Hon Tim Groser

Minister of Trade

19 September 2010

Speech

Speech To Meat Industry Association Annual Conference Christchurch

There will be many people in this audience who, like me, are visiting Christchurch – our second most important city – for the first time since the Canterbury Earthquake.

For me at least there is a compelling reason: while there has been an unprecedented number of Ministers coming to Canterbury in discharge of their responsibilities for post-quake management, the Prime Minister has asked all his Members of Parliament not to come to Christchurch during this immediate post-shock period unless they have something specific to bring to the table. I won’t explain the logic – it is self-evident.

However the Prime Minister has also emphasised – as has Gerry Brownlee, the senior Minister heading up Ministerial coordination of our efforts – that the best possible thing for the people of Canterbury is to return to normal life. That means getting the kids back to school with their packed lunches, turning up for work, engaging in their weekend sport or whatever activity they and their families do in the weekends.

In times of deep difficulty, and dislocation – war being the most brutal of all, but major natural disasters coming next in line – communities everywhere yearn for what would otherwise be considered the mundane, the normal rhythms of daily life.

A vital part of the normal rhythm of life in Canterbury is exporting. For at least a century and a half, this wonderful region has pumped out wealth, primarily through the port of Lyttelton but more recently also through Christchurch International airport, to the rest of the world. In a very literal sense New Zealand is richer for their contribution.

The rest of New Zealand needs Canterbury to return to its roots as quickly as possible – though Canterbury will need a lot of help and an even larger dose of internal fortitude to do that. And getting back to business for Canterbury most certainly includes returning to its vocation as an exporting power-house of New Zealand. It is a contribution that includes both core NZ agriculture strengths and, increasingly, innovative niche manufacturing and services exports which are clustered around Christchurch.

It is therefore entirely appropriate that we have come to this City in a spirit of ‘business as usual’ to consider where we are as a country on trade, where we are on agriculture and, more specifically, to reflect on where our meat industry is heading.

The Role of Agriculture in NZ Productivity

First, let’s restate some basics. I start from a proposition that agriculture will be as important a part of our future as it has been of our past.

I remember when I had the privilege of being NZ’s Chief Negotiator in the GATT Uruguay Round in the late 1980s – the Round that put agriculture into the system of world trade rules - being told by a senior NZ official that he hoped I failed. Why? Well, the twisted logic was that if I and my team succeeded it would only delay the ‘inevitable’ adjustment NZ needed to make out of agriculture. People in the audience of my generation will recall the pernicious debate of that era around the concept of agriculture being a ‘sunset industry’.

That view has deservedly taken a hammering in the last ten years or so, but it still lurks under the surface of some of our debates about structural policy direction. Some of you for example may have read at least the Executive Summary of the latest New Zealand Institute Publication “A Goal is not a Strategy: Focussing Efforts to improve New Zealand’s prosperity”.

First of all the NZ Institute has played a valuable role in the NZ economic debate over the last five years or so. This is not an attack on the Institute. Second, many of the operational conclusions they reached I agree with. But the route they took to get there leaves me puzzled to say the least. Specifically, I have no idea how they came to the conclusion:

“.....labour productivity of agriculture is very close to the average labour productivity of NZ as a whole....simply growing agriculture with existing average productivity will not change much".

The Institute is right to focus on productivity because in the long term this is the most important determinant of our economic performance. But having quoted extensively in past political debates an earlier productivity study commissioned by the Treasury - a study which established a vastly superior productivity growth rate by agriculture compared with the NZ economy as a whole – I went immediately to check more recent data. Here are the facts.

Over the 30 year period ending in 2008 NZ’s overall labour productivity growth rate was a modest 2.1% per annum. Labour productivity in the agriculture sector averaged 4% - twice as high.

I am not trying to make some highly technical point here. This is deeply political, not in the partisan sense, but in the sense that it is vital this Government and future Governments understand correctly what works in this country and what doesn’t. And in our country, agriculture is decidedly part of the solution, not the problem.

