Hon Michael Cullen

25 June 2004

Speech Notes

Address to Export New Zealand Annual Dinner

Sky City Conference Centre, Auckland

It is a pleasure to be with you this evening and to have this opportunity to acknowledge the invaluable role exporters play in our economy. Awards are important in the pursuit of excellence so I would like to thank the sponsors for this event - the ANZ, Hamburg Sud, NZ Trade and Enterprise, Bax Global NZ Ltd, Ullrich Aluminium, Air New Zealand Cargo, Maersk Sealand, Ports of Auckland, Axis and Staging Connections.

For much of last year and the early months of this one the New Zealand economy, and the export sector in particular, has been steeling itself for a "winter of discontent' in 2004 and 2005. Dark clouds of Shakespearean proportions loured over our house, in the form of the relentless rise of the Kiwi dollar (or more correctly the relentless slide of the US dollar) and a sharp fall in net migration.

It has certainly been a difficult year for exporters. While export volumes have remained high, and some commodity prices have been at historically high levels for several months, the effect of the exchange rate undermined the value of exports in the latter quarters of 2003 and the first quarter of 2004.

However, some of our worst fears have eased. Statistics New Zealand noted in the release of the March quarter balance of payments data yesterday that, after two years of widening deficits, the current account balance trend was showing a turning point. The deficit narrowed by a further $22 million after narrowing $448 million in the December quarter. An improving export story has been a key driver behind this turnaround.

The Kiwi dollar has fallen back from its mid February high of around 71 US cents, and net migration has shown signs of recovery. The strength in commodity prices - dominated by dairy and other agricultural commodities - has been maintained, and the World Commodity Price Index rose again in May to be 21 percent up on May 2003 and 30 percent up on the July 2002 low.

It is very heartening to see that Fonterra has reviewed its forecast payout for the season, moving its fair value share price upwards by 7 percent to reflect the positive trends in the dollar and overseas markets. This could see most dairy farms make a modest profit next year, as opposed to the losses that were being forecast earlier this year.

So while the winter of discontent has not exactly turned into glorious summer yet, we are looking forward to a tolerable spring.

The latest quarterly GDP results out today were at the top end of market expectations and point to the continuing resilience of the New Zealand economy. Growth for the March quarter was 2.3 per cent; the highest result achieved in 18 quarters. Growth for the March year was 3.6 per cent.

This continues a strong run. In the five years from the March quarter 1999 to this year, New Zealand has achieved growth of 21.7 per cent. Population growth over the same period was just 5.6 per cent.

What these figures show is that living standards for New Zealanders have increased. Growth over the quarter was broad-based: household spending was up 2.9 per cent and exports were up 3.4 per cent.

Particularly encouraging is that business investment rose 4.1 per cent taking the increase for the March year to 12.6 per cent. Obviously it is too early to be dogmatic, but the evidence suggests that the economy is continuing to outperform official forecasts.

The budget forecasts for the years ahead are for the economy to grow by 2.8 percent in the year to March 2005, and 2.5 percent in the year ended March 2006. This represents a slow down from the 3.5 percent growth we posted for 2003, although it remains in OECD terms a very creditable performance.

After 2006 growth is forecast to pick up to 3.4 percent in the following year and return to Treasury's current assumption of medium term growth of 3 percent.

So much for the short to medium term outlook. What I would like to focus on tonight are the longer term prospects for New Zealand exporters. Where have we come from as a trading nation? Where are we headed? And how are we going to get there?

Watching the various indices move up and down on a daily basis it is easy to lose sight of the larger shifts in New Zealand's export industries. If we take a step back, however, we see that the last couple of decades has brought about some major shifts in what we produce, how we market it, where it sells and how it gets there.

There are new export industries that barely existed in New Zealand two decades ago. We have a substantial and growing software industry. Export education has become a major player, and now faces the challenge (which I am sure will be met very competently) of developing a more mature infrastructure and quality standards.

And we have specialised manufacturers such as Navman, who have become a world leader in marine navigation products since the company was started in 1987. Navman today has units in China, Australia and New Zealand and Brunswick Corporation, one of the world's largest marine manufacturers, has recently taken a 70 percent stake.

In addition to new industries, other, more established export industries, are bringing new products to market. New Zealand wool producers have recently patented new types of wool fibre that take up dye faster and are superior to other wools in carpet making.

Our tourism industry has added value to the innate attractions of the landscape through an expansion of products, a broadening of markets and the development of high-end consumer goods.

