Making way in a polycrisis: challenges and opportunities facing New Zealand-Japan trade

The current state of trade relations and economic engagement in the Asia–Pacific region is highly problematical. The disruption facing commercial operators today is on a scale, both generally and in complexity, not known since the world wars of last century. The situation has been described as a ‘polycrisis’, meaning a cluster of inter-connected systemic risks. In these unpropitious circumstances, it is essential for New Zealand and Japan to remain firm supporters of modern, high-quality trade agreements, to help ensure their scope and content evolve over time in response to the way the dynamics of the international marketplace itself are forever changing.

This presentation is about the current state of trade relations and economic engagement in the Asia–Pacific region. The cross-border activities involved are of huge importance to Japan and New Zealand. Each of us is an island nation. We both depend heavily on our ability to exchange goods and services with other countries. Long experience has taught us that interaction with trading partners is always challenging and never straight-forward.

However, without exaggeration, the disruption facing commercial operators today is on a scale, both generally and in complexity, not known since the world wars of last century. The situation has been described as a ‘polycrisis’, meaning a cluster of inter-connected systemic risks. They are not hard to identify: the on-going global pandemic, climate change, conflict in central Europe and the Middle East, blockades of trade moving through the Red Sea, economic sanctions on Russia, threats to critical energy supplies and economic and geo-strategic rivalry between the world’s two largest economies. These disruptive forces have combined to make the world we live in an uncertain and unpredictable place, not only for the trade community in our two countries but also for global citizens everywhere.

I will return to this unstable international environment and its impacts below. But first, I will explain the contribution that legal instruments in the form of agreements and binding commitments make to the functioning of the trading systems in our region and globally. On the trade frontline are exporters and importers and the companies they work for. Those firms may be small- or medium-size enterprises or big multinational corporate entities with a presence in many economies. They make trade happen. Whether their operation is small or large, private enterprise is constantly seeking new ways to expand existing commercial links or exploit new opportunities. For their part, regulators in the public domain who work for governments are rarely ahead of the game. They usually struggle to keep up with trends in the marketplace. This is because it is not the regulatory agencies but practitioners in the trading arena who set the pace of business activity. The market is constantly evolving as private companies anticipate or respond to shifts in consumer tastes and preferences. Successful companies regularly innovate in areas such as design, composition, production and distribution to establish their point of difference with competitors.

Ambitious entrepreneurs seeking profits are not usually enthusiastic about government regulation of the marketplace. It is a common characteristic of private sector participants that they value their independence. But they know the inherent risks if trade was wholly unregulated and the marketplace unruled. There must be discipline and agreed means to manage and monitor business behaviour. It is not surprising that every government attaches great importance to its sovereign right to approve or disallow foreign operators having access to its domestic market. And governments are normally just as vigilant and careful about granting approval for their own commercial community to send goods and services offshore.

Most business ventures will acknowledge that for their operations to work efficiently and generate stakeholder returns, certain conditions must be met. One operational priority for every commercial enterprise is to have knowledge and assurance about the trading environment they work in. They depend on a regime of rules and regulations that are publicly available and fairly administered to ensure assurances given are upheld, and that the status of contractual obligations will be protected. When disagreements occur, as they often do in business dealings, it is highly desirable there should be in place a recognised legal mechanism and process for settling disputes.

Trade law

For those sorts of reasons and to enable the trading arena to adapt as it has grown increasingly complex, formal undertakings with legal support have become a standard part of the trading landscape. They set out terms and expectations negotiated and accepted by the trading partners about how trade between them will be carried on. Building and regularly updating this body of trade law fills a critical role in enabling the wheels of global and regional commerce to turn.

For much of the past three decades, since the early 1990s, international trade and the movement of capital, goods, people and services among countries within the Asia–Pacific region enjoyed a lengthy period of stability. Increasing inter-connection and inter-dependence among trading nations became the norm. As the process known as ‘globalisation’ gathered pace, formal trade agreements became essential to provide a framework within which goods and services could move with minimal regulatory interference. Early trade deals had a singular focus on reducing the cost of trade by cutting tariff levels. Only a fraction, 10 to 12 per cent, of the benefits of modern trade agreements now come from lower tariff rates. The big returns today are gained from measures that make doing business behind foreign borders easier, encourage uniformity among regulatory regimes in different national jurisdictions and address 21st century commercial developments such as digitalisation, disciplines on labour practices, environmental sustainability and protection for intellectual property rights.

