happen” - is absurdly pessimistic.

So the political take-away is obvious: if you want your economy to move forward and you want higher exports and more secure jobs, you want to be part of this growth picture, or you need to re-examine some fundamental policies. That is the essential framing for the discussion about trade policy.

We are stuck at the multilateral level. I have spent almost all my professional life on multilateral trade liberalisation in the GATT and WTO. I was New Zealand’s chief negotiator in the last Round of talks, the Uruguay Round. I have been a Chair or an independent member of numerous GATT and WTO dispute settlement panels starting from 1986. In this Round I had the privilege of chairing two of the key negotiating groups – the Agriculture Negotiations and at an earlier stage, the Rules Negotiations around subsidies, countervailing duties, anti-dumping and regional trade agreements. I remain 100% committed to multilateralism and am convinced that this should remain New Zealand’s top trade policy priority.

But it does no good whatsoever to sugar-coat the fundamental reality. For a number of reasons - and it is nobody’s ‘fault’, it is just the way it is – we have totally lost momentum in the Doha Round and there is no obvious way to reignite momentum in the foreseeable future. We are not politically in the right space to move forward. It is not about economic logic, it is about political logic.
Proposals that seek to deny that base reality are counter-productive. When and if the planets are aligned to move forward again multilaterally, we will need business, stakeholders, Ministers and above the professional negotiators who actually conduct these negotiations, to believe that there is a credible basis for recommitting to the process.

Further failures can only undermine that. We cannot afford a further exercise in wishful thinking – for example, some phoney and elaborate ‘road map’ with so-called ‘firm political guidance’ that professional negotiators know is not real even before the ink has dried.

Let’s not forget the recent past. Nothing is more powerful in world politics than the G20. In Washington in November 2008, the Heads of Government of the twenty most powerful countries on the planet issued a firm instruction to their Trade Ministers to go to Geneva in December and complete the negotiation of the Doha Development Agenda. As far as I know, only one Trade Minister – and it was not from a G20 country – even bothered to turn up in Geneva in December 2008 to find out what was going on.

We should be very clear about one thing: this position is unsustainable in the long term. We do indeed have a global supply chain and global supply chains need global rules. Whether in Europe, the Americas, Africa or the Asia Pacific, we are all investing in regional integration, of varying degrees of complexity. All of this rests on the assumption of a benign system of international economic law, providing the ‘glue’ that holds the negative consequences of regionalism in check. GATT and WTO law, built up by clever people over eight Rounds of negotiations, underwrite that system. We needed that system in 2009 when we hit the worst recession in seventy years. We will surely need it the next time the business cycle viciously turns south.

It is naive to imagine that you can sustain permanently support for a system last refreshed multilaterally in 1994. We are going to have to return to multilateralism, make no mistake about it. So we need to stabilise the situation now, reaffirm our commitment at the December meeting to this extraordinary post-war success that is the WTO system and which is bigger than just the current negotiating impasse.

I do not pretend to know precisely what will emerge as the best way forward, but I am certain that it will emerge only from quiet, informal and discreet discussions. I would also like to note that in December, we will formally welcome Russia into the WTO. This is another clear sign that, while the negotiating process is blocked, the institution itself remains central to all countries’ trade policy. It is inconceivable that it could be otherwise.

In the meantime, each of our economies needs to move forward on the trade agenda where it can. And this is the paradox. Although we are stuck at the multilateral level, there is unmistakable momentum to move forward within the Asia Pacific on a regional front.

For New Zealand, this means moving forward on multiple fronts. We are the only developed country to have a comprehensive FTA with China and a matching agreement on Hong Kong. We are the first country that Russia is negotiating an FTA with. We, along with Australia, have just cemented in place the final step to establish comprehensive free trade between Indonesia, its ASEAN partners, and Australia and New Zealand.

Indonesia is the fourth largest country in the world. Indonesia has been growing at an average of around 6.5% for thirty years. Indonesia is projected to be among the world’s top five economies in less than 20 years. You would be excused for having missed this development in the news here. It was crowded out by other apparently more pressing issues, most of which will be irrelevant footnotes in the margins of NZ’s history within less than a month from now.

Today however I want to concentrate on TPP, or the Trans-Pacific Partnership. By any measure, this is a most significant development for the sole reason that it involves the United States and as from last week, has received an extraordinary political endorsement from President Obama and the other Leaders of the nine countries concerned.

