15 June, 2011
The Trans-Pacific Partnership: State of Play
Good afternoon and thank you for this opportunity to do a stock take of the Trans-Pacific Partnership, or TPP. I am not going to do a technical appraisal. For one thing, I deeply believe it is not in New Zealand’s interests ever to negotiate any trade agreement through the media and this is a public speech.
Rather, I will give you a political evaluation of the strategy. And the first question I wish to address is: how does this fit into a New Zealand agenda of economic reform?
TPP is, by definition, a trade negotiation. But let me emphasise the importance of not seeing this negotiation in a hermetically sealed zone labelled ‘trade policy’ – somehow divorced from the broader, and for New Zealanders, frankly more important, internal economic agenda. These are not parallel universes. The linkages are explicit and important.
Trade Policy and the Growth Strategy
Start with the broader challenge facing New Zealand. You know the main lines of the narrative. New Zealand must lift its long-run growth rate. It is not viable for us to stay in the bottom income quartile of developed countries, flat-lining our way to mediocrity.
We can have a legitimate political debate about what we do with the wealth a higher long-run growth rate would create – there are a dozen different ways to cut the cake. But leaving aside a few outliers on the political fringes who have radically different views on how we should organise our society, it is pretty well understood that all choices become easier if we achieve this goal.
The key to this is higher productivity. We must lift the long-run rate of labour and total factor productivity to higher levels. We had more than respectable productivity growth rates from 1997 to 2000 – labour productivity averaged 3.5 percent annually. It has tanked in the decade since then.
To achieve this requires a number of structural shifts. This is what the phrase ‘rebalancing’ means. ‘Rebalancing’ has a number of facets to it. First and foremost, it is about moving away from debt fuelled consumption growth. As Bill English has pointed out on many occasions, the recovery now clearly underway is fundamentally different to previous recoveries in New Zealand.
It is not built around consumption, or increased structural Government spending. It is built around lifting national savings rates and reducing debt, including the Government’s debt. Yes, the triple whammy of the world’s worst recession in 70 years in 2009, two major earthquakes, and now some terrible aftershocks, affecting our second largest city have forced us to go onto capital markets to soften the edges of what would otherwise have required a far more brutal adjustment by New Zealand firms, Government and households. However, we are on track towards a surplus in about three years, thanks to some tough, but not unreasonable, decisions we have taken.
This will shift resources back towards sectors where we have a competitive advantage and activities we are good at – allowing us to earn our way in the world. This is what we mean when we emphasise the need to rebalance resources to the ‘traded sector’ of our economy.
That is the essential background to everything we are trying to do in the trade portfolio. Even the best results for New Zealand on trade will not cut the mustard if they are not backed by complementary policies to reinforce the competitiveness of our export companies.
So, in a sense, the work that, say, Steven Joyce is doing on infrastructure, the work Nick Smith, David Carter and others are doing on regulatory reform and irrigation storage facilities, the work Phil Heatley is doing on ending the stalemate that had befallen our aquaculture sector – their work programmes, and the work programmes of several other Ministers, are as much part of the trade agenda as anything Murray McCully or I are doing on the external front.
I have said on numerous occasions that a successful trade negotiation for New Zealand does not in itself add a dollar to New Zealand’s wealth. It only creates an opportunity. Our country’s ability to exploit that opportunity in the wider world out there depends on our ability to be match-fit. New Zealand is not, at least in my view, yet in that space. But I am extremely confident we are making progress. The elements needed for a superior performance are slowly and surely being put in place.
Trade Policy and New Zealand’s Future
I am not trying to talk my way out of a job as Trade Minister. Trade policy is very important to this enhanced future. Historically, New Zealand has suffered more than any developed country from distortions in international trade. There are numerous empirical studies that were done by independent international institutions and researchers in the 1980s, and which I stopped quoting ten years ago, that made that very clear.
This deeply negative external trade environment simply arose from the conjunction of the world’s worst subsidy and market access barriers sitting alongside our traditional primary export industries. We were very strong in dairy, horticulture, and other pastoral industries but the strongest swimmer can’t swim against a rip tide.
As a result of various highly successful trade negotiations over the last 25 years – CER, the Uruguay Round which put agriculture into the system, a whole series of FTAs, New Zealand is in a fundamentally better place. Crushed for lack of opportunities in the past, we now have abundant opportunities. Trade policy has played a vital and positive part in creating the basis of a far better outlook.
