John Ballingall. Photo / Supplied via LinkedIn
COMMENT:
As a pointy-headed economist and trade geek sitting in my comfortable office in Wellington, I have nothing but admiration for our primary sector.
Over the past year New Zealand's farmers, orchardists, grape growers and their processing industries have battled through Covid, conflict in Ukraine, a wobbly global recovery, supply chain chaos, volatile weather, labour shortages, uncertainty over emissions pricing, and spiking costs to name a few.
Through all this mayhem, the value of our food and fibre exports has grown strongly — up around 9 per cent to over $53 billion in the year to June 2022. Much kudos is due.
While the primary sector has been fighting these headwinds, I've been busy pontificating about the future of our trade policy and what it might mean for the agri-food businesses.
Yeah, I don't get out much.
The overriding narrative in recent times has been exporting diversification.
China accounted for 30.3 per cent of New Zealand's total goods exports in the year to June 2022, and its share of dairy, meat and seafood exports is around 40 per cent. This undoubtedly leaves some agri-food exporters exposed to market slowdowns in China or punitive actions from Beijing.
But identifying potential risks and specifying what should be done about it are different things. The trope of "we should reduce our reliance on China" is usually silent on who "we" is, how much "we" should reduce our exposure, and where else "we" should sell.
There is no 'correct' share of a firm's exports that should go to China (or any other market). Each firm needs to make its own commercial assessment of concentration risks and weigh up potential costs against the benefits — the sheer volume of demand and higher per-unit prices — they receive from China.
Should firms decide that diversification is in their interests, then the government has come to the party over the past 12 months in terms of opening additional market options in the UK and EU — at least for most products. These free trade agreements (FTAs) provide welcome optionality for some New Zealand exporters, but there are three main reasons, in my view, that they are unlikely to drive a substantial shift in our trade patterns.
First, there's the issue of sheer scale. The UK takes 2.2 per cent of our goods exports, and the EU takes 6.3 per cent. So combined, these markets only account for just over a quarter of what we currently sell to China.
Second, China's middle class is growing rapidly and with this income growth comes changes in consumer preferences toward high-quality consumer food products and ingredients. These structural shifts are not happening in other markets to such a degree.
Third, the EU does tightly managed trade, not free trade. It remains highly protected for key New Zealand exports such as beef, lamb, butter, cheese and milk powders. The European Union Free Trade Agreement, while offering modest (if I'm being generous) market access improvements in these products, doesn't deliver a sufficiently compelling commercial alternative to China for all exporters.
So which other large, growing markets might offer New Zealand further diversification options?
The Gulf Co-operation Council (GCC) FTA negotiations have re-started after being on ice since 2009. Given GCC's collective size as an export market — larger than the UK, Taiwan or Indonesia — there is certainly some value in seeking to conclude a high-quality, comprehensive FTA. However, existing tariffs are low (5 per cent for almost all products) and some GCC economies' desire to be self-sufficient in dairy and meat could prove problematic for concluding a quality deal.
The two other most obvious candidates are the US and India.
Sadly, despite getting close via the Trans-Pacific Partnership (US) and the Regional Comprehensive Economic Partnership (India), the prospects for New Zealand agri-food exporters getting improved access to these long-standing trade policy priority markets to seem remote in the short term.
Beyond the US, India and GCC, our 2021 report for the New Zealand International Business Forum demonstrated it's a hard road to finding the next perfect FTA partner.
There are large countries, but they often have low average incomes. There are fast-growing countries, but they're often tiny. And many will be reluctant to offer the sort of market access we would want for our agricultural products.
This all points to diminishing returns from future FTA negotiations. Commercial gains are likely to be small, accrue to a narrow range of exporters, or both.
So it is reasonable to ask whether New Zealand now needs to explore alternatives to negotiating resource-intensive and complex FTAs that regularly stretch to over 25 chapters apiece. To be clear, our FTAs have served, and continue to serve, New Zealand very well.
My humble suggestion is that officials and exporters work together to make trade policy more explicitly about reducing transaction costs writ large. This doesn't need to happen through traditional FTA negotiations. Exporters face many types of costs along their supply chains, of which tariffs are but one. For example, there is empirical evidence to suggest that non-tariff measures (NTMs), which are hard to reduce through FTAs, impose far greater costs on New Zealand exporters than tariffs. NTMs cover at least 83 per cent of our goods exports and have an annual compliance cost of over $12 billion.
On average, New Zealand meat exports typically face 28 NTMs across the markets to which they are exported, dairy 24 NTMs, and fish 20 NTMs. That's a lot of paperwork and administrative cost.
It certainly won't be easy to persuade our trading partners to ease the burden of these NTMs, and some are in place for valid public policy purposes. But might the long-term economic payoff from substantially redirecting our trade negotiating and diplomatic resources towards reducing NTMs be greater than that from future FTAs?
Trade facilitation is another area that might warrant more resourcing. The faster and easier it is for our primary product export consignments to get through offshore ports and logistics chains, the more competitive our exports will be, and the higher the returns to Kiwi exporters.
Trade facilitation should be a pretty easy sell from a political economy perspective. It delivers efficiency gains for both exporters and importers. It's hard to see who loses. And Covid and subsequent supply chain snarl-ups have demonstrated how vital it is to have essential goods flowing as freely as possible across borders. Perhaps the time is right to devote significantly more resources to this space.
It is for these transaction cost arguments that I am less cynical and more optimistic than many about the potential benefits of an ambitious Indo-Pacific Economic Framework (IPEF), the US-led vehicle for deepening regional economic integration that New Zealand has signed up to.
For sure, it's not a traditional FTA that includes market access. But that is a feature, not a bug. Without the need for Congressional approval on tariff reductions, there may be more scope for officials to co-operate creatively to reduce other forms of transaction costs in the Indo-Pacific that hurt New Zealand exporters' competitiveness and margins.
IPEF's negotiating pillars currently cover digital trade, infrastructure, trade facilitation, decarbonisation, technology and transparency around tax regimes, for example. Small regional improvements in efficiency across these could add up to something material for our exporters.
Now, lest I be accused of being Pollyanna, I recognise IPEF is not without its own challenges. How it plays out in practice is not yet clear. Potential gains could take time to eventuate. And these may be incremental rather than monumental.
But at least the discussions are happening, and New Zealand is at the table helping to shape the agenda. Deepening institutional linkages through regular face-to-face contact with the other 13 economies in IPEF could have longer-term payoffs in terms of more quickly and effectively addressing future trade irritants.
Trade policy, like all policies, must evolve over time. Our negotiators have shown their creativity in other areas with the novel "open plurilateral" arrangements such as the Digital Economic Partnership Agreement and the Agreement on Climate Change, Trade and Sustainability.
My challenge to them is to think about how to conceptualise and resource New Zealand's future trade policy as it relates to transaction costs in the agri-food sector.
I don't have the answers, but I think it's essential we — officials, Ministers, agri-food businesses, even pointy-headed economists — have the conversation.
Wanted-new-FTA-Partners was commissioned by the NZ International Business Forum in 2021 and can be located on the tradeworks.org.nz website.
Other relevant Sense Partners reports include: The NZ-US trade relationship: Stability and diversity in a time of change which can be found at mfat.govt.nz and nzuscouncil.org.nz and How many eggs in how many baskets — The New Zealand-China Trade and Business Relationship 2022 Update which was commissioned by the NZ China Council and can be found at nzchinacouncil.org.nz
• John Ballingall is a partner at Sense Partners, an independent economic consultancy. He specialises in trade policy, development, climate change and regulatory analysis. His clients include several government agencies, industry bodies and exporters.
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