But for the contribution of agriculture, our modest rate of overall productivity growth – the single most important determinant of living standards – would have been worse than mediocre. It would have been anaemic. What’s more, during substantial periods of that thirty year period, the rate of productivity growth in NZ agriculture has been stellar – it averaged about 7% over the 12 year period 1985 to 1997. If we could sustain a 7% growth rate in productivity over the economy as a whole, NZ would again become among the richest countries in the world in a decade or less.

Now I appreciate that you as farmers don’t get up from the kitchen table every morning and explain to your partner: “better get out there and repair that fence in the front paddock. If I don’t, she’ll wreck havoc with NZ’s multi-factor productivity growth rate”. It is possible that our former Party Leader, Dr Don Brash, who has been a kiwifruit farmer for many years, may have said that. But as one bushman with the benefit of a classical education said to another, that’s sui generis.

What you in the meat industry would be aware of are the more tangible signs of productivity underlying these statistics that relate to sheepmeat:

In the last 10 years to the 2008/09 season there are been:

A 12% increase in the average lamb weight;

A 31% increase in the volume of lamb produced per ewe. As a consequence, the volume of lamb shipped as actually increased despite the huge decrease in sheep numbers.

As to the pervasive belief that we are still commodity exporters, the share of NZ lamb exports that is shipped in carcass form is now 2.6% compared with 92% in 1970.

Chilled lamb exports have risen from around 3% in 1990 to 30% in 2009. That latter statistic – huge evidence of the increasing sophistication of our meat industry – has a particular resonance for me.

I remember vividly negotiating the end of the restriction on our chilled exports to the EU in the context of the final Uruguay Settlement on sheepmeat, which also did away with the old so-called ‘Voluntary Export Restraint’ and set the in-tariff quota rate at zero.

I could of course produce a similar set of statistics for dairy, which has also produced fantastic productivity growth – and of course our beef industry’s fortunes remain closely tied to their performance. But the general point I am making is obvious: people involved in agriculture in our country don’t need to take a backward step for anyone. Agriculture will, I am sure, play as vital a part in our future as it has in the past and NZ will be the better for it.

I fully appreciate the frustration of our meat industry with the fact that these impressive gains in productivity have not been reflected in profitability. Essentially we're simply not doing well enough at capturing the benefit of our innovation and hard work. It's getting extracted further up the value chain.

But, while not my direct responsibility as Trade Minister, the Government in a collective sense is strongly committed to working with the industry so that we extract better returns from our agricultural investments and exports. The PGP is a key vehicle to take this partnership forward.

Agriculture v Non-Agriculture: a False Choice

Agriculture still dominates our trade policy agenda. It is, however, important people drill down a little more deeply into this statement.

The reason why agriculture must continue to dominate our approach to trade policy is simple: some 50% of our exports are agriculture on a narrow definition. If we use a broader definition – many of our manufactured exports are in fact processed primary products – the share is a lot higher.

Second, it is still regrettably true that by far the highest barriers to our exports are concentrated in the agriculture sector. Hence, when you put these two facts together, by far the largest gains for NZ in any trade negotiation remain in agriculture.

Actually, we don’t need to create an absurd zero-sum gain here between prioritising our agriculture interests and vigorously promoting our increasingly successful exports of niche manufacturing and specialised services exports.

As a practical matter, trade negotiators don’t make or need to make false choices here. Both as an official in the past and now as Trade Minister my colleagues and I push out all the boats at the same time.

In practice, negotiations on what are called ‘NAMA’, or non-agriculture negotiations, are conducted according to their own rules and logic – ‘modalities’ is the term professional trade negotiators use. The political limits NZ negotiators face in helping our non-agriculture exporters have nothing to do with the far more intractable political problems involved in negotiating agriculture. I think we have a great future as a niche manufacturing exporter and exporter of services.

