Internationalised Economy

Of all the issues in trade, I’m most fascinated by supply chains and value chains, and what that means to economies. I’m going to start with a quote from the introduction to the annual report from UNCTAD, which just came out a couple of weeks ago. This is what the Secretary General of UNCTAD said at one stage: “Asymmetric power is not unique to financial markets. The global trade landscape is also dominated by big players. The ability of lead firms in global production networks to capture most of the value added has led to unequal trading relations even as developing countries have deepened their participation in global trade.” Interestingly the report is entitled: Power, Platforms and the Free Trade Illusion.

I am going to start with an international story, and how this relates to us in NZ, and then end with a NZ story. But I want to stress that I really don’t know what the answers are to these complex and important challenges.

There is a northwest corner of South Carolina, around the city of Greenville, that was a booming manufacturing area for textiles and carpets between the two world wars and into the 1980s and 1990s. Then the area began to decline, particularly as textiles and clothing manufacturing moved overseas. In order to turn that around, less than 20 years ago, they headhunted very hard to find a European carmaker who was prepared to build an assembly plant there. BMW responded, building its first US plant there. Over time some 200 companies from 24 countries, all parts of BMW supply chain, located nearby. So today that plant is BMWs largest manufacturing plant in the world. Even more fascinating, it’s the largest exporter of US made cars, which may be a shock to US car makers.

But because of what Trump’s been up to on trade, those plants and supply chains have been substantially disrupted. BMW has substantially reduced its exports of SUVs that were going to China, because the tariffs Trump has imposed on steel and other items has substantially pushed up the cost of making vehicles. In response, BMW is now sourcing some of those SUVs it sells in China from its South African plant, not the US plant. Meanwhile, it’s building up investment in China, which is now on track to become its largest manufacturing complex in the world.

So increasingly the real power of trade lies in the ability of major multinationals to create and drive their deeply integrated supply and value chains. Trump’s efforts to try to break those down and to increase manufacturing in the US pose a crucial question: is that a move for good or ill? There are lots of key examples not just across the motor vehicle sector but also crucially in consumer electronics and food too.

The next factor is that China’s role in this is changing fundamentally. There are some great studies on this. Not the least is one by Standard Chartered Bank some three years ago. China is moving incredibly fast, from being a source of low-cost components for other people’s value chains to being a relatively high cost country. For example, it’s far more expensive to manufacture something in Shanghai than it is in Michigan. So they are moving very fast to build up their own value and supply chains around the world, of which the high value part of the chain is in China. Surrounding countries like Vietnam become the low-cost suppliers. It is interesting to see the US starting to articulate how it’s trying to do bilaterals with the likes of Vietnam to try to disrupt that process. Clearly, this asymmetry of supply chains, whereby greater benefit flows to a few players and less to the rest, is becoming a more marked feature of international trade.

I would add one other aspect to this in terms of the asymmetry, and it’s a really important example about what we export. We want to be able to export the most valuable things that not only generate maximum income for us, but would be less subject to commodity price swings, and other vagaries of markets. Maximising our export earnings is crucial because we need to import the very best of things and be able to pay for them. That’s going to be increasingly important as we push very hard for a low emissions economy, because a lot of that technology is going to be coming from overseas.

Where does NZ stand on this? There are great data about where we sit in these value chains that comes from the World Economic Forum’s global competitiveness report. One of the measures is a country’s comparative advantage on a scale of 1, which is low cost labour or natural resources, to 7, which is unique products or services. In its most recent report NZ scored 4.4, ranking us 31st in the world. In other words, we are quite a long way down that measure.

Our biggest weakness is limited not just to that point, but is also reflected in where we stand in global value chains. Again, the WEF has a scale of 1, from being narrow so you are primarily involved in individual steps like resource extraction, such as shipping logs overseas, to 7 where you are present across the entire value chain, including design, production, marketing, distribution, and increasingly these days in the non-physical after sales and servicing of that. NZ did worse on that: our score is 4.4 and our ranking is 37th.