New Zealand, along with Singapore, can rightly claim to have done the original working drawings, if not the full architecture, of TPP. Our two small and open economies entered into FTA negotiations in the late 1990s precisely to build a bridge for what we called ‘P5’, or ‘Pacific Five’. The real objective was to provide a platform for APEC trade liberalisation that the world’s number one economy – the United States – could buy into.

It has taken many twists and turns and well over a decade to get there, but that original strategic vision between Singapore and New Zealand is on track to being realised. It is not ‘P5’ but ‘P9’ and we have given this template for APEC trade and investment integration a slightly different name – Trans Pacific Partnership – but the central idea is exactly what we envisaged.

We are trying to provide a basis for realising, perhaps over many years, an Asia Pacific wide free trade zone. TPP is one, though not the only one, building block. Because it involves the United States and has gone way beyond a concept to a deeply complicated negotiation, it is an initiative of major strategic significance.
At the APEC Leaders Meeting in Honolulu, chaired by President Obama, the nine APEC members involved in TPP were able to take some important decisions consolidating politically the TPP negotiations. The report from Trade Ministers was endorsed by Leaders and will now represent the base from which the negotiations will proceed.

There are many different ways to explain what was agreed but I think of the negotiation in three parts. The first part is to clean up the detritus of unresolved twentieth century trade problems. The second part is to add some coherence to the complex network of free trade agreements spanning the Asia Pacific –referred to by academics and trade policy experts as the problem of ‘the noodle bowl’.

The third part is to map a way forward on some of the trade issues of the 21st Century, most of which are about ‘behind the border’ issues. For the most part, we have dealt with the twentieth Century problems of high tariffs, quotas and direct frontier barriers to trade. Inevitably, this has turned the heat onto other policies that stand in the way of even further productivity growth from trade.

But there are a few tough hold-outs, where this is not true. Overwhelmingly, this is about agriculture. I do not see this as an economic problem. It is a political problem. And we have to resolve it. Let me repeat the central point: we are not going to get to the interesting 21st Century trade agenda without dealing with what remains of the old 20th Century trade agenda.

The Leaders statement, and the Trade Ministers detailed report which they endorsed, establishes the outline of an eventual agreement amongst the nine countries. I think the Trade Ministers’ report is quite remarkable on this central point governing traditional trade policy issues. It commits to elimination of tariffs and other barriers to trade. Its goal is “comprehensive duty free access to each other’s goods markets”. It commits to each TPP member establishing a single schedule – a technical term used to describe legal commitments to open markets to imports – for all the other TPP partner countries. Earlier fanciful notions of a potpourri of separate and often inconsistent schedules – adding even further to the ‘noodle bowl’ problem - have properly been consigned by Leaders to the waste basket.

‘Elimination’ of tariffs and other like measures is a pretty stark word. I don’t think there is any ambiguity about that. The ambiguity that remains is all about that old political cliché – “well, TPP members have shown they can talk the talk, but can they walk the walk?” Can the nine countries involved find a politically feasible way to eliminate tariffs? It is a non-issue for a number of the TPP countries, certainly for NZ – we lost interest in direct barriers to imports twenty years ago. But it will certainly test some of our members.

Let me deal quickly with one obvious question. When the Leaders endorsed ‘elimination’ of direct trade barriers, not a single member of their negotiating teams from the most junior official to their Trade Ministers, was under any illusion that this could ever happen quickly, easily, without well-designed WTO-consistent transitional arrangements to facilitate change. This is deeply difficult territory. But it has to be done.

In the case of the most sensitive agriculture sectors – and dairy is right up there – I cannot imagine adjustment can be achieved in anything less than a decade. Is this a concern to New Zealand since we are the largest dairy exporter in the world? Not at all.

Time here is not the issue – what we seek is gradual and progressive liberalisation over many years. We know that is the only politically feasible way forward. This will be true even within the existing grouping of nine. It will be even more important to the next step we envisage for TPP – expansion to other Members. Three very important economies – Japan, Canada and Mexico – have now formally declared their interest in joining. We welcome their expressions of interest.

I could explore this issue with respect to rice, sugar or one or two other sensitive sectors, but for obvious reasons I will choose dairy.

