Thank you for the opportunity to address the Conference today. It is a pleasure to be here.
I have been asked to give my perspective on new markets on the horizon for our agricultural trade. In doing so I would like to cover a few themes. Part of our focus on new opportunities is on improving conditions in our existing markets. That includes working for a successful outcome from the multilateral negotiations in the WTO Doha Round. I will give you an update on prospects for the Round.
New opportunities will come from both the WTO and from direct engagement with our key trading partners. It will be useful to update you on two recent Free Trade Agreements with China and ASEAN, and also on the other deals that we are negotiating now.
But there are also some underlying trends at play in world agricultural markets, and I will touch briefly on some of those, including moves for ongoing domestic reform in Europe, and trends more widely, and how those might affect our interests.
Agriculture and agricultural trade of course remain vital to New Zealand. We are a small, isolated, trade‑dependant economy with primary sector exports some 63 percent, and Agriculture over half, of our goods exports. That profile makes it extremely difficult to negotiate market access since in many countries agriculture remains heavily protected for political reasons.
The last 35 years have seen a shift in our export profile. Our trade has diversified in destination but much less so in content. Agriculture exports are still dominated by dairy and meat, but we export much more horticultural produce like vegetables, apples and kiwifruit. Wool has declined from its historical importance, and now accounts for around 2% of our goods exports. We now export more wine than wool. However there is considerable ignorance in some quarters about the ongoing importance of agricultural exports and the productivity of the primary sector – points which deserve to be more widely known.
This is not to downplay the importance of manufactured exports and services. Exports of services have increased from about 5% in the 1950s to nearly 30% of total exports in recent years. They are dominated by tourism and education. As our agriculture sector looks to invest overseas, it would be good if this could stimulate exports of the farm support skills that are vital to the industry.
We are sending our exports to a more diverse range of markets. As recently as the 1960s 70% of our goods exports were to the UK and Europe. We now send that amount to 21 members of APEC. The marketing challenges, of customs and language, are bigger in the Asia Pacific region but it does have the advantage of proximity and a superior growth performance.
The trade game has, of course, changed enormously in the past 10-15 years. At the WTO level, twenty-three countries signed the General Agreement on Tariffs and Trade (the GATT) in 1947. One hundred and seventeen countries signed the agreements at the end of the Uruguay Round in 1994. Now, in the Doha Round we find ourselves negotiating with 152 other individual members. That makes it much more difficult for a democratic, consensus-based body like the WTO to reach agreements.
Over the past 15 years our trade policy has been openly multi-track. The WTO, regional agreements or bilateral FTAs are all good routes to a trade deal – but the WTO still offers the greatest potential reward for a given negotiating effort. An outcome from the Doha Round remains New Zealand’s top trade priority. A Doha Round outcome would reform world agriculture, including setting new ceilings for domestic subsidies, eliminating export subsidies and reducing tariffs. All of those elements are important to New Zealand and would improve market conditions for our agricultural exports over time.
Unfortunately the Ministerial-level talks in the Doha Round in the second half of July failed to achieve an outcome. That breakdown was intensely disappointing. We were closer than we ever have been to a deal on the modalities for liberalising agricultural and industrial goods trade.
Outstanding issues in industrial goods were largely agreed, as was much of the agriculture package. The key standout issues were the so-called SSM (special safeguard mechanism) for developing countries, and the unresolved issue of cuts to subsidies for cotton producers in the developed world.
There had always been some expectation that if the negotiations fell over then it would be over agriculture. But most were still surprised that it fell over on the finer detail of the safeguard mechanism to protect farmers in the developing world.
The fundamental question remains whether talks broke down because two or three large members were unable to bridge the gap on technical aspects of this one particular SSM issue, or whether this was symptomatic of a larger gap in ambition.
That is hard to answer. We may find out as we tackle the key question, which is “where to from here?” The chairs of the negotiating groups – including our own Crawford Falconer in agriculture – have made a start by releasing state-of-play reports. Those are a useful start. There has also been a lot of political activity over recent weeks with Brazil’s President Lula pressing for high-level re‑engagement. Minister Goff has been active in making contact with the key players, and has been on the phone to his ministerial colleagues in Washington, Canberra, and Brussels. He met the Brazilian Foreign Minister in Auckland, and remains in close touch with the WTO Director-General.
