New Zealand Must Focus On East Asian Regionalism

Media Release 31 October 2002

New Zealand must focus on East Asian regionalism

If the wave of East Asian regionalism continues, New Zealand has to be there on its crest, according to Asia 2000 Foundation's executive director, Christopher Butler.

Mr Butler was speaking to the 19th Confederation of Asia-Pacific Chambers of Commerce and Industry (CACCI) conference on October 30 in South Korea, about emerging free trade areas and the rise of China.

Pointing to the astonishing stability, integration and wealth created by Europe over the last 50 years as a result of regionalism, Mr Butler turned his attention to East Asia's situation.

Regionalism would not be quick and easy but the rapid growth in intra-regional exchanges of goods, services and investment were creating a practical business need for liberalisation, he said. That in turn ensured tariff predictability, reduced transaction costs, created understanding on trade issues, highlighted opportunities and helped resolve disputes.

Foremost among the questions Mr Butler put to conference delegates to consider were:

* Would an East Asian economic model follow the European pattern, or honour the APEC spirit of 'open regionalism'?

* Can Asia build lasting closer economic relations in an era of border assertion and sometimes dispute?

* And, if we need to enforce our borders, how do we make them productively porous?

China was also now a specific factor driving East Asia, Mr Butler added. Its return to the status of a world economic power now influenced the whole East Asia region.

"In the mid-80's China was a static hub around which the Tigers of the region turned. Now the hub itself is moving and turning the Tigers with it. Everyone in the region feels the new gravity," Mr Butler said.

"The fact that China is now a World Trade Organisation member makes a greater level of economic integration a lot more possible," he added.

Mr Butler was invited to deliver this speech as a guest of the Korean Chamber of Commerce and Industry.

ENDS

SPEECH FOLLOWS...

EMBARGOED UNTIL DELIVERY 1400 30 0CTOBER 2002

“EMERGING FREE TRADE AREAS AND THE RISE OF CHINA”

ADDRESS BY CHRISTOPHER BUTLER, EXECUTIVE DIRECTOR ASIA 2000

19TH CACCI CONFERENCE, 30 0CTOBER 2002, JEJU ISLAND, KOREA

Introduction

Mr/Madam Chair

Thank you very much for the invitation to speak today. I bring greetings from the President of the New Zealand Chamber of Commerce, Nigel Gould. Barrie Saunders and Philip Lewin, the President and Chief Executive of the Wellington Chamber of Commerce, also send their best wishes. I am very honoured to be with you as a representative from New Zealand.

I am not the only New Zealand representative on Jeju Island. Somewhere beyond the walls of this hotel are the descendents of New Zealand sheep and cattle which arrived a few decades ago to develop the agricultural potential of this island. You can also find orchards of New Zealand kiwifruit which came here later, but for the same reason. I know this because I was fortunate enough to have served as New Zealand Ambassador to Seoul from 1990 to 1993, a period I remember fondly.

“Big Brother”

A lot has happened since then, including for me a short interlude after 14 years of working with Asia. Eight months ago I was on the point of departure after 40-months living inside the “big brother” of all regional trade agreements, the European Union. The small New Zealand Embassy I ran was in The Hague, not far from Amsterdam. We were responsible for three EU members, three aspiring members, and one country which so far has rejected the idea. During my time, two of those countries occupied the key role of the EU Presidency.

Life in The Hague ran on a twin track of bilateral issues on the one hand, and EU issues on the other. The European Union is now a totally pervasive reality for all its members. Internal borders are open, trade is dominated by intra-Community transactions, the EU sets 70-percent of the regulatory framework for member states, and the introduction of a common currency in January this year happened with an ease that confounded Eurosceptics.

Europe still has a lot to do, and the process of doing it is sometimes unbelievably complex. But what Europe has achieved in the last half century in terms of stability, integration and wealth creation is absolutely astonishing. The current stage will involve the Union’s membership expanding by two thirds, and the effects of that should be watched very closely indeed.

Pointers and Questions

Europe might seem an odd place to begin a commentary on regional trade arrangements in our part of the world. I do so because I observed it with Asia-Pacific eyes. It offers a number of pointers from a long and successful history, and it also suggests some questions.

The first pointer is that success breeds success - and sometimes competitors too. The EU model has been an important driver of the growth of interest in regional arrangements in other parts of the world, sometimes for reasons of rivalry rather than admiration.

To what extent do competitive instincts underlie current thinking about regional trading arrangements? And who is the competition?

Secondly, predictability enables growth. EU rules have given its commercial sector a long-term basis for trade and investment, dramatically illustrated by current economic growth in the Baltic EU applicant countries. Even external partners like New Zealand have generally had a predictable (if not always palatable) basis for trade, and we have generally profited from the increasing wealth of EU citizens.

