Hon Tim Groser
Minister of Trade
Minister of International Climate Change Negotiations

26 October 2010

Note: Embargoed until 4am (NZT) Wed 27 October 2010

Speech
Address to the International Food and Agriculture Trade Policy Council (IPC) Conference

Sao Paulo, Brazil

Thank you Mr President

It is a pleasure to address the International Policy Council once again. The IPC, at least in my view, is the pre-eminent think-tank in the world on the great issues of trade and agriculture. I was honoured to be invited to become an IPC member when I retired from my position as Chairman of the WTO Agriculture Negotiations in 2005 and went into politics.

Having said that, I was, however, even more pleased to have to resign from the IPC! This was required by the fact that the political party I belong to won the General Election in NZ in 2008 and our new Prime Minister, the Rt Hon John Key, offered me the position of Trade Minister.

But I am also the Minister responsible for Climate Change International Negotiations – as far as I know, only in New Zealand has the same Minister responsibility for both the trade and climate change portfolios. After almost two years with these two responsibilities, I would like to share some reflections on the two sets of negotiations.

Let me also say that I am delighted to be back in Sao Paulo – for all its many challenges, one of the greatest cities in the world. And with the democratic process in Brazil reaching its culmination this very week with the final stage of the Presidential Election, it is a fascinating time to be in this fascinating and important country.

While the BRIC phenomenon may need to be broadened to include Indonesia in particular, I absolutely share the orthodox view that Brazil, Russia, India and China will become – in China’s case already is – economic powerhouses with global reach. They will shape the course of the planet’s economic progress in the decades to come.

Trade and Climate Multilateral Negotiations: The Issue of ‘Balance’

The first and most obvious thing to say about the twin challenges of trade and climate change is that both sets of formal multilateral negotiations face formidable challenges in being brought to a successful conclusion.

At a certain level, both sets of negotiations are grappling with what theorists have for decades called ‘the free rider’ problem. To academics and to experts working in the fields of either trade or climate change, this is regrettable to say the least.

Economists have railed against ‘mercantilism’ and its economic sins literally for two centuries. Similarly, many Climate Change experts talk about the risk of anthropogenic global warming as ‘the greatest moral challenge of our age’. They were backed by about 45,000 NGO activists in Copenhagen trying to shout a deal through the UN system, rather than negotiate it.

Both the economists and the climate change cognoscenti are no doubt correct. But we won’t get a deal in either set of negotiations unless key players can see there is a degree of acceptable ‘balance’ in the nature and level of commitments. There is no escaping this reality in either trade or climate change.

In climate change, this issue of ‘balance’ goes by the term ‘comparability of effort’ – to use the polite language of the OECD and international diplomacy. In domestic politics it is expressed more crudely: “are we (whichever country may be in question) doing more or less than our fair share”?

While of course there is an upside for early adopters of climate change technologies – this is essentially what the ‘green growth’ debate is about – that upside, or first mover advantage, is no more likely to override the concern about ‘balance’ any more than the incantations of economists about the benefits of unilateral liberalisation have been able to bury mercantilism in the field of trade.

Were that not to be true then we could happily abandon negotiations in both domains and rely on enlightened self-interest to solve both trade and climate change. I will leave that space for others to advocate. I can’t see any alternative to multilateral solutions in both spheres.

One can of course take the logic of realpolitick too far. Like many countries, New Zealand has pursed trade reform unilaterally while pushing forward with a vigorous trade negotiation agenda. Equally, in Climate Change, we have enacted a comprehensive Emissions Trading Scheme, which when fully implemented will cover all gases, all sectors while trying to make a contribution to the multilateral climate change negotiation – and coordinating a major international initiative around research into agriculture emissions. More on that later.

However, conscious of the economic adjustment costs of proceeding too far ahead of the play, the carbon price will be introduced in my country in stages across the whole economy. Further, we have, in effect, also put a speed limiter on the engine that is driving this adjustment to a low carbon future via a variety of technical policy measures.

