The Future of the WTO and Trade Structures
Address to the Otago Foreign Policy School, June 29 2019
Kia ora tātou
It’s a pleasure to be back in my home town of Dunedin to address the Otago Foreign Policy School this morning. As we observe the so-called “trade wars” around us, the imposition of tariffs on national security grounds, Brexit, and the burgeoning difficulties at the WTO, it is clearer than ever that trade and economic policy and foreign policy are inseparable, and that the operating environment is increasingly complex.
My topic for today is the future of the WTO and trade structures. I’ll begin by setting out the context – why trade matters, the general trade structure established by the WTO and through our FTA framework, as well as the contemporary global trade operating reality. I will then turn to New Zealand’s response to these turbulent times, and how we are investing in the future of the WTO.
At the outset it is worth recalling why trade matters for New Zealand. Because our domestic economy is too small to provide an adequate market for what we are best at producing, we have to sell our goods and services to the rest of the world in order to pay for the standard of living that we want. We are good at doing that, and the export sector now sustains more than half a million New Zealand jobs. Put another way, one in every four New Zealanders working today depends on exports for their livelihoods.
Trade is also an important driver of productivity, employment and incomes. We know, for instance that productivity per New Zealand worker is 36% greater if they are in a firm that is exporting, compared to one that isn’t. It has also been established that employment grows 7% to 12% faster when New Zealand firms start exporting. International research also suggests that exporting firms pay better wages – up to 6% more than non-exporters[.
On the flipside, New Zealand also needs imports. As consumers we seek computers, smart phones, cars, tropical fruit and even essential products like some medicines – none of which New Zealand manufactures or grows here. Furthermore, some of our important exports require components that we do not make here, and trade is integral to our participation in global value chains. In short, trade is crucial to securing and increasing the prosperity and well-being of all New Zealanders.
However, many of the sectors where New Zealand is most competitive are the most protected in world trade. While the average tariff on non-agricultural goods is just 6%, agricultural goods face an average tariff of 23% with tariff peaks often in excess of 100%. Non-tariff barriers (for example, unnecessarily burdensome labelling requirements or non-science based health requirements) have been calculated to cost our exporters $6 billion a year in the Asia Pacific region alone.
Unsurprisingly, New Zealand places great importance on securing fair international trade rules and market access, both at the WTO and in our free trade agreements.
Although the WTO was not the first trade framework to be created, certainly the conclusion of the GATT-era Uruguay Round negotiations and the establishment of the multilateral trading system at the WTO in 1995 brought many benefits – especially for small, export-oriented economies like New Zealand.
The WTO included for the first time binding rules on things like agriculture, sanitary and phytosanitary measures, intellectual property and services, and locked in New Zealand’s access to key agricultural markets so that this no longer had to be repeatedly negotiated. Importantly the Uruguay Round agreements also built on the GATT framework to make WTO dispute settlement effectively binding on WTO members and ensuring the enforceability of the rules – including against major economic powers like the US, the EU, China, India and others. New Zealand has made judicious use of this mechanism, taking nine cases to the WTO – including on apples to Australia and beef to Indonesia - and we have been successful every time. The WTO itself has grown in membership to today include 164 members who are all bound by the same set of trade rules. It is the true “mega FTA”. Unique amongst the multilateral organisations, it makes its decision by consensus, rather than voting. Think for a minute on how much work it takes to get 164 countries to agree on where their common interests lie!
In considering our existing trade structures, it must of course also be recognised that since the establishment of our first free trade agreement in the form of Closer Economic Relations with Australia in 1983, New Zealand has further bolstered the WTO baseline rules and commitments through our expanding FTA networks.
We concluded negotiations with Singapore in 2001; Thailand in 2005; and the “P4” (with Chile, Singapore and Brunei) in 2006, which built on our earlier Closer Economic Partnership (CEP) with Singapore and was itself a precursor to the Comprehensive and Progressive Trans Pacific Partnership (CPTPP).
In the watershed year of 2008 we concluded the “AANZFTA” agreement with ASEAN and Australia (which set the scene for our subsequent participation in RCEP), and were also the first developed country in the world to conclude an FTA with China, under which exports have more than quadrupled since entry into force.
