Global Issues Affecting the Primary Sector: WTO, MAF and the Rules of Trade
An address to the NZ Institute of Primary Industry Management and Rural Valuers Conference Christchurch, 29 June 2002
By Murray Sherwin, Director General Ministry of Agriculture and Forestry
Introduction
Thank you for the invitation to speak at this conference today. I've been offered the theme of "Global Issues Affecting the Primary Sector". I note that both Ruth Richardson and Dick Grant from MFAT will be speaking this afternoon on world trade issues - thus removing one of the subject areas that I might have addressed.
However, facilitating international trade in agricultural horticultural and forest products is a core part of MAF's work. So I have chosen to speak today about the ongoing importance of agriculture in the New Zealand economy, the fundamental dependence we have on the export of our agricultural products to sustain the sort of prosperous and growing economy we all wish to see, and the role of MAF in facilitating that trade through our work with the WTO and related bodies on the technical rules and standards governing trade in agricultural products.
The place of agriculture in New Zealand
Over the past couple of years, New Zealand's farmers have enjoyed the sorts of returns that have those with particularly long memories making comparisons with the 1952 Korean War related boom in wool prices. Certainly, in my 26 years of professional life, I have not previously seen this combination of favourable production seasons, robust international prices, low exchange rate, low interest rates and low inflation that has contributed to the very strong profit results recorded down on the farm.
One outcome of this rural strength is that it serves to remind all New Zealanders of just how important agriculture remains to the performance of the New Zealand economy. It is now 18 years since the structural reforms of 1984 commenced. The earliest steps in that reform process involved the removal of agricultural subsidies. New Zealand's farmers, uniquely in the OECD, have become accustomed to standing strictly on their own feet.
They have no government financial support to speak of, but compete vigorously in international markets against a myriad of trade barriers and against foreign producers who, in some cases, obtain the bulk of their income from the public purse rather than from the market place.
New Zealand has had a fairly long tradition of assuming that agriculture is a bit like the 1987 World Cup All Black Team - a world beater in its day, but now well past its use-by date. Through the 1950's, we attempted to build an industrial base behind protective barriers, largely on the assumption that a modern economy was, almost by definition, industrial - agriculture was viewed as rather too much like an unsophisticated developing country activity. Over the last decade or so, we have seen enormous hype surrounding high tech industries, and the line that New Zealand's future growth prospects are dependent on our joining the "New Economy". The high growth, high productivity sectors driving the US economy, in particular, were in the IT and communications sectors. The presumption was that to join the high growth, high productivity economies, New Zealand also needed to be active in those sectors.
What is interesting, and surprising for many, is that since the 1984 reforms, agriculture has sustained its place in the New Zealand economy. In fact, the share of GDP contributed by agriculture (broadly defined to include processing and downstream activities) has actually risen slightly over that period and now stands at around 17%. And taking the land-based primary sector more broadly, we find that about 240,000 people, or 13% of our work force is employed in these sectors. Moreover, these sectors continue to contribute almost 70% of New Zealand's merchandise exports.
In short, agriculture, continues to be the sector whose performance shapes the behaviour and dynamics of the New Zealand economy overall. But far from being locked in some sort of time warp, attempting to survive without change and third world in character, agriculture is our modern, dynamic, high productivity and high growth sector.
We don't have the hugely capital intensive and large scale manufacturing of microchips, computers and other high tech products that have driven the productivity boom in the US and elsewhere. We don't have the large scale manufacturing of consumer items such as motor vehicles, heavy machinery or mass consumer electronics that are important in most other parts of the OECD. Nor is it likely that New Zealand will ever sustain the sort of international financial sector that is so important to London, New York, Tokyo, Hong Kong and Singapore - and even Melbourne and Sydney on a more modest scale. Our remote location and small size effectively determine that.
But what we do have is a genuine competitive advantage in our agriculture and other land-based activities, such as horticulture and forestry. After 18 years of deregulation, removal of subsidies, removal of tariffs and quotas on imports, it is agriculture which has reasserted itself. It is in agriculture where we have something approaching global scale, where we have accumulated and effectively applied unique intellectual property, and where very strong and sustained productivity growth is being achieved of the sort that is essential to support a high growth, modern and wealthy economy.
