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Tim Groser

16 August, 2011

‘Regional Economic Integration Initiatives in the Asia-Pacific’ - Address to the China Academy of Social Sciences

Director Li,
Deputy Director Han,
Distinguished guests

I would like to thank the Institute of Asia-Pacific Studies, and the China Academy of Social Sciences, for the opportunity to discuss the opportunities and challenges presented by economic integration in the Asia-Pacific.

Imperatives for regional integration

When we address the question of how we should move forward trade and investment integration in the Asia-Pacific, it is obvious that we are discussing a long term strategy.

But right now this may sound a little academic. We are witnessing deep disturbances on both sides of the Atlantic in the major centres of the developed world - the European Union and the United States of America. This should concentrate our minds. You could take the view that the short term trumps the long term. In other words, let's get through today, tomorrow will look after itself.

None of us can be certain what will happen in the world's major developed countries, but the best case scenario would appear to be a long period of fiscal consolidation in the EU and the US.

Of course, we will be influenced by whatever unfolds in the EU and the US, but let us not hesitate to seize the opportunities we have for pushing ahead economically in our dynamic Asia-Pacific region. The Economist Intelligence Unit forecasts annual real GDP growth for Asia and Australasia combined to be over 6.5% each year through to 2015.

The changing nature of trade: "Made in the World"

Contributing to the very positive long term outlook in our Asia-Pacific region is an increasing integration of national economies. This has been driven to a significant extent by a fundamental change that has taken place in the structure of international trade.

Today, over 50% of non-fuel world merchandise trade comprises trade in intermediate goods. When I speak of “intermediate goods”, I am talking about parts or components that trade across national borders before becoming part of a final traded product. This has led, essentially, to the evolution of the global supply chain.

Regional and global supply chains deepen the interdependency of trade relations. One recent study gave the example of the Boeing 787 Dreamliner - which has a wing box made in Japan, engines made in the UK, landing gear made in France, a control fuselage made in Italy, wing tips made in Korea, and the pilot control system in the US. It is not too much of a stretch to say, as the study does, that many products are no longer made in a single country but are rather “made in the world”.

Nowhere has this trend been more evident than in the Asia-Pacific region. In Asia, intermediate goods are more than 60 per cent of imports and China is the top importer of intermediate goods in the world. Add to this trend the development of government policies in Asia that are conducive to international investment and trade, and you have an ever deepening integration of national economies.

New Zealand does not stand apart from this phenomenon. Increasingly, New Zealand companies are embracing the regional supply chain. Here in China, for example, Rakon recently opened production facilities in Chengdu, Tait Electronics has expanded its sales office to include research and development, marketing, finance, and services support. Fonterra has expanded milk production in Hebei province. These companies know that in order to be globally competitive and grow their businesses they must strive to lower operating costs and to be close to their markets and customers.

In the context of deeper economic integration in the Asia-Pacific, the logic is compellingly in favour of having a coherent set of regionally agreed regulatory rules for trade and investment.

But, as we know, at present the reality of trade rules in the Asia-Pacific region is very different. It has been famously described as a “noodle-bowl” of overlapping and sometimes contradictory regimes.

Initially a slow starter when it came to negotiating Free Trade Agreements (FTAs), the region has made up for lost time over the past decade. In 2000, only three FTAs were in effect in East Asia. Today this number is closer to 50, and it has been estimated that more than that again are in various stages of negotiation.

New Zealand is actually at the centre of this process. Our FTAs have focused on the Asia-Pacific region - not least of course the FTA between China and New Zealand, which entered into force in 2008 and to which I will turn a little later.

An Asian Development Bank survey concluded that the spread of FTAs in East Asia has brought net benefits. Not least, it has kept intra and inter-regional trade flowing, particularly at a time when world trade contracted during the global financial crisis. But, I caution to add, it is not an optimal situation.

Ultimately, trying to move forward using a patchwork of bilateral FTAs does not make sense economically, strategically or geo-politically. Businesses want to see clear and coherent trading rules. Global supply chains demand global, or at least regional, solutions. Now is the time to modernise and enhance trade rules to reflect the transformation that has taken place in production/distribution patterns and business models.

For this reason NZ is an enthusiastic supporter of the various regional economic integration initiatives under way. And, importantly, we see these as complementary - as potential pathways towards the same ultimate strategic objective.