Having spent three decades as a negotiator for NZ, I am aware that many countries ‘fear’ open trade with New Zealand. I understand why – they look at relative cost levels that applied 10 or 20 years ago and say ‘we cannot produce milk at the unsubsidised price New Zealand dairy farmers’. Drill down deeper into the proposition and you quickly discover this is wrong on multiple levels.

First, New Zealand is a small producer of dairy products. We produce about the same amount of milk as the State of Uttar Pradesh in India – 2.5% of world milk. We can increase production and we will. I am confident we can increase our exports by around 2-3% per annum. It will take many years, but I am optimistic that by 2025 (13 years from now), depending on whether it is 2% or 3% growth, we can produce another 4 to 7 million tonnes of wholemilk equivalent.

That, ladies and gentlemen, is equivalent to the increase – let me repeat this – the increase in anticipated demand for milk in India over some 18 months of growth. And we have not even factored in China’s increased demand for milk protein – the purpose behind today’s celebration of this new Chinese/NZ dairy joint venture.

I have said – deliberately to stir things up a bit – that the United States has a stronger interest in a good dairy outcome from TPP than does NZ. It is the United States that is going to be the chief beneficiary, not New Zealand, of a strong dairy outcome in TPP.

Some 60% of the growth in dairy import demand to the emerging economies in recent years has gone to American dairy farmers, and some 10% to New Zealand. We are only the largest dairy exporter in the world because of the absurd barriers to trade in dairy. As they come down – and they are coming down – New Zealand will be quickly displaced by the United States as the largest dairy exporter.

This is not bad for New Zealand, this is good. It will be even more profitable for New Zealand. World dairy prices – already above US domestic support prices for all important dairy products – will fluctuate around these new high and profitable levels. It is a great future for all dairy producers. The idea of New Zealand flooding TPP dairy markets is absurd. We can’t even keep up with China’s rapidly growing import demands.

Now, I have not lost my political common sense here. None of this is understood at a deep political level. The political lobbying is all about avoiding this future, not preparing for it. The political lobbies are looking through the rear visor at where we have been, not the front windscreen to see where we are going.

Because of that, it will take years to transit to this better space. I have been hugely encouraged by the far sightedness of the United States in the TPP negotiations. To be frank, I was not sure that the existing configuration of nine TPP members was big enough for the United States. Even Australia, a one trillion dollar economy – looks modest if you are sitting in Washington looking out from the Beltway. It is also an open secret that it has been difficult to move the trade agenda forward in Washington. But due to strong bipartisan support, and skilful political management, the US Congress recently voted through the three key FTAs in the legislative holding pen – the FTAs with Korea, Columbia and Panama – and by a very healthy margin. I think this has given many people, not just in the United States, confidence that the United States is back in the game and ready to play.

The announcement by Japan, Canada and Mexico that they too want to participate in the TPP is a game changer. These are major economies. We have had trade disputes with each of them – we even have trade disputes with our closest friend, Australia. But we enjoy outstanding political relationships with all three. We welcome this expression of interest by each of these countries. Their clear expression of interest in becoming involved in TPP will exert positive gravitational pull on the existing TPP-9 negotiation.

But trade diplomacy is tough. It involves real and embedded political and economic interests and is not for the faint-hearted. This is not going to be straight-forward.

First, it is unlikely that these three economies will be joining the negotiation formally within, say, the next few months. The existing nine TPP economies will now seek to build on this endorsement by their Leaders in Honolulu. The next opportunity to review the negotiation at a political level will be in July when Trade Ministers next meet. I doubt that all three of these major economies would be ready to join the substantive negotiations by that point.

After July, I simply do not know. We will have to wait and see. It is important to avoid being dogmatic when you are dealing with deeply sensitive issues.
In the meantime, all nine TPP members will be ready to step up their level of engagement with Japan, Mexico and Canada to help these economies, as well as the existing nine TPP members, make a considered judgement as to whether there is indeed an appetite to engage in a formal expansion of the negotiation, when that might be possible, and under what understandings and modalities.
This is exactly what happened with the United States when they expressed interest in joining P4, the Foundation stone of TPP. I do not believe for a minute that this is the end of this dynamic. I will be very surprised if other economies do not, within the next few months, indicate expressions of interest. Whether the existing TPP-9 would move ahead with some, all, or some other formula is simply academic at this stage.