We are also beginning to tap into global marketing networks as never before. One might consider the alliance that Fonterra is developing with Nestle in South America, or the increasing level of foreign investment in the New Zealand wine industry, and the creation of marketing and distribution alliances which link New Zealand wine producers into the global wine industry

Exporters are also pragmatic people, recognise that, while they may compete within New Zealand, when they are offshore there are significant gains from collaborating.

This has been the driving force behind the Kiwi Expat Association, or KEA, which now has chapters in several world centres. KEA is essentially a private sector initiative, conceived as a global networking organisation with our expatriate community for help. The best part of a million New Zealanders live offshore and many are in a position to contribute to the New Zealand innovation system and promote the interests of New Zealand exporters and entrepreneurs.

Government has small role in KEA, through a programme finances the movement of expats back to New Zealand for a sabbatical, typically with a New Zealand business.

There are also broader challenges that demand a collective approach, and that is where government becomes an essential partner in supporting export industries.

Trade access remains an issue, with both opportunities and threats to be considered. That is why the recent Budget included additional spending on the operations of the Ministry of Foreign Affairs and Trade - $19 million initially, rising to $28 million in out years. This will assist that organisation with the very significant work load they will carry in securing trade access with some of our key trading partners.

We have very real prospects of a free trade agreement with China in the medium term. New Zealand's small size, and the fact that we have relatively few areas where tariffs currently operate, offers China an opportunity to take its first steps on an FTA with an OECD economy that would involve a less complex negotiation than it would face with larger developed economy trading partners. The Chinese also recall that New Zealand was the first developed country to sign off on terms for China's accession to the WTO.

Alongside China, we are also actively pursuing an FTA with the ASEAN nations after their economic ministers recommended initiating discussions with Australia and New Zealand on free trade. ASEAN is a region of some half a billion people with increasingly sophisticated economies and very fast growing middle classes.

We are also facing what is hopefully the final stage of opening the Australian market to New Zealand apples, and on the negative side have opened a new file over the tax breaks offered to small wine growers in Australia in this year's Federal Budget.

We should not allow these issues to cloud the bigger picture of progress on CER. They are bumps in the road in a process of reducing the remaining barriers to trans-Tasman trade and investment, to which both governments are strongly committed. As many of you will know, we have just released a discussion document on mutual recognition of securities offerings. We are undertaking work on options for mutual recognition and harmonisation in prudential regulation of our banking systems with a view to enhancing the efficiency and soundness of the banking systems in each country; we have established an Advisory Group on Accounting Standards whose task is to propose a single set of accounting standards to operate across the Tasman; and we are also working on coordinating trans-Tasman competition policy.

Our goal is to arrive at the point where a properly constituted New Zealand company can function as a company in Australia as of right, and vice versa. It is, if you like, a sort of de facto common citizenship for companies.

When we arrive at this point, one might argue that, technically speaking, exports to Australia will cease since we will have essentially a domestic market of some 25 million people. I do not think the result will be a sudden drop in the membership of Export NZ, however. As we know, New Zealand companies often approach Australia as their first export market, and having developed that market use it as a platform for moving into Asia or the US. The single economic market is intended to make that process easier and encourage greater integration of Australian and New Zealand export industries in terms of marketing and distribution, sourcing of produce and raising capital.

In addition to building up our capacity in trade relations, Budget 2004 announced $500 million of extra spending over four years for economic development initiatives. The new measures are aimed at the export sector and include:

- $26 million over four years to enable New Zealand Trade and Enterprise to boost its offshore efforts;

- $35 million over four years to market specialised business sectors offshore;

- $42.6 million to deepen Investment New Zealand's offshore representation and funding, increasing their capacity to find offshore companies to partner growing New Zealand companies; and

- $40 million over four years for the education sector to develop stronger offshore relationships to protect and promote export education.

We are continuing to invest in the kind of research that drives technological innovation. Research, Science and Technology received $212 million extra in the budget, spread over four years, with $50 million allocated in 2004/05. Of that $50 million, $17.3 million is earmarked for the Research for Industry fund, rising to $19.2 million in each of the following three years. This will take that particular fund to around $205 million per year.

The transformation of New Zealand's economy from a commodity based one to a knowledge economy is a long term venture. The major ongoing task is to transforming agriculture in New Zealand from its status as something of sunset industry in the 1990s to a technology-rich sunrise industry in this century.

There is a great deal of very exciting work going on in biotechnology and agritechnology, both in relation to our key primary industries ¡X agriculture, horticulture, forestry and fisheries ¡X as well as supporting areas of technology, such as pest management. New Zealand firms and researchers are also picking up on the opportunities created by the global interest in technologies that reduce carbon emissions and enable land-based production to be more environmentally sustainable. We should be looking forward to an era when we earn as much as providers of expertise to the world's farmers as we do as providers of agricultural produce to the world's table.