The recent experience of the world’s economy has been one of boom, bust and recovery. Would greater predictability help smooth the bumps?

A third lesson is that one person’s preferential arrangement can also be another person’s problem. Sadly in my view, Europe departed early from the generous spirit of its founding treaty in requiring external partners to pay a price for its internal success, especially but not solely in the field of agriculture.

Would an East Asian economic model follow the EU pattern, or honour the APEC spirit of “open regionalism”?

The fourth lesson is that regionalism and nationalism make uncomfortable bedfellows. The European model has deliberately sought to reduce the importance of borders, and at the same time preserve local cultural identity. The Schengen Agreement demonstrates its success on the first point. On the second, it is difficult to deny that there are persisting differences between French, Dutch, British, Germans or Italians.

Can Asia build lasting closer economic relations in an era of border assertion and sometimes dispute? And if we need to enforce our borders, how do we make them productively porous?

A final lesson is that Rome is never built in a day. Europe laboured for over 50-years to get to its present position. We can congratulate ourselves on much progress in the Asia Pacific region over that same period.

At the same time we need to ask ourselves a serious question about what else we need to do.

Need for Liberalisation

The period of gestation and the final nature of any emerging East Asian free trade area will be conditioned by the answers to that and the preceding questions. My personal view is that the evolution of some form of “harder” economic regionalism in East Asia is more likely than not. The APEC experience suggests that it will not be a quick and easy process. But rapid growth in intra-regional exchanges of goods, services and investment are creating a practical business need for liberalising agreements which provide a means of:

- Ensuring tariff predictability, and pursuing tariff reductions and bindings

- Reducing transaction costs by simplifying trade procedures

- Creating common understandings on trade rules and standards

- Highlighting opportunities and focussing attention on them

- Improving dialogue and setting up ways to resolve disputes

Regional liberalization arrangements are seen as one way of meeting these objectives. The negotiation of bilateral free trade agreements is seen as another. While neither option provides the benefits of comprehensive multilateral agreements, and both contain some risks, they have strong common currency at the moment. One general argument is that the multilateral “best” should not be the enemy of a regional or bilateral “good”. There are also some more specific reasons which I will cover later.

Alphabet Soup

The headlines of the economic Press record a new surge of activity in the Asia Pacific region with respect to Free Trade Agreements (FTAs), Closer Economic Partnerships (CEPs) or whatever else you want to call these more sophisticated intra-regional trade instruments. We have swum for years in an alphabet soup of broader regional arrangements of varying degrees of maturity, including:

- AFTA - the ASEAN Free Trade Area

- ANZCERTA - the Australia New Zealand Closer Economic Relations and Trade Agreement

- APEC - Asia Pacific Economic Cooperation, a non-binding association of 21 regional economies with a goal of creating free trade and investment among all its members by 2020

- FTAA - the Free Trade Area of the Americas, a kind of super-NAFTA

- MERCOSUR - the Latin American Free Trade Agreement

- NAFTA - the North American (and Mexico) Free Trade Agreement

- PACER - the proposed Pacific Agreement on Closer Economic Relations

More recently there has been talk of a new grouping of East Asian economies, links between China and AFTA, the Koizumi concept of East Asia plus Australia and New Zealand, and other ideas too. In recent weeks agreement has been reached to resume discussions of links between AFTA and ANZCERTA. It is difficult to know which corners of this new geometry will light up, in which order, or when. Much will depend on developments in other quarters such as the World Trade Organisation, on wider political and economic developments, and importantly also on the level of private sector interest.

Bilateral Options

There is a link of course between these regional developments and parallel bilateral initiatives. New Zealand itself was something of a regional pioneer in the field of quality bilateral agreements with the conclusion of the ANZCERTA agreement with Australia 20 years ago. Two years ago we concluded another quality agreement, the CEP with Singapore, and we have been in negotiations with Hong Kong for over a year.

New Zealand has signaled its willingness to discuss similar agreements with other regional partners, including Korea. Australia, Chile, China, Japan, Korea, Taiwan, Thailand and the United States are all on the same bilateral band-wagon, and I would be very surprised if other regional countries are not also giving serious thought to the possibility.

Five Drivers

There are a number of well-documented drivers for this crop of bilateral and regional liberalization initiatives. The first was the pause for thought, to put it mildly, created by the failure of the 2000 WTO Ministerial Meeting in Seattle and the two-year hiatus which followed. That, thankfully, ended last year in Doha with agreement on the Doha Development Agenda.

The WTO was, is, and will be for the foreseeable future the most important game in town. Mike Moore and the many others who brought success at Doha richly deserved the applause. The optimum outcome for an internationalized world in my view continues to be comprehensive multilateral agreements. To cite but one example, halving the tariffs in developing and developed countries would be worth $US150 billion annually to poorer nations. That is three times the amount developing countries receive in aid each year.