A third measure is an attempt to judge our control of distribution. We ranked relatively well, at 28th. The last measure I’ll offer is particularly difficult for us, which is cluster development. How do you get a whole cluster of companies, as in the North Carolina BMW example, which becomes more sophisticated and innovative in aggregate, and thus globally competitive? On that we ranked 44th in the world. No surprise because the scale of our industry is so small with few competitors within each sector.

Let me apply some of those principles to two examples. The first is about logs. For many years we’ve had a boom in log exports, which account for the vast majority of volume and value of exports from our forest sector. But 75% of those logs are bought by Chinese companies and there is increasing evidence – and I’m working on a story on this for Newsroom – that one organisation in particular seems to be lying behind that and driving up those prices. That makes it virtually impossible for NZ companies to access those logs at a price they can do something more valuable with them.

The other example is milk powder and particularly infant formula, which remains a very small percentage of our dairy exports. The sales of ingredients for infant formula are very big, but a high proportion goes overseas to be mixed into formula so the value is created over there rather than here. Let me give an example of what’s going on. Over the last few years, just over the Bombay Hills from Auckland, a large factory has been built. It is the Yashili infant formula plant, with Yashili being one of China’s major dairy companies. I was always fascinated why the ‘goods inward’ bay was so big, and it was only when I went there a few years ago I understood why. At that time they were buying whole milk from the West coast, which has been dried and packaged into 50kg sacks and then shipped to Auckland, stored there and used through the year. They open the sacks, add water back in (not as much as originally) to then refractionate the milk powder to get the high value ingredients for infant formula they want. This was working so well that Synlait Milk, which is controlled by Bright Dairies of Shanghai, is now building a companion plant next door.

It is fascinating going to the Yashili website and on the first page it says ‘Why did we choose NZ?’. They launch into this lyrical thing about cows in NZ that makes the case for NZ milk better than any NZ companies I’ve seen try. Such lines as “The most pristine place on earth, one of the best dairy resources of origin around the world.” Then you flick through the attributes, and this is the one I love best – “where each cow has on average 300 square metres of space each”. Well this led me to do a Google search about the size of the average apartment in Shanghai – it is 71.04 square metres. The consumer in Shanghai is seeing that one cow in NZ has the space of more than 4 Shanghai apartments to roam around. So we treat our cows even better than the little emperor or empress in a Shanghai one child family might experience.

The point is that less value is sticking to the ribs of the New Zealand economy from the milk powder used in Yashili’s plant than if it was used in an NZ-owned plant.

So how do you push back against these things and redress some of this great asymmetry? It’s obviously far easier to build a single plant in NZ than it is for a NZ exporter to create a multifaceted distribution network overseas. That’s a very serious imbalance. These are very complicated issues but ones we have got to get right. And I don’t have the answers.

Barry: If NZ has been relegated to this raw materials producing role within international supply chains and/or a being host to foreign investors who are capturing most of the value added, if that occurs, what’s the role for government policy and particularly vis a vis trade agreements on trying to move us up this value added chain and capture some of those opportunities?

Rod: The first point I want to make is that I am a big fan of Foreign Direct Investment as long as it helps us do something that we couldn’t do ourselves, so there is real co-benefit. The Overseas Investment Act has long had some provisions that require some measurement of benefit to the NZ economy. Those rules are rather weakly drawn and have been much reduced in terms of some approvals that have been made. The current government is planning to use those more effectively. I think those are important and it’s incredibly crucial that we still have the right to do that in trade agreements.

Another example of flexibility is that in British Columbia, where they had a real problem of log exports, they instituted a system whereby any logs harvested have to be offered to domestic processors first in an auction and only the ones they can’t use are then exported. So that makes the log price more dependent on the supply and demand side domestically rather than the demand side overseas. I don’t know how well that’s worked, but from the little I know it seems that’s a help. However, any conventional old style ways of addressing such issues tend to be very prescriptive about what can and can’t happen in a country. Attempts to try to erect barriers against that sort of extraction is I think a 20th century model. I struggle to be at all articulate about how a 21st century trade agreement might be more help in that.