What is also striking about New Zealand's agricultural sector is that it is utterly anomalous in OECD terms. No other OECD economy relies as heavily on agriculture as does New Zealand. No other OECD country (indeed, very few developed economies) exports such a high proportion of its agricultural produce as does New Zealand. Fully 87% of what we produce on the land is shipped abroad. 3 Agriculture and the rules of international trade
One implication from all of this is that few countries have such a strong interest as New Zealand in the rules and the organisations that govern international trade. For a small country with a heavy dependence on international trade in agricultural products, strong multilateral processes that establish rules governing that trade, and that provide for those rules to be enforced, are of huge benefit.
Evidence in this direction is found in assessments undertaken by MAF and MFAT on the impact of the Uruguay Round of multilateral trade negotiations. Some commentators have suggested that the Uruguay Round was as important for the New Zealand economy as the advent of refrigerated shipping or the CER agreement with Australia. I'm not sure whether those comparisons are valid. But the best analysis we have been able to undertake in MAF is that the Uruguay Round may have been worth something like $600 million per annum to New Zealand in terms of improved market access and lower export subsidies for our competitors in beef and dairy markets. Other benefits would also have accrued from other industries and from reduced tariff barriers elsewhere.
Dick Grant will this afternoon refer to a related study undertaken by the Ministry of Foreign Affairs and Trade which assesses the reduction in duties paid to foreign treasuries by New Zealand exporters as a consequence of the Uruguay Round. While the two studies employ different methodologies, both confirm that the gains flowing from the Uruguay Round were very substantial indeed.
As a result of the WTO Ministerial Conference in Doha in late last year, there is now a mandate for negotiations on a range of trade liberalisation measures, not just agriculture. Those negotiations are due for completion in 2005. They promise to be very difficult negotiations, but also every bit as important for New Zealand as was the Uruguay Round.
New Zealand's interests remain very much in achieving the elimination of export subsidies on agricultural products, improved market access and reduced levels in trade distorting domestic support offered to farmers. In short, New Zealand continues to have a very strong interest in moving agriculture towards something resembling the open and free markets we see mostly in international trade in manufactured products.
MAF's role in the international trade arena
So what does MAF have to do with all of this? After all, the agency with prime responsibility for trade negotiations is MFAT, and you will be hearing from Dick Grant of MFAT later today.
Within MAF, we define out mission statement as " Creating opportunity and managing risk in New Zealand's food, fibre, forestry and related industries." Given how important international trade is to our agriculture and forestry industries, it is obvious that creating opportunity and managing risk takes us directly to the rules governing international trade.
My team at MAF has a significant role in these trade negotiations from the New Zealand side, working very closely with the MFAT negotiators. MAF tends to provide the technical analysis to support the agricultural and forestry negotiators.
But our interests are much wider than just the WTO negotiations.
Trade related issues in a variety of guises represent a significant part of what MAF is now engaged in.
It cuts across all of our business units within MAF and it sits at the essential core of what MAF does, and is probably the activity that we engage in that has the biggest direct impact on the welfare of both the New Zealand farming community and the broader New Zealand economy.
Of course, to the extent that we are successful in lowering barriers to trade, we also benefit the welfare of our trading partners. One of the great mysteries of life as an economist is that so many countries continue to burden themselves with trade restrictions and to deny the gains from trade.
The significance of the SPS Agreement
The Uruguay Round not only delivered substantial gains in terms of market access and improved tariff quota access for our agricultural products, it also saw the introduction of the Agreement on the Application of Sanitary and Phytosanitary Measures - more colloquially known as "The SPS Agreement". At the risk of having you all nod off to sleep, I would like to dwell a little on this. I do so because the SPS Agreement is an essential part of the fabric of our international trade relationships, it is of core importance to New Zealand, and it is a key example of how New Zealand continues to be very influential in matters governing international trade in agricultural products.
The agricultural negotiations of the Uruguay Round were primarily about domestic support arrangements, export subsidies and market access - much as with Doha. However, a good number of the GATT contracting parties (now WTO members) felt that the effects of liberalisation in those areas could all too readily be negated or reduced by trade restrictive actions in the sanitary/phytosanitary area.
By this is meant restrictions based on hygiene standards, biosecurity risks or other similar limitations to trade that may or may not be soundly based in terms of the risks.
In essence, the parties to the GATT round (amongst which the Cairns Group, including New Zealand, were very active) felt that some form of agreement was necessary on how to interpret Article 20 of the GATT which provides for members to employ trade restrictive measures as necessary to protect human, animal or plant life or health.