We will carry on down this path but ultimately, progress made in the multilateral negotiations will powerfully shape all future Governments’ decisions, including ours.

Trade and Climate Multilateral Negotiations: The Need for a ‘Power Grouping’

Second, both trade and climate change negotiations need what I call a ‘power grouping’ to broker any deal. This has been the one inescapable reality of all multilateral negotiations, from the Congress of Vienna onwards. The most powerful countries, representing the different interests of the wider set of countries with less relative power, finally have to shape, but not impose, the deal. It is a fantasy to believe otherwise.

Of course ‘shaping the deal’ has to be done with great skill and sensitivity to smaller countries, bearing in mind the deep wisdom of Alexander Hamilton, the key personality behind the writing of the US Constitution. He observed two centuries ago “Men will often oppose a thing, simply because they have had no hand in its making”.

In the field of trade, given the massive shift in power to the developing world, we have long passed the point where the EU and US can alone perform that role, as they did in the Uruguay Round with the Blair House Agreement filling in the negotiating gaps – sometimes for better, sometimes for worse. But as anyone who actually participated in the endgame of the last successful multilateral trade Round knows, at least the two most powerful trading entities of their day brought closure to the negotiation through the Blair House Agreement after seven long years.

Today, while the US and the EU cannot alone play that leadership role in the multilateral trade negotiation, the good news is that we have a new power grouping in place that can do the job. It is not perfect, but it is fit for purpose. It is of course feeling its way forward since there is no deep tradition of this group exercising political leadership.

I am referring to the informal grouping of Brazil, the United States, India, China and the EU represented by the Commission. I am also pleased that this group of five is showing a high degree of sophistication in maintaining open channels of communication with a broader group of WTO Members, the composition of which depends on the issue.

But if we can get a deal in the Doha Round in 2011, the broad shape of it will depend powerfully on this group of five, building a more ambitious, but balanced, outcome from the texts that have been so painfully developed in the course of the negotiation.

In climate change, we do not have a comparable power grouping. The MEF – Major Economies Forum – might yet play that role, but with seventeen countries it is far too large. The Copenhagen meeting demonstrated above all the need for such leadership to shape the multilateral negotiation.

At one stage – around 2.00 am on one of the ten days I spent there – I walked into a room which was allegedly negotiating the text. The Chair was taking drafting suggestions from the floor. I estimated there were around 1000 people in the room, some of them literally screaming for the floor. While it fully met the demand of ‘transparency’, it was like a Fellini movie about the end of Civilisation, interpreted through an international diplomatic event. I left the room quickly, by the way and went back to the hotel.

We should be thankful for small mercies. With complete collapse staring us in the face, we salvaged at least the Copenhagen Accord. This was produced by a small group of Heads of Governments of some major countries, operating in an unplanned and one could say haphazard way.

They had no choice, and thank goodness they did take the initiative. However, it was a modest return from the investment of so much high-priced political talent – not to mention the pre-Copenhagen hype, based around the absurd negotiating scenario of ‘No Plan B’. I will leave to others to describe the contribution made by Hollywood film stars to the process. Rationality, one could say, was at a premium and we paid the price in terms of the mediocrity of the result.

The Copenhagen Accord could have been - should have been - drafted by First Secretaries months before. It was ridiculous that Heads of Government were left in the position of starting a drafting exercise amongst themselves. Ladies and Gentlemen, the conclusion is stunningly obvious: we need some leadership here from the most powerful countries - and on a more systematic basis than relying on chance meetings.

Given that the US and China are responsible for some 40% of the net flow of emissions into the atmosphere, it is obvious that the basis of any accommodation has to start with some accommodation between these two giants. But I don’t yet see sufficient political traction in spite of no doubt great efforts by both Governments.