The message we are hearing is that there is wide political agreement that there should be efforts to wrap up a deal in the negotiating modalities by the end of the year. There are looming election deadlines in Washington and New Delhi which add a sense of urgency. We will be doing our part to support a resumption of negotiations. The agriculture negotiators from the G7 countries began meeting in Geneva yesterday, in theory for several days, and there has been speculation that Ministers could meet in a few weeks. We rather think that while it is still doable to get a deal on modalities by Christmas, it is likely to take longer than a few weeks to pull the pieces of the jigsaw together.
We are not placing all our hopes on the market opportunities arising from the Doha Round. In recent years countries have become much more active in negotiating free trade agreements to supplement their efforts in the WTO. We have no choice; New Zealand’s policy of pursuing its trade objectives, also at the regional and bilateral levels, reflects our assessment, firstly, that a Doha outcome will not deliver all the market access gains we would like and, secondly, our defensive concern that competitors might gain an advantage by beating us to such FTA deals.
We are pursuing an active FTA agenda.
We are not the only ones. In fact there are so many countries involved in the negotiation of FTAs - that the map showing the various FTA strands linking different countries around the world has been dubbed the “spaghetti bowl.”
We are committed to negotiating comprehensive, high-quality FTAs which, in accordance with the WTO rules, cover “substantially all trade”. For New Zealand, this means an FTA must deliver a liberalising result for at least 95% of trade, with tariff elimination on all items of key trade interests. For some years in the late 1990’s, it seemed that our ambitious approach was a deterrent to potential FTA partners. Many other countries were less particular about coverage. For us, it is crucial since market access for agriculture is often the sector that many countries do not wish to liberalise. If we gave away the comprehensive approach in one negotiation, we would have no chance of retrieving the lost ground in the next one. We also look to create agreements that encompass goods and services, as well as investment, government procurement and competition policy, and which also integrate labour and environment issues.
We finally found negotiating partners, first with Singapore in 2000, then Thailand, then the so-called P4 and we now have an active FTA negotiating agenda. We have just concluded two major agreements with China and with the ten ASEAN countries, and we have several more still under negotiation.
My circulated notes give comments on the two important FTAs completed this year with China and ASEAN so I won’t go into those in great detail.
New Zealand’s comprehensive Free-Trade Agreement with China will enter into force on 1 October. It is the first FTA China has concluded with a developed country. It is also the first agreement they have concluded covering goods, services and investment as a single undertaking. We have also concluded legally binding agreements on labour and environment. The key points of the China deal are not only the direct trade benefits but the mechanisms which it sets up to build cooperation and transparency into our dealings. This is important as the recent issues over adulterated milk show. In the food safety area, for example, the FTA aims to facilitate trade in agri-food products. It establishes procedures for the resolution of SPS issues when they arise, and a Joint Committee to facilitate dialogue on risk analysis, equivalence and technical assistance, and for enhancing the Parties’ cooperation in these and other areas. We expect this will assist the handling of food related issues in future: clearly transparency and cooperation are crucial in handling sensitive matters concerning the food supply. This is not a matter of diluting existing standards as is sometimes misrepresented; decisions on matters affecting New Zealand biosecurity and food safety will continue to be made and enforced strictly in accordance with our existing regulatory regime, and with international obligations.
The FTA is a major outcome.
China is our fourth largest export market. According to a study prepared prior to the negotiation, a high-quality FTA would increase New Zealand exports to China by up to NZ$350m a year.
The deal provides for elimination over time of tariffs on 96% of our current exports to China. Based on current trade, that will equate to an annual duty saving of $116 million. We secured a zero tariff outcome for all our key agriculture exports, but with phase in over 10 years for some of the most sensitive products in dairy, meat, and horticulture.
In addition to those good outcomes with China and ASEAN, we have several other negotiations underway. We have re-engaged in talks with Malaysia, discussions being on a slower track for the last two years. The seventh round of negotiations is being held in Kuala Lumpur as we speak – and we see scope to build on the AANZFTA outcome.
P4, or more properly, the Trans-Pacific Strategic Economic Partnership, entered into force in 2006. Its members, Chile, Singapore, Brunei and New Zealand, are currently holding negotiations on investment and financial services and the United States has joined those negotiations. The United States is also considering whether to enter into negotiation of a comprehensive FTA with P4.
