Some thoughts on New Zealand's international context

[Prepared for the Ministry of Business, Innovation and Employment]

A. The big picture
1. The geo-economic and geopolitical balance is changing rapidly. This is well known and has been rapidly and deeply altering the location of production and work. But it is changing the world in more than trade and economics.
China, India and other “emerging-economy” nations are demanding a bigger role in the rules, conduct and leading positions of international forums and organisations; the rules may change in ways that are suboptimal for New Zealand.
Associated with that, those countries will assert different forms of government and political organisation as the match for, or an improvement on, liberal democracy – China is demonstrating that in its resistance to real elections in Hong Kong;
Likewise they will assert different forms of economic organisation as the match for, or an improvement on, liberal-market-capitalism.
More new science and other innovation (one example: surgical and other healthcare procedures) will come from researchers in China, India and elsewhere.
That is, after half a millennium in which the “west” (western Europe and north America) has dominated the generation of ideas through new science and on how best to organise society, politics and the economy, that dominance is being, and will continue to be, challenged, modified and perhaps overturned.
The risk to New Zealand, which, being very small, needs a rules-based international order, is of an inappropriate or hostile set of rules or no agreed rules at all. It is not clear there an opportunity.

2. Global security structures are being reframed, reworked and remade. After four decades when the United States and the Soviet Union kept an uneasy but mutually self-interested “peace” and two decades in which the United States assumed unipolar dominance, the international security structure picture is being unsettled by:
—assertions by China and reassertions by Russia of nationalist claims and ambitions, which could go toxic – Russia’s blatant detachment of parts of Ukraine and China’s assertions of sovereignty over the Diayou/Senkaku islands and the South China sea are examples;
—chaos in the Arab world, which has gone tribal and sectarian in Iraq, Syria, Lebanon, Palestine, Yemen and Libya, with serious implications for the stability of Saudi Arabia and the Gulf States and coupled with reversion to authoritarian rule in Egypt and increasing authoritarianism in Turkey, all of which turmoil threatens (a) to disrupt oil supplies and (b) to eventually draw in others with unpredictable results; and
—a redefinition of “war”, so that it is no longer just between states but between non-state entities which can shift allegiances in ways which make it difficult to work out who the “enemy” is and which use new devices, techniques and organising methods, made possible by new weaponry and by digitally-based technologies.
Again, the risk to New Zealand, needing a rules-based international order, is of an inappropriate or hostile set of rules or no agreed rules at all. Is there an opportunity?

3. Hyperglobalisation is also of people, not just finance, production and trade. Far-reaching changes in the speed, reach, quantities and nature of finance have jangled exchange rates, relocated jobs and made supply chains much more complex, with the result that many of the biggest companies are now truly global, not just multinationals based in a particular nation. Equally important for social, political and probably economic security, around 300 million live outside the borders of the countries they were born in, with profound and growing impacts on the societies they have moved to.
That, plus strain and stress generated by the global financial crisis and economic contraction or disruption, has generated populist movements of a wide variety in Europe and the United States. Such movements destabilise politics and policies in non-rational and unpredictable ways.
An opportunity: New Zealand’s relatively stable politics and policy environment (so far) could attract investment. A risk: trade could become less free and there could be socially destabilising levels of immigration.

4. The 2010s decade is the coming of age of a disruptive technology, digital technology.
This is turning a hyperglobalised world into one that is hyperconnected and hyper-datamined. It is rapidly and radically transforming
—how goods and services – no longer distinct categories by the way – are designed, funded, made and marketed and how “factories” are organised operated and located and making “additive manufacturing” more sophisticated so that in 10 years or so a German product might be imported as software and the goods fabricated locally;
—how children are educated and how adults add to their skills and
—how illness and disability can be diagnosed, offset and treated, for example with nerve interference devices and gene manipulation.
This potentially changes – arguably is already changing – the definition of scale: niche operators can seek out niche markets worldwide. And it potentially changes – arguably is already changing – the definition of distance. So it offers New Zealand obvious opportunities and risks.
This disruptive technological change is a principal driver of major social change, including, critically, in the nature of work, akin to the change driven by the industrial revolution but very many times faster. This will in turn drive big changes in our politics and policy imperatives.