It can only get better. I say that conscious of the fact that every trade negotiation is difficult to begin - and a political nightmare to end. The torture of the never-ending saga of the Doha Round is simply the most recent and brutal example.
For the first time in thirty years, we have choices. The India-New Zealand FTA is now well underway. In a couple of weeks’ time, the Prime Minister will lead the most important business delegation ever to leave our shores for India, including a fair number of New Zealanders of Indian ethnic descent. Raising the political profile of the FTA is a central part of that trip – although it is also seeking to build direct commercial links. This is the second emerging developing country super-power. We need a new vision for that relationship, similar to the huge success of NZ Inc in developing our China relationship over the last 30 years.
The FTA with Russia – it is the first FTA that Russia has embarked on – is also moving along nicely, having been announced by President Medvedev and the Prime Minister at APEC in Japan last November. We have other negotiations also in play.
But the one negotiation which attracts the most public debate is, of course, TPP.
TPP: The Negotiating History
Let’s quickly review the negotiating history. I am a deep believer in the old saying that if you don’t understand where you have come from, you won’t understand where you are going.
The real roots of TPP lie two election cycles ago - the New Zealand/Singapore FTA, started in the late 1990s by the then National Government and brought to a successful conclusion by the previous Government. As I said – I was the chief negotiator at the time - the point of this negotiation was almost purely ‘strategic’. It was only a small overstatement to say there were no trade barriers to negotiate. Any econometrician trying to model the ‘gains from trade’ using traditional general equilibrium modelling, would have been left scratching their head, no matter what assumptions they fed into the mathematical sausage machine.
At the time, I deliberately and provocatively called the FTA a ‘Trojan Horse’, designed to gain entry to trade fortresses elsewhere in the Asia Pacific region. It infuriated the extreme left, opposed as they are fundamentally to trade liberalisation. Unfortunately, there are people in this country, as there are in all countries, who have never seen a trade agreement they liked. They never will.
The strategy – quite explicit in various background papers both published and unpublished – was to provide a strategic bridge between two small open economies and two big strategic ideas.
The first big idea was to merge the two geographically contiguous FTAs to which our small economies belonged – the CER for New Zealand and the ASEAN FTA (AFTA) for Singapore. That led, ten years down the track to exactly the result - the AANZFTA. Job done. Signed, sealed and delivered. The collective good work of many people and different Governments. Trade policy is not a field for those who are into instant gratification. Consistency of policy across the electoral cycle is vital since these initiatives frequently take more than a decade to accomplish.
The second big strategic idea was for the deal to act as a bridge to what we then called ‘P5’, or ‘Pacific Five’. The countries we had in mind were New Zealand, Singapore, Chile, Australia. The fifth economy was the real target: the United States. At that stage (late 1990s) none of the original Asia Pacific economies had an FTA with the United States.
It has taken another ten years – and two intermediate negotiations, one called P3 (New Zealand, Singapore, Chile) and another called ‘P4’ (Brunei wanted to join) – but finally we are there. TPP is P5, just 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. Freer trade, by the way, is not one and the same thing as absence of regulation. I would say exactly the same with respect to the investment side of the equation. We still need effective regulation of markets – and that is a moving target as markets develop and new technologies emerge.
That is why there is still a legitimate basis for ensuring that such trade agreements allow ‘policy space’. It comes down to a balance between allowing flexibility on one side and certainty of the regulatory framework so as to encourage trade and investments on the other. There is no precision or set of inflexible rules here; it is a matter finally of political judgement where the balance should lie.
For example, I remember very well the political conversation around putting the first ‘Treaty of Waitangi’ clause in a Trade Agreement. We put it into our first set of services agreements in the Uruguay Round in 1994. Why? Because it was clear politically that New Zealand needed policy space in that domain. The domestic debate then – and probably now – was not sufficiently mature or settled to wrap the Treaty unequivocally in the Korowai, or coat, of international economic law.
Variants of the ‘Treaty Clause’ have been, in my view quite appropriately, a feature of every trade agreement we have signed up to since. I do not, by the way, believe it has caused a dollar’s worth of trade loss for any of our trading partners. Those who would oppose it would be taking a purely ideological position.
The history of TPP is worth bearing in mind because it reminds everyone that this is a moving game. Ten years ago it was ludicrous to look at the Singapore/New Zealand FTA as if we were getting off the plane at Changi airport and had no intention of getting on another flight to another trade destination. 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.