While we have a Trade and Investment Framework agreement with the US, the move into the sectoral negotiation on Investment and Financial Services was an important step forward. It is no secret that the negotiation of a comprehensive Free Trade Agreement with the United States is one of our highest trade priorities. We are very hopeful that US involvement with P4 could pave the way in that the United States has an interest, as we see it, in engaging in the Asia‑Pacific trade architecture given its importance to the region as a market and as an exporter. Mr Goff will be meeting shortly with the other four Ministers involved for a stock take on progress in the FSI negotiation. So watch this space.
We have had three rounds of FTA negotiations with six states of the Gulf Cooperation Council, – Saudi Arabia, Oman, Qatar, Bahrain, United Arab Emirates and Kuwait. The GCC together form our seventh largest export market, worth over eight hundred million dollars a year and have plenty of spending power. Our objectives include the removal of tariffs and other barriers affecting our main export interests in agricultural goods, as well as improved access for parts of our services trade.
While Malaysia and the GCC are important, Korea has been identified by producer groups as a key negotiation, once it gets underway. During the PM’s visit to Korea in April, it was agreed that two rounds of preparatory talks will be held – and our strong hope is that Korea will be in a position to announce a decision to enter into FTA negotiations before very long, having linked that decision to the prior approval by its National Assembly of the Korea-US FTA. We will hold the first round of preparatory talks in Korea next week and the second round in New Zealand before the end of the year. We have significant offensive and defensive interests in Korea with potential tariff savings from an FTA of around $200 million annually; and our interest in removing the tariff advantage of Korea’s other FTA partners who compete with New Zealand in the Korean market.
Japan is our other major partner in North Asia and one of long-standing: we celebrate this month the 50th anniversary of our original Treaty of Commerce with Japan. We are making slow steps towards an FTA negotiation, Prime Minister Clark and former PM Fukuda having agreed in April that an authoritative FTA study should be undertaken by the two countries. We are currently discussing with Japan the TOR for such a study and hope to get this underway next year. We have a strong interest since Japan has already engaged with Australia in FTA negotiations, a situation which stands to disadvantage New Zealand.
Finally, with India, we are conducting a joint study into an FTA. There are good prospects to build export trade from its low base of NZ$360 million. We expect the study to be considered by Ministers late this year.
Taken in their entirety, these existing and hoped-for FTAs demonstrate clearly the geographical spread of the Government’s efforts to assist in improving our access to some of our current and key future agricultural markets.
Looking more broadly, there are some wider trends which are also of relevance as we consider the future character of key agricultural markets. Key issues include the climate change debate and also the impact of high global commodity prices for agriculture – which reflect a wide range of factors. I’d like to take you through our perspectives on one or two issues.
One of the ongoing developments in world agriculture is the European Union’s reform of its Common Agricultural Policy, the ‘CAP’.
Europe is a key market for us. After Australia, the 27 members of the European Union are our second-largest trading partner. In the year to December 2007, our exports there totalled five and a quarter billion dollars. The vast majority of these are agricultural, with sheepmeat comprising almost thirty percent of total exports by value.
European agriculture is heavily subsidised. The OECD estimates that that almost one third of farmers’ income comes from government support policies and current CAP spending at 50 billion Euros (or 70 billion US dollars) is probably six or seven times that of current US farm expenditure. Under the Doha Round proposals, spending entitlements would reduce to 24 billion Euros for the EU and 14.5 billion US dollars for the US. But the CAP has been progressively liberalised. Decoupling was a key step forward in 2003, and export subsidies have fallen to negligible levels from 6 billion Euros ten years ago. In May, the European Commissioner for Agriculture, Mariann Fischer-Boel, announced details of further reform in a “Health Check” of the policy.
Rather than a fundamental reform, the Health Check has been presented as a further step to modernise, simplify and streamline the CAP, by removing restrictions on farmers and thereby enabling them to respond more flexibly to market signals, including the growing demand for food as well as climate change, water management and bio-energy. From New Zealand’s perspective, the Health Check reaffirms the positive direction of European agricultural reform toward greater market orientation.
In terms of sectoral trends, livestock numbers in Europe are falling and this appears likely to continue. The European dairy sector presents more of an open question. Under the health check, the European Commission has firmly signalled the end to milk quotas in 2015 – noting that the phasing out of these quotas should serve to expand production, bring prices towards world levels and increase the competitiveness of the sector.