5. Life-sustaining ecosystems are being destabilised and other resources put under increasing strain. Water is scarce in many places. Climate change is coming. There is serious pollution in many “emerging-economy” countries. Food security is a worry for at least 1 billion people and global population is projected to add another 2 billion by 2060.
This opens significant opportunities for New Zealand, where the physical environment is in reasonable shape and the direct impact of climate change is projected to be lower than in most other countries. Those opportunities are in supply of food, in export of farm systems expertise and other technologies to build agricultural efficiency and capacity and for adaptation and mitigation in less-developed countries, in attracting investment to a still good environment and in being the honest broker in international forums trying to work out rules to manage or avert the impacts.
The risk is that the world becomes a much more hostile place which impoverishes small outlying countries and/or big countries and their citizens and businesses simply muscle in and/or there are tsunamis of refugees.

6. In the wake of the global financial crisis the settled political economy orthodoxies of the past 40 years are under first-principles scrutiny, debate and attack. The breadth of the debate from right to left, coupled with the wildly unconventional behaviour by central banks in northern-hemisphere rich countries, suggests a shift akin to that from Keynesianism to Friedmanism in the 1970s (and possibly bigger, such as in the Malthus/Smith/Marx era).
New Zealand has in the past been at times a fast adopter of new thinking. That might give inside running with those making the pace in developing the new orthodoxy.

7. There may yet be another disjunctive shock of the magnitude of the global financial crisis. The global financial system is still fragile. For that resilience is needed.

B. Trade, aid, related – and a pivot?
1. The TPP
(Trans-Pacific Parnership) continues to drag on. Even if it is signed (and it can hardly include Japan in its current state), there are real doubts the Senate will approve a deal that New Zealand and the rest can accept on intellectual property and investment rules. Moreover, it is seen in Britain, Europe and China as aimed at excluding China which, if it was true, poses some real issues for New Zealand if China sees it in that light.

2. The TTIP (Trans-Atlantic Trade and Investment Partnership) is seen in Brussels as potentially setting global product and services standards through mutual recognition between Brussels and Washington. But it has stalled. The European Union’s current anaemic economic conditions and widespread populism, coupled with the United States’ dysfunctional federal political system make unlikely that it will advance it quickly.

3. The Chinese are pushing RCEP (the Regional Closer Economic Partnership of ASEAN, China, India, Japan, Korea, Australia and New Zealand) as an alternative but logic suggests ASEAN needs first to integrate its 10 economies much more before a true free trade area could be established, though negotiations are continuing with regular meetings. Notably, the United States is not included.

4. A new protectionism? So far protectionism hasn’t emerged to any significant degree as a result of the global financial crisis. That is not to say it won’t but it is also not to say it will. But is there a risk related to climate change, either through offsetting tariffs against countries not seen to be playing the game, one way or another, or through behind-the-border pro-climate regulatory measures which amount to protection? And is there a risk that the influence of China and India on international trading rules, as a result of their size if nothing else, might in effect amount to targeted protections?

5. Aid cooperation: New Zealand has aid cooperative aid projects in the South Pacific with China and the European Union. This is one way of building goodwill not just with the recipients of aid but with the big players. New Zealand is seen as having a degree of expert knowledge of the South Pacific – at least of the Polynesian Pacific – which is useful to bigger players who have other, bigger fish to fry elsewhere.

6. New Zealand as a pivot? The aid issue illustrates one possibility for non-allied New Zealand: to be a no-nonsense, no-hidden-agenda pivot between the big players, the United States, China and India – a country with a sufficient reputation as an honest broker for all the big players to deal with safely in a variety of situations.