Global Research Alliance on Agricultural Greenhouse Gases

Given the singular focus of the IPC on agriculture, I must mention one other outcome we got from Copenhagen: the Global Research Alliance on Agricultural Greenhouse Gases, coordinated by New Zealand.

With emissions from agriculture accounting for about 14% of all emissions, and growing rapidly, we have a simple but ambitious, aim. That is, to find new technologies that can help achieve the 70% increase in global food production we require to feed the extra 3 billion people that will populate the planet by 2050 – but, and this is the crucial point, to achieve this growth with lower growth in emissions.

The Alliance is a tremendous opportunity for countries to be part of an initiative that will bring together the world’s best scientists in this area. We have a strong desire to keep the governance simple. The science is complicated enough without creating unnecessary additional complexities. The governance structure must be built on a strong foundation of trust and a shared belief that the benefit of the Alliance to all involved will be greater than the sum of its individual parts.

The Alliance has the potential to be a very powerful initiative. Its strength lies in its ability to link national systems of Agricultural research. To this end, we are well on the way to creating a global networked community of scientists, policy makers, farmer organisations and others to strengthen cooperation and collaboration in agricultural greenhouse gas research.

What is crystal clear to me and anyone who has similarly been deeply immersed in the politics of food, is that if you ask countries to choose between their food security and climate change, it will not be treated even as a serious question. Food security will always trump climate change. We need to find a way to avoid that unacceptable, even impossible, choice.

The Alliance is going extremely well and involves some 30 developed and developing countries. We ourselves have put $45 million into the initiative. We hope to bring our preparatory process to a successful conclusion in a Ministerial Conference in New Zealand next year.

Policy Linkages Between Trade and Climate Change

There are also some important policy linkages between the trade and climate change negotiations and today I want to focus on a few of them.

One linkage is potentially extremely negative. As you know, the issue of ‘carbon leakage’ is central to the climate change policy debate and there are various proposals, some more sophisticated than others, to implement unilateral border tax adjustments, based on a unilateral measure of the carbon content of imports.

The first rule of politics, both domestic and international, is ‘at least avoid doing harm’. These proposals, in my view, do not pass that test and I utterly reject the conclusion of certain prominent thinkers that they somehow constitute ‘good protectionism’. Rather, they would be a ‘ticking bomb’ under the WTO system.

Forget the extensive international literature as to whether or not there might be a legal basis under GATT Article XX or one or two bits of WTO jurisprudence. That literature is interesting but finally politically irrelevant. While we search for the way forward on climate change, we need some international breathing space, not ill-conceived unilateralism.

I continue to see merit in some type of carefully negotiated moratorium around such policy measures. This would be designed to give the international community time to navigate through these dangerous waters. It could be part of any final wrap-up deal in the Doha Round, cross referenced to the multilateral climate change negotiations.

Having dealt with the most obvious negative linkage, let us turn to more positive trade-climate change linkages. There is a real possibility of some genuine win-win, trade and environment outcomes. In fact, let me go further. I do not believe that an outcome from the Doha Trade Round without at least some pro-environment outcomes as well as some pro-trade outcomes will be politically saleable.

An obvious place to start is to complete the two mandated trade and environment negotiations: the fisheries subsidies negotiation in the Rules Group and the negotiation to reduce or eliminate barriers to trade in environmental goods and services.

The first addresses an insanity – the wanton destruction of the wild fisheries of the world. This is the ‘tragedy of the commons’ in its most extreme form. Eighty per cent of global fish stocks are either over-fished or at capacity.

While I am well aware that there are some legitimate and serious development issues that need to be finessed, the bigger picture is that the global fishing fleet – much of it supported by massive subsidies - is more than twice that is needed to harvest commercial stocks on a sustainable basis. A deal to eliminate or reduce the most damaging subsidies, estimated seven years ago at US$27billion - is not a complete solution to this global problem. However, it would make a serious contribution. NZ will continue to be extremely active in campaigning for this initiative.

