Trade for All and the state of international tradeTrade and Export Growth
Address to the Trade for All Advisory Board, July 23, 2020.
Trade and Export Growth Minister David Parker
Today I would like to discuss the “state of the world” in international trade, the concerning trend towards protectionism and three major challenges I see ahead of us – the environment and trade, digital trade and the challenges assailing international institutions. I will then outline New Zealand’s response to all of this including our immediate response to the COVID-19 crisis, our trade recovery strategy, and finally Trade for All, about which I have some specific announcements.
Before I discuss these matters, I would like to comment on our ongoing negotiation with the European Union. The European Union is our third largest market after Australia and China. It is also the source of our largest trade deficits. It has long been a close partner for us in many areas: support for liberal democratic values, addressing global environmental issues, shared values and human rights, the rules-based system, sound governance including data protection and the rule of law. Most importantly, we share a commitment to international trade rules that deliver a level playing field.
I am therefore sympathetic to mounting concern within New Zealand about the EU’s approach to our negotiations. And in that context to the ongoing trade deficit with the EU – 2-1 in its favour – of about $5.5 billion in the year to March. That’s $5.5 billion in the context of a total current account deficit of $8.5 billion.
The EU’s high tariffs and other significant trade barriers are the cause of the prolonged trade deficit. The imbalances are obvious. Our frozen fish traders face an 8-22% tariff into the EU; our onions 9.6% and our kiwifruit 8.8% tariff. All of their main competitors from other countries get in paying nothing at all.
In sharp contrast, key European exports such as wine, cheese, autos and pharmaceuticals benefit from some of the most open MFN trade settings in the world in the New Zealand market.
This imbalance in treatment was reinforced by the EU’s recent poor quality and protectionist offer to us in the last round. I am also conscious that there is an erroneous perception that we are taking this lying down.
The negotiation remains by far the best vehicle to redress these imbalances, but I can understand the frustration of those who say we should raise our tariffs against the EU, especially in these difficult times. In a global environment characterized by rising protectionism and the imposition of tariff and non-tariff trade barriers in many jurisdictions, and in light of our common values and approaches, this is not my preferred approach. But it is not tenable for the EU to continue to impose such costs on our country. In this regard I agree with the notion that persistent trade deficits should cause policymakers to look to the reasons behind the imbalances. And that when trade deficits are the result of the lack of reciprocity in market access or the use of subsidies the rules of trade should change.
The EU says they support fair trade, with environmental and labour standards important to them. They can get this from us in a way that few other countries can offer. I hope we can land a deal.
We have many other countries we can buy manufactured goods that we currently buy from the EU. If we do not achieve acceptable reciprocity from the EU we have rights to pursue other solutions. I expect the European Commission is aware of this and look forward to the negotiations.
Overall economic situation
The World Trade Organisation’s Trade Forecast predicts that world merchandise trade will reduce by between 13 and 32% in 2020. The OECD estimated in April that GDP drops 2% for each month of strict virus lock-downs.
The latest Treasury figures for New Zealand are better than they would have been had we not stamped out community transmission. They predict a contraction in GDP of 4.6% in the year to June 2020, with a further 1% contraction by June 2021.
New Zealand overall goods exports have remained largely steady throughout the COVID-19 pandemic, although there was a 2% dip in April.
Two key exporting services sectors – international education and tourism - have however been very hard hit by our necessary border restrictions. Overseas arrivals in April were virtually zero against 307,000 in April last year. The news is not all bad for services, however, with digitally delivered services seeing an increase, and domestic tourism bouncing back
Our economy is one of the most open in the world. By “going hard and going early” we have avoided the worst of the COVID-19 economic impact, but many of our trading partners have not. The world is looking at the largest economic shock since the 1930s. This is not a financial crisis like the GFC. It is a demand and supply-side shock. At a time when interest rates are already at an all-time low, meaning that conventional monetary policy is not working well, Government responses outside of monetary policy have to carry more of the load. In short, the global environment in which we trade has changed profoundly. Economic shocks of this magnitude tend also to be accompanied by significant changes to the wider global economic structure. It may be that many of the facets of the post-war economic system will shift over the coming years.
I am concerned by a broader emerging global trend towards protectionism. This was apparent before the advent of COVID-19, but the economic impacts of the pandemic certainly risk exacerbating it.
At one point following the COVID-19 outbreak, nearly 80 WTO Members had more than 100 new restrictions or other barriers in place - mainly on PPE and medical products. While I do not agree with the protectionist approach being pursued by a number of economies, or some of the “hostage taking” behaviour we have witnessed by various major players or groups in recent times, it is undeniable that there are some fundamental challenges in the global trading system that need to be addressed. I want to touch on three of them today:
1 Trade and the Environment
While the COVID-19 pandemic is one of the greatest global challenges in generations, it comes on top of the climate crisis which is perhaps the greatest environmental challenge in the history of humanity. The inextricable links between climate change, the global economy and trade policy are becoming ever more apparent. We and all of our partners need to ensure a sustainable and inclusive economic recovery from COVID 19 aligns with climate change, trade and sustainable development agendas.