The Trans-Pacific Partnership (TPP) is one pathway that New Zealand is pursuing toward a high quality, free trade agreement in the Asia-Pacific. It is, of course, not the only one. APEC is doing some valuable work in this space. And New Zealand, along with China, is closely involved in the economic integration initiatives in the East Asia Summit.

Regional economic integration initiatives in East Asia

In fact, I have just come from a meeting in Manado, Indonesia, of Economic Ministers from the member nations of the East Asia Summit. Discussion in Manado focused on two ideas for integrating trade and investment flows in the Asia-Pacific region. The first is the concept of an FTA between the 10 members of the Association of South East Asian Nations (ASEAN) and the north Asian economies of China, Korea and Japan. This is sometimes referred to as ASEAN + 3. The second initiative is ASEAN +6 as it includes all of those nations as well as Australia, New Zealand and India.

These are bold concepts which are proceeding steadily and incrementally, with work led by officials participating in highly technical working groups. No political decisions have yet been taken on how to translate these concepts into a mandate for an actual trade negotiation, but it is clear to me that we are moving forward.

These ideas, or a variation of them, could be a powerful force for integrating FTAs in the Asia-Pacific region. The unifying factor behind them is that all participating nations, including China and New Zealand, already have their own FTAs with the ASEAN bloc, so one could say that we are trying to untangle the noodles in the bowl by unifying this network of bilateral FTAs.

From a New Zealand perspective, this is actually very similar to the strategy that Australia and New Zealand adopted in negotiating with ASEAN the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA). Over a period of 10 years, this will progressively create a single unified trade zone between Australasia and the nations of South East Asia.

All these efforts are important responses to the realities of global and regional trade and investment patterns.

The negotiating history of the TPP

The roots of TPP lie in the New Zealand/Singapore FTA, concluded in the late 1990s. It is only a small overstatement to say there were no trade barriers to negotiate between New Zealand and Singapore. The point of this negotiation was almost purely strategic - to build a strategic bridge between two small, open economies that could set the basis for future trade integration in the wider region.

Following the New Zealand-Singapore FTA, the first big idea was to merge the two geographically contiguous FTAs to which our small economies belonged - the Closer Economic Relations agreement (with Australia) for New Zealand and the ASEAN FTA for Singapore. Ten years later, that strategic objective was achieved, with the conclusion of the AANZFTA.

The second big strategic idea was the New Zealand-Singapore deal to act as a bridge between what we called the ‘P5’, or ‘Pacific Five’. The countries we had in mind were New Zealand, Singapore, Chile, Australia, and the United States. At that stage (the late 1990s) none of the original Asia Pacific economies had an FTA with the United States.

It has taken another ten years - and an intermediate negotiation called ‘P4’ (New Zealand, Chile, Singapore, and Brunei) - but finally we are there. The TPP is an extension of the P4. It includes the ‘Pacific 5’, but is a bigger and brighter version of it, with nine, not five, APEC economies.

The strategic concept is exactly the same: to expand the opportunities for all our economies by wider and wider concentric rings of freer trade and investment.

The history of TPP is worth bearing in mind because it reminds everyone that this is a moving game. Similarly, if TPP is successful, it will not stop with the current membership of nine APEC economies.

The vision for TPP is far more ambitious than that: it is to make TPP one of the essential building blocks behind a concept that APEC Leaders have endorsed as a long term goal - a Free Trade Area for the Asia Pacific. This is not unattainable over a decade or more.

Update on the TPP negotiation

In terms of the negotiation itself, it is making progress. We are not going to complete this negotiation by the time President Obama hosts APEC Leaders in Honolulu later this year, but I think we can make solid progress.

I hesitate to put a political label now on what might be deliverable. A Framework Agreement is a possibility, but the crucial question will be what might be contained therein. In part this depends on what happens to the three FTAs - Korea, Panama and Colombia - currently awaiting Congressional approval in the US.

But whatever is achievable by Honolulu, a step forward will be taken by the end of the year. This size of the step is not as relevant as its direction - and there is no doubt that it is heading in a direction that supports our long-term strategic vision.

We are under no illusion that much of the difficult negotiation lies ahead of us. But this is a big objective aimed at developing pathways toward an Asia-Pacific FTA. No-one would expect that to be easy.