Let me put down a marker: I ‘look forward’ with a certain weary sense to the inevitable attempts to ‘model’ the gains from TPP in some econometric model. I am a deep sceptic here.
The original IAC (the forerunner of the Australian Productivity Commission) estimates done in 1979 of the gains from trade from establishing free trade between Australia and NZ suggested we were wasting our time with the CER on which negotiations were just beginning. Early estimates in the late 1960s of the costs of the UK staying outside the process of economic integration on the European Continent suggested there was ‘nothing in it’.
I am delighted that my Australian counterpart, Dr Craig Emerson, who has a PhD in economics from the ANU and is thus extremely well placed professionally to make this judgement, has exactly the same sceptical view of modelling the gains from trade negotiations.
Many years ago, when I was working for a couple of years in the New Zealand Treasury with Roger Kerr – I can set off a whole new conspiracy theory here with this observation – Roger once made a point to me that if you input almost any policy change into such models, while holding all other variables constant (the ceteris paribus standard methodological approach) the economy- wide gains are always some small fraction of GDP which could lead you to wonder why you should change anything.
Of course, Dr Emerson and I are just humble Trade Ministers, so we are not going to stop the aficionados in our respective research institutions from rolling out their modelling. We will think of something nice to say at the time, I’m sure.
Personally, I put far more importance on one of the most powerful observations in economics: societies advance by specialisation. Trade – first barter within the village economy, now the deeply sophisticated process of the global supply chain – drives specialisation. Grab it when you can if you want to move forward. TPP is one of those opportunities.
The Negotiations: A Political Evaluation
I am not going to give you a blow by blow technical account of the negotiations. The saying ‘stop me before I kill again!’ comes to mind. A full and accurate account of the issues being discussed in the Rules of Origin negotiations, even if it did not lead to a charge levelled against me of mass murder, could cause mass euthanasia. And with respect to the controversial issues, well, I stick with my standard line: I am not negotiating this in public.
So let me stick to the bigger political messaging.
The first thing I want to say is that the negotiations are 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 – an upbeat political declaration? That is at the very low end of possibilities. I think we can do better than that. A Framework Agreement? Getting warmer to the potential landing zone. But the crucial question will be what might be contained therein.
A lot depends on the progress made inside the Beltway on the existing trade agenda. I was in Washington a couple of weeks ago, following the APEC Trade Ministers Meeting in Montana. I met with US Trade Minister Ron Kirk, his most senior advisers and some of the most influential Congressional leaders on Trade. There is a sense – somewhat nervously shared between centrist Republicans and centrist Democrats – that they must move the trade agenda forward. The United States, still the indispensable superpower, must have a trade policy that is more than purely defensive.
The issue is remarkably specific. There are three FTAs – Korea, Panama and Colombia – that are waiting for Congressional approval. The political oil to facilitate their passing is Trade Adjustment Assistance. No TAA, no deal. At the same time, the TAA is part of a wider political debate about fiscal prudence that even someone as cavalier as me in commenting about sensitive matters would hesitate to comment on.
But there is a good chance – let me call it a 60:40 chance – of Washington moving this linked agenda forward. If they do, then my estimate of what is possible on TPP by the APEC Leaders’ Meeting moves forward.
If they don’t? Well, a smaller step forward will be taken by the end of the year. This is not fatal to where we want to go long term. This is the nature of trade negotiations.
My third point is that we are not at the point of confronting difficult political choices.
But there are unquestionably one or two sensitive issues for New Zealand here. Finally, they come down to a simple question: what is on the negotiation table? Professional negotiators call this – what is the scope of the negotiation? Please recall, if you will, my earlier comments on the Treaty of Waitangi. Our judgements were and remain – the Treaty is part of our Constitution. We don’t negotiate our Constitution with foreign Governments. There are limits to sovereignty that even people like me who have spent a lifetime negotiating the boundaries of globalisation respect.
I cannot yet answer that broad question – what is on the negotiating table - in highly specific terms. The public debate over Pharmac is a classic example. Is this a legitimate issue to be negotiated in an international trade negotiation?
On its fundamentals – no. Let me be unequivocal on this. We are not about to negotiate our public health system in any trade negotiation. The two major political parties which have shared political responsibility for governing New Zealand decided this some 70 years ago, in the usual messy democratic way.