A small number of deals among trading partners in the early 1990s grew rapidly as the years passed. Over 100 trade deals have been concluded since 2000 in Asia alone. By 2010 ‘globalisation’ appeared to have become a permanent reality. A core feature was the formation of production networks, or supply chains as they are often called, that linked many points of intermediate production. They were established to enable the smooth exchange of sophisticated goods and services and in growing volumes. A Sony television or a Toyota car, for example, contain parts from as many as twenty different regional sources.

Favourable setting

In that favourable setting, countries that depended on trade such as Japan and New Zealand did well. They prospered because much of what they produced was not consumed at home but sold at higher market prices offshore. Japan was out in front. A distinguished Japanese economist after the Second World War was Saburo Okita. He was prominent in the campaign to rebuild Japan’s economy after the war. Okita-san introduced the term ‘flying geese model’ to capture Japan’s successful leadership from the 1960s of neighbouring Asian markets like South Korea, Singapore and Taiwan in their push for industrialisation. Post-war Japanese companies set global standards for excellence in fields such as automobile manufacturing and electronics. The ‘just in time’ concept to ensure inventory stocks were maintained at optimum levels was another Japanese initiative.

A post-war shock to New Zealand came in 1973 when Britain joined the European Economic Community. New Zealand had no choice but to diversify its trade network. Alternative destinations for its agricultural exports had to be found nearer to home in regional and other global markets. In both our countries exports earned revenue to pay for the imports that allowed Japanese and New Zealand citizens to enjoy the benefits of a first-world economy. The cultural and scenic attractions of each country attracted a growing number of foreign visitors. The phenomenon of global tourism arrived. Both our countries benefited because visitor spending was a major contributor to the national economy.

After 1990, for those who spent much of their careers in the field of trade policy or the business of buying and selling goods offshore, ever expanding trade and tourist numbers became a familiar feature of the work environment. Consumer tastes grew more selective, fashions changed and the demand for top of the range products increased. So, too, did the expectation that the goods on offer would always be of high-quality. These trends highlighted the fact that market dynamics are never still but always on the move. That process has driven the transformation of company strategies and business models. It has required firms to regularly adjust their workplace practices and ensure the frequent upgrade of employee skill sets. Japan, for example, was an early world leader in developing personnel management strategies for modern companies to follow.

Although commercial change through the 1990s and into this century was constant, the direction it took was reassuringly positive. The mid- and long-term future of world trade appeared secure and predictable. This seemed to support the arguments of those who over the years had painted an appealing picture of the benefits that would flow from lowering barriers to trade and fostering business transactions across borders. Not least, that harmony among nations would be encouraged by economic inter-dependence.

There was an assumption that a competitive but peaceful and rules-based world would give nations the incentive to forgo enrichment through conquest and colonisation and focus on their ‘comparative economic advantage’; that is, concentrate on what their productive sector did best. There would inevitably be some losses to jobs and incomes through competition with cheaper imports. But overall, consumers would have a greater range of choice, pay lower prices and enjoy a higher standard of living. The work of the World Trade Organisation (WTO) established in 1995, and the ever-growing number of formal bilateral and plurilateral agreements among trading partners, seemed to provide a reliable, emerging body of international law to lock-in the anticipated benefits of open markets and freer trade.

Hard truth

What a vastly different world we are now experiencing. In the last four years our planet has become a less friendly, less certain and stable place in which to live and work. One result is that we have learned a hard truth. Trade does not operate in a vacuum. It is subject to the influence of many other forces. Some of which have nothing to do with the movement of goods and services and people. A notable example was the arrival of a global pandemic on a scale the world had not previously witnessed. Without doubt the impact of Covid-19 has been the most difficult challenge our countries and their business communities have faced in the memory of most of us.

The Covid virus and its mutations have inflicted widespread disruption to daily life. The human and economic costs have been enormous. Supply chain interruption through lockdowns, shipping delays and port congestion has upset normal trade patterns. Tourism numbers more than halved due to restriction on people movement across borders and are only beginning to recover as borders reopen.