The crisis has shown that it is possible to make transformational changes almost overnight.
So there is no good reason not to be phasing out fossil fuel subsidies and moving rapidly away from fossil fuel technologies. Globally, governments are subsidising fossil fuel production and consumption to the tune of over $500 billion US dollars a year. As Prime Minister Ardern has said, this is the height of policy incoherence.
Trade rules are used in the WTO context to address industrial and agricultural subsidies. They have an important role to play here also. This is not new territory for New Zealand. As well as pushing for action multilaterally, we are currently negotiating a new Agreement on Climate Change and Trade Sustainability (ACCTS) with other small but ambitious countries Costa Rica, Fiji, Norway, Switzerland and Iceland. The ACCTS initiative will tackle fossil fuel support by establishing rules and prohibitions on this type of harmful spending. ACCTS will also eliminate market access barriers on environmental goods and services, encouraging the transition to low carbon renewables.
This open plurilateral begins with a small group of countries, and will expand to create the momentum for multilateral solutions – always our overarching goal.
The Trade for All Advisory Board’s recommendation to review our framework for environmental trade provisions provides a valuable opportunity to modernise our policy settings on this important trade and climate nexus.
The headwinds against reform have been strong, but it is possible to envisage a new model of economic globalisation that focuses on areas where international cooperation truly pays off – the global commons including climate, biodiversity, and health.
I for one, am up for a discussion on border adjustments for high carbon goods. This week the European Union confirmed they will introduce carbon border adjustments in 2023. I know these are contentious and create trade risks, but our efforts to decarbonise and to clean up our own system of production could be undercut by high carbon imported substitutes. Multilateral rules have so far been ineffective. Perhaps as a country working with others we could be a pathfinder here too.
2 Digital Trade
On digital trade the COVID-19 epidemic has accelerated trends which are dramatically changing of our economy. The “lockdown” in many countries has provided a significant push towards people both working and shopping online. These changes will remain. That throws in to stark relief challenges in international economic policy around, for example, the appropriate way to tax digital activity.
As with all such complex international economic issues, the optimal way to solve these issues is collaboratively and multilaterally; or at least plurilaterally. This is why I have supported the negotiations at the OECD as a first best solution. This process is facing headwinds. Recent developments on taxation issues, leave me pessimistic about the prospects for a plurilateral outcome within the proposed timeframes and I am aware that many WTO members, including the European Union, are considering digital levies. I can understand that pressure and again, this is a matter we will need to consider here as well.
More broadly, the Digital Economy Partnership Agreement (DEPA) that I signed in June with Chile and Singapore is a good way forward. 3 Challenges to International Institutions
It is a challenging period for various multilateral institutions. A number of major economies, from whom we have expected leadership, have stopped supporting and investing in a range of institutions. The collapse of the WTO’s appellate body and lack of meaningful progress in its negotiating function are mirrored in the inability of many other institutions, both economic and otherwise, to resolve increasing frictions. Progress on any front is hard to find.
APEC is another institution which has a role. It is challenges like these that make institutions like APEC important. The government has announced that our hosting of APEC in 2021 will take place virtually, so that we can get on and organise for next year at a time of unprecedented disruption. We want to use our host year to forge a collaborative regional response to the economic impact of COVID-19. We also want to make use of APEC to build confidence in the rules and norms of the multilateral rules based system.
New Zealand Approach
In the face of the challenges I have outlined above, and indeed the protectionism manifest in some of our key trading relationships, New Zealand may be required to chart new courses of action. We will not give up on the international institutions we have derived such benefit from over the years, and retreat to a more inward-looking trade policy. But we will need to build resilience and encourage greater reciprocity from our trading partners. As we have done in the past we have the opportunity to act as pathfinders in seeking solutions.
In our responses to the disruptions to the global economy wrought by COVID-19 we have resisted protectionism. We want to maximise opportunities for trade to contribute to a robust economic recovery for New Zealand and others. But we need to be realistic, and adjust to the global circumstances we find ourselves in. Reciprocity and addressing trade imbalances will not occur by wishing and hoping the world returns to the trading conditions of the past quarter century.
NZ Immediate COVID-19 Response
New Zealand’s immediate goal was to bring the COVID-19 pandemic under control within our borders and to mitigate the impacts on our people, health system and the economy. We have sought to protect New Zealand’s supply chains to ensure we could access essential items like medicines, PPE and COVID-19 testing kits, as well as continuing to export our products.
As with the rest of the team of 5 million, everyone did their bit. We drew on strong relationships. When things were urgent, we picked up the phone. The New Zealand – Singapore Air Freight Project was an early initiative to help maintain our access to essential medical supplies, and access for our exports.
