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Groser: Growing our Exports and the Role of China

Speech – New Zealand Government

First of all, on behalf of my three other Parliamentary colleagues who are with us today – the Hon Jonathan Coleman, and two new MPs, Dr Jian Yang and Maggie Barry, MP for the North Shore – I would like to acknowledge the North Harbour Club and the …Hon Tim Groser Minister of Trade

15 March 2012 Speech Speech to the North Harbour China Business Panel: Growing our Exports and the Role of China

First of all, on behalf of my three other Parliamentary colleagues who are with us today – the Hon Jonathan Coleman, and two new MPs, Dr Jian Yang and Maggie Barry, MP for the North Shore – I would like to acknowledge the North Harbour Club and the fantastic work you have done over many years promoting excellence amongst young people.

I understand that in recent years you have raised over $1million to help young people across the North Shore of Auckland. You have been helping them to excel in whatever field of endeavour they show real ability, whether it be in sport, academia, the arts or business.

The topic you have asked me to address – ‘Growing our Exports and the Role of China’ – is certainly a challenging one. I don’t want to dive straight into the China story, fascinating though it is. Rather, I would like to start with the broader external strategic environment which shapes our trading future.

The Broader External Strategic Environment

The ‘big picture’ – not at all obvious even a couple of decades ago – is now beyond dispute. We are living through an extraordinary shift in relative economic power from the developed world, our traditional trade and investment partners, to the emerging economies led by China and India. Behind these two giants are a host of other large fast-growing emerging economies such as Indonesia, Russia, Brazil, Turkey and Mexico. In the last five years, the entire developed world has grown its cumulative GDP by 3% and the emerging economies by 46%.

Many analysts have pointed out that this is simply a reversion to the past. Two hundred and fifty years ago, most of the world’s wealth was generated from economies where most of the world’s people lived.

China, with a third of the world’s people in 1750, probably generated about a third of the world’s GDP. Add India to the mix and the estimates of economic historians suggest these two population giants had around 50% of world GDP for about a thousand years until the First Industrial Revolution.

The Industrial Revolution shattered this equilibrium that had lasted centuries. It started in one small European country, Great Britain. It then spread to what we now consider the developed world. Since 1980, economic growth has gone viral: over 100 countries averaged growth over 3% in the next 20 years. We are not there yet, but it is making redundant the political economy division I grew up with – the so-called ‘North South divide’: a group of around 30 rich developed countries facing off against a far larger group of poor developing countries. That, a younger person might say, ‘is sooo last Century’.

According to this perspective, we are returning – at breakneck speed – to the status quo ante. Wealth is once more being created more in line with where most of the world’s people live.

So the key question about our own trade and foreign policy strategy is obvious: do we get it? Are we aligning ourselves with this great tilt of power towards the emerging economies or are we missing the plot? Are we still trying to sell our wares in what was Main Street 30-40 years ago or are we moving along with the foot traffic politically and economically?

I think we are absolutely on the right track as a country, though there is a lot more work to be done. This is why I am fundamentally optimistic about this country’s long-term future.

Consider first the orientation of our export economy. One sinologist, Professor Paul Clark, of Auckland University, wryly observed:

For our two countries, one huge and the other tiny, the changes of recent decades represent a great return. China is finding ways to re-establish the kind of pre-eminence it enjoyed in East Asia and beyond around 1800. In that year New Zealand’s first trading partners were Australia and China respectively. This is precisely the picture today.

Absolutely correct. We are back to the priorities we had as a trading nation 200 years ago: Australia is our number one market, taking 23% of our merchandise exports (up from 6% in 1970) and China, our number two export market, takes 11% – up from much less than 1% of our exports at the same time.

The start of this realignment was CER, which was as much about internal policy change as trade policy. What is intriguing about the CER, in the context of this analysis, is the strategic framing of the agreement. CER was always much broader than just a bilateral trans-Tasman deal. Let me quote you from the preamble in Article 1.

It is formal Treaty language, which I shall slightly abbreviate, the objective of CER was described this way:

“[to] lead to a more effective use of resources… and closer economic and trading links with other countries, particularly those of South East Asia”

So the first point of CER was to raise productivity of our two countries through freer trade – that is what ‘more effective use of resources’ means.