Barry: It is interesting on your point that government policy is still going in the opposite direction that as far as the TPP clone, the CPTPP, we increased the level at which foreign investment did not require any screening from $100 million to $200 million, so rather than exercising more discretion over foreign investment, this government has actually gone in the other direction.

Rod: Yes, and in NZ terms $200 million is a big slug of investment.

I am going to challenge your views on something. Stand up if you have either an Apple phone or an Android phone. Who has either used in the last week Facebook, Google, … the international digital companies, not just the hardware but also software companies? They call them FANGS on the global stock markets – Facebook, Apple (you could add Amazon) Netflicks, Google. I want to challenge you to think about these things that are so deeply intertwined in our lives. Everyone got here today with the help of one of these tools. For example, to find out where to come I Googled Fale Pasifika trade conference, then used Google maps to get here, then used an app on my I-phone to use the scooter to get here. That was great and of course I didn’t pay for the searches. Many of us are using these services to subsidise what we do, to tell our friends and family where we are, or publicise events or to raise money.

As a publisher at Newsroom we use many of these services. Gmail I use pretty aggressively. We obviously use Google search and we arrange our webpage to ensure Google search can find what we need it to. We have someone who is our social media editor who uses Facebook and Twitter to distribute what we do. We all use these things every day and it seems incredibly convenient and fantastic. And if I did a survey of the general public, let’s see what you say: who thinks that the benefits of the FANGS – Facebook, Amazon, Netflicks, Google – outweigh the detriments to you of all this free and very cheap stuff. Just imagine life 30 years ago without all this. Could you do all the things you currently do, and as cheaply? Who here thinks the benefits outweigh the detriments? Most people think that and on the face of it that seems the way.

But I want to challenge that because the FANGS are dangerous. I want to explain that through the lens of being a journalist and running a publishing operation. I’ve done this for about 15 years – my first website I launched was in Britain in 2002. This was in the days when we use Ask G – instead of Google. In the movie with Tom Hanks email used AOL. The point is to say that Big Tech now dominate what we do and are starting to have an impact on our lives in a negative way.

Let’s start for example with democracy and news. We saw in the 2016 election in the US the impact of Facebook in particular on the ability to fairly and cleanly choose candidates in the US election. We certainly saw it also in the Brexit debate. Malign forces from Russia, it seems, and inside the countries used the power of Facebook to target voters with misinformation. They were obviously encouraging people to vote for Trump and discourage people of colour and from Latino communities from voting for Hilary. That’s on the democracy side and we’ve heard much more since those elections about how people used this data.

Remember when we use Facebook we are not just getting a free service, we are the product. We are not buying a product, we are the product. Data we use to get around, where we are, who our friends are. Turns out Facebook was hoovering it up and giving it to its partners in exchange for them doing all these amazing apps. So millions of people had their data hoovered up by a company called Cambridge Analytica to be sold to malign forces to do nasty things with. That’s just to start with what Facebook can do. Google is in a similar situation. For example, there are a whole bunch of very clever young men and women in Macedonia who started making up fake news stories, for example about the pope endorsing Donald Trump. They would make these up having fun – and there is some debate on whether they were pushed into by Russian agents – put up the story and actually made money from it and used the tools to screw the scrum of democracy.

Then we have the breaking the law part of it. We know about Uber and its business model. They are about to list and be worth $100 billion so they will be in the FANG. Uber’s business model is basically about breaking the law. They go into a market, break the law on taxis and labour, get people to run a taxi service without registering as a taxi service, pay their people much lower wages even below the minimum wage, create a perfect market which matches demand and supply, and essentially pumps a whole bunch of labour that drives down the effective minimum wage in that market. And they do many other things that are pretty awful. I would recommend Zoomy as a much friendlier company and they are NZ owned. As it turns out Uber doesn’t actually make any money so they don’t have to pay any tax. At some point they will and be supposed to pay tax, but they won’t be paying it here.