We went on to conclude negotiations with Malaysia in 2009 and added more “firsts” when concluding a Closer Economic Partnership with Hong Kong in 2010 and our economic cooperation agreement with Taiwan (ANZTEC) in 2012. An FTA with Korea was concluded in 2015, and other G20 Members followed as part of the CPTPP in 2018. The entry into force of the CPTPP gave us new FTA partners in Japan, Canada, Mexico and Peru. Once CPTPP is fully implemented, that’s at least $222 million in tariffs per year that New Zealand goods exporters won’t have to pay on products sent to CPTPP markets. It has also brought our FTA coverage to 65% of trade. Once existing negotiations with the EU and other partners are concluded, this is projected to rise to over 70%.
This global structure – the rules-based multilateral trading system at the WTO and the FTAs that it underpins – brings certainty, predictability and enforceability to our trading relationships. This is hugely valuable and something New Zealand actively seeks to protect and strengthen. We certainly would not want to go back to the pre-1994 GATT era when trade relationships were more fragmented and uncertain, and we were at the mercy of more powerful trading partners and competitors.
However, despite these obvious improvements it should also be recognised that the context for global trade is becoming increasingly challenging and complex. New Zealand’s trade policy has long been based on two assumptions: first, that over time we would see ongoing reduction of trade barriers and increased market openness and second, that the WTO rules for trade would be sustained and grown. For much of the past 25 years we have been moving in the right direction but we haven’t come as far as we’d hoped and sadly, those assumptions are under serious challenge.
Despite periods of great activity in the 2000s, the Doha round of negotiations at the WTO is now effectively on hold and there have not been any truly multilateral and meaningful liberalisation at the organisation since it was established, despite a handful of improvements to its rules – for example the Trade Facilitation Agreement and the Ministerial Decision on Agricultural Export Competition, which delivered on a long-standing New Zealand priority of agreement to eliminate the subsidisation of agricultural exports.
And despite the important gains made by New Zealand in our FTAs – including an impressive 65% trade coverage now that CPTPP has entered into force, New Zealand continues to lack preferential trade agreements with some of our most important trading partners. The Government is taking action to remedy this of course, and has launched negotiations with the EU and initiated talks with the US about the possibility of a bilateral deal. Both these processes continue.
More generally, rather than the expected liberalisation, protectionism is on the rise and appears to be accelerating. We have seen the highest increase since 1995 – an increase of 30% - in protectionist measures over the last two years. NZIER research suggests that amongst Asia Pacific Economic Cooperation (APEC) economies alone, Non-Tariff Measures broadly defined increased in the region by 74% between 2004 to 2015. The cost to New Zealand exporters of these NTMs was US$5.9 billion.
The reason for this protectionist turn is multi-faceted, but the Global Financial Crisis is certainly associated with a slow-down in global growth after the earlier years of debt-fuelled consumption (and possibly inflated growth statistics).
Recent political and foreign policy developments in major trading nations have undoubtedly also played a part. As has the fact that the Membership of the WTO has changed considerably from the largely developed country club of GATT Members to now include 164 Members, of which 2/3 claim developing status and 36 are Least-Developed Countries according to the UN Classification.
In addition, the nature of trade has changed much since 1995. Although the WTO expanded the GATT-era rules to include new areas such as services, at that time, no-one foresaw the huge rise of digital trade and e-commerce. Since then, the increasingly interconnected nature of global value chains (as evidenced by the disruption caused across many economies by recent protectionist measures) and the role of data flows, means that services have become critical inputs to the production process of exported goods.
In some instances the existing trade frameworks are insufficient to deal with these developments, and new rules are needed. To this end, New Zealand is actively participating in negotiations on e-commerce at the WTO and with our Singaporean and Chilean colleagues through the Digital Economy Partnership discussions.
This Government is also interested in the changing nature of the role of trade. It is no longer enough to consider trade policy solely through a GDP lens. We want trade that is more inclusive and sustainable, and New Zealand has been at the vanguard of efforts to ensure trade contributes to sustainable development and contemporary issues of cross-boundary concern. For example, New Zealand’s number one negotiating priority at the WTO this year is to conclude disciplines on fisheries subsidies, and we are also seeking to promote a broader conversation on how trade can contribute to climate change solutions.
