US-NZ 2011 Partnership ForumTrade
Trans-pacific Partnership Agreement – A 21st Century Trade Agreement
Let me extend a particularly warm welcome to our American friends. We very much appreciate your travelling here to NZ and the commitment to the relationship that obviously represents for busy people with significant responsibilities.
The United States, as the world knows, is still the indispensable partner for all countries. NZ from that perspective, with our 4.5 million people, looks very modest indeed. But it is the United States – the massive aggregation of power from the 50 States and a few other territories like the District of Columbia – which I and others would have in mind in making that daunting comparison.
If you disaggregate the 50 States it looks a little different. According to the 2010 US Census, there are only 12 States with a population of more than 6.7 million people. Amongst the 38 States with populations below that figure are places like Maryland with 5.5 million, Colorado with 5 million, Oregon with 3.8 million, Connecticut with 3.5 million, Maine with 1.3 million or the State of Montana with a fraction less than 1 million people.
Their towns, their farms, schools and courthouses don’t look a whole lot different to what you find here. Further, there are some fundamental common values which have shaped the somewhat different judicial and political systems these communities and New Zealanders use. From this perspective, the relationship looks a little less daunting and a lot more manageable.
Presumably the 50 States that came together over decades, through both peace and war, came together to advance shared interests. And that is pretty much how I see the US/NZ relationship. We come together to advance shared interests – which we have in many, many areas.
The United States brings power and influence to the table. NZ, on the occasions we get it right, brings the tactical agility that in international negotiations is the antidote to lack of power. In the three decades I have been working with the United States on international economic issues of shared interest, this combination can work very well, I assure you.
I currently have direct responsibility in NZ for two areas of international economic issues of some real importance to the United States: climate change negotiations and trade.
Cooperation between the NZ Government and the US Administration on climate change is working outstandingly well, and I do not use that description casually. With the strong and enthusiastic support of an outstanding political leader, USDA Secretary Tom Vilsack – a visitor to NZ on the last occasion we held this Partnership Forum in NZ – the Global Research Alliance on Agricultural Greenhouse Gases is tracking forward exactly as we both want it to. We hold the pen; you provide the muscle. Good combination.
And in December at the Cancun Ministerial Meeting, I and my team worked extremely closely with Ambassador Todd Stern and the US Team on the common goal of getting a more balanced deal, involving serious and verifiable commitments from the large developing country emitters.
But I am here to talk here about the US/NZ Partnership on Trade. I won’t do more than touch on the biggest arena – our long-standing partnership on GATT and WTO. However, I need to acknowledge the presence here of three people who have played very important leadership roles in that arena: Clayton Yeutter and Susan Schwab, both of whom have held the position of US Trade Representative and of course Mike Moore, former NZ Trade Minister and former Director General of the WTO.
Rather, I want to focus on TPP, the Trans-Pacific Partnership.
I am not going to dwell on the NZ position. That’s very simple: just get rid of the ridiculous trade barriers you have in place that prevent US consumers having wider access, at more affordable prices, to the wonderful high quality produce that this country is ready to supply. What could be simpler than that, I ask?
Well, having dealt with US dairy politics for thirty years, it ain’t quite that simple.
However, we will get nowhere with TPP unless we understand the bigger picture. To do that, we need a clear understanding of the strategic thinking behind TPP. Here’s my take.
We are in a global transition phase, unparalleled in history. A massive process of wealth creation in the emerging economies, underway for a few decades, is accelerating and the inevitable process of fiscal consolidation and slow movement away from unbelievably expansive monetary policy in the developed world will drive this further.
Yes, the sky could fall in and undoubtedly there will be shocks and surprises ahead of us. We are seeing a great drama being played out now in the Arab world, for example. But I am not expecting this wealth creation process in emerging markets to end in tears on a permanent basis.
This unprecedented process of wealth creation is accelerating in the areas of the world where most of the world’s people live. It is centred on the two emerging developing economic super-powers, India and China, but is broader than that. Greater political influence will follow ineluctably but the pattern and traditions of global responsibility that accompany power will take time, whether the issue is trade, climate change or international monetary policy. That is why global governance models are being challenged right across the board. Most of them – though the G20 is a promising start – are not fit for purpose. They were designed for a different world.