To repeat the key political point: a successful negotiation here is not only intrinsically worthwhile from a conservation perspective; it is an essential part of selling the wider trade deal. These days, trade needs friends right around the world. The pro-trade lobby is simply too weak in many important countries to bear the political weight of a deal that has no positive environmental outcomes.

This is equally true of the negotiations to reduce or eliminate barriers to trade in environmental goods and services. Just one sub-set of the sector – the 43 goods the World Bank has identified as being clearly linked to climate change mitigation – would yield GDP gains exceeding $11 billion, according to one recent study.

Given the extraordinary success of a few developing countries to develop green technologies, it is absurd to regard this as something of interest primarily to ‘high technology’ developed countries – whatever might have been the case as little as five years ago.

In wind turbines, for example, developing countries account for over 30% of global exports – with China, India and Vietnam amongst the top five global exporters. Developing countries now account for 64% of total global exports of solar cells and panels.

This is only going to grow. Using the World Bank definition of product coverage, the average annual growth rate for the export of climate-friendly products averaged an astonishing 43% over the five year period 2005 to 2009.

The successful completion of the two mandated trade-environment negotiations, fisheries subsidies and environmental goods and services, represents the irreducible minimum we should expect of any final multilateral trade deal. But inevitably, in the wash up we will be laying down markers for future negotiations. At the very top of any list should, in our view, be a negotiation over fossil fuel subsidy reform.

Fossil Fuel Subsidy Reform

It is, I believe, increasingly clear that the broad framework for international subsidy disciplines – the SCM Code – is working pretty well, with two caveats. First, on some technical issues, there is certainly room for improvement here and there. As Chair of the Rules Group at an early phase of the Doha Round, I used to chair the subsidies negotiations. The second, and more important qualifier, is that there are obvious problems around subsidy peaks. Spikes, or peaks, in subsidies need, to some extent, customised deals.

The most obvious – and central to the work of the IPC – is agriculture subsidies and as you all know, we are negotiating the core reductions outside the SCM negotiations within the Agriculture Negotiating Group. An ambitious and radical reduction of agriculture trade and production distorting subsidies, as well as elimination of export subsidies is an absolute requirement of any final deal. Deeply controversial a decade ago, today this is no longer the case. Only looking back, they say, can one see how much progress has been made. We still have not nailed it down, however.

But we need to look beyond this most obvious subsidy peak. Here, fossil fuel subsidies stand out as the next target for a number of cogent reasons.

Let us look first at the numbers. They are huge. Total production and consumption subsidies are generally estimated at between US$400 and $700 billion per annum. To put that into perspective, let me put my Climate Change negotiating hat on.

Long term financing to help developing countries in their adaptation and mitigation efforts is a huge issue in the negotiations. So what are we talking about? Well, in the context of the Copenhagen Accord the developed countries have committed jointly to mobilise US$100 billion a year by 2020 for this purpose. Note that this is the long-term goal of the negotiation. I am not referring to the more immediate, and necessarily more modest, ‘Fast Start’ financing provisions.

In other words, fossil fuel subsidies of all types every year are somewhere between 4 and 7 times the total envisaged to help all developing countries fight climate change. I think that puts the puts the importance of fossil fuel subsidy reform into perspective.

It is very important to understand this is not an attack on fossil fuels per se. The reality is that the world will need to use fossil fuels for decades, unless the price competitiveness of renewable energy is vastly improved.

What we are trying to do here is different: reduce or remove over time a ludicrous distortion in the price signals that have two extremely important effects. First, they artificially increase the competitive problem that alternative, non-fossil fuels face. Second, they reduce the incentive to use fossil fuels more efficiently.

At the end of the day, putting a price on carbon, designed to discourage use of fossil fuels, while simultaneously subsidising the price of fossil fuels, is completely incoherent. However, just to declare something as ‘incoherent’ does not take you very far in the real world. We need a politically sophisticated pathway to remove or at least reduce that incoherence.