In NZ too we forget, or aren’t told, that Facebook and Google in particular, are big players in the media scene. Google owns YouTube. They are the ones used when jurors want to search stuff, when they are wondering what is going on in the court case, even though the judge says not to. Jury pools are effectively contaminated by all sorts of things that turn up on Google and Facebook. We forget that for our legal system, they are really big parts of that system now. Our courts are having trouble with evidence that is being thrown around that’s been suppressed or information that may or may not be true that is getting into the environment.

You may use all these services. But you try to find someone at Google or Facebook or Uber who is responsible to take something down in NZ. We all use these services, but would you be able to knock on a door and get them to take something down or get them to comply with the law in NZ – no. There is routine breaking of the law by these large companies in NZ.

To drive the point home that these companies are dangerous, I want to drill down into how they operate in the NZ media scene. Facebook and Google make money in NZ from advertising. There are probably people here who pay them to advertise for them. We are doing a lot of that. NZ is now paying Google and Facebook, by my estimate, more than $600 million in year in advertising revenues. Google and Facebook are effectively the biggest earners of advertising revenue in the country now. Bigger than newspapers by a long shot, which wasn’t the case 3 or 4 years ago, the pace of growth has been so strong. They are bigger than our television. Can anyone name someone who works for Google and Facebook in NZ and is actually responsible for that and can say I am running a $300m business in NZ? No. And unfortunately they don’t break out these figures in their annual results, because those revenues typically go to Ireland or Singapore, back to Netherlands and are laundered for tax purposes, so no one effectively pays tax on this stuff. $600 million to Google and Facebook, is that a problem? That money used to be spent on newspapers mostly, maybe a bit of TV. So that money is not going to those services. Google and Facebook do not pay for a single journalist in NZ, but Google pays for a full-time lobbyist in Wellington.

That’s the meaning of that $600m and I’m in the market competing for those $600m. To the point now there is so much volume that Google and Facebook have managed to put into the market, that the publishers are now going broke and sacking journalists. For example, this morning, the Southland Times in Invercargill had this front page picture of the helicopter crash that killed one of the Wallace boys. Big story. The Christchurch Press had exactly the same headline and front page. If the big media had their way there would be one journalist covering that story. That is a problem of lack of diversity and news coverage to the point where 20% of the US by territory no longer has any journalists covering any events. No one goes to council meetings, no one covers what the police are doing, no one goes to the courts. And you end up with all sorts of problems that go unchallenged.

Eventually you get to a point where democracy is unclear, where the sunlight of journalism is not applied to keep the bastards honest. And that is the cost of Google and Facebook from a media point of view. There is also a cost from a democracy point of view, and a compliance with the law point of view.

The final thing I want to say is that when we think of connecting to the world in terms of trade, we often think of commodities in containers and bags of milk powder. But as the world is changing we are shifting from a goods-based world to a services-based world where a lot of those goods are effectively turned into services or we are effectively doing things which are goods rather than services. And a lot of that services stuff is not included in our trade agreements. Google and Facebook and the rest of the FANGS aren’t even mentioned in our trade agreements that were done before we started using these devices and software tools.

That’s something we need to think about. Whether we use a trade agreement or not – my personal view is that the most effective way to deal with it is to take the Chinese approach. This is not very popular or PC – they just ban Facebook, Google and Twitter and make their own. They do it for their own reasons, which is restrictions on their own free speech and I’m not advocating a Chinese style Internet. But there are people behind those faceless platforms that say you can’t operate in NZ unless you obey our rules. I would argue for that in our trade arrangements in this digital world we live in.