C. Some New Zealand specifics
1. Trade is foreign affairs
. New Zealand has generally, explicitly or implicitly, talked of foreign affairs being trade. That had some validity when the main trading partners were Anglo-European countries with whom New Zealand’s Anglo majority had kinship. But for north Asian, south-east Asian and south Asian countries, New Zealanders will need to learn the languages, cultures and histories – that is, to get to understand unfamiliar countries and their people(s). It will not be enough to rely on some motivated individuals and the presence in New Zealand of significant immigrant populations from the countries New Zealand businesses are trading with. Moreover, to meet the challenge, the diplomatic effort needs to be smart, informed and intense, run by professionals with on-the-ground understanding of trading-partner countries. A high-quality foreign service is needed and there needs to be strong two-way connections between the foreign service and the economic, education and other agencies.

2. New Zealand’s independent foreign policy rejects formal alliances (except, sort of, with Australia). That is a plus dealing with China and was a large part of the reason why New Zealand got a free trade agreement. It is a plus in New Zealand’s bid for a United Nations Security Council seat. But for it to work well for New Zealand there must be rules-based international systems for security, trade, aviation, shipping etc, and New Zealand needs the big players to abide by the rules.
But, for all its vaunted independence, New Zealand is not unique: the value-system here is aligned with that of the liberal-democratic, market-capitalist world. So New Zealand is not allied but we (the people) are aligned.

3. New Zealand can make a virtue of being small. Two examples: the six small advanced countries project initiated by Sir Peter Gluckman for science, with economics tacked on; the small country group in the United Nations, which New Zealand convenes.

4. New Zealand is changing fast. The population remix is taking New Zealand into Asia: those saying they were ethnic Asians went from 3% to 12% from the 1991 census to the 2013 census.

5. That reflects geography but also, in the case of China, reflects New Zealand’s trade and tourism patterns which have changed dramatically. The rapid rise of a new middle class which can afford, first, protein and then, later for those who get richer, higher-quality protein suggests New Zealand has 10 years of good prospects ahead for food and fibre exports (though, of course, with some ups and downs, some of which may be big).
That is a huge opportunity, the like of which has not been seen since the invention of refrigeration. But there is also a risk of overdependence on volatile economies as they go through the difficult adjustment of their social, political and economic management systems to meet the aspirations of successive generations of the new middle classes and also adjust to fit into the global economic system as a maker, not just a taker.

6. New Zealand is oil-dependent and will be until the cars/trucks/buses fleets shift to electricity (not significantly so before 2025 and maybe not a lot before 2030). This may matter less if oil fields are proven in and off New Zealand and begins to be extracted from about 2025. But New Zealand has abundant alternative energies: coal, sunlight, tidal, wind. And it has scope, if necessary, to develop alternative liquid fuels.

7. New Zealanders don’t save enough, so they and the economy are overdependent on foreign capital for consumption and investment. This will cause periodic political upsets as foreign – particularly Chinese and Indian – companies (including state-owned enterprises) buy New Zealand enterprises, farms and processors and as China comes to control some of the supply chains and moves processing to China.

8. We can export biculturalism, not as such but as a spinoff from having incorporated indigenous claims, thinking and culture into a modern economy, that is, from having combined cultural respect with economic development, for instance, in farming, to get economic value and stronger social cohesion. This sort of export is happening to a small degree now but could be built into a significant connection with some less-developed countries (for example, in South America) which will need to factor in indigenous populations.

9. New Zealand can (and does) export niche technologies, such as top-end farm management systems and associated instrument technologies and how to do climate change emissions trading (when we fix the price issue). This can be done part-aid, part-trade.

D. Some countries and regions
1. Australia
is foreign and family: family from past colonial settlement and Westminster constitutional and legal traditions; foreign from different geologies, topographies, climates, indigenous populations, perspectives on the South Pacific and perception and approach to international security issues. CER and SEM are well advanced but will advance further only if an Australian politician takes an interest or there is something in it for Australia. A customs union is off the agenda. But joint trade agreements are conceivable – TPP and the Australia New Zealand-ASEAN agreement are examples. At some point New Zealand will have to address the fiscal costs of educating people for Australia’s workforce, where they pay taxes, and then giving them free hospital care and superannuation if/when they come back. Australia also has at some point to do some uncomfortable structural reforms which for a time may make it a less lucrative market for New Zealand – there has been a taste of that since the end of the mining investment boom.