But the second point was about looking beyond Australia and NZ to develop closer economic and trading links with Asia where we sensed our future lay.

And the two objectives were indeed linked. Neither Australia nor New Zealand was going to be able to engage comprehensively with Asia behind defensive and protectionist trade and investment barriers. As one of those hilarious Air NZ safety videos puts it, to enter this new economic flight zone into Asia, we had to “work out, work hard and get fit to fly”.

Thirty years on, we are in a far better space. Both our countries have negotiated a clean FTA with the whole of South East Asia – this is the AANZFTA that is slowly coming into effect.

Further, we each have separate but complementary networks of FTAs with other emerging economies particularly in Asia. Of these, China is the most important but we are also fully engaged in FTA negotiations with a range of other emerging economies such as Russia, India and of course the TPP or Trans-Pacific Partnership Negotiations.

TPP is intended as a key building block for trade and investment integration for the entire Asia Pacific region.

Three other major economies – Japan, Canada and Mexico – have all indicated strong interest in joining the negotiation.

In short, our trade policy strategy is precisely aligned with this much more profound shift of relative economic power to the emerging economies.

Domestic Economic Policy Settings: Setting The Scene for Export Growth

Obviously, this strategy of ramping up our export performance involves foreign policy in its pure sense – we would never have had an FTA without a sound political relationship with China. That has required very careful attention by successive NZ Governments over the forty year period that we have had diplomatic relations with Beijing. But the drivers behind this strategy are fundamentally economic – providing New Zealand with the platform for a much improved export performance. And if we want to move this country forward, that will be a critical factor.

What the Prime Minister said in 2008, says it all: “Well, we’ve proved we can spend like a first world country. Now we need to prove we can earn like one”. Ladies and gentlemen, nobody owes NZ a living. I wish they did, but they don’t. We have to do the hard yards.

So how do we do this? Well, conventionally, the NZ debate focuses on the traditional instruments of trade policy – formal negotiations in the WTO and FTAs to open up markets for NZ – and trade promotional work to leverage off those agreements and work with our export companies. And that is absolutely right: that is front and centre of the Government’s trade strategy and it keeps me and a bunch of talented New Zealanders in MFAT and NZTE who support me directly or indirectly more than busy, I can assure you. But raising our exports to GDP by some 10 percentile points by 2025 is going to involve far more than effective trade policy and trade promotion.

First, we have to get our fiscal house in order. This is the foundation stone of any rebalancing towards the traded sector. You know our target – to steer NZ back to surplus by 2014-15. It is going to require a lot of discipline over several years – and finally the public’s support – to do it. The days when the money arrived at the front door by the truckload and then were dispersed to scratch every political itch are gone. You don’t need to speak Greek to get this point.

In addition, we have identified 120 key actions in what we call our Economic Development Action Plan. They range from investing $12 billion in new state highways over the next 10 years, to investing $3.9 billion in upgrading the National Grid, to further reforms in employment law and resource management. Right now at an another speaking venue in Auckland, the Prime Minister is outlining our thinking behind getting further value out of taxpayer investment in State Agencies. When over a third of your economy is spending by Central Government, you can’t possibly raise productivity growth in the economy as a whole without addressing these issues.

By definition, this means that this Government has concluded there is no silver bullet that by itself will build a stronger, more competitive NZ economy that makes a better fist of paying its way in the world. Rather, we need to pick off, one by one, a whole series of reforms. It is hard work and quite relentless. Almost every one of them will be fought every step of the way. You could set your watch by that prediction.

Think about our plan to use PPPs to irrigate, in an environmentally sound management framework, additional land. What’s that about? It’s about increasing our exports of course. If we want to earn our own way in the world and reduce our dependence on OPM (“Other People’s Money”) it is initiatives like this that have to be done.

What is our legislation introduced late last year to promote sustainable aquaculture about? Growing our exports – same story.

In the first 8 years of this Century, not a single new hectare of open water space was approved for aquaculture – largely, as far as I can make it out, because of NIMBY politics. Well, sorry. While of course we will do this in a responsible way and put proper environmental safeguards in place, we have to move forward as a country in order to earn our living.