The real choice in NZ is not between different types of exports but between the share of GDP that goes into the ‘traded sector’ (exports and efficient import-competing parts of our economy) and the non-traded sector. This agenda lies at the heart of the Government’s economic strategy and the term you will hear Bill English and the Prime Minister use repeatedly – the need to ‘rebalance’ the economy to the benefit of the traded sector. The harsh facts are these:

The ‘tradeable’ sector – the internationally competitive part of our economy comprising exports and import-competing industries – actually shrank in the five years 2004 to 2009; by contrast, the non-tradeables sector – the spending side of our economy – has grown 15% in that period.

Even more disturbingly, in the last decade there have been no net new jobs created in the manufacturing and agriculture sectors.

This is the real policy choice facing NZ, not some ideological argument about the competing claims of different export industries.

The Trade Outlook

A critical issue facing our agriculture sector, including our meat industry, has of course been agriculture protectionism. That, as you know, has taken a variety of forms: massive access barriers through tariffs and non-tariff measures, huge production subsidies that distort trade and production and export subsidies – a critical issue for our dairy industry.

Your own Chairman, Bill Falconer – my boss many years ago when Bill was one of NZ’s most senior trade negotiators – is as well placed as anyone to put these issues in historical perspective.

And it is necessary to take a long view of progress. As I have often said, trade policy is not a field for those who are into instant gratification. It can literally take a decade or more for trade strategies to work. And they work in cycles. Right now, the various agendas I am responsible for have entered a tough patch. This may last years. That is the nature of the game. I will describe some of those presently.

However, if you take a helicopter view of NZ’s trade, I think we are entering the most favourable environment we have seen for forty years. This, I assure you, is not rhetoric. It is based on a combination of factors:

First, the underlying dynamics of the world economy and the vast shift of relative wealth to Asia.

Second, the success of our trade policy agenda over the last 25 years.

The Underlying Drivers of our Trading Future

You all know the main lines of the narrative here. We started a process of re-orienting our economic futures away from Europe to Australia and to Asia some four decades ago. Again, this is not an anti-European issue: the EU remains a market of fundamental importance to NZ. Europe’s share of our total exports is around 15% and absolutely critical to our sheepmeat industry. But 15%, while important, must be compared to 64% of NZ total exports in the mid 1960s. In the professional lifetime of many of us here, this represents a massive shift.

We have had huge success in developing our exports to Australia – by far our largest market, accounting for some 23% of exports, but obviously not a big market for our meat industry. Incidentally, I no longer see Australia as an independent story from the more general ‘Asian’ story. It is obvious that Australia’s considerable economic success is itself hooked into the Asian story. It is better to see our trading relationship with Australia and Asia as a strategic triangle.

Asia of course is the real growth story. And what a story that is. Two hundred years ago the two Asian giants – India and China – accounted for around half of world GDP. The planet’s relative wealth lay with where the planet’s people lived.

That equilibrium got rudely interrupted in the late eighteenth century when a tiny country, physically the size of NZ, started the process of becoming the first country in the world to move from an agrarian past to an industrial future. I am referring of course to the UK and the first industrial revolution. But, roughly speaking, internationally we are going back to where this process started. In the near future, the wealth of the planet will once again tend to be more closely aligned with where most of the world’s people live.

To put it bluntly, most people in the world live in Asia and the process of economic development in Asia is spreading its tentacles ever more broadly. It started in 1950 with Japan and spread out from there, including importantly Central and Western China. In only the next ten years another 1 billion people will enter the middle class of Asia. These are our future customers.

Second, we produce some of the products the globalised middle class wants. These include – obviously – high quality, safe food and beverages.

Third, many of these emerging economies face critical natural resource problems in meeting growing demand and the growth in agriculture yields is flattening:

FAO estimates that 94% of all arable land in South Asia is already farmed and under massive pressure. China with 24% pop has only 9% world arable land;

70% of all fresh water is used in agriculture; at the same time, there has been a massive increase in per capita water use. In 1900, it is estimated that per capita consumption was around 350m3 per person on planet; by 2000 this had approximately doubled.