The second big global issue of concern is the geopolitical tension and uncertainty created by economic and strategic rivalry between the two most powerful nations, China and the United States. This has included the imposition of sanctions against their respective trade sectors. The situation is not a minor matter for Japan and New Zealand. We share a close interest in how these two major players manage their relations. For each of us China is our main trading partner. For both of us the United States is our principal security guarantor. Beyond question China is flexing its muscles in our region; its assertive military activities in the South China Sea are an example. The Belt and Road Initiative or BRI is another mechanism for expanding China’s influence. The other dominant power, the United States, remains the stronger of the two in hard power terms. But its readiness to lead like-minded democracies and its ability to determine the course of world events, including the trade sphere, have weakened.

There are other factors contributing to this scene of global instability. They influence the decisions made by political and business leaders and the recommendations of policy-makers in capitals around the world. Several additional negative trends and developments come to mind. The war between Ukraine and Russia has had consequences well beyond central Europe; as, more recently, have hostilities between Israel and some neighbours. These conflicts have upset the long-term plans of trading companies and created deep uncertainty in the marketplace. The impact of climate change is another disruptive factor. This relentless process is shown in the occurrence of extreme weather events as Japan and New Zealand have found to their cost in recent times. Closer to home for New Zealand we are troubled by the rising sea levels affecting several of our close Pacific Islands neighbours that threaten their livelihoods. Tonga, Samoa, Kiribati and Vanuatu, for example. We are becoming familiar with the term, ‘climate refugee.’

Disturbing trend

Another disturbing trend is the declining influence of global institutions such as the United Nations and its Security Council. Respect for international law has been eroded. There is less regard for the rules-based international order that came into being after the Second World War and for decades underpinned the conduct of world affairs. The World Trade Organisation is a notable casualty. More than a quarter-century since its creation the WTO needs significant reform. Its original rules that are still in place were not designed to address some of the major trade issues of today such as industrial subsidies, the impact of artificial intelligence, the role of state-owned enterprises and nontariff measures that distort trade patterns. The WTO continues to do useful work in fields like technical co-operation, capacity-building and information sharing. But the agency moves by consensus and that is hard to reach in a membership of close to 170.

It is no exaggeration to say the WTO is today in crisis mode. Its broader trade liberalisation and rules-making role has largely come to a halt. Nor can it fulfil the other main activity that functioned well in the early years, of acting as a neutral umpire in settling arguments among trading nations. The WTO’s dispute resolution process has been unable to function effectively because the United States is blocking appointments to the Appellate Body that considers disputes. Japan and New Zealand are in a cluster of fourteen WTO members in Geneva drawn from all regions and known as the ‘Ottawa Group’. They are trying to resolve the issues that are currently impeding the work of the appellate panel and reset the trade reform agenda in areas such as agriculture, e-commerce, fisheries and trade in environmental goods. Trade ministers from WTO members met in late February in Abu Dhabi to review the functioning of the multilateral trading system and the future work of the WTO.

A third trend in the global arena is of concern to countries like Japan and New Zealand that believe in the democratic way of life and individual freedoms. This troubling development is the expanding number of countries in several continents that have in recent times fallen under autocratic rule. Dictatorship or minority control has little attachment to values such as individual freedoms, citizen well-being and the common good, which our two countries hold dearly.

Declining support

Finally of note, there has been a decline in support in many societies for the concept of free trade and closer economic integration among trading nations. Without doubt open markets have rewarded consumers and producers around the world and helped lift millions of people out of poverty. We have seen ample evidence of this in the Asia–Pacific region. But it cannot be argued that the benefits of freer markets have been evenly shared. In many economies large and small, developed and developing, open borders and more accessible markets have eliminated jobs and traditional sources of income. Where effective social safety nets are not in place this damage has inflicted scars that are slow to heal. It is understandable that the disadvantaged in many societies feel left behind and mar- ginalised, and, as witnessed in several societies not least the United States, are easily influenced by populist rhetoric such as ‘America First’.