This is not going to be a mechanical exercise – there is no formula or number of boxes to be ticked. It finally will be a subjective political judgement on our part and their part. But the decision taken by TPP Leaders, and the Trade Ministers Report they endorsed, lays down some clear benchmarks. And there are two questions that we will be asking when we assess aspirant countries’ preparedness to join the TPP negotiations:

• First, do we see clear evidence of a matching commitment to attain a high quality Agreement across all chapters, including the most sensitive matters?
• Second, can they join the negotiations as a highway ‘on-ramp’ without dramatically slowing the negotiations down?
To help us answer these political questions, one crucial element we at least will be looking for is the following: is there evidence of a domestic political debate underway that suggests their lobbies ‘get it’? What do I mean by ‘get it’? Well, we will be looking for clear political signals of a reasonably broad-based understanding that it is not just a matter of turning up at the Club and demanding membership. There is a very strict dress code involved and we are going to be stuffy and old fashioned in enforcing it. When our Leaders said ‘eliminate’ tariffs and other direct barriers to imports, they meant it.

I do see some signs in Japan of this debate taking place – in fact it is blindingly obvious that the decision of Prime Minister Noda to express interest in joining TPP followed a year of deep debate in Japan, largely around agriculture. I like to joke – it may be true but I am not sure – that no person who is not Japanese has met more Japanese agriculture delegations than me in the last thirty years. Truly I understand how sensitive this issue is for Japan.

One reason I am encouraged by what I and our Embassy see is the link with domestic agriculture reform. I cannot do justice to this in a speech, so let me say in rather technical terms what I mean, without fully explaining this in plain English. The Japanese system seems to have grasped the central point: TPP involves deep structural reform and movement away from what is called ‘Market Price Support’ to the Green Box.

This is what Franz Fischler – the outstanding Commissioner for Agriculture for the EU – did some years ago to start a process of reform of the CAP. I remember him saying to me, when I was Chair of the Negotiation in Geneva, “I have one absolute red line in this negotiation: do not fundamentally change the Green Box criteria. You change that in Geneva and you cut off reform in Brussels.” While I could not deliver on that – a chair is only a facilitator, not a judge - I know that the now stillborn agriculture text is totally consistent with that red line.

In a time of fiscal consolidation, this is not easy advice. Nobody has money to throw around. But in a long slow process of liberalisation this is absolutely part of the way forward.

Dairy will be very challenging for Canada. This is a statement of fact. Canada follows a policy that many Governments used to follow but most have moved forward. It is called ‘supply management’. It is completely inconsistent with tariff elimination.

However, and this is not a small point, supply management is not inconsistent with more traditional trade negotiations of the past. Canada is fundamentally a free trading nation with very strong interests in agriculture liberalisation. But Canada has always sought special treatment for its supply managed industries. If I were a Canadian politician or trade negotiator, I would have done exactly the same.

It has not been easy in past negotiations. The United States and New Zealand had to pursue Canada in the courts for ten years after the conclusion of the Uruguay Round before Canada brought its policies into conformity with its international legal obligations arising from the export subsidy disciplines. With respect to market access, Canada’s highly skilled senior trade negotiators – I have worked with almost all of them – have negotiated concessions that have preserved the system of supply management, albeit a system operating at a lower level of output relative to domestic consumption than might otherwise have been the case.

The question here can be stated very simply: is TPP a point of inflexion in trade negotiations, or is it business as usual?

Well, in terms of the negotiating history of TPP and the antecedent agreements that led to the launch of TPP, it was designed explicitly not to be ‘business as usual’. We wanted to create a template for Asia Pacific trade and investment integration that set new and higher standards. More to the point, our Leaders statement and the Trade Ministers Report they endorsed in Honolulu says – no, this is not business as usual.

But the cynics, whether they are in Tokyo, Ottawa or Mexico City, have history on their side. So in the months ahead, as the negotiations amongst the nine TPP economies, we need to provide an answer. Can we walk the walk as well as talk the talk? We will find out. The reformers watching this from other capitals are not going to win a domestic political argument on the basis of our communiqué alone. In this tough world, a higher standard of proof is required. New Zealand negotiators, and we will be far from alone, will be working hard to provide that evidence, one way or other in months ahead.
 

  • Tim Groser
  • Trade