The future of economic integration in Asia Pacific

Speech: New Zealand Government

The Future Shape of Regional Economic Integration in the Asia Pacific Region

We appreciate the effort that the Japan Economic Foundation puts into these events. It is important to have opportunities for international level exchanges involving a wide range of stakeholders from outside of government. So I very much welcome this initiative of the Japan Economic Foundation and the New Zealand Institute of International Affairs.

What is the optimum future shape for regional economic integration in the Asia Pacific region? None of us will really be able to provide a definitive answer to that question. But there are plenty of ideas out there, and I trust that these will be fully aired during the course of your discussions today.

What is happening right now in the Asia-Pacific region is extraordinary.

The Asian region is currently driving the world economy. The IMF forecasts that average growth for developing and emerging countries in the Asia will be around 9.4% for 2010 and 8.4% in 2011. This contrasts with IMF forecasts for growth in advanced economies of 2.7% in 2010 and 2.2% in 2011.

This growth dynamic is occurring right on our doorstep and presents major opportunities for the large populations of Asia. It is also good news for our friends and trading partners in Europe and in North America who are looking at an extended period of fiscal consolidation on the top of major demographic pressures. These pressures will inevitably constrain US and European growth and so growing consumer markets in Asia will continue to be an important source of world growth

It means that within the next few decades we could see four economic super-powers in the world: China, India, the US and the EU, plus a number of significant second-tier economies such as Japan, Korea, Indonesia, Russia and Brazil.

Each one of us in the Asia-Pacific region feels this change. Each one of us wants to position our economies to take full advantage of it. And we are all implementing strategies to ensure we have the opportunity to contribute to and benefit from these changes.

This has meant building relationships on an unprecedented scale, creating dialogues and commitments to one another and deepening our understanding of each others’ cultures and economies.

New Zealand is part of this – and has been part of it for some time. Of all of the regions’ partners, our experience with the entry of the United Kingdom into the European Community in the 1970s taught us that we are the ones who can least afford to be complacent. We must have an active trade strategy if we are to continue to grow and prosper and to make a contribution to economic growth and social prosperity in our Asian neighbours.

We don’t live in this fanciful world where the dynamic Asia-Pacific region has de-coupled from large developed markets. We know that the rapid growth in intra-Asia trade has been driven largely by trade in intermediate goods destined for final products demanded by the EU, the US and Japan. A 2010 study by the Asian Development Bank highlighted that nearly 59% of East Asian exports were destined for the EU, the US and Japan, when taking into account the proportion of trade to other East Asian countries that was destined for final goods demand in the G3 markets. This 59% compares to 38% when looking at the static trade figures.

I say all this to highlight the need to grease the tracks of modern trade in this era of increasingly fragmented supply chains and the criss-crossing of borders of materials, resources and products. We need to do everything we can to remove unnecessary impediments to trade to drive further productivity and welfare gains.

It is against that backdrop – the rapid growth taking place in the Asia-Pacific and greater interdependence through trade – that a growing web of integration initiatives has taken hold at the governmental level. In short, an Asia-Pacific region is being developed through a number of mutually supportive approaches to integration. There is no chief architect overseeing this project, but it’s coming together.

So what is New Zealand’s strategy? Well, for maximum benefit and despite all odds, we must strive to complete the WTO Doha Development round. All of us stand to gain immensely from an ambitious outcome to these negotiations. They must remain a top priority. I cannot tell you today when I think those negotiations will be concluded. I do not know. But they remain a critical backdrop to the discussions today and continue to hold great promise for global trade flows tomorrow.

The WTO is of course not the only vehicle to set trade rules. New Zealand, like most other WTO members, has supplemented its WTO engagement with an active programme of talking to its trading partners both individually and in likeminded groups.

And we’ve chalked up some significant successes: China, Hong Kong, Malaysia, Thailand. We‘ve started too with Japan, India and Korea.