Barry: How can we regulate some of the FANGS and the digital economy. What is happening in trade agreements is the e-commerce rules in these agreements are increasingly restricting what government can do to regulate the Internet. We are seeing essentially a privatisation of Internet where any government regulation that might level the playing field is being ruled out by trade agreements. So what domestic policies could a progressive NZ government do in order to regulate.

Bernard: We are relatively unusual in that we are one of two places that has two tiny glass fibres that connect us to the rest of the world – the Southern Cross cable and the new Hawaii cable. Sovereignty today is about access to those cables and the ability to control those cables. The government has some controls over the people running them to apply pressure. It would be hard, but NZ is ultimately in a position where we could shut down access to those tools if we were really serious about that. But under our current laws that would be difficult and Google’s lobbyist would be working hard to stop that.

Ultimately it’s about applying public pressure and getting government to get them into the room, talk to people and get concessions. If you are looking at precedents for power to push back against the FANGS, the EU has been very effective so far in doing that. It has a new privacy policy, the General Data Protection Regulation (GDPR), which has effectively rewritten the rules about privacy globally, which are really important.

The rules about tax, which we need to be pushing really hard on, how we get people to declare their revenues and how they operate here. We do have some control over this. Google and Facebook do actually have staff here. If the PM was to say to most of those employees you are selling your country down the river by working for these sociopathic libertarians, do you want to keep working for them when they are selling out your communities and families? Someone needs to say that stuff to the person who works for those companies and point out they are robbing their families of schools, and hospitals, and roads that would be paid for by the tax that would have been paid, and you helped elect Donald Trump. That might get their attention.

We do have the ability to go to the cables and say to not let them in. They all have proxy servers here, in every Chorus exchange in the country. The other final thing is to start using national security and hacking issues. They are Trojan horses for hacking and privacy breaches on a large scale. By contrast, Trade Me as a NZ company owned by NZers complies with the law, takes stuff down. Rupert Murdoch has used his resources to wage a war on Google and Facebook and he’s absolutely right to do so.

[He mihi] I would like to keep on the domestic side of things. As Barry said I have worked a lot with Treaty settlements and I also come from Ngati Whatua o Orakei and Kaipara. I would like to echo some of the words in the korero this morning from Taiaha Hawke and remember some of the words from our tupuna Paora Tuhaere who was a very well respected tupuna, and was known as the father of Auckland. He lived in the 19th century and he was a trader. He bought schooners and he traded to Rarotonga. He said at one of the dozen Māori Parliaments in Tamaki in 1879 that “Ma konei ka whiwhi ngatai ahi. Ae. Kei te pai. E nga iwi e rua nei te Māori me te Pakeha.” And that literally means thence do we achieve together for good these two people – Māori and Pakeha. In other words, from thence do we reap of goodness.

I’ve been listening to the korero today and thinking, and Bernard Hickey has raised it again, what is good, what is goodness? What is meant by wellbeing, by sustainable really, and what are we prepared to do to achieve it. Clearly, we are looking for a well-articulated and over-arching long-term inter-generational set of policies and targets.

The other aspect that I can to this hui with was the question of the Woodhill Forest. It appeared in the famous Lands case in 1987, at a time when the government wanted to sell off its state-owned enterprises. We had to go all the way to the Court of Appeal to argue for Woodhill. It was one of 3 cases presented to the Court, because of the nature of the forest, because of the land taking under the Public Works Act and the urupa within. 30 years later we own, but we also had to buy, as Taiaha said, from the government the Woodhill Forest.

I am interested in the way we are looking after our back yard first, before we are considering international trade agreements or trying to improve them and do something more progressive. The Lands case in particular gave rise to the principles of the Treaty of Waitangi. I want to build on the idea that those principles. Although they are generally talked about in the context of Māori /Pakeha Treaty settlements, actually the work this country has done to grapple with these issues and produce that set of principles surely is highly applicable to international partnerships and trade agreements with other parties.

