ORAM Let’s grasp Asian realities
On trade, the prime minister is singing off-key, writes Rob Oram.
PRIME MINISTER John Key says his Government won’t sign a trade deal with the United States unless it gives our dairy farmers free access to its markets.
That sounds bold. But it runs completely contrary to Fonterra’s US and global strategy. Free US access for our commodities would damage not help it.
The US does indeed protect its dairy producers. It applies tiny quotas backed by low tariffs to severely limit imports of cheese, milk powder and other commodities.
But far from hobbling our dairy industry, these restrictions have pushed the Dairy Board and then Fonterra to develop high value products for, and investments in, the US that are free from trade barriers.
This is exactly what Fonterra is trying to do worldwide to lift dairy’s value to the NZ economy. It is the only way to overcome the big economic and physical constraints in New Zealand to growing low value commodity exports.
In fact, the very US commodity markets Key is seeking to open up for Fonterra and other exporters are the very ones in which they see very little value.
Fonterra forecasts that US and European demand for dairy products will grow by barely 1 per cent a year out to 2020. Thus its strategy calls for sharply reducing its efforts in those markets and switching the resources to India, which it forecasts will grow by 10 per cent a year, China (7 per cent), other Asian countries (up to 4 per cent) and Middle East and North African countries (4 per cent).
Moreover, those new markets will be growing their own milk supply more slowly than demand, creating opportunities for imports from New Zealand and elsewhere.
The US domestic market has always been a sideshow for our dairy industry. In 2002 our exports to it totalled $299 million, just 5.1 per cent of our total dairy exports. Last year they were $479m, only 3.7 per cent of the total. But just imagine how much more we’d sell in the US if there were no quotas or tariffs, the Government says.
No we wouldn’t. Our industry rarely fills its existing tiny quotas because of better commodity opportunities elsewhere. And, of the $479m of exports to the US last year, the barriers affected only 20 per cent. The rest were higher value products that faced no restrictions.
The US does interest Fonterra but as a source of dairy products for export and as a place to invest in high-value manufacturing such as making cheese for the fast-food industry.
To those ends, it has developed excellent partnerships with some of the most efficient US milk producers and processors. This segment of the US dairy industry has lifted exports by 180 per cent over the past 10 years, making the US a major player globally. Today exports account for 14 per cent of US production, with Fonterra as one of the largest exporters of US milk powder.
These leaders of the US dairy industry would love to have greater freedom at home in return for more market access overseas. But politically they are outgunned in Washington by the vast ranks of small, inefficient, family-owned dairy farms. These are winning more subsidies and protection from Congress, not less, as this column on August 12 described. It and other columns are available at on.fb.me/QeCP0n
With these US political forces arrayed against him, Key’s quixotic attempt to force the US to liberalise its dairy market is doomed to failure.
But, just for the sake of argument, let’s consider what would happen if he succeeded.
First, Fonterra would play the US commodity game opportunistically, as it does now. Rarely, though, would market conditions make it worthwhile.
Second, Fonterra would be competing domestically against the very same low-cost US producers that are its partners in US manufacturing and in exports. They would be perplexed, to say the least.
Thus, any effort by Fonterra to reap those minor and transient rewards from selling a bit more into US commodity markets would seriously distract it from its US and global strategy.
This is only one of many problems with the Government’s position on the Trans-Pacific Partnership trade negotiations. Here are a few of the biggest:
Key’s other bottom line is to preserve the substantial pharmaceutical savings Pharmac generates. That’s a crucial goal. But what ground might he give to achieve it?
Even some concessions to the US drug industry’s demands for longer and tighter intellectual property protection would have negative consequences. For example, Douglas Pharmaceuticals, the leader of our industry here, says the US proposals as they stand would substantially damage its ability to develop and export drugs.
AThe Government can’t or won’t articulate the value of a deal. Trade Negotiations Minister Tim Groser says he doesn’t believe in such calculations; the prime minister says the value would be up to 1.4 per cent of GDP. But he seems to have taken that from a study based on all 21 Apec members signing up, not the 11 negotiating. Moreover, the study didn’t count negative costs and it only had two scant references to New Zealand.
The Government says the TPP has the potential to be ‘‘a truly regional, high quality, comprehensive, 21st-century trade and investment agreement’’. But text on the table in the current round of negotiations in Auckland is largely a US push to impose its highly litigious and self-serving international trade and business mechanisms. The US has hijacked TPP, seeking to turn it into an instrument of geopolitical dominance.
Our Government won’t say what it stands for, other than Key’s two bottom lines on US dairy markets and Pharmac. But some other countries have staked out strong, sensible positions. For example, Australia is adamant it won’t sign up to the US proposed tribunals that would give foreign investors big new powers to sue host governments. China says it would never join the form of TPP the US is demanding.
Our Government says it would only sign a TPP that was in New Zealand’s best interests. Of course, that’s right. To maximise our opportunities we need an agreement that reflects the fastchanging new economic, political and business realities of Asia rather than a US view of the world.
But while our senior trade officials understand what we need in such an agreement, the prime minister, Groser and their political colleagues are palming us off with platitudes.
The real danger is that Key so loves doing deals he will do a bad one.
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