Beyond Europe there have been some significant developments in relation to trade in agriculture.
On the supply side, there have been large reductions in exports from some of the key commodity exporters. For example, drought in key wheat growing regions in Australia and Eastern Europe saw global production drop by 5% last year. But markets are already reacting to higher prices and we have seen recent indications of significant increases in grains output projected by several producer countries.
On the demand side, growth in the key developing-country markets has seen demand for agricultural products soar. This is being driven by changing diets in the growing middle-classes in emerging economies like India, China, and South-East Asia. Increasing urbanisation, economic growth, and growing populations are driving demand for food and animal feed in developing countries.
In global terms, the OECD reports that food and feed remain the largest sources of demand growth in agricultural trade. But underpinning this is growth in demand for feedstocks for the burgeoning bioenergy sector. Biofuel demand is the largest new source, and is a major factor in the current levels of commodity prices.
While the effect of biofuel on commodity prices is less than that driven by changes to supply and demand around food and feed – biofuels are set to be a key driver in agriculture commodity prices. Looking at mandated fuel targets in the EU and US, 13 percent of world coarse grain production and 20 percent of world vegetable oil production could shift to biofuel production by 2015.
So in sum, commodity prices have been at or near their historic records. Despite recent slackening, the OECD predicts that high prices are likely to remain above levels seen over the last decade. The price outlook will however be impacted by a range of factors including the possible impact of the current financial crisis on global growth and incomes over the next 12 months.
In my distributed speech I go on to make some comments about sustainability and the need for product innovation in agriculture. As a long time trade negotiator, one is always aware of the new risks that confront our agricultural trade access.
The debate about sustainability is one that requires careful watching. As is the case with other policy areas, such as animal welfare, there are legitimate policy objectives to which we subscribe and indeed, by having and living up to high standards, we can make these a positive factor in our international relationships and our marketing. But there is a need for vigilance since, as we have seen, aspects of the sustainability issue can be turned into a negative for our trade interests. A case in point was the invented controversy on food miles and some of the inaccurate comment and advertising about New Zealand products in the UK market – and elsewhere in Europe.
Thanks to the work that had been commissioned in New Zealand, it was possible to turn that debate around into a more sensible focus on the carbon footprint of products. We continue to monitor closely developments in our overseas markets on carbon footprinting research and on the potential development of international standards in relation to measurement of the carbon footprint. Such work is underway in the UK and in the International Standards Organisation. Our approach is to try to be ahead of the game and to see the opportunities which research and innovation can give us.
There are larger concerns too. One element of the climate change debate in some developed country markets has been the suggestion that imports from countries which do not take on emissions targets, should be targeted and have to pay a levy to compensate for their lower production costs. This so-called “border tax adjustment” concept is not an immediate threat, in that any national action would be constrained by the risk of legal action in the WTO or even of trade retaliation; and clearly it will be difficult to find any international agreement on it. But it is another trade element of the sustainability debate, along with many others, where we need to be vigilant and engaged.
Looking ahead, our objective is to be at or close to the front of the pack when it comes to environmental performance, global competitiveness, and delivering new products and services to market. We are facing growing competition from lower cost, higher volume producers. As well, consumers in affluent markets have rising expectations about the quality of the food they consume and the way it is produced. We can therefore expect ever more focus on the functionality of food and on the extent to which it is sustainably produced and supplied.
So where does this leave New Zealand agriculture? The huge growth in demand from our Asia-Pacific neighbours is set to keep commodity prices high – albeit below recent peak levels. There are new opportunities for New Zealand agriculture in those markets, and it is no coincidence that the focus for our FTA efforts is in that region. We can already point to recent success with China and ASEAN, and we are working on closer engagement with Korea, Japan and India, not to mention our important ambitions with the United States. So watch this space. Further liberalisation from multilateral negotiations, and from reform in our key markets, would also deliver important benefits. New Zealand’s pastoral and food industries have a strong productivity record. Creating new market access, and improved trading conditions and regulatory links overseas, has been a long term task under successive governments. We see these actions as contributing to higher returns, to competitiveness, dynamism and the sustainability of New Zealand’s pastoral and food industries.