It is this Article 20 provision that allows New Zealand, for instance, to ban meat imports that might raise a risk of bringing with it foot and mouth disease, or under which Australia claims to ban New Zealand apple imports because of a concern that they might introduce fire blight into Australia. It is this provision that allows us to ban or impose conditions, for example, on imports of Californian grapes due to a concern about black widow spiders or glassy winged sharpshooters that might arrive with the grapes. 5
The obvious risk is that this provision provides ample scope for members to subvert the intent of the trade liberalisation measures by introducing new SPS measures with little or no technical justification. In effect, it is very easy to use health and biosecurity related matters to provide covert protection for domestic producers.
The SPS Agreement recognises explicitly the existence of certain multilateral technical standards and ascribes to the bodies originating these standards (OIE, Codex Alimentarius and IPPC - known in the trade as the "three sisters . In effect, the SPS Agreement has an inbuilt presumption that measures already approved by these bodies, applied even handedly across domestic products and imports and even handedly across different suppliers, are acceptable.
Members must have technical justification for measures which are more stringent or trade restricting than the international standards approved by these bodies.
The OIE, Codex and IPPC develop international technical standards. The SPS Agreement provides a framework of rules which integrate the technical standards into WTO trade law, and thus provide a basis by which these standards can be enforced. Under the SPS framework, concerns with a trade partner's trade restrictions can be discussed within a known and agreed framework, can be elevated to a formal bilateral meeting in the surrounds of the SPS Committee, to the Committee itself and, ultimately, can be directed to a dispute settlement process.
The significance of this work can be judged by the various points at which it impacts on New Zealand's trade, both inward and outward. For New Zealand exports, the SPS framework enables us to agree with our trade partners on objective, risk-based and scientifically justifiable standards of hygiene and disease risk which our products should meet to enable them to be admitted to our export markets.
Similarly, on imports, the SPS Agreement provides a framework in which MAF is able to undertake risk assessments on incoming goods, and establish standards that will both facilitate trade and protect our human, animal and plant health. Given our biosecurity responsibilities, this framework is absolutely at the core of our work on managing risk at the border. Note that this is not an exercise in achieving zero risk - which would amount to banning all trade completely. Rather, it is aimed at explicitly identifying a level of risk that is "acceptable", using as much science and objectivity as can be applied, and devising transparent processes which can reasonably be expected to deliver that acceptable level of risk.
Reflecting that, New Zealand has had, and continues to have, a very significant influence of the evolution of SPS issues. MAF employees have had, and continue to have, a huge influence on the development and application of the international rules of trade. It is one of those archetypical areas in which New Zealand continues to punch well above its weight in terms of the influence we achieve. We chair major international committees, serve on expert panels, provide background technical analysis, draft strategies, policy frameworks and provide advice. What I find striking is how often my foreign counterparts comment on how much they rely on and appreciate the New Zealand contribution on these matters.
SPS issues are a regular part of the dialogue we have with trading partners - almost on a daily basis. Recent examples include an extensive round of discussions with the US authorities earlier this month, with Chinese authorities last week, and with Korea last Tuesday. These are detailed, time consuming and essentially technical discussions aimed at facilitating trade between New Zealand and our counterparts - laying the platform on which our companies can undertake their international trading activities.
In the area of dispute settlement, MAF has undertaken the technical and economic analysis underlying such contentious issues as the EU spreadable butter case, US lamb tariffs and Canadian dairy price arrangements. In each case, we have been successful in applying the rules and processes of the WTO to protect and further the interests of New Zealand's farmers.
Concluding comment
Agriculture has a pivotal role in the New Zealand economy. Within the developed world our economy is uniquely agricultural, and our agriculture is uniquely export oriented.
Given that, we have a huge interest in the effective functioning of the WTO and its associated multilateral standard setting agencies.
Within MAF, the work of facilitating international trade is a core function. Much of this is essentially technical, detailed and low profile. It requires high levels of technical expertise, and solid experience of animal and plant health issues and food processing technology. It requires a thorough knowledge of domestic and international practice. New Zealand expertise is very influential in shaping the international rules of trade.
From MAF's perspective, we view this as vital and very high yielding work. It is the sort of work that gives us confidence that we are indeed adding real value to our agricultural sector and to the economy more broadly.
Contact for Enquiries
Director-General
Ministry of Agriculture and Forestry
PO Box 2526
Wellington
Tel: +64 4 894 0100
Fax: +64 4 894 0720
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