Trade is the key – first steps to FTA with Chinese Taipei

October 26, 2011

Quote of the day:

Trade is about specialization. Specialization is the heart and soul of productivity growth, which in turn is the key to the elimination of absolute poverty –  Trade Minister, Tim Groser in his addres for the annual Ralph Hanan Memorial Lecture.

This contradicts the widely held view many on the left harbour about the advantages of protection and trade barriers.

The address incldues other gems:

More and more people and communities on the planet have discovered that the competition for resources does not need to involve war, but is better organized through mutually profitable exchange, buttressed by the rule of law, both domestic and international.

What has changed is not human nature, but technology. Because of technology, the opportunities for trade are now extraordinary. It is rapidly falling transport and communication costs that have created the phenomenon of the global supply chain . . .

When transport was expensive, trade had to be in highly priced goods to justify the expense of getting them to market. Now transport costs are relatively low it is cost effective to send low price goods within and between countries.

The industrial model of vertically integrated production – you try to make everything – is almost certainly the wrong model. “100% made in New Zealand”, while a crowd pleaser as a slogan, is absolutely the wrong slogan for higher real wages and a prosperous future.

There will be honourable exceptions – goods that are from top to bottom nearly 100% NZ value added and yet remain internationally competitive in the process. Further, given our extraordinary primary resource strengths, there may be rather more such successful examples in New Zealand’s future than would be the case in most developed countries. But by and large, we need to move beyond this idea of “100% made in New Zealand” to embrace the extraordinary opportunities of the global supply chain.

Local production and independence have their place but they are not always the right model.

This is where New Zealand needs to position itself – as a small, diverse and sophisticated producer of ‘bits’ in the global supply chain. Trade in intermediate goods is now some 60% of world trade; trade in intermediate services is even higher, according to OECD definitions.

The examples he gives is aircraft. We can’t make and export them but we can, and do, manufacture some of the parts which are needed to make them in other places.

The address also highlighted the inefficiency, high costs and general stupidity of the way our economy used to operate:

Through rigid import licensing and massive tariff barriers, we force-fed vertically integrated production in New Zealand for the domestic market. I remember that when we started to scope out the CER negotiation, our exports of manufactured goods were some pitifully small percentage of total NZ exports.

If we could not make it 100% in New Zealand, we had a simple solution: we sent officials and business people to Tokyo or Detroit and said: “pull your TV, Sony-san, to bits and export the bits to New Zealand where we will re-assemble them. And while you are at it, Mitsubishi-san and Mr Ford, send us bits of your cars so we can re-assemble them here in NZ”.

It was a money-go-round and subsidy racket made possible only by having a highly successful mono-cultural agricultural export economy with unlimited access to the middle class of what had been the most powerful country in the world – Great Britain. The moment the UK joined the then EEC, the skids were under us. It was the start of a massive challenge to NZ to build new political, business and trade policy platforms.

It’s hard to believe that some political parties would take us back to days.

If you sit down and ask yourself why have we not made a faster adjustment to this new trading world, and why all those OECD comparative charts have us flat-lining from the mid 1970s you may be underestimating the gulf between the reality of NZ trade strategy yesterday and today.

But ladies and gentlemen, don’t throw in the towel yet on this small but fascinating country of ours. We have engineered a revolution, if you are allowed to use that term to describe something that has required a quarter of a century. And this lies at the heart of my deep belief, that New Zealand is now poised to enter a new period of highly successful wealth creation over the next quarter of a century.

As with our earlier success, if we make it happen, it will be based around superior export performance, and again to the middle class of the world’s most important economies as it was in the early 20th Century. It is just that the power has shifted and we have needed to shift with it.

He then gives the case for rational optimism:

All the ingredients are there and we just need to put them together, piece by piece. I have concentrated tonight on our future as a niche manufacturing and services exporter, not agriculture. Nothing alters my view that agriculture is going to play as large a part in our future as it has in our past and our relationship with the emerging economies lies at the heart of that judgment. I think Sir Graeme Harrison, Chairman and founder of ANZCO, is absolutely right with his metaphor: agriculture is New Zealand’s Silicon Valley. The choice was never agriculture or non-agriculture. We need superior exporting performance from all sides of our economy to build our future.

Quite – agriculture is one of our strengths and given our natural advantages in converting grass to protein for a hungry world, it will continue to be so. But we shouldn’t have all our eggs in the agricultural basket.

Of course we need to see our way through this current deeply difficult international situation in the developed world, and we will. And of course we will need consistently sophisticated leadership from our political, business, farming and technology leaders to build successfully on this new trading platform. These leaders need to be looking through the front windscreen to where we are going as a country, not the rear-vision mirror at where we have been.

Central to this new trading platform are our trading relationships with the emerging economies. The bedrock here is our relationship with Australia, the CER and the wider economic relationship around the CER.

The next most important trading partner is China.

We are uniquely well placed to build that economic relationship, because we are the only developed country in the world to have a comprehensive FTA with the world’s second largest economy.

But we also, intriguingly, are the only country in the world to have a matching comprehensive FTA with the second element in the wider Chinese economic area – our FTA with Hong Kong, which we signed in 2009. And tonight I am delighted by the news that we have initiated the first step that may lead us in a year or so being the first economy in the world, other than China itself of course, to join the three points in the Chinese economic triangle together.

Tonight I have issued a brief press statement welcoming a sparsely worded press release from the New Zealand Commerce and Industry Office in Taipei (NZCIO) and the Taipei Economic and Cultural Office in Wellington announcing that they had agreed to explore the feasibility of an economic cooperation agreement between New Zealand and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei).

To use its WTO nomenclature, Chinese Taipei is an important trading partner for New Zealand and even after its WTO accession maintains a number of high barriers to our exports.

New Zealand signed a FTA with China in 2008 and a Closer Economic Partnership with Hong Kong in 2009. The FTA with China has been spectacularly successful.

I am hopeful that any eventual economic cooperation agreement with Chinese Taipei will see substantial growth in exports to this important economy. It is not just important for our goods exporters. It is an important source of tourists, students and investment as well.

This is both a trade and diplomatic coup. Relations between Beijing and Taipei are at best delicate and talking to one has in the past required ignoring the other.

That our FTA with China has been so successful and that we are now taking the first, albeit tentative, steps towards economic co-operation with Chinese Taipei is internationally significant.


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