In the face of these many negative forces, it is not surprising that we see a trend for visions of a ‘free trade world’ to be put aside in favour of a more pragmatic approach to the way that countries conduct their trade relations. In today’s inter-dependent world no region or individual nation, even the largest, could realistically aim to be self-sufficient in goods and services. But the confusion caused by Covid, made worse by the flow-on effects of the Ukraine and Middle East conflicts and concerns over the strains in China–US relations, have persuaded many countries to re-examine their trade strategies. The purpose being to find ways of reducing the local economy’s exposure to disruptive forces offshore over which individual governments may have little influence.

One approach being followed is to diversify import sources. Here the objective is to have less concentration on a few dominant overseas suppliers in favour of a larger spread of foreign sources. Another tactic is to ‘de-couple’; that is, achieve greater self-reliance through lowering the dependence on foreign sources by imposing high tariffs and offering subsidies to promote local industrial production. This process has been termed ‘bringing supply networks on-shore‘. As a result, the number of measures put in place by individual governments that favour domestic sources and make foreign suppliers less competitive continue to increase.

This is evident in fields like energy, essential medicines and medical equipment, critical minerals, and innovative technology such as semiconductors and computer chips. A variation of ‘on-shoring’ is a practice described as ‘friend-shoring’. This is where countries show preference to individual or small groups of exporting nations with whom they have long-term, close and stable bilateral relations. Under both the Trump and Biden administrations, these protectionist measures have found favour in the United States, formerly and for many decades the acknowledged champion of free trade.

Trade implications

I have painted a broad background of the volatile world we live in today. What does it mean for our two nations? Especially in the trade field? At the multilateral level we have witnessed the collapse of the Doha Round of trade negotiations. The weaknesses of the WTO and the loss of much of its earlier relevance and influence are starkly evident. To that sorry mix we can add what seem to be intractable differences between China and the United States. These are all serious negative forces. To which we can add, as the failed Doha Round showed, the challenge of achieving consensus among nearly two hundred trading nations.

As a result, in present circumstances it is unrealistic to contemplate any new globally comprehensive trade agreement such as the Uruguay Round of negotiations produced in 1994. In the regional setting, the ambitious concept of an all-encompassing ‘Free Trade Area of the Asia–Pacific’ (FTAAP), which Japan and New Zealand and most of the other 21 APEC (Asia–Pacific Economic Cooperation) members have supported since 2005, is struggling to survive as a credible goal. What might be termed ‘the period of peak FTA’ has clearly passed.

In the face of this unfavourable situation in the multilateral setting, it is not surprising that some trading nations have gone in search of other options. One trend is for groups of like-minded countries that share similar levels of trade ambition and are willing to set their own rules, to negotiate ‘plurilateral agreements’. Recent examples completed in the Asia-Pacific region and now in force are the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which has eleven members, and the RCEP, the fifteen-nation Regional Comprehensive Economic Partnership. Japan and New Zealand belong to both groups.

Another trend is towards sector-specific agreements. For example, digital trade deals that support the expansion of ecommerce. This is another growth field where Japan and New Zealand have been actively involved. One of the first digital economy partnerships was signed in 2021 by New Zealand, Singapore and Chile, who have in common that they are small, open to trade, Asia–Pacific economies. A third emerging trend is support for what are described as ‘framework agreements’. This is where partners agree to work together on a narrowly defined range of specific contemporary issues such as those around infrastructure, sustainability and standards setting in emerging technologies. The Japan–US Commercial and Industrial Partnership is an example.

A more broad-based concept is the Indo-Pacific Economic Framework (IPEF), an initiative launched by the United States in May 2022. When it was announced, IPEF was applauded as an apparent affirmation of serious US interest in the wider region’s future economic well-being. Japan and New Zealand were among the fourteen founding signatories. IPEF has been described as ‘not a typical free trade agreement’. Its focus instead is on four specific ‘pillars’: trade, supply chains, clean energy and anti-corruption. There is no reference to improved market access as a goal, which Japan and New Zealand might have preferred. There is, however, a welcome promise by the US sponsors that modern trade rules will be built into the final agreement and specific regional projects promoted. At this stage, with negotiations among members concluded only on the supply chain pillar and still unfinished on two other pillars, IPEF is best described as ‘a work in progress’. Finalising the trade pillar is a serious test of the US commitment to regional trade liberalisation and regulatory co-operation. The challenge for US negotiators in 2024, with a presidential campaign underway, will be to construct an outcome that will demonstrate that IPEF can offer more to the region than the impression it is primarily being promoted as an alternative to China’s Belt and Road Initiative.