20% of China’s drinking water failed to meet Chinese national standards, leaving 90m people without potable water. Everywhere, there is massive pressure on fossil water: ½ the world’s groundwater is in South Asia. And yet, satellite Data shows level of ground aquifers in Northern India has fallen on average 4 inches per annum 2002-2008.

The Emerging Pattern of Trade Agreements

These underlying dynamics are given real life by the relative success of NZ trade policy over the last 25 years, starting with CER, encompassing the disciplines introduced into world agriculture by the Uruguay Round and now augmented by our FTA successes.

If we step back, in the next ten years as further liberalisation already negotiated is fully implemented, NZ will have effectively full and free access to:

Australia, our largest single export market by far through CER, augmented by the complex and far-reaching SEM, or Single Economic Market Negotiation. This process is not yet complete. Ultimately, I think we are trying to create what I call ‘one system, two countries’;

China, already our second largest export market through the FTA and augmented by the recent FTA with Hong Kong; generally our exports to China are going through the roof. We have doubled our exports in two years and the Prime Minister has suggested, given what is driving that, we should aim to triple our exports over the next five years. It is ambitious, but not unattainable. I appreciate China hardly figures yet for your industry. Total meat sales in 2009 to China were under $150m, or about 3% of our $5 billion total meat exports to all markets. There is a set of reasons for this and I had a good opportunity to get my head around the issues while leading the recent meat and seafood mission to the Shanghai Expo. Nevertheless, it is difficult to draw any conclusion other than the obvious one: on meat, we haven’t scratched the surface of the China opportunities.

We must add to this emerging very positive picture of opportunities the whole of South East Asia through the AANZFTA Agreement. This is the FTA that essentially creates a single trading bloc encompassing Australia, NZ, Indonesia, Vietnam, the Philippines, and all the other ten economies of South East Asia, known as ASEAN. Collectively, ASEAN is our third largest market with our exports growing at double digit levels. The additional FTAs we have with Singapore, Thailand and, most recently, Malaysia are cream on the top.

We maintain a vigorous and ambitious further set of trade negotiations which I hope will extend the opportunities further. These negotiations are all at early stages of maturity. They include the United States, through the Trans-Pacific Partnership or TPP agreement.

We should recall that under successive Governments, NZ has been trying to establish an FTA with the United States for a quarter of a century. TPP, the means to do it, is not a bilateral negotiation in the classical sense. However, it is another, probably smarter, way of doing it and has far broader strategic implications for trade and investment integration in the Asia Pacific. It is a negotiation that will have many twists and turns.

The negotiations with India – the second emerging developing super-power growing consistently at around 8% - are at an early stage but of great strategic significance to NZ. The negotiations with Korea are in full swing and, as you would expect given the high trade restrictions on agriculture, they are by no means straightforward.

We are focussing strongly on launching negotiations with Russia – still the 12th largest economy in the world and which imports 40% of its food. The concept of an FTA has been agreed in principle during a visit I made to Moscow a few months ago, following up an earlier visit by Murray McCully in his capacity as Foreign Minister. By the end of this year I hope we will be in a position to take the next step forward: a formal launch of negotiations. If we can, over a period of time, put this together this would be Russia’s first ever FTA. From our perspective, it would be a classic example of future-proofing the NZ economy.

The general theme here is that Trade Policy moves forward – but more often than not, on a glacial basis. I’m used to this. The never-ending saga of the GATT Uruguay Round was a case in point. I maintain – rather pointedly – a collection of media articles about that negotiation describing the WTO’s predecessor institution, the GATT, as ‘The General Agreement to Talk and Talk’. It is a good joke until you have read it 25 times. These articles – and most of them are actually Australian not NZ commentaries - usually went on to explain that only a few naïve officials with a vested interest in travelling to Geneva still believed there was any possibility of the talks ever producing anything. Well, how wrong that proved to be.

I’m betting that we will eventually be able to write a similar successful postscript to the even longer-running successor negotiation, the WTO Doha Round. None of the eight world trade Rounds since 1947 have failed. I don’t think this will be the first. While we are getting on with business elsewhere, it still remains the most important trade objective.

