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I would like to begin by thanking the President of Customs Brokers & Freight Forwarders, Willie van Heusden, for inviting me to speak at your annual conference. I’m delighted to be here and to be able to speak to a theme of considerable personal and professional interest to me – namely whether or not Intra-Asia is our trading future.
Today I’m going to offer some thoughts on this theme, focusing on where I think we’re headed more broadly as an economy. I’m optimistic about our economic future – I do believe we’re on the right track towards achieving sustained economic growth – but we’re going to need to be fast, smart, and well-coordinated (within the government and between the government and business) to push up our wealth curve.
In particular, we need to ensure that we’re doing the best we can to enhance the international competitiveness of our companies. New Zealand needs more businesses that are able to operate successfully in international markets in order to grow.
I am pleased that notwithstanding a tough global environment, our export volumes in recent years have increased year on year. That said, the rate of volume growth, running at around 1.4 per cent per annum over the 2004 to 2010 period, is considerably down on the annual average rate of 5.4 per cent in the preceding 1990 to 2004 period.
This is simply not good enough. We need to lift our game. An important lever in this respect is trade policy, but it will not deliver the growth we need on its own. We need all parts of the economy to work in sync if we’re to lift the tradable sector of the economy.
So whilst the government is focused on negotiating a raft of FTAs – including with India, Russia-Belarus-Kazakhstan, and the Trans Pacific Partnership – we also need to ensure that our domestic policy settings are sound, that our companies are taking full advantage of the trading platform that we establish through these agreements, and that we are moving to integrate New Zealand companies more into global supply chains.
New Zealand’s Economic Story
I’ll return to this later, but let me begin by offering some thoughts on New Zealand’s economic story over the past few decades. As a small, relatively distant country, much of this narrative is bound up in our external trading environment.
To state the obvious: we cannot, nor will we ever, get rich by selling to ourselves. Our domestic market is simply too small and we require a vibrant export sector to maintain our standard of living. We don’t have the luxury of size when it comes to generating domestic economic activity to fully support our own growth.
This is a challenging space to be in as our economy can be disproportionally affected by developments largely beyond our control - namely the economic performance and policies of our big trading partners. The need to those external risks and uncertainties has necessitated a transformation of our economy over a number of years with a view to building greater economic resilience. In this we have been remarkably successful.
In the 1960/1970s, we were an effective mono-culture in economic terms. Around 70% of our exports went to Europe – the majority of which were agricultural commodities.
This left us exposed. It’s a story that my generation is familiar with but it bears repeating. The UKs entry into the European Economic Community in 1973 was a sharp reality check – we had to diversify our export markets and product base as our preferential access to the UK’s middle class consumers disappeared almost overnight.
Indeed, diversification is exactly what we did over a number of years. We went from being an inward-looking protectionist economy to one of the most open economies in the world.
Since then, the transformation in our trading profile has been quite extraordinary.
Today, exports to Europe represent just 11 per cent of our total exports - still important, but nowhere near as important as they once were.
At the same time, we began a process of reorienting ourselves towards Australia and Asia, and our exports to the two regions increased significantly. Between 1964 and 2010 Australia’s share of total exports increased from 4 per cent to 22 per cent; Asia’s from 6.6 per cent to 39 per cent.
This sits against the backdrop of a major shift in economic power from the developed to the developing world. In particular, Asia looks set to reclaim a share of world GDP close to what it controlled prior to the Industrial Revolution. Wealth creation is returning to where the bulk of the world’s people live, and in another ten years or so, another billion people will enter the middle class in Asia.
It is clear that much of our trading future lies here, and I believe that we’re well placed to capitalise on this historical shift in economic geography.
We’ve developed strong political relationships in the region – it was no accident that we were the first Western country to sign an FTA with China. In many respects, this agreement was made possible by successive governments that worked hard to build a strong political relationship with China.
This government is working hard to capitalise on this tradition. For example, the Prime Minister and I have just returned from leading a high powered business delegation to Indonesia - my fourth such trade mission in as many weeks. Such visits are an important way of leveraging New Zealand’s political relationships for our business community.
So, we’ve managed to diversify our export markets, focusing particularly on Asia. At the same time, we’ve also managed to diversify our product base. While agriculture is no less a ‘sunrise’ sector as it was during the boom years of the 1950s – it is certainly less dominant today.