 Japan’s response

Under the late Prime Minister Shinzo Abe, Japan’s response to the trade challenges I have outlined was to emerge from three decades of minimal growth to reassert its standing in the world and closer to home in the Asia–Pacific region. More than 80 per cent of Japan’s global commerce has the security of being covered by formal agreements with trade partners. An Economic and Strategic Partnership Agreement with the European Union was finalised in 2019. It created the world’s largest free trade zone. After the United States under President Trump withdrew from the Trans-Pacific Partnership, Japan stepped forward to sponsor the CPTPP, the Comprehensive and Progressive TransPacific Partnership.

Notwithstanding the absence of the United States, the tenmember CPTPP contains the most comprehensive set of commitments and rules ever built into a trade agreement. Several other countries, among them Britain and China, have shown interest in joining the CPTPP. Japan also remained a staunch supporter through to successful conclusion of the other large Asia–Pacific trade project, the Regional Comprehensive Economic Partnership. This agreement covers the ten members of ASEAN and five others, including Japan and New Zealand. RCEP came into force on 1 January 2022. Japan and New Zealand worked closely together during 2021 when New Zealand chaired the APEC group of regional economies.

Earlier, Japan convened a successful meeting of the G20 major economies in June 2019 and it has been active at the annual East Asia Summit. Japan has promoted the concept of a ‘Free and Open Indo-Pacific’ that shares many features with the Indo-Pacific Economic Framework launched by the United States. A US$50 billion regional infrastructure programme is part of Japan’s vision, which in part is a response to China’s ‘Belt and Road’ project. Japan’s close ties with the United States survived the strains of the Trump era. There are still differences with the United States over tariff levels and a burden-sharing formula on defence, but the partnership between Tokyo and Washington remains strong.

Significant responsibilities

What of New Zealand? Once described by a visitor as ‘the last, loneliest, loveliest’, New Zealand is the only member of the Organisation for Economic Cooperation and Development to fit the description ‘small, developed and distant’. It has significant South Pacific responsibilities and hosts the world’s fifth largest exclusive economic zone. New Zealand’s international search and rescue responsibility covers 17 per cent of the planet’s maritime domain. The economy is being transformed, with the services sector, international education, finance, information technology, tourism and the creative arts progressively becoming more important. Before Covid struck, tourism had risen to be New Zealand’s number one earner of foreign revenue.

What has not changed is that New Zealand must still find markets offshore for 75–80 per cent of its large output of farm, horticulture, fish and forestry products. It was that part of the trading sector which remained resilient and enabled the New Zealand economy to escape the worst ravages of the pandemic. With the CPTPP and RCEP accords now in force, and new trade deals confirmed with Britain and the European Union, New Zealand is looking to a future where more than threequarters of its exports will have the certainty and confidence of being covered by formal agreements with trade partners.

It is vital for New Zealand to continue to work closely and collaboratively with like-minded overseas partners one on one, such as bilaterally with Japan. And with Japan and others in regional and global trade forums. The ties with Japan have high priority. The two countries have built a mature relationship made up of strong political connections, robust trade links and a Strategic Co-operative Partnership. Together in many forums, they promote mutual respect for law and the rights of individuals. It is essential the two countries remain firm supporters of modern, high-quality trade agreements that help ensure their scope and content evolve over time in response to the way the dynamics of the international marketplace itself are forever changing.

Brian Lynch ONZM is a life member of the NZIIA. A former diplomat and deputy secretary of transport, he was director of the NZIIA from 2003 to 2012. From 2004 to 2009 he was alternate New Zealand representative and senior advisor on the APEC Business Council. He was a government appointed member of the New Zealand Meat Board (2004–10) and chair of the New Zealand Horticulture Export Authority (2004–13). This article is the edited text of an address he gave to the University of Fukuoka Law School on 12 February.