We have to be patient here. If we look to our past we can see that the political process involved in nurturing a strategic concept of any comprehensive trade agreement, multilateral or bilateral, from start to finish can take a decade or more. That is why strong and consistent bipartisan policy has been a crucial ingredient in our success. These negotiations have frequently spanned two, and in some cases, three phases of the NZ electoral cycle.

The negotiations to conclude CER took in effect seven years. The first attempt to move to a more comprehensive FTA with Australia – known today only as an historical footnote - failed in 1975. That knocked the stuffing right out of the dialogue. We only picked it up again in 1978 and the formal negotiations, launched in March 1979, took until 1982 to bring to a conclusion.

The roots of the AANZFTA are very deep – years of meandering CER/ASEAN ‘dialogues’. It took a more concrete shape with the initiation of the NZ/Singapore FTA under the previous National Government and completed by the last Labour Government. TPP itself has a similar complex negotiating history.

We are now pushing the boat out further with TPP, Russia, India and Korea. You should expect uneven progress and reverses. That is the nature of the beast. I have never, either as an official or a Minister, participated in an ‘easy’ trade negotiation. You would have thought that perhaps the NZ/Hong Kong CEP must be an exception. Surely, that must have been straightforward? Two economies almost without trade barriers? What was there to negotiate?

Wrong. Wrong in spades. In the 1990s I led a team that negotiated a detailed confidential memorandum of understanding designed to lead to an FTA. The initiative failed. Another attempt to negotiate with Hong Kong was started in 2002. That failed too – and for political reasons I could easily explain if I had the time and you had the motivation for a history lesson

Even the final, and ultimately successful, negotiation required a high stakes poker game at Ministerial level to conclude. Anyone here who attended the last Ministerial NZ/Japan Partnership Forum earlier this year – the focus of which is trade and economic - may on reflection wonder why I was not there with the Prime Minister and Foreign Minister. I certainly had planned to be but the Hong Kong negotiations had gone off the rails and that took precedence.

You did not hear anything about this in public – in fact this is the first time I have mentioned this. Across the broad front of our FTA agenda, I don’t carry out negotiations under the public spotlight through the media. Trade negotiations are deeply ill-suited to media sound bites and frankly require a certain degree of confidentiality and discretion.

The quid pro quo is of course that I consult very closely with industry leadership and leadership of other directly affected parties, including the Opposition when they request a briefing. The time for full public disclosure is when the deal is done and the full National Interest Analysis is put out as the foundation stone for the Parliamentary process required for Trade Agreements.

Any of my predecessors could tell the same story about the negotiations they were involved in. It is, as I say, the nature of the beast. The China negotiations took some fourteen negotiating sessions. While I was not involved except indirectly as NZ WTO Ambassador at the very early stage of those negotiations when we were setting policy on the crucial issue of the market economy status of China, I know there were periods of deep difficulty in that negotiation.

The conclusion is obvious: we need to have a complete clarity in our country about the strategic imperative and total persistence. And as a country, NZ Inc has done this with more success than I would have dreamed possible a quarter of a century ago.

I am hoping for even better results in the future. But even if I adopted a ludicrously pessimistic assumption – namely, we never signed another agreement again – with already essentially free access to Australia, China and the whole of South East Asia, crucially accompanied by the cumulative achievements of 50 years of multilateral trade negotiations - we have abundant opportunities for the next generation of New Zealanders.

And that raises the broader question: can we restore NZ’s place eventually to the top tier of developed countries? Well someone in another country at the very top of the international political food chain said it all – ‘yes we can’.

I know the difficulties ahead of us. The policy agenda required to do this is far larger than trade. But trade is a vital part of it. The last 3-4 decades have been very tough for NZ as we started to respond to the old political slogan – “diversify, diversify” - from an earlier generation of political leaders such as Jack Marshall and Brian Talboys. It has been thirty years of hard grind. But ladies and gentlemen, I think today we have the ingredients of a far brighter future in front of us.

Thank you.

ENDS

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