I also want to take a look at what Māori are doing in NZ. Just last week our manuhiri Wayne attended the 2018 World Indigenous Business Forum, which was showcasing indigenous business and trade. It was hosted by Te Ohu Whai Ao charitable trust in Rotorua. It was the first time Aotearoa had hosted this conference. Around 1000 delegates came from many first nations peoples around the world. Those conversations are about advancing Māori business interests, nationally and internationally, and supporting indigenous to indigenous trade and development. The World Indigenous Business Forum has a track record for building long term relationships between indigenous businesses. But the kaupapa was wider, and also touched on environmental concerns, building the indigenous leadership pipeline and supporting indigenous communities. So their focus was on capability development. On this question of self-determination, mana motuhake. Having a values-led leadership. Of course the focus continually on land and water, whenua and wai, which is a big deal at the moment. Sharing inter-generational knowledge. And the question of accessing and controlling information and opportunities.

Māori enterprises according to Google (!) are making their mark on the NZ economy and growing steadily year on year. MBIE figures in May 2018 estimate Māori enterprise is worth nearly $40 billion and growing faster than the economy as a whole. Māori employers, while flying largely under the radar, have amassed assets of $22.4 billion, according to a 2013 report by BERL. Māori who are self-employed have a combined asset base worth $6.6 billion, and the remaining $12.5 billion is owned by Māori trusts, incorporations, and other collectively owned enterprises, such as tribal organisations managing Treaty settlement funds. Māori make up 13% of the current NZ labour force, but Stats NZ estimates the Māori labour force will double to make up 1/5 of New Zealand’s working age population by 2038.

I’m going to give some examples of the growth of the Māori business, but it needs to be acknowledged that Māori have a place and position in this question about a strategy for trade.

You may have heard of the Waikato Innovation Park in Hamilton. The focus there is to tap into untapped potential. They are going around the country into the small towns and helping entrepreneurs to develop initiatives and apply for grants, stimulate action plans and provide mentoring. This reflects the Māori approach to business, which is broader than the individual generally and we see people making mokopuna decisions for the generations ahead. This is something that Mark Solomon spoke about. He said Ngai Tahu had been talking the language of sustainability since 1870. Mo tatou ano ka uri a muri ake nei – for us and our children after us.

So there’s a question of empowering individuals and investors to forge ahead with business ideas when they realise the size of the Māori involvement in the economy. One of the challenges though is that Māori also need to empower themselves and, according to June McCabe, leave an embedded victim mentality behind. There is no point of focusing on the deficit. But she also mentioned that Māori have a middle class that’s truly developed, well educated, knows how to grow and make money to look after its own. So we do have a spectrum here and this is where some of the employment and Treaty settlements have come into play.

I don’t know how Miraka functions alongside Chinese milk powder operations that Rod talked about, but Miraka is a dairying partnership between the Wairarapa Moana, Tuaropaki Trust, Waipapa 9 Trust, Hauhungaroa Partnership, Tauhara Moana Trust and Huiarau Farms. They have a Vietnamese dairy company Vinamilk among their investors, and the Global Dairy Network is a strategic partner. The shareholders’ values are disposal of solid waste to a worm farm, the use of geothermal energy to power the new $90 million whole milk powder plant at Mokai. It’s that holistic approach and interest in sustainability that’s behind Miraka. Now, after building the whole milk powder business, they are launching a new product called Whaiora, a natural smoothie blend combining milk, honey, oats, fruit and vegetables in powder form. Whaiora being ‘in pursuit of wellbeing’. They’ve gone into Malaysia and Singapore. That’s one example of the value-added product.

What we learned from the korero this morning also was to rely on the uniqueness of what we have in NZ. The Māori contribution to that is the holistic approach, the collective approach. Using that also for tourism and education purposes, based on our local history, the preservation of our significant sites and the education around them, and the building of trust, confidence and integrity through cultural exchange. Some of the delegations that have gone to China has been very focused on building solid relationships with people.