Massive innovation and open markets are driving this. We are seeing a huge acceleration of intra-industry trade, or trade in intermediate goods, taking place. That of course could only take place with liberal trade policies in place.
Some 60% of world trade in goods and over 70% of world trade in services is now taking place in intermediate goods and services. This is the global supply chain on steroids. With a few noble exceptions, if you are still thinking ‘made in the US’ or ‘made in NZ’ is by definition commensurate with either of our country’s economic interests across the board, including employment opportunities in well paid jobs, you need to think again. OK – as always, there are legitimate exceptions. But generally the old, vertically integrated model of production and trade, particularly when protected by trade barriers and subsidies, is hopelessly outdated.
In saying this, I don’t just have aspects of the US political debate on trade in mind; even in this country we still hear voices echoing debates that have long been overtaken by global events. If followed politically, such views would consign this country to be an irrelevant economic backwater. What we want is the opposite: NZ to become progressively a small but deeply successful part of the global supply chain. We can do this.
Go back and read the brilliant study on the Apple i-pod and what that tells you about the absurdity of protectionism. It arrives in the United Sates with a stamp on the import certificate ‘made in China’, but actually most of the commercial return for the sale of every i-pod is the property of Americans.
If the c.i.f. import price of each i-pod is, say, US$150, that is recorded as another yet another $150 onto the huge bilateral account surplus China has with the United States. But it is the shareholders of Apple that get most of that return and each i-pod also includes components that are made in the United States and shipped to China for final assembly. Actually, the Japanese get more of the benefit from each i-pod than China, the final assembler, because the hard drive is made by Toshiba. Welcome to the reality of modern international trade and the complete irrelevance of protectionism to the 21st Century.
Alternatively, for the New Zealanders here, reflect on what the Prime Minister of Australia, Julia Gillard, said last week in our Parliament – the first foreign leader ever to do so. Summing up the immense opportunity TPP and Asia Pacific growth offers Australia and NZ, she said this needed to be underpinned by: “…rigorous fiscal discipline, constant structural reform and an unswerving commitment to free trade”. I can’t improve on that.
The formal trade architecture that is underpinning the process of economic integration of the Asia Pacific economies is clear.
First, it is still rooted in the past successes of the multilateral trading system. The underlying principle of MFN treatment remains a hugely powerful integrating force. Negotiations conducted forty years ago in Geneva, no doubt overwhelming by suited men of European ethnic origin, trying to calculate the net advantage of, say, liberalising tariffs on electrical machinery amongst their own economies, deliver results today to very different people in far-off lands.
These long forgotten negotiators could never have foreseen clearly that the results of their negotiation would be powering economic development in Bangalore or Kuala Lumpur’s industrial estates decades later as they too exploited the opportunities of MFN-based freer trade.
While it is deeply frustrating that we seem forever poised, but never capable of completing, the latest Round of multilateral trade negotiations, the achievements of the past roll on. This creates opportunities for people to escape absolute poverty – historically, overwhelmingly associated with rural poverty. Their relative success – and the word ‘relative’ is important: much more wealth creation still needs to take place - creates new markets in turn for our economies. These new emerging markets are transforming the Australian and NZ economies. We have excellent prospects looking forward – provided we continue to get the economic fundamentals right, as Prime Minister Gillard’s forthright statement on fiscal discipline and free trade reminds us.
The second key aspect of the emerging architecture is the role of FTAs. The role is changing and understanding at a deeper level is central to understanding the strategic opportunity of TPP – and, frankly speaking, the difficulties of delivering on that opportunity.
We have gone long past the intellectually interesting, but now politically irrelevant, debate about whether these FTAs should be encouraged or not. The fact is that if you are not at the cutting edge of FTA strategy, you are not part of the game.
This is why Russia, an APEC as well as a European economy, has agreed to do its first FTA with NZ. Except in some very long-term sense, our market hardly matters to Russia. That is not the reason they have embarked on this track. Rather, Russia will put its toe into the warm waters of APEC trade liberalisation through this FTA with a small but active participant in this strategy. I am confident of success. It will then be interesting to see what develops from there.