But to continue on the current course, the second driver of the interest in regionalism was the fact that, rightly or wrongly, many people drew an early conclusion that the Bush administration of the world’s largest economy would put less weight on multilateral means of pursuing American interests, and more on unilateral initiatives. Some have termed it a policy of “selective multilateralism”.

The third is that a good deal of groundwork has been created already through regional initiatives and the mere fact of expanding trade and investment. Countries within the region trade with and invest in each other at a level unimaginable only a few decades ago. And, although it has its critics, APEC has played a hugely important and often unrecognised role in establishing networks of understanding through the region.

At the most basic level, people in the region know each other better than ever before, and are better connected. There are now quite a few people in New Zealand who work along side Australians, Americans, Japanese, Malaysians, or Singaporeans for example. Equally, there are many people around Asia who work alongside New Zealanders.

Fourthly, there appears to be something of a shift in the way that other influential people view the world. The doctrine of unqualified multilateralism (sometimes referred to as “multilateral monogamy”) pursued by players such as Australia, Japan and Korea has been replaced by a more pragmatic philosophy. Like New Zealand, other countries are now increasingly pursuing opportunities where they find them in bilateral and regional contexts.

Their motives differ, of course. In the case of some, New Zealand included, one important objective has been to reinforce the multilateral process with a supportive network of comprehensive and consistent agreements. In the case of others, the exclusion of difficult issues such as agriculture raises the suspicion that bilateral and regional routes are seen as a soft option at best, and at worst as a means of watering down unpalatable multilateral alternatives.

The fifth factor can be best paraphrased in a quotation I have come across several times. “Regional trading arrangements are like street gangs. You may not like them, but if they are in your neighbourhood it is safer to be in one”. In short, if everyone else is negotiating these agreements, you don’t want to be left out in the cold.

Trade Policy Works

Finally, there is the simple fact that trade policy works. Looking across a few recent analyses of the New Zealand experience, I found that:

- According to a Singaporean assessment, trade between New Zealand and Singapore grew by 7.7 percent in 2001 while Singapore’s trade with the rest of the world declined 9.4 percent.

- The value to New Zealand of tariff reductions in the Uruguay Round is some $US0.25 billion each year.

- New Zealand’s trade with Australia increased fourfold since ANCERTA was signed, while a two-to-one imbalance in Australia’s favour became a roughly balanced trade.

- The value to New Zealand of the WTO accessions of China and Taiwan is of the order of $US50 million in tariff reductions alone.

- Annual New Zealand gains from a FTA with the US have been estimated to be around $US0.5 billion.

The Rise of China

There is also a specific factor driving East Asia, and that is the return of China to the status of a world economic power. When I worked in China in the mid 1980s, China was a static hub around which the Tigers of the region turned. Now the hub itself is moving, and turning the Tigers with it. I have not had a serious discussion with a regional economist in the past six months which did not speculate on the effects of this phenomenon. Some serious Japanese thinkers envisage the future of the Japanese economy now being inextricably linked with that of China, for example. And that is already the case with some other regional economies, including Taiwan.

Everyone in the region feels the new gravity. In the mid 1980s, China and Hong Kong accounted for around 4 percent of New Zealand’s exports and 2 percent of imports. The equivalent figures today are 7 percent and 8 percent. But that is not all. Chinese tourists make an important contribution to our services exports, we have reciprocal investments, and fee paying students from China are next year expected to account for around one third of a $US 0.75 billion international education sector. We also have a growing Chinese community, and a resulting resource of new skills and linkages.

So it is no coincidence that China is always bracketed with any discussion of East Asian economic regionalism. This conference is no exception. The fact that China is now a WTO member makes a greater level of economic integration a lot more possible. WTO benchmarks create common ground.

New Zealand Perspective

What does all this mean to New Zealand? In a nutshell, an enormous amount. New Zealand may not be in East Asia, but it is most definitely of it. The region includes five of New Zealand’s top 10 trading partners, and accounts for about one third of the country’s total trade.

East Asian investment in New Zealand totals some $US 3.5 billion, a very large amount in the context of a $US 50 billion GDP economy. East Asian tourists account for one quarter of New Zealand’s $3 billion dollar annual receipts, and over 80 percent of the 73,000 international students expected this year will also come from the region.

Perhaps most important of all, New Zealand is increasingly tied to East Asia by personal bonds. Friendships aside, one New Zealander in every 15 now comes from Asian origins as a result of changing patterns of immigration. In Auckland, New Zealand’s largest city, the figure is one in nine. The new communities have had a visible effect in diversifying the fabric of society, the educational mix, the signage in streets and shops, and the energy of business.

What happens in East Asia has direct and immediate implications for New Zealand. If the wave of regionalism rolls on, we need to be there on its crest.

ENDS

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