2. China has a range of tensions, any one of which could get out of hand: appalling pollution requiring urgent action, not slogans and blind-eyes to miscreants’ activities; huge income inequalities; unequal rights of those living in cities (rural migrants are denied citizenship and so schooling and other social assistance, though a small programme is beginning to address that); a shadow banking sector that has got risky and a formal banking sector dominated by state ownership and a long way from being able to foot it with global players; debt-laden state-owned enterprises (though something is now being done about that); a tightly regulated business sector which depends on good relations with powerful officials; tightly regulated relations with the global economy which are slowly being loosened, a process which at some point is likely to cause adjustment problems at enterprise level; the need to manage growth rate expectations down to about 5% by 2020 or so; widespread corruption; a court system subservient to officials (but some changes are beginning); ethnic tensions in outlying regions; expectations among the better-off young of a freer internet which at some point is likely to develop into wider expressions of dissent (now tolerated to a point but arbitrarily frowned on; and a sclerotic party which has a monopoly on power but within which power is not centralised, leaving provincial officials in powerful fiefdoms. Overlay all that with tensions China has created in the seas to its east and south and its failure to resolve the Korea question. And pile on top a population problem as the one-child policy radically changes the ratio between workforce-age and post-workforce dependents. Optimists believe the technocrats at the top of the party can solve all of those mind-boggling issues with maybe a hiccup from time to time. Pessimists believe that is heroic and the most pessimistic expect an imminent financial crisis which will trigger tension over much else. The point: be prepared for some downs at least and possibly worse (including military adventurism to distract people from domestic problems. And note that China’s economic health or ill-health has a direct effect on New Zealand’s earnings from China, an indirect effect via Australia and an indirect effect via other countries in Asia dependent on the China market.

3. The United States’ dysfunctional politics reflects stagnation of wages, continued high unemployment and serious inequalities and other strains that have given rise to populism, notably the Tea Party. Plus it is in a difficult transition from global master to one among equals which will take a decade or two. (Think Britain 1914.) There is a risk of retreat into isolationism which could spill over into trade. It is, however, still a powerhouse of innovation and it still has by far the biggest military.

4. India has great potential, not least in high-technology industries, but also consummate skill at avoiding living up to that potential. Still, from about 2030 it is likely to be a high-potential market (and partner?) for New Zealand.

5. Europe: is it unified or fragmenting? What is its rationale now ¬– it used to be peace and prosperity? The Hungarian Prime Minister has proclaimed an “illiberal democracy” which trashes a lot of the underlying democratic expectations the western European Union countries have of all its members, including those formerly under the Soviet Union umbrella. The drive east to form relations with and eventually recruit new members has stalled after Belarus and Armenia opted for closer ties with Russia and Russia besieged and started partitioning the Ukraine.

6. Russia meanwhile is trying to recover its lost empire through trade and other agreements and by dismembering Ukraine. It is not playing by cold war or post-cold war rules. The risks should not be overstated but should not be understated. Hubris is a frequent cause of war (as in Austria’s determination to teach Serbia a lesson in 1914).

7. The muslim world is a mess. See A2 above and add Afghanistan and Pakistan. So far there is no indication it will drag other countries in but that cannot be guaranteed, especially if oil supplies are disrupted and if the likes of Saudi Arabia descend into turmoil – and if the extreme extremists anger the United States public to the point that it demands its President acts. A sideshow – but an important one – is the Israel-Palestine conflict, which has a couple of decades to run. The risk to New Zealand is that it might home-grow some terrorists and that any conflict might go big and amount to a disjunctive shock.

[2014 is a good year to be thinking about all this. And the bottom of the world is quite a good place to be but remember we are hyperconnected and hyperdependent.]