The challenge comes with confidence and capability, in the face of some of these Treaty settlements. I’m thinking of Tamati Kruger’s words about Tuhoe, he talks about the ‘unsettledness’ of the settlement. The question of repair and healing. While June McCabe is talking about Māori who are well-educated and have the capability, there’s also a spectrum of people who want to focus on building their own capability and sense of being tangata whenua first and foremost.

In the case of Ngati Whatua o Kaipara there is also the question we need to address of complacency and the prominence of convention. We bought Woodhill Forest, and while we would have liked to have grown native trees, the fact is that we have radiata pine there. Our relationship has been built with Matariki and that’s a long-term relationship, and we have internships and a joint-venture partnership around the forest. So we own not only the land underneath but also part of the business. But when it comes to wanting to have complementary activities in the forest we are focusing on tourism, adventure tourism, eco-tourism, including our marae, our harbor and the cultural history of the land. That’s probably where our most optimistic feel for business is. We’re also focusing on growing sungroves of natives and growing manuka for honey and oil, shifting into niche markets and premium markets.

I think that the work that’s been going on in Aotearoa is a microcosm of what we are talking about between national and international agreements around economics, trade and business relationships. We should take not of the good work we have achieved through Treaty settlements and reconciliation agreements and note what we hold on to as being important as a nation. Take those principles of rangatiratanga and kaitiakitanga, and partnership and protection, and the ability of everyone to participate in this conversation. They are solid principles that we as a nation have grappled with long and hard, and the work we all do to uphold these principles has great merit when being applied to trade and investment agreements.

Barry: Of the principles you identified that underlie much of your economic development work, based on te Tiriti, what would you highlight as an important flexibility for the government to retain when they are talking about trade agreements? What policies do you want the NZ government not make sure that they don’t give away to support the kind of work you are doing. Or how can government policy be supportive?

Margaret. One of the things that has come about in today’s korero is that the government has the right to make good legislation in exchange for the quid pro quo of protection. We have all been mentioning those questions: protection of our domestic market, protection of our land and water particularly, protection of our right to say no. We are looking to the government to persuade them to take care of our country and our people first.

Bills presentation starts at 4mins 30sec

Policy Director and Economist at the Council of Trade Unions. Previously Deputy Director of Teaching and Learning at the University of Canterbury.

I want to cover the topic of financial stability and tax in three different areas: 1) domestic finance, 2) cross border international finance and 3) taxation of multinationals.

In the domestic arena the global financial crisis (GFC) hammered home to us the importance of strong financial regulation. Regulation needs to be at a system level – the too big to fail or too connected to fail issues of a whole system. It needs to be at an institutional level: this is about the stability of the institutions and the protection of customs of those financial institutions. And it needs to be at a product level; we must be very careful about the kind of high risk products we saw in the US as the partial trigger for that financial meltdown.

But the trend of these international agreements is to deregulate, to allow the entry of financial firms and products both by investment and by selling products across borders. They either come into the country or they open up the availability of these products across borders, making regulation much more difficult. There is concern among some experts that the prudential exception in these agreements will not be effective in allowing these regulators to do their job of regulating. This raises problems at all levels: the control of the institutions, restrictions on the ability to control financial flows across borders, increasing the availability of difficult to regulate products, and reducing our ability to restrict the offering of toxic financial products.

The scale of the financial system and offerings are both important. The bigger they are the more influence they have on the local economy and the more difficult they are to regulate. And the ability to control institutions offering products also becomes more difficult, in particular through institutions selling products across borders. So the concern is that this raises the probability of future financial crises. These concerns are intensified by making investor-state dispute settlement (ISDS) available to these financial institutions, as in the CPTPP [although not for cross-border financial trading], further threatening the willingness of governments to regulate and enforce regulation. So we need in these agreements to enhance the ability to regulate, not to reduce it.