This is also the reason why the Japanese Prime Minister has launched an intensive study of TPP and Economic Partnerships more generally. Japan knows it cannot forever remain on the sidelines. We are watching this difficult political debate in Japan with great interest. There is a way forward for Japan that does not ask for the politically impossible on agriculture liberalisation.
The third characteristic I would like to highlight is the trend away from purely bilateral to plurilateral or multi-economy negotiations. In many cases, this step towards complex multi-party negotiations is politically possible only because sufficient progress in liberalising trade with bilateral FTAs had already been made. Think of it visually, as a stone cast in the water, leading to wider and wider concentric rings of trade and investment integration.
TPP is of course centred on this strategic approach. TPP should, at least in principle, become the most important of these new broader FTA agreements. It is obvious why – it is because the world’s number one economy, the United States, is involved. And of course, the current scenario would not stop with the current nine TPP economies. This is what we mean by a ‘building block’ approach.
But TPP is not the first of these agreements – the NAFTA itself is an early progenitor, whatever criticisms are levelled at it. And Australia and NZ are already in this space having negotiated a comprehensive FTA with all the countries of South East Asia. This is now in its second year of implementation and when complete will have created a huge zone of liberal trade in the geographic centre of the Asia Pacific.
The fourth characteristic I should like to highlight is the flight to quality. A lot of second-rate FTAs were indeed negotiated in the 1990s and there will be other less than stellar agreements concluded in the future. But in terms of our small country’s experience, there has been a discernible flight to quality. With some unimportant qualifications of a technical nature, one could say that our FTA with China, our FTA with Hong Kong, our FTA with Malaysia and the much larger FTA we and the Australians have with the ASEAN countries are as clean as a whistle. And of course, we and the Australians negotiated the original gold standard FTA in CER in 1982 and continue to build towards a Single Economic Market.
It is very important that the negotiators in TPP – astonishingly there were some 675 officials at the formal negotiating session just concluded in Santiago – do not lose sight of this. Their political leaders are saying they want a ‘gold standard’ FTA or a ‘21st Century FTA’. Does everyone understand what this means?
First, do people understand the competition? Do they understand the bar of credibility has been lifted? I cannot answer these questions yet. The answers will lie not just in the more obvious issue of dealing with high formal barriers to trade in very sensitive areas. Deeply technical matters such as the evolution of rules of origin also have to pass difficult tests such as – is this consistent with the emerging global supply chain in the Asia Pacific?
All this is ahead of us because the negotiation is not sufficiently mature to allow us to form judgments and thus make political choices. However, anyone who imagines that we are going to deliver on this vision of a 21st Century Agreement just by repeating the goal over and over again, needs to reflect a little more deeply. Tough decisions that many lobbies won’t like are going to have to be made.
But this is a negotiation. I cannot think of a single trade negotiation that I’ve been involved in from the CER onwards that was not difficult to launch and a nightmare to conclude. Watch this space.
Finally, we need to keep in mind that there is far more at stake than commercial prosperity and international economic relations. Because my day job is centred on international economic matters, I have confined myself largely to that language. But everyone understands there is more at stake in TPP than economics.
I would put it – and I think I am expressing a very orthodox view – that this is about strategic leadership in the Asia Pacific. We know who has driven the process of trade and investment integration in the past 60 years: the United States.
We know who has underwritten the security relationships in the Asia Pacific – the United States. We know who designed the Bretton Woods Institutions, with a little bit of help intellectually from Lord Keynes as the leader of the British Treasury delegation. It was of course the United States.
I have always thought that the institutional structure of the post-war era – the World Bank, the IMF and the GATT – was perhaps the most benign dictatorship we have ever seen, since it created the policy space not just for the recovery of the powers defeated in World War II, but for everyone. We continue to owe a debt to inspirational post-war political leaders like Cordell Hull.
But that was the product of a deeply self-confident and utterly dominant post-war United States, with then some 50% of world trade and production, backed by overwhelming military superiority in a relative sense.
Some sixty years on, we know the theatre where the main game is going to take place – the Asia Pacific broadly defined, and the definition will have to be expanded to include India. But in this theatre there are more players on the stage. The ability of the United States to lead the TPP initiative to its full potential will answer at least some of the important strategic questions before us about leadership in the first quarter of the 21st Century.