China: New Zealand was the first developed country to conclude an FTA with China. In the 22 months since signing that Agreement, we have seen a 77% increase in our exports to China which is now our second largest trading partner behind Australia. At current rates of growth, and that is something we can’t assume, China would overtake Australia as our largest trading partner in 5-10 years.

Hong Kong: a few months ago we became the first country, other than China, to conclude an FTA with Hong Kong. That was already an open market for goods. But this agreement makes it a more accessible market for services and an even more important launch-pad for trade into China. This consolidates New Zealand’s position in that greater Chinese market.

Malaysia: On top of existing bilateral trade agreements with both Singapore and Thailand, we have also concluded a high-quality FTA with Malaysia which has now come into force. This builds on the regional trade agreement that New Zealand and Australia have concluded with the ten ASEAN countries which as a bloc, are our third largest trading partner with total trade breaking ten billion dollars for the first time in 2008. We continue to build and consolidate our trade agreements with the ASEAN countries (both bilaterally and through AANZFTA) as we are with China.

We are in discussions with Japan about whether we can negotiate a trade agreement with that important market. And we are negotiating bilaterally with Korea and India, and have begun scoping a negotiation with Russia.

Even this level of intensive one-on-one activity is being augmented in our region by a complex overlay of plurilateral networks. And each one of us is involved in this.

From my point of view, a real highlight has been the entry into force of the ASEAN-Australia-New Zealand Free Trade Agreement in January 2010. AANZFTA represents a comprehensive Agreement that will deepen economic integration between 10 ASEAN economies and Australia and New Zealand. It covers trade in goods and services; customs procedures; sanitary and phytosanitary measures; standards, technical regulations and conformity assessment procedures; the movement of persons and e-commerce.

AANZFTA commits all its parties to high levels of tariff elimination to be achieved within a few years, with transition periods for our least developed partners.

AANZFTA is a key piece of Asian regional trade architecture – one that truly locks New Zealand and Australia into an economic relationship with our Asian neighbours that we hope will be enhanced further as ASEAN itself moves closer towards its stated goal of an ASEAN Community.

AANZFTA will help set the conditions under which even greater regional integration can be achieved. And this is where the vision for a Comprehensive Economic Partnership in East Asia (CEPEA) enters the picture.

CEPEA is a vital institution linking all 16 countries of East Asia Summit (EAS – including Australia, New Zealand and India). Its objective is to deepen economic integration, narrow development gaps and achieve sustainable development. It is concentrating its work on three pillars: economic cooperation; facilitation of trade and investment; and liberalization of trade and investment.

Longer term, I expect CEPEA will become central to the transformation of the economic structure of the Asian region. It will expand domestic demand within the region; enhance economic efficiencies; and target and speed infrastructure development to better connect its members. These elements are directly related to the need to rebalance economic growth in the region – a primary policy response to the 2008 economic crisis.

Together with our EAS partners we are now embarked on some of the hard yards that will be necessary to achieve CEPEA: working groups on rules of origin and tariff nomenclature. We stand ready to engage as soon as we can on customs procedures and economic cooperation.

Looking across the Pacific, there is the Trans-Pacific Partnership (or TPP). This is one of the vehicles for building bridges between Asia and the Americas. It comprises the original Trans-Pacific or ‘P4′ countries (New Zealand, Brunei, Chile and Singapore) with the US, Australia, Peru, Viet Nam, and now Malaysia. Others in the Asia-Pacific region have shown interest in joining the TPP.

We hope that the TPP will establish a high quality platform linking the two regions. Like the EAS’ CEPEA, our hope is that the TPP will go beyond traditional trade liberalisation and address some of the ‘behind the border’ issues that traders face when doing business across the Pacific. We want to create a more coherent regulatory environment for businesses to ease constraints and hurdles to facilitate even more trans-Pacific trade.

In APEC we are talking about the concept of a Free Trade Area of Asia Pacific (FTAAP), involving economies from East Asia, North America and Latin America.