We need as part of this to change the perception of land-based industries among our bright young people. I would argue that our tertiary education system is producing a surplus of lawyers and accountants (not to mention some of the more flighty diploma courses), and not enough graduates skilled in the applied sciences and the broader range of technical and technological skills. This is not the fault of tertiary providers themselves. It has deeper roots which we need to understand and address.

However, it does illustrate the weaknesses of a tertiary system based upon achieving increased participation rates with little thought to a tertiary education strategy liked to national goals and economic priorities.

That is the goal of the reform of the tertiary system: to shape the workforce of the future by focussing not simply on what courses can easily fill lecture rooms today, but on what skills and competencies are needed for the next quarter century. This is not a call for elitism. Far from it. What international research demonstrates is that economic growth is linked to workforce competencies across the spectrum.

We do need the kind of technological entrepreneurs who apply leading edge technology to commercial uses. But we also need people in larger numbers who can manage complex operations, apply technological innovations, and be masters of technology rather than servants of it.

At the lower end, we have to recognise that jobs we used to think of as requiring low to mid level skills now require significant levels of technical competency. It is these positions that many of our manufacturers are finding hard to fill.

For that reason we as a government have made industry training a priority over the past five years. We adopted a target of getting 150,000 New Zealanders learning on the job by the end of 2005. We are well on the way to meeting that target, with the number of workers participating in industry training jumping by nearly 20,000 last year to a new record high, and the number of employers involved in the programme also increasing substantially, with around 29,000 firms now on board (up from around 25,000 in 2002). Many of those firms are involved directly in exporting, or form key parts of the infrastructure that supports it.

So we are investing heavily in education and industry training. We are also adapting our immigration policies so that they help rather than hinder our search for specialist talent and skills. And we are taking a carefully targeted, focussed approach to attracting quality foreign investment.

Clearly there are times when hard choices must be made that affect how government is perceived by exporters. The allocation of the cost of improved border security is one such occasion.

We send almost half a million shipping containers overseas every year as well as air freight and mail all over the world.

Our export destinations are increasingly improving their security. The United States, for example, is very clear that when it is operating on heightened security alert, it will give border clearance priority to goods from a secure and trusted source, such as a port with a Container Security Initiative (CSI) agreement with the US, or some equivalent to CSI - effectively putting those goods in the green lane.

The government wants to ensure New Zealand's export trade is seen as secure and trusted.

The US Commissioner of Customs Robert Bonner has said that "the initiatives being introduced in NZ, when fully implemented, will help ensure the low risk nature of goods coming from NZ to the U.S. - and keep NZ goods flowing in International commerce in times of heightened security...".

This approach is supported by industry; but what is disputed is who should pay for it. It is a fact that securing the supply chain costs money.

The main cost in enhancing trade security is providing the New Zealand Customs Service with the capability to screen shipments deemed to be a risk. To achieve this with minimum disruption to trade flow, Customs needs cargo x-ray technology and staff. The government has provided $22 million of capital to purchase equipment, and is funding $9 million of set up costs this financial year.

In recognition of the benefit to business of avoiding the cost of disruption and delay at international borders, government will be looking to industry for a contribution towards the ongoing costs of the trade security programme. In total it will add approximately $20 million per year to the cost of import, export and trans-shipment clearance services.

To help address exporters concerns over these cost increases, as well as in recognition of the added costs in meeting increased security requirements and increased transport costs, the government has decided to move in two areas.

First, we will be reviewing all charges for Customs goods clearance services. This review will examine the quantum and apportionment of charges for imports, exports and transhipments, and the basis on which Customs charges should be levied. The results of the review will be implemented no later than the first half of 2006.

Second, we will continue to contribute significantly to the total cost of goods clearance services, including a share of the new costs of the trade security programme. To help reduce the impact of the new charges on top of the other costs exporters are facing, and while the review is taking place, the government will provide an additional $8 million over the next two years towards the costs of Customs export clearance. This means 50 percent of the new costs of export clearance will be met by the Crown and 50 percent by exporters.

To conclude, there are many reasons to be optimistic about our future, and many of them are in this room tonight. Many of New Zealand's tallest poppies are our exporters.

Our prosperity as a nation rides upon your continuing energy and dedication. That is something that I and my colleagues understand and respect.

Each of you knows the particular challenges you face, whether it be diversifying markets, securing supply, improving distribution systems or developing new products for new niches. There are also broader challenges where we need a New Zealand Inc. approach. That is where partnerships and networks are needed, and we are committed to creating the environment in terms of collaborative strategies and skills where they can thrive.

Thank you.

ENDS

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