We have, for the most part, a public health system that allocates scarce resources – they are always scarce – by a mixture of the price mechanism supplemented in part by private insurance, and sophisticated queuing systems that operate in the public sector, of which Pharmac is one - and a very good one. It may not be perfect, and we are always open to suggestions of change, but we are not about to adopt a health system, via a trade negotiation, that allocates resources according to capacity to pay.
But I am not ‘taking Pharmac off the table’. No professional negotiator of any quality ‘takes issues off the table’ at an early stage. I have great respect for the United States – one would be a fool not to. It is the pre-eminent country in the world and a great friend of New Zealand. We will sit with US negotiators and listen to their concerns. All I am prepared to say in public is that we will listen and respond accordingly. I make no apology for keeping this at this level of generality.
Another big challenge is intellectual property. Intellectual property rights are built on the recognition that governments can help ensure that people who create and innovate have the opportunity to get a return for their efforts.
It goes without saying that Governments looking for stronger economic performance see innovation as one of the key planks. This Government is firmly in that camp. And we know that the people who are making or funding movies and music or investing in cutting-edge industrial innovation will want to know that we have in place modern intellectual property rights backed by effective enforcement.
So I make no apology for belonging to a Government that believes in intellectual property rights, as part of a commitment to innovation, and is committed to keeping the rules current and to enforcing them. We have seen estimates that pirate DVDs cost our brilliant NZ film industry as much as $100 million a year.
I understand the political appeal of ‘freedom in the digital universe’. But the idea that any enforcement of intellectual property rights is, by definition, antithetical to human freedom is naïve and absurd. As one commentator put it recently, we are not operating in a “parallel universe where legal and moral rules, and all the basic principles that govern societies, do not apply”. Digital natives over the mental age of 13 take note. All below 13 are excused.
With respect to our ‘offensive interests’ – a wonderfully misleading term used by trade negotiators – we have much ground to cover in the TPP negotiations. ‘Offensive’ in this context means those areas of the negotiations where we see the possibility of major gains for New Zealand.
As always in trade negotiations, for New Zealand the most difficult issues come down largely to dairy. Dairy is, after all, about a quarter of our total merchandise exports.
One prominent American official – a great and deep thinker who has moved in and out of academia and Administrations over decades – has a great joke about New Zealand. He calls New Zealand ‘The Saudi Arabia of Milk’. It’s a great line and an affectionate line. But it is also profoundly wrong. We are nowhere close to the Saudi Arabia metaphor. We are the “Algeria of milk” – Algeria has about 2.5% of world oil production which is about what New Zealand has of world dairy production.
We have no capacity to ‘flood the American market’ with our milk. We can’t even keep up with the opportunities in China. I am a great believer in metrics. Let me put some numbers around this.
New Zealand currently produces some 17 million tonnes of WME (wholemilk equivalent). Think – take out the water and you have 17 million tonnes of product left.
We are extremely confident that we can increase our domestic dairy production by 2-3% per annum. Go and visit our wonderful agricultural scientists in Hamilton at the LIC, if you have any doubts. And I have no doubt that the drive to improve environmental outcomes, and reduce the carbon intensity of this output, will continue.
So by 2020 we might have another 4-7 million tonnes of dairy products available for export. This, ladies and gentlemen, is equivalent to about 18 months of the likely growth of dairy consumption in India alone – forget China, Indonesia, the Middle East, Latin America.
In quantitative terms the New Zealand dairy industry is a small player. It is the United States dairy industry, not New Zealand, that is poised to take the major share of this growth. In the three year period 2005 to 2008 US dairy farmers captured some 60% of the international growth of dairy commodity that this vast and positive paradigm shift produced.
The US dairy industry is – let me be blunt – looking in the rear vision mirror. They need to look at where they are going, not where they have been. This is not easy, I understand that political perceptions lag way behind reality. But this will change in time, just as the US Meat Industry, which hidden behind the old US Meat Import Law, used to be a very inward-looking industry until it discovered exports. Since the vision of TPP is that it will be a building block into these giant growing markets, I could say, only a little mischievously, that the United States has a greater interest in including a quality deal on dairy than New Zealand. We already have FTAs with most of these markets, they don’t.
So, we are a long way off in TPP in dealing with the really tough political questions. What I hope you will have drawn from this analysis is a simple point: this is a big strategic game. We, and I mean New Zealanders, are 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, ‘you don’t need to be a big country to have a big idea’.