The Government has recognised this turbulent and changing trade environment, and has developed a six point strategy in response, as follows:
Defending the rules-based system: As mentioned already, the negotiating environment at the WTO has become more challenging over the years, and new threats have arisen to the WTO’s dispute settlement system - formerly known as the “jewel in the WTO’s crown”. We now face a situation where the Appellate Body faces the prospect of no longer having sufficient quorum of three members (out of seven total) to enable it to hear any new appeals from 11 December, if a solution is not found to unlock the appointments process. This is of existential concern as losing parties will be able to avoid compliance by appealing a negative panel outcome to a non-functioning Appellate Body and essentially sending the dispute into limbo. This loss of an enforcement mechanism is likely to have broader ramifications as it diminishes the incentives for Members to abide by existing rules, or to create new ones.
If we don’t find a solution, eventually, the rules-based system could crumble, and we will be faced with a return to power-based trade, where small export-oriented economies like New Zealand will struggle to prevail. The risk of the system’s disintegration would seriously affect New Zealand traders and make them more vulnerable to non-transparent and arbitrary protectionist measures that cannot be disciplined, having flow on implications for New Zealand’s economic prosperity. So far we have not seen a wave of countries turning to protectionism writ large, but the risks are real.
Unsurprisingly then, New Zealand is active in efforts to safeguard and strengthen the system. New Zealand is one of 13 Members involved in the Ottawa Group which is actively seeking to find constructive solutions on WTO reform and improvements to the system. We are active in the WTO negotiations under way, particularly on fisheries subsidies and e-commerce, and are investing time and resource into the issues faced by the organisation. For example, our Permanent Representative to the WTO, Ambassador David Walker is facilitating the informal process to solve the Appellate Body impasse in Geneva. Having a New Zealander appointed to this role shows the esteem in which New Zealand and David Walker are held. It also reflects our willingness to contribute to the effective functioning of the organisation, especially in the face of current challenges.
Embedding New Zealand in the emerging regional economic architecture: Building on the WTO rules and commitments, we are involved in efforts to create and expand regional frameworks to enhance the free flow of goods and services through common rules and deepened market access. FTAs will always be second-best to a properly functioning multilateral rules-based system. This is due to the negative impact of trade diversion and the potential disincentives for multilateral liberalisation they create. But in the WTO’s current circumstances, the option of the FTA track is one we cannot afford to ignore – not least if we are to keep pace with our competitors.
Consequently, in addition to our existing FTA framework that I’ve already described, we are actively involved in negotiations with the EU and separately with 15 partners in Asia through the Regional Comprehensive Economic Partnership (RCEP) – RCEP. This includes India with its US$2.7 trillion economy and rapidly growing market for middle-class consumer products. New Zealand is also well advanced in discussions with the Pacific Alliance (Colombia, Mexico, Chile and Peru), and to upgrade our China FTA. We are also looking to update our existing agreement with ASEAN and Australia, and bring further parties into the CPTPPP.
Taken together, the RCEP and the CPTPP are the region’s two “mega plurilaterals” that over time are expected to drive the region’s broader and deeper economic integration and from the basis for an eventual Free Trade Area of the Asia Pacific (FTAAP)– a long standing New Zealand objective.
In areas like fisheries subsidies, CPTPP has also demonstrated the utility of forging ahead with like-mindeds in FTAs to develop rules in areas where progress has been blocked multilaterally.
Supporting regional and global public goods: New Zealand is working to reinforce global and regional institutions which help safeguard social, economic and political progress – organisations like the OECD, APEC and the Commonwealth, as well as likeminded coalitions such as the Cairns Group of agricultural exporters at the WTO, the Friends of Fossil Fuel Subsidy Reform, or the Small Advanced Economies Initiative. The establishment of a Commonwealth trade caucus, and our APEC 2021 host year are examples of this strategy.