If we talk about the cross-border issues of finance, international finance other than foreign direct investment can move rapidly across borders and therefore be destabilising. This is particularly a risk when we are undergoing progressive political change. The threats, or the reality, of large financial movements can create the impression of crisis, much like the frenzy over business confidence surveys we have recently experienced. The frenzy is concerning because sometimes the problem can be real. Financial movements also influence the exchange rate, sometimes creating serious imbalances in the real productive economy for exporters and for those competing with imports. An increasing body of research also suggests that increased financial openness and the size of the financial system is associated with rising inequality.

So we need to be able to manage financial flows through controls on those flows, often called capital controls. That is, regulation of those financial flows or through the use of international financial taxes, even if they are only used quite rarely during times of crisis or when crisis is threatening. Many of these are made unlawful, or it is unclear whether they are permitted, under trade and investment agreements. A related need is to be able to take action necessary to prevent financial or balance of payments crises or where we cannot prevent them to help us mitigate or recover from them. The US has opposed effective exceptions in these crises. Even the IMF, for many years a strong proponent of deregulating capital movements, has become much more accepting that capital controls are a valid policy option.

On the other hand, foreign direct investment (FDI), where control of assets is concerned, raises issues of control and national interest. In some ways it is analogous to immigration – we want to be able to select what is needed for NZ. We are largely unable to do that, other than where land and fishing quotas are involved, under our current rules as a result of commitments made by previous governments in the WTO and other agreements. In addition there are increased barriers to placing conditions on FDI in investment chapters of the agreements. We need rules broad enough to allow this kind of selection and control of FDI.

Finally I’ll talk briefly about taxation of transnationals. There is fortunately increasing international cooperation on the taxing of multinationals that shows where international agreement should be focused. Some of this is possible. However, there are large gaps, particularly regarding the digital service corporations such as Google and Facebook, where there is international concern at their ability to massively avoid tax. We, like many other countries, are limited in what we can do. We are sandwiched between double taxation treaties, which require a physical local presence of the corporation to tax it, on the one hand, and on the other hand these trade and investment agreements, which make alternative approaches such as taxing revenue unlawful on the other. There may be a small place between them where countries can do something. But what is left is not likely to be very satisfactory in the long run.

We need much more policy space to do this effectively, without damaging side effects. And we need international agreements to recognise the nature of these corporations that work across many different jurisdictions. More broadly, we need greater international cooperation to ensure fair taxation of multinationals, such as taxing them in proportion to their revenues around the world, make international financial transaction taxes more effective, and stop unethical practices, including tax avoidance and corruption. We also need to be careful that tax rules increase, and don’t limit, taxation options that are so important to governments that want to improve public services and reduce inequality.

So whether we are considering finance, taxation or any of the other issues we are talking about in this conference, we need to see international rules that are consistent with our own economic, social and environmental goals.

Barry You talked about the need for new regulation of financial flows and taxation of multinationals. How would these be developed and implemented at the international level? Would it be through major change to current trade and investment treaties or do we need something like a new regulatory instrument?

Bill – We have to continue to push to change the nature of the trade and investment agreements, and there are a number of areas we can look at. Getting rid of ISDS is one, but there’s a whole lot of others in the area of ensuring regulators have enough policy space to do their job. For example, widening the prudential protections to make sure they are available at all levels. But we find the negotiators say they don’t want to change the exception because then every other agreement we’ve negotiated will be seen to be weak. So we’ve set up some bad precedents.

Perhaps what we need to be thinking about how to provide for mass change to these international agreements, or have a litigated understanding of what these exceptions mean to widen that space. There are precedents for that in the agreements that are emerging on taxation of transnationals, where countries are realising that there must be a common interest in making sure they don’t rob the revenue too much. And there are agreements at the Bank of International Settlements, for example, on regulation of banks that are common across countries. Now some of these don’t go far enough and are very difficult to work with because there are huge vested interests pushing back against these things. But some of these things are possible and we may be able to use some of those precedents.