These multiple processes are important for engaging major players in discussions on trade architecture. They provide New Zealand with the opportunity to persuade them to adopt our approach to achieving high quality FTAs in the region. Ultimately we will not achieve the consolidated regional trade architecture that we want unless these major economies, as well as ASEAN, Japan, Korea and others are willing to negotiate among themselves as well as with us.

But why are we involved in these discussions at all? If we are getting new market access through bilateral FTAs why do we need regional trade agreements? Why are we concerned about regional economic integration?

Let me come now to the particular question you have set yourselves today: what is the optimum future shape for regional economic integration. I would like to make three comments:

We need to be ambitious. This is a constant theme of New Zealand in regional discussions. We can’t afford to move towards integration on a low-quality, low-ambition model. That only encourages new entrants to demand further exemptions and carve-outs. We will end up with regional economic integration which will be the envy of no one and of little practical value to our companies and our citizens.

That doesn’t mean that countries that cannot immediately meet high quality criteria cannot participate. But it means that they have to commit to meeting those criteria over time. And there is scope within our regional processes already to assist them.

We also need to be inclusive. This is not easy. Firstly, inclusion must be on the basis of agreement to meet those high quality standards I have talked of. And some countries face real problems in developing the capacity to participate in what are complex regional processes and negotiations. We need to assist them. There is also the question of the negotiating dynamic itself. We need to find negotiating models that work for us in this region. The ASEAN Plus model is one approach. TPP is another.

I can’t let this opportunity pass without referring to one issue that I think is important. We need to find ways of ensuring that this inclusion extends to both the United States and to India. Both are engaged in the region in various ways, but due to geography and history and other factors they are pulled in other directions as well. New Zealand has argued that India should join APEC. We have welcomed the ASEAN decision to invite the US to join the East Asia Summit. How these two extraordinarily important economies are involved in regional economic integration in our region will continue to be a key issue for us all.

My final point is that we are dealing with an expanding agenda. Our understanding of what needs to be included in our regional economic integration work continues to develop and needs to take account of emerging issues. These include environment issues; labour mobility; logistics and physical connectivity issues; competition issues. These are already part of the debate, though we are still feeling our way as to how best to deal with most of these on a regional basis and in a negotiation framework. But there are new issues coming our way: the regulation of scientific developments in numerous fields, counterfeiting, corruption, food security, food safety, internet commerce, privacy issues. Some of these are old issues, some new, but they are all present or arriving on our agenda. How are we to deal with new issues as a region, given our inherent diversity?

There is a lot at stake. The economies in East Asia account for 32% of New Zealand exports and 38% of New Zealand’s overall (import and export) merchandise trade. The economies of APEC account for over 70% of New Zealand total merchandise trade. Our trade with APEC economies has been growing at an average of 4.5% per annum over the last 20 years.

The Asia Pacific region includes some of the world’s most open economies, such as Hong Kong and Singapore. But it also includes some of the most serious trade barriers that New Zealand exporters face, including high tariffs imposed by some major trading partners on our dairy and other agricultural exports.

So New Zealand will continue to pursue this multi-pronged strategy: negotiating FTAs bilaterally and with groups of economies, while continuing to scope the longer-term goal of a region-wide FTA.

What is happening strategically is fascinating and very important to New Zealand. We are extremely well positioned. New Zealand now has five or six $NZ1 billion export markets in Asia. This signals the transformation that has taken place since the 1970s. And it can only get better.

Lastly, I want to suggest that while the goal is always multilateral trade liberalisation and reform, there is still a place for bilateral trade agreements even as we make progress in the plurilateral and multilateral arenas. These will continue to allow us to go further than we might otherwise be able to go, both in terms of market access and in terms of exploring new issues such as Trade and Labour or Trade and Environment. Bilateral agreements therefore become vehicles for promoting greater regional integration and trade liberalisation.

I wish you well in your deliberations today.

Thank you.

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