APEC’s work on fisheries subsidies and the recent Trade Ministers’ statement also demonstrate how such organisations are not just a hedging strategy against dysfunction, but can also help build support for the rules-based multilateral trading system even when relationships amongst major economies are strained.
Advancing the concept of ‘flexible and open negotiating approaches’: While multilateralism remains our preference, we can further bolster the rules-based system by pursuing international agreements with clauses that allow others to join if they can match the standard of commitments set by the original partners. This could include agreements like the e-commerce negotiations that recently launched with over 70 Members at the WTO, as well as FTAs with open accession clauses like the CPTPP.
This new approach acknowledges that the dream of the “single undertaking” is almost certainly over, and recognises that in order to move ahead at the WTO, we may need to be more creative in our approaches in order to make progress (while still respecting fundamental principles of openness, transparency and WTO plus disciplines).
Developing a Trade for All agenda in consultation with New Zealanders: We can’t negotiate trade agreements and trade rules without the support of New Zealanders, and to maintain that support we need to have open dialogue and to demonstrate that outcomes add real value. The Trade for All consultations and our efforts to ensure that New Zealand’s trade policy delivers for all New Zealanders, including women, Māori, rural communities and SMEs is a crucial element in our push back against anti-globalisation sentiments and associated scepticism around the benefits of trade. I established an independent Trade for All Advisory Board last year to make recommendations on how we can improve New Zealand’s trade policy in this regard, and look forward to receiving its report later this year.
This distrust is not just a New Zealand problem however, as evidenced by growing protectionism abroad. New Zealand is also co-operating with Chile and Canada to promote inclusive and sustainable trade on the international stage through the Inclusive Trade Action Group and to share strategies for how we can best engage with citizens and respond to their concerns and interests on trade. There is an ITAG caucus at the WTO to help spread this message as part of reforms to the organisation too.
Intensifying our Economic Diplomacy: The Ministry of Foreign Affairs and Trade, working through our embassy network and with other agencies such as New Zealand Trade and Enterprise, collects a wealth of market information and analysis. We’ve put in place a number of initiatives to better share this information with Kiwi businesses big and small to help them succeed in international markets. We are also improving our existing tools, such as the very popular tariff finder, to make them more comprehensive and easier to use so that more New Zealanders can actually use the advantages negotiated.
So in this context, let’s return to the central question - what is the future of the WTO, and other trade structures?
I take pains to emphasise that New Zealand has not, and will not, give up on the WTO. This is something that we continue to actively support and invest in, and is the heart of the trade strategy I have just outlined. Even the US has acknowledged that if we did not have the WTO we would need to create it – although of course they are also looking to make a number of significant changes to its functioning.
New Zealand agrees that there are improvements to be made. The key will be to ensure that in engaging in WTO reform we are building an institution that works more effectively and efficiently for all Members.
We are investing in efforts to solve the Appellate Body impasse and ensure the smooth functioning of the dispute settlement system, while maintaining the elements of key importance – such as binding dispute settlement. Certainly from New Zealand’s perspective, there are things that we agree with the US on – for example that disputes are taking too long, and where we hope a pragmatic solution will be possible. In his role as an independent facilitator our Ambassador is conducting informal consultations with Members to try and bridge positions and tease out solutions to this and other problems identified by the US.
Our efforts to unlock the negotiating function by getting some runs on the board in the fisheries subsidies and e-commerce negotiations will show that the WTO can deliver negotiated outcomes on issues of key importance to modern trade and sustainable development; and demonstrate the value of different negotiating approaches. Hopefully this will build momentum and lead to re-invigorated negotiations that deliver the enhanced rules and deepened market access we have been waiting for.
New Zealand is also working with other like-minded members to ensure that we are also strengthening the WTO’s core functions – transparency, notifications and monitoring of how the existing rules are being implemented. There is certainly room for improvement, including through enhanced uptake of best practice gained through 25 years of WTO experience. New Zealand has recently updated its own long overdue services notifications, and has cosponsored a proposal by the US/EU/Japan/Australia and others to enhance compliance with existing notifications.
Turbulent times are indeed challenging, but also an opportunity, and working with others through this multi-pronged effort, there is hope for an enduring and well-functioning WTO to emerge.