New Zealand is among the original architects of TPP. We have little power in international relations by any conventional measure. However, as I have said in the context of the Global Research Alliance on Agricultural Greenhouse Gases, which New Zealand leads, and in which we have recently warmly welcomed China as a member, you don’t need to be a big country to have a big idea. The TPP is an example of this.

With regard to the question of new membership in the TPP, a key concept embedded in the original TPP was that of “open regionalism” - the idea that the TPP is a regional building bloc, open to all countries willing and able to meet its high standards. New Zealand sees it very much in these inclusive terms.

The TPP in the context of regional economic initiatives

If the TPP negotiation can add further momentum to other negotiations seeking similar objectives, then I regard this as positive.

First, the TPP will deliver comprehensive and high quality commitments. As well as delivering important outcomes in terms of tariffs on agricultural products of interest to New Zealand, the TPP will also respond to the reality that applied tariffs in Asia on non-agricultural products are already quite low. What happens to the products when they have crossed the border becomes more important.

Greasing the wheels of cross-border supply chains requires high quality commitments on services, investment, and intellectual property, to name a few. A recent study by the WTO showed a link between the trade in intermediate goods and the depth of FTAs signed. This reflects an obvious point - deeper economic integration creates a demand for deeper FTAs. This is what the TPP will deliver.

A second reason the TPP is important is that the US is very much part of the regional economic picture. Manufacturing in Asia still depends crucially on the US market as a destination and draws on its entrepreneurial energy and innovation. And this goes deeper than just providing a destination for final products. Consider, for example, the iPod - it has been estimated that in 2006 this created 41,000 jobs, 27,000 of which were outside the United States. The figures for the iPhone and iPad would only underline the point. There is a need to ensure the US is built into the trade architecture in the Asia-Pacific. The TPP is one way of achieving this.

NZ-China FTA

These regional initiatives are vital. But I do not want to finish without mentioning the crucial importance of two other roads to our economic integration: New Zealand’s bilateral FTA with China, and multilateral liberalisation under the WTO.

The NZ-China FTA has been a great success in the two and a half years since it entered into force. It remains the only FTA that China has with a developed country. Since the FTA entered into force in October 2008, New Zealand’s trade with China has increased by 50%. With total bilateral trade touching NZ$12.8 billion in the year to June 2011, we are on track to meet the goal set by Premier Wen and Prime Minister Key in 2010 of doubling trade from $10 billion to $20 billion by July 2015.

The FTA is an excellent example of a high quality, 21st century agreement. Our two-year review of the FTA reiterated its relevance to both economies and our commitment to continual improvement in our bilateral trade structures. It is complemented by a genuine Closer Economic Partnership between New Zealand and Hong Kong which was signed in March 2010.

The World Trade Organisation Doha Round

While the focus in Manado last weekend was on regional developments in East Asia, it is important that we step back and look at these regional developments in the context of the global economy as a whole.

First, I am sure all the trade Ministers involved in these APEC and Asia-Pacific regional initiatives are doing the right thing for our respective countries in pushing forward regional trade agreements, particularly in the light of economic developments on both sides of the Atlantic.

We also, however, need to be mindful of the very disappointing reality facing us in the WTO. In 2009, we got through the world's worst recession since the Great Depression without any large scale reported protectionism. This was very largely as a result of the achievement of negotiators over the last 50 years in putting in place a system of trade rules which kept markets open under severe pressure.

I am a little concerned that this may have led in some quarters to a sense of complacency that "Geneva could look after itself". That is, that the WTO system of rules on which we still rely could be left to run itself indefinitely. I think that is an illusion. Yes, the system of rules is robust and there is a high degree of respect for those rules internationally. But to leave them unattended forever as we see these vast shifts in power, and as new issues appear on the global agenda, is simply not realistic. We cannot manage the development of regionalism without in the long run coming back to Geneva to update the rules of the international trading system.

So although the political space may not exist right now to conclude the Doha Round, we must not lose sight of its importance to the coherence and smooth running of the global trading system. In the meantime, New Zealand, and China too, will continue to persist in efforts to achieve greater economic integration in our region through various complementary initiatives.

  • Tim Groser
  • Trade