Early contact with Singaporean Ministers and officials, led to the development of a joint statement committing to sustain trade and supply chain connectivity. There are now 12 ministerial signatories, with China having joined on 2 July. We operationalised this commitment by suspending tariffs on medical and PPE-related goods.
We have since joined a variety of statements in different fora, all with the aim of building a groundswell of commitment to avoiding protectionist measures and maintaining supply chains. We are working to resume cross-border travel, subject to the need to safeguard public health.
Trade Recovery Strategy
We launched the Trade Recovery Strategy on Monday 8 June. It is aims at realigning our efforts to put us in the best possible position to recover from the economic impacts of the pandemic.
The Strategy consists of three elements:
- Supporting exporters, including through an additional $216 million over four years allocated to strengthen NZTE’s service offering and an enhanced cross-agency focus on assisting exporters;
- Reinvigorating the international trade architecture, including the WTO, our expanding FTA network and newer “open plurilateral” agreements; and
- Refreshing key trade relationships, with a view to expanding the market opportunities that our exporters can choose from, enabling them to be more resilient to future disruptions.
Concerted Open Plurilateralism
One mechanism for progressing our trade liberalisation efforts will be what we are calling “open plurilateralism.”
The idea is straightforward; too work with like-minded partners - typically small and medium-sized economies - to put in place ‘building blocks’, which others can then join as their recovery permits.
The prototype of this was the P4 that led ultimately to CPTPP. Strategic Resilience/Re-Shoring
There is a further element to our trade recovery strategy. This is what I am calling building New Zealand’s strategic resilience. This is about us preparing for the long term challenges posed by weaknesses in international connectivity. Supply chains are being reviewed internationally. Some governments restricted exports of “essential goods” including materials needed to produce PPE. Businesses are reportedly looking to build in greater redundancy in their international processes or to source some critical components closer to home.
There is a proper question as to whether we need to be looking at greater self-reliance in some products. I, for one, am pleased that an earlier Labour government – after SAARS – contracted a New Zealand supplier of high quality face masks. There is certainly an argument to be had here for some critical technologies and materials. This is WTO compliant. Any such measures should be targeted and minimise unnecessary costs on our economy. Let’s not forget that despite the unprecedented challenges, supply chains have worked. Fisher and Paykel Healthcare continued to supply world markets with critical ventilator components. Inward goods were stretched but worked. I am optimistic fast global cooperation on vaccines will overcome protectionist tendencies, and that New Zealand will play its part in that journey.
This is proper and we should remain very cautious indeed about the suggestions of some WTO members that say they want to “nationalize” supply chains. This can quickly become protectionism in another guise.
We continue to seek new opportunities to broaden the market access available to our exporters. Where exporters send their products is ultimately a commercial decision for them, but if we provide more options by levelling the “playing fields”, they can diversify their options and help to build a more resilient export profile for New Zealand. CPTPP is helping us through Covid. The negotiation with the EU, and the launch on 17 June of FTA negotiations with the UK are important too.
Trade for All and the Social License
However, there is little point in securing a strong trade recovery from COVID-19 if the benefits are not sufficiently felt across the country as a whole, including by Māori and in the regions.
Our international trade needs to deliver for kiwis. Kiwis should be able to trust the way we act in the world.
And that is where the Trade for All agenda we launched nearly 2 years ago fits in. You, as the Trade for All Advisory Board, produced a strong set of recommendations that covered both the way we operate here and how we should act offshore. My Cabinet colleagues and I agree with you. Cabinet has agreed to implement your recommendations as short, medium and longer term priorities.
I have further assessed your recommendations through the lens of our Trade Recovery Strategy and the majority of them reinforce it. The small number that don’t – about 12 recommendations – stand on their own as contributions to our policy settings. In short, there is nothing in your recommendations that doesn’t align with our trade recovery objectives.
Some examples of responses to some of your specific recommendations are
- Strengthening the connection between NZTE and MFAT, and a funding boost, to better help New Zealand business, particularly SMEs;
- A huge uptick in proactive and public reporting from our embassy network in key markets about the conditions faced by New Zealand businesses;
- Developing a new trade and environment framework, which should be completed early next year;
- Intensifying our work with Te Taumata as a complement to ongoing consultation with Maori;
- The conclusion of the first agreement amongst the Inclusive Trade Action Group (ITAG) on trade and gender, with Chile and Canada;
- In the context of the UK-NZ FTA, establishing specific negotiating groups on the five focus areas of Trade for All; and
- Thinking about our approach to National Interest Analyses, as recommended, in parallel to the UK, EU and RCEP negotiations.
Not everything will happen immediately or exactly as you drafted. But work is already underway. I am pushing my officials to deliver on this. I would like to enlist your help and retain the Trade for All Advisory Board, to help us to chart a course for New Zealand trade policy in a post-COVID era. I would like to meet every six months to advance this.
Times they are a-changin’ for trade. And New Zealand will be better off for your input.