What is our investment in Ultra Fast Broadband about? Well, it’s obviously about connecting our homes, companies, schools and communities to the superhighways of the 21st Century but it is also about exports. Since my other examples relate to our outstanding primary exports, let me draw this out a little more.

Allow me one minute on ‘Exporting Services 101’.

We earn our keep not just by exporting what are called ‘goods’ or ‘merchandise trade’ – everything from apples to machinery – but also through services exports. And they are very significant. Total services exports in the year to June 2011 amounted to $13.5 billion – some 30% of the value of our total merchandise trade exports. Without our services exports, we would be bankrupt or close to it.

NZ services exports are dominated by tourism (more accurately called ‘travel’) and education. We do well in these areas but the NZ has seriously underperformed in the real high end of global services trade – commercial or business services. Happily, we can now add a qualifier to that gloomy statement – “….underperformed until recently ”.

In the year to June 2011, we earned $4 billion of foreign exchange in what are called ‘commercial services’. That is close to 10% of our exports of goods. Starting, I think, to get interesting and encouraging. Among the top performers are:

• ‘computer services’, six years ago that was less than $100m. Today it is over half a billion dollars;

‘merchanting and other trade-related services’ exports. Six years ago it was $50 million; today it is the thick end of half a billion.

‘architectural and engineering’ services. Six years ago, it was just over $100 million. It is now over $300m.

Financial Services: Six years ago there were $120m; they are now double that.

Audio-visual services exports. Up from $56 million to $283m. That is nearly a six-fold increase in six years.

And what is the common thread here? It’s obvious. You don’t put these exports in a plane or a boat – as far as we know, no audio-visual exports were lost in the Rena disaster. These are exports that are all delivered via the internet or email.

Come back to my central point: investing in ultra-fast broadband is also about creating connectivity within the country to help these export industries. We will need to watch events carefully to ensure that once we are properly wired internally, the external connectivity to the rest of the world keeps up.

So that’s the setting. We have many of the right trade policy platforms in place to succeed in this new global economy. We need to increase our work rate domestically across a whole range of issues – we have identified 120. One of those – number 101 to be precise – is “NZ inc: develop individual NZ inc Country Strategies to grow our exports with key markets”. China is obviously the most important of them, so let’s drill down into our China Strategy to see where we are

China: Its Role in NZ’s Trading and Investment Future

Given the audience, I will assume a high level of familiarity with the main contours of the China story. To put it in a nutshell: bar some cataclysm, China is going to be the most important economy in the world and the only argument is whether it is in 10, 15 or 20 years. That is not much more than a blip even in NZ’s history, let alone China’s.

We have the foundation stones in place: an excellent political relationship, a comprehensive FTA that is now well into its work. For example, all other exporters of wine to China pay a tariff of 14%. After successive tariff cuts, our rate is zero. Our exports of wine are still small – $23million last year – but the annual growth rate is well above 50% per annum and Wine NZ is putting in a lot of work into an integrated market strategy.

We added in 2009 a comprehensive FTA with the separate customs territory of Hong Kong. I hope we will add a similar agreement to the third and separate WTO customs territory of Chinese Taipei – known outside trade policy circles as Taiwan.

This negotiation, known as the ECA or Economic Cooperation Agreement, is being conducted strictly within the framework of our long-standing One China policy. Taiwan is a very significant part of the greater Chinese economy with massive investment and trading links with the Mainland. If we can achieve this – and I am very confident we can – NZ will be the only country, other than China itself of course, to have a trading platform that puts the three dots in the Chinese economic triangle together. That will be some strategic achievement for a country of our size. It has only happened because a group of different New Zealanders, over many years, helped put this together, and they were united by a clear strategic vision of what we are trying to do long term.

Which brings me to the NZ Inc strategy. This strategy is fundamentally about trying to use in a more coherent and collaborative way the assets of a small country playing on a big global stage. The Prime Minister has now launched the first two NZ Inc Country Strategies. As you would expect, they involve the two emerging developing country super-powers, India and China.