The potential gains in terms of reduction of emissions are huge. OECD estimates suggest that this could provide about 13% of the total estimated global reductions in emissions required to keep global warming below 2 degrees in 2050.

That is the broad and I think compelling case for setting out an agenda for long-term negotiations. There are inevitably major problems. First, since I am in Brazil let me make it clear that in our thinking the scope absolutely excludes biofuels subsidies. I very much appreciate that around the world there is a strong case for more carefully thought through biofuels subsidy regimes but that is a separate agenda.

Second, I think it most unlikely that a broad-based undifferentiated attack on fossil fuel subsidies would succeed. We have years of experience in negotiating reductions in agriculture subsidies to guide us here.

The first concerted attack on agriculture subsidies – known among veteran trade negotiators as the ‘montant de soutien’ negotiations (think of it as the quantum of support) failed. They failed, I believe, because politically you cannot just lump all subsidies together and then reduce them.

We made negotiating progress in reducing agriculture subsidies only when we successfully introduced comparable negotiating categories. Without the Green Box ‘safe harbour’ concept, for example, it is most unlikely that the EU in particular would have been able to make as much progress in subsidy reform.

To succeed with fossil fuel subsidy reform we will also need some type of ‘traffic light’ system that differentiates between different types of subsidies. Real purists never like these compromises but real purists never negotiate anything successfully.

This is extremely difficult for developing countries since certain types of consumption subsidies protect vulnerable communities. At the same time, these subsidies can impose crippling fiscal costs on them. We need a politically sophisticated pathway and the best way to do this is to provide a negotiated and concerted approach.

For those here who may be thinking this sounds extremely theoretical, let me emphasise that some early progress is being made. Crucially, in 2009 G20 Leaders committed to rationalise and phase out inefficient fossil fuel subsidies. This was followed two months later by APEC Leaders making a comparable commitment.

I spoke earlier about the importance of the most powerful countries providing political leadership – if we are ever to make progress on multilateral solutions. Here the first step has clearly been taken by the most powerful countries. However I also spoke about the importance of powerful countries working with smaller countries to build convergence. This is the model we are trying to follow. The lead has been taken in the G20. New Zealand is now forming a group of smaller countries to support this idea and initiative.

We established a few months ago a ‘Friends of Fossil Fuel Subsidy Reform’ group. It comprises New Zealand, Denmark, Sweden, Switzerland and – crucially, given their role in fossil fuel production, Norway We are now reaching out beyond this small group of smaller developed countries to approach a similar number of smaller developing economies. I am reasonably optimistic we shall succeed. Our aim will be to support the major economies but push strongly the agenda of reform.

I will not even begin to outline the nature of the policy or technical choices – other than to re-emphasise my strong personal view that any successful reform path on this massive subsidy peak will necessarily involve what professional negotiators call ‘a traffic light approach’ to reflect the different of environmental and economic impacts of fossil fuel subsidies.

Nor am I going to position NZ on what might be the best negotiating forum to carry forward a reform of fossil fuel subsidies – WTO, UNFCCC, a tailor-made negotiating Forum? Of course I have views. But this initiative is at an early stage. We are not ready to call in the architects, let alone the engineers to operationalise this project. We are still at the point of trying to build a political consensus in favour of long term reform of fossil fuel subsidies.

Conclusion

Reflecting on these two agendas – climate change and trade – it is clear that the linkages are strong. They are strong, at least I believe so, in terms of lessons as to how to bring multilateral economic negotiations to a successful conclusion. There are also strong policy linkages both positively and, potentially, negatively. Finally, while each country can of course pursue its own trade policies and its own climate change policies unilaterally – and there is certainly a case for pushing ahead on both fronts – personally, I don’t think the time has come to throw in the towel on multilateral negotiations on either front.

Thank you.

ENDS

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