In 1964, agriculture claimed a 93% share of our total exports by value. In 2010, this had reduced to 54%.
However, the sector has also diversified and moved its products up the value chain – important if we are to supply the safe, high quality food and beverages that the growing middle class of Asia is increasingly looking to purchase.
Take sheep meat exports for example. In 1971, 92% of sheep meat exports were frozen carcasses, with just 8% frozen cuts. By 2008, 65% were frozen cuts, with frozen carcasses barely registering at 3%.
Outside of agriculture, sectors such as forestry, high-value manufacturing, and oil have become high earners of foreign exchange for New Zealand.
Services Exports and Global Supply Chains
Although our goods exports have become significantly diversified in recent years, our services exports have been dominated by the tourism and education sectors. We do well in these sectors, but we have historically underperformed in what is known as commercial or business services – the real high-value end of the services trade.
However, indications are that we’re beginning to improve in this area. In the year to June 2011, we earned $4 billion from commercial services exports – an increase from $2.5 billion in 2005. Growth in this specific sector over this period was 8.3 per cent compared with a contraction of 0.9 per cent in our more traditional services sectors – tourism and education.
The top performer in the commercial services sector has been ‘management fees between related parties’ – which is simply another way of referring to the provision of services or the collection of royalties between head office and a subsidiary. Exports of this type have increased a staggering 290 per cent since 2005!
Business models are also changing, which is reflected by the increase in merchanting exports. Merchanting captures the situation where a New Zealand company buys goods abroad and then on-sells them to another overseas party. For example, a New Zealand company might buy garments from an overseas factory and then sell these onto another overseas party at a higher price without the goods entering NZ. Exports of this type have increased by about 50 per cent since 2005.
This is not simply a story about a high performing sector. When we observe this increase in commercial and business services, what we’re also observing is another shift in the nature of New Zealand’s trade – a shift towards greater integration into the global supply chain. And it’s big – the OECD estimates that trade in intermediate goods is close to 60 per cent trade in goods and 73 per cent of trade in services within the OECD.
This is being driven fundamentally by technology. As transportation and communication costs continue to decrease, it becomes increasingly viable for companies to make use of the comparative advantages of other countries to produce their products.
Let’s use China as an example. We simply cannot compete with China’s ability to produce things at a low cost. But what we can do, is combine their strengths with our own comparative advantages, whether it’s in design or high-value manufacturing, to become internationally competitive.
A good example of a company adopting this strategy is Rakon, who design and manufacture crystal oscillators used in smartphones and GPS navigation devices. Their investment in a factory in Chengdu, Western China enables the company to keep costs down and remain internationally competitive in their major market for high-volume simple chips and oscillators. The top-end products continue to be manufactured in New Zealand.
This is how we should begin to position ourselves internationally – as a niche producer of intermediate goods in the global supply chain. However, in order to do so, we simply to have to break out of outmoded twentieth century thinking - the sort that would view this as a threat to New Zealand jobs. The reverse is actually the case – the rise of the global supply chain will create more high-value jobs for New Zealanders provided that we can find our way into this new ‘trade story.’
This, I think, speaks directly to the theme of this conference. As I said before, much of our trading future lies in Asia, but not only in terms of exporting finished products – we’re going to need to export more intermediate goods and services.
One implication of this is that we’re likely to see, given the link between trade and investment in the global supply chain, increased investment from Asia into New Zealand and vice versa. This is something we should welcome if we’re serious about growing the economy. We can’t afford not to.
New Zealand’s trading platform – the WTO and FTAs
So, what is the government doing to enhance New Zealand’s external position in this challenging and fluid environment?
We are focusing on two key challenges. First, we need to secure a world class trading platform, and second, we need to ensure that our companies are taking full advantage of these platforms to enhance New Zealand’s economic growth.
Let me begin by briefly sketching out the development of New Zealand’s trading platform over the past few decades.
Of fundamental importance is that we were able to secure a set of agreed disciplines around agriculture in the WTO Uruguay Round. That was big for us.
Since then the multilateral route has been exceedingly hard going. Unfortunately, few but the most optimistic are under any illusion that we’ll see a successful conclusion to the Doha Round anytime soon. It is in trouble, but we must continue to work towards enhancing a rules-based international trading system. Indeed, the body of pro-liberalisation jurisprudence is probably one of the most important achievements of the multilateral trading system – we saw the value of this during the financial crisis, when a number of countries reactively turned towards protectionism.
Thankfully for New Zealand we’ve also invested in a successful plan B – namely an active FTA agenda – to the extent that about 46 per cent of our exports today are now covered by FTAs.
This process began with CER in 1980 – a truly game changing agreement in New Zealand’s economic history.
Then there was a long gap, but things began to pick up in the 2000s. Between 2000 and 2010 we signed agreements with Singapore, Thailand, what is known as P4 (Singapore, Chile, and Brunei), China, Hong Kong, and (together with the Australians) an agreement with ASEAN.
But we haven’t stopped there. We have a suite of additional FTAs under negotiation with:
We have also begun to look into the feasibility of an Economic Cooperation Agreement between New Zealand and Chinese Taipei. This is significant. If we succeed, NZ will be the only country to have secured trade agreements with the three Chinese customs territories (the Mainland, Hong Kong, and Chinese Taipei).
If we conclude all of these agreements, then 64 per cent of our current exports will be covered by FTAs. To put it another way, 36 per cent of our exports by value are able to enter markets duty free under current FTAs. This will climb to 46 per cent by value if we secure these additional agreements – and a much higher percentage will be able to enter – if not at zero – at a rate lower than for 3rd countries.
This will be a significant achievement, but we can’t rest on our laurels. We have a world class trade policy platform, but these agreements, in and of themselves, don’t create wealth for New Zealand. The economic benefits from an FTA are largely realised when traders utilise the preferential tariff rates available.
Tariff Preference Utilisation
This is the piece of the jigsaw that I’m not entirely happy with yet. Recent research by the Ministry of Foreign Affairs and Trade has indicated that our exporters are not taking full advantage of our FTAs. What I’m referring to here is tariff preference utilisation under these trade agreements.
Let’s look at our FTA with China for example, which has by most measures, been a tremendous success.
Since the agreement entered into force in 2008, our total trade with China has increased by 50 per cent: New Zealand’s exports to China have tripled over the last five years. At this rate, we look set to achieve the ambitious goal set out in the government’s strategy to double two-way trade with China by 2015.
However, that statistic does not tell the full story. In the 2010 year, use of preferential tariffs under this FTA resulted in duty savings of about $50 million. This is up from around $27 million in 2009.
A good result – a combined duty saving of close to $80m in two years – but a quarter of NZ exports to China in value terms did not make use of available preferences. A further 25 per cent of exports underutilised available preferences.
In dollar terms, this amounts to lost duty savings of up to $94 million.
We know that the bulk of tariff preference uptake is taking place across a narrow number of tariff lines (where the majority of our trade to China takes place). Sectors with high tariff utilisation included fruit and vegetables (91.7 per cent), and agriculture (other animal products - 98.2, per cent, dairy - 73.2 per cent).
What we don’t yet know conclusively, is why there is a long tail of underutilisation taking place in other sectors. One explanation may be that the Chinese have unilaterally reduced or eliminated tariffs on a number of tariff lines, which means that there are no tariff savings to be had under the FTA when exporting these products.
Other potential explanations include:
In a number of these cases I’m sure that preference utilisation uptake might be improved if the critical sector you all represent – that of customs brokers and freight forwarders - is active in understanding our FTAs and is ensuring that your clients are positioning themselves to leverage these FTAs to full effect.
Given that this issue is a “bread and butter” one for your industry, I expect that I might find some of the answers from speaking with people in this room during the morning tea break.
To sum up, it is clear that ‘Intra Asia’ is a key component of our trading future. Asia is on the economic rise, and there is significant growth potential for New Zealand companies that can take advantage of global supply chains within Asia.
This requires different ways of thinking and operating. It won’t happen overnight, but the government is absolutely committed to supporting our exporters to get into the right space.
Your industry is also a critical player. You have an important role to play in giving the best advice to your clients to enhance their export position. I’m therefore pleased to see a vibrant customs brokers/freight forwarding community present today.