Let me emphasise one thing: this is a work in progress. Even in Government, some of our agencies have quite different cultures and different attitudes to working collaboratively. When I have left politics I might be prepared to illustrate this with some of the more colourful examples of inter-agency rivalry that I have seen when I was an official. Until then, I will stick to high-level generalisations.

And outside the agencies – I think 16 different agencies were involved in the first China strategy – is the private sector. These people compete with each other by definition. It is a matter of identifying common interests and shared goals. A simple example would be the group I led to Shanghai in 2010 to try to develop a long-term integrated strategy of marketing our green shell mussels to China.

If you look at the NZ Inc strategy launched by the Prime Minister you will find on page 10 an inset about the history of our forays into the Chinese market with this product. It is written in polite terms. I can be much more blunt: we botched up the China market right and proper in our first foray about a decade ago. This time we are going to try with a more strategic approach and there is a collaborative project taking place under one brand – Pure NZ Greenshell Mussels. We are not expecting quick results. We want sustainable progress.

The Plan sets five strategic goals, such as doubling our two way goods trade, specific growth targets for services trade and increasing bilateral investment flows to reflect the commercial relationship. It is essentially aimed at cities, where two-thirds of China’s population will live in a little over a decade from now. It lays out a framework for involving our NZ Chinese communities more closely in the relationship – one of the reasons Dr Jian Yang is accompanying me next week when I visit Shanghai, Beijing and Chongqing. In Chongqing, a municipality of around 30 million, we will be accompanied by some 17 NZ export companies, 13 of which, or so I am told, will include Mandarin speakers. That’s a good sign.

Am I satisfied with the China Strategy and the progress we are making in China? Well, to paraphrase the ‘Southern Man’ beer ad, it’s a hard job finding the perfect NZ inc strategy. No, of course I am not ‘satisfied’ with it because it is very much a work in progress. As far as I am concerned, this is just the first iteration.

Equally, one could ask, should I be satisfied with what we have achieved on the ground in our exports to China? I would give exactly the same reply: we are doing very well and we need to try to do a lot better.

But let’s celebrate success: we have made a great start. Since the FTA came into force in late 2008, exports from New Zealand have increased over 150% to just over $6billion. Imports from New Zealand into China have, by the way, been increasing far faster than the general rate of increase of global imports into China.

So, yes, the internal dynamic of change is driving a huge growth of imports for all of China’s trading partners, but NZ is outperforming the market and we should celebrate that. China is now our second most important trading partner Incidentally, while I am far more interested in NZ’s global current account position than any bilateral measure, our current account deficit with China has declined by nearly 60% since the FTA was signed.

I am well aware of the critique that, crudely put, says: ‘this is a nice story, but it is all about dairy products and logs’.

Well, there is a fair bit of truth in this: just under $3.5 billion are in these two product categories. Personally, I do not draw a negative conclusion from this: it is all export earnings in the bank and that, ladies and gentlemen, is what NZ desperately needs if we want to earn our way in the world and reduce our addiction to debt. Dairy is our largest single export item. The market in China is booming. Would people have it any other way?

But if $3.5 billion of our exports are dairy and logs, it means by definition that $2.5 billion is not dairy and wood products. So how big is $2.5 billion? Well as recently as 2008 total NZ exports including dairy and logs were just over $2 billion. So immediately we can say the economic relationship with China is not just benefiting our dairy and forestry sectors.

However, I understand this view feeds into the broader and legitimate concern about diversifying our export base. I am choosing my words here with care – diversifying our export base. I am a huge believer in the power of our traditional agriculture and primary exports. They will play just as big a part in our future as they have in the past. The choice facing New Zealand is not between different types of export (“agriculture versus manufacturing”), it is between the traded sector and the non-traded sector. We need far more resources to flow into our traded sector if we are to improve our economic performance.

So what is happening to our non-traditional exports to China? In a nutshell, we are just starting to develop some momentum and I want to give you some practical examples rather than more aggregated statistics. I can’t give you their revenue for reasons of commercial confidentiality. Just take my word for it: these are not trivial sales.

Gallagher Security sells its software driven security management systems into large organisation in China such as banks, airports and universities and is enjoying compound annual growth around 10%. I am told that every week, most of their Chinese clients will see a member of the Gallagher team.

Tait Radio Communications is a global leader in designing and delivering radio solutions for industries that include public safety agencies like fire services and urban transport providers. I have supported this great company in several parts of the world – I did some very interesting work with them in Sao Paulo a year or so ago. In China, they have been there for 20 years and have a strong customer base in, for example, China International Search and Rescue and the Shanghai Fire Service. They opened a new facility in Beijing last year.

Perhaps less familiar to you will be Phitek. This is a high technology company operating in the niche market of noise reduction devices. They have 100 staff in China. Atrax is another. They design and manufacture passenger baggage electronic weighing equipment and cargo weighing equipment. Their products are used in a large number of airports in China.

Last year, Stephen Joyce and I led two separate trade missions into China for a number of ICT companies, introducing them to major Chinese corporations like China Mobile, Alibaba and Huawei. If you don’t know these corporate names, you will. Huawei, by the way, is one of the world’s great global ICT companies and has 20 R&D institutes globally, has just landed its second major fibre deal under the $1.35 billion Ultra-Fast Fibre rollout. They are already working with a number of NZ ICT companies and we welcome their presence in New Zealand.

Not all the work that a New Zealand Trade Minister does involves the high-end policy of trade negotiations. Part of my job – and it is a very interesting part of my job – is to be a travelling salesman for NZ export companies. There are so many clever New Zealanders out there doing smart things. They are almost always at the high cost/high value/customised niche of the market they operating in.

The fundamental problem they face is – they just need to scale up and this is not easy. It is starting to happen – there is a bunch of highly export-oriented companies in the TIN-100 index (our top 100 technology companies) in the $50-$90 million bracket. If some of them could grow into half billion export companies, this would have a large impact on NZ. Here’s a thought experiment: how many Fisher and Pykel Healthcares would we need in NZ to transform our future?

That is why the reconfigured NZTE strategy is to work intensively with around two thousand NZ companies in total and, of that, about 500 in a far more intensive client management program.

At the political level, we then help take them to market. In emerging economies like China, having Ministers fronting really helps. In 2010 – we slowed down a bit during Election Year – I visited China alone five times. We had 10 full Ministerial led trade missions. We plan a minimum of 28 over the course of this Election cycle. This is an ongoing part of our work programme.

Let me turn now to foreign investment. Obviously I will stay clear of the specific issue of the Crafar Farms issue, since once again, this is before the Government and the courts.

Trade and investment are increasingly linked in today’s global supply chain. It is inconceivable that this vast expansion of China-NZ trade links would not be accompanied by a major expansion of Chinese investment in New Zealand and vice versa. If you look at the stock of foreign investment in New Zealand it is Australian, British, and US that dominate it. Why? Because these countries have been our major economic partners. This will change in line with the very radical shifts in New Zealand trading partners. It needs to change.

It won’t just be China. Get ready for significant investments from India and Indonesia. This will happen. I was delighted that this week the New Zealand Venture Investment Fund and Taiwan’s National Development Fund signed an arrangement to established strategic cooperation on joint investments in venture capital funds. They will collect up to US$170 million and invest in start up companies in both countries, with a particular focus on the green, bio-tech and creative sectors. I think that is a fantastic development and if we can succeed in completing an Economic Cooperation Agreement with Chinese Taipei, this will complement trade liberalisation in exactly the way we would want.

Why do we welcome foreign investment? Because it helps New Zealand, end of story. In a recent speech, the Prime Minister put it this way:

The reason we allow investment to flow between countries – both into New Zealand and out of New Zealand – is because it benefits New Zealanders. Overseas capital makes New Zealand a vastly more productive country. There is absolutely no way we could enjoy the standard of living we do without overseas investment.

The Prime Minister then quoted a recent study which concluded that overseas investment in New Zealand lifted national income by around $5billion between 1996 and 2006. That is an estimate of the return to New Zealand from overseas – crucially over and above the cost of paying interest and dividends on that investment.

To sum up, I see a fantastic opportunity ahead of our country as it seeks to add its trade, technology, people to people, investment and other links with China. No country has a better platform than NZ to take advantage of China’s extraordinary